2.8: Exercises- Unit 2

SHORT Answer QUESTIONS, EXERCISES AND PROBLEMS

Questions:

➢ Accounting has often been called the language of business. In what respects would you agree with this description? How might you argue that this description is deficient?

➢ Define asset, liability, and stockholders’ equity.

➢ How do liabilities and stockholders’ equity differ? How are they similar?

➢ How do accounts payable and notes payable differ? How are they similar?

➢ Define revenues. How are revenues measured?

➢ Define expenses. How are expenses measured?

➢ What is a balance sheet? On what aspect of a business does the balance sheet provide information?

➢ What is an income statement? On what aspect of a business does this statement provide information?

➢ What information does the statement of retained earnings provide?

➢ Identify the three types of activities shown in a statement of cash flows.

➢ What is a transaction? What use does the accountant make of transactions? Why?

➢ What is the accounting equation? Why must it always balance?

➢ Give an example from your personal life that illustrates your use of accounting information in reaching a decision.

➢ You have been elected to the governing board of your church. At the first meeting you attend, mention is made of building a new church. What accounting information would the board need in deciding whether or not to go ahead?

➢ A company purchased equipment for $ 2,000 cash. The vendor stated that the equipment was worth $ 2,400. At what amount should the equipment be recorded?

➢ What is meant by money measurement?

➢ Of what significance is the exchange-price (or cost) concept? How is the cost to acquire an asset determined?

➢ What effect does the going-concern (continuity) concept have on the amounts at which long-term assets are carried on the balance sheet?

➢ Of what importance is the periodicity (time periods) concept to the preparation of financial statements?

➢ Describe a transaction that would:

• Increase both an asset and capital stock.
• Increase both an asset and a liability.
• Increase one asset and decrease another asset.
• Decrease both a liability and an asset.
• Increase both an asset and retained earnings.
• Decrease both an asset and retained earnings.
• Increase a liability and decrease retained earnings.
• Decrease both an asset and retained earnings.
• Identify the causes of increases and decreases in stockholders’ equity

B) Accounting Exercises:

Exercise 1. Applying Basic Accounting Equation

Royals Palm, Inc. reports the following assets and liabilities. Compute the totals that would appear in the corporation’s basic accounting equation (Assets = Liabilities + Stockholders’ Equity (Capital Stock)).

Cash………………………….$55,000

Accounts Payable……………25,000

Office Supplies………………. 1, 500

Loan Payable…………………..7,000

Accounts Receivable………….10,000

Answer

Assets	= Liabilities	+ Stockholders’ Equity

Exercise 2. Applying Basic Accounting Equation

Dan and Den, Inc. reports the following assets and liabilities. Compute the totals that would appear in the corporation’s basic accounting equation (Assets = Liabilities + Stockholders’ Equity (Capital Stock)).

Cash………………………….$37,000

Accounts Payable……………15,000

Supplies……………………….1, 800

Loan Payable…………………..9,000

Inventory……………………….12,000

Answer

Assets	= Liabilities	+ Stockholders’ Equity

Exercise 3. Complete missing amounts in fundamental accounting equation for several businesses:

Assets	= Liabilities	+ Stockholders’ Equity
578,000		152,000
	25,000	180,500
127,000	17,000
269,000	45,000
850,000		675,000
	250,000	657,450

Exercise 4. Perez Company had the following transactions during January:

1. Jan 1 Issued $100,000 in stock to owners in exchange for cash to start the business.

2. Jan 5 Borrowed $50,000 from the bank by signing a notes payable.

3. Jan 10 Purchase equipment by paying cash for $25,000.

3. Jan 15 Paid January rent of $2,400 for the office space (hint: since this is for January, record as rent expense)

4. Jan 18 Performed services for customers and received cash immediately for $8,000.

5. Jan 20 Purchased $2,000 in supplies on account.

Prepare a transaction analysis for the January transactions. Remember to prove the accounting equation at the end.

	Assets =			Liability		+ Equity	+ Revenue	– Expense
Transaction	Cash	Supplies	Equipment	Accounts Payable	Notes Payable	Common Stock	Service Revenue	Rent Expense
Jan 1 Issued stock to owners
Jan 5 Borrowed money from bank
Jan 10 Purchased equipment with cash
Jan 15 Paid January rent
Jan 18 Performed services
Jan 20 Purchased supplies on account
Balance:

Exercise 5. On December 31, Bryniuk’s Company, the accounting records showed the following information:

Cash	49,500
Accounts Receivable	125,000
Supplies	1,500
Prepaid Insurance	12,000
Equipment	70,000
Building	420,000
Land	111,500
Accounts Payable	80,000
Notes Payable	170,000
Common Stock	410,000
Retained Earnings	65,000
Dividends	20,000
Service Revenue	174,000
Interest Revenue	1,000
Salaries Expense	52,000
Advertising Expense	17,000
Insurance Expense	5,000
Utilities Expense	13,750
Interest Expense	2,750

Prepare the Income Statement for year ended December 31.

Bryniuk’s Company
Income Statement
For Year Ended December 31
Revenues:	.
Total Revenues
Expenses:
Total Expenses
Net Income

Exercise 6. Using the information from Exercise 5, prepare the Statement of Retained Earnings for December 31.

Bryniuk’s Company
Statement of Retained Earnings
For Year Ended December 31
Beginning Retained Earnings	$65,000
Add: Net Income
Subtract: Dividends
Ending Retained Earnings

Exercise 7. Using the information from Exercises 5 and 6, prepare the Balance Sheet for December 31.

Bryniuk’s Company
Balance Sheet
December 31
Assets		Liabilities and Equity
		Total Liabilities
		Total Equity
Total Assets		Total Liabilities and Equity

Problem 1: Prepare the financial statements of RodCast Company using the following information:

Accounts Payable	43,100.00
Accounts Receivable	85,000.00
Cash	55,320.00
Common Stock	125,000.00
Dividends	28,000.00
Machinery	70,000.00
Rent Expense	24,000.00
Retained Earnings	70,000.00
Salaries Expense	65,000.00
Service Revenue	165,320.00
Supplies	2,350.00
Trucks	60,000.00
Utilities Expense	13,750.00

1. Classify each account by Account Type (Asset, Liability, Equity, Revenue or Expense) and which financial statement (income statement, statement of retained earnings, or balance sheet) it appears on.

Account	Account Type	Financial Statement

2. Prepare the Income Statement, Statement of Retained Earnings and Balance Sheet for the month ended October 31.

Comprehensive Problems Example:

Larson’s Accounting Company has the following account balances: Cash, $5,000; Accounts Receivable, $2,000; Prepaid Rent $1,500; Supplies, $850; Equipment, $6,000; Trucks, $15,000; Accounts Payable, $2,500; Common Stock, $20,000; Retained Earnings $7,850. Business transactions during December are presented as follows:

1. Company received cash from clients for services, $4,500
2. Larson paid to creditors $500,
3. Paid office rent for the month of December, $750,
4. Company billed client for accounting services on account, $5,200
5. Supplies were purchased on account, $650,
6. Company received cash from clients billed previously, $6,000
7. Larson received an invoice for office equipment repair services from Office Extra for December (the invoice will be paid next month), $850,
8. Larson paid monthly salaries, $2,700,
9. Utilities expense were paid, $280,
10. Miscellaneous expense were paid, $350,
11. Dividends were paid, $550.

	Assets =						Liabilities	+ Stockholders’ Equity			+ Net Income
	Cash	Accounts Receivable	Prepaid Rent	Supplies	Equipment	Trucks	Accounts Payable	Common Stock	+ Retained Earnings	– Dividends	Revenue	– Expenses	Expense Type
Previous Balances	$5,000	$2,000	$1,500	$850	$6,000	$15,000	$2,500	$20,000	$7,850
1	4,500										4,500
2	-500						-500
3			-750									750	Rent expense
4		5,200									5,200
5				650			650
6	6,000	-6,000
7							850					850	Repair expense
8	-2,700											2,700	Salary expense
9	-280											280	Utilities expense
10	-350											350	Misc. expense
11	-550									550
Ending Balance:	$11,120	$1,200	$750	$1,500	$6,000	$15,000	$3,500	$20,000	$7,850	$550	$9,700	$4,930

Larson Company

Income Statement

Month Ended December 31, 2014

Fees earned		$9,700
Expenses:
Rent Expense	$750
Repair Expense	850
Wages Expense	2700
Utilities Expense	280
Miscellaneous expense	350
Total Expenses		$4,930
Net Income ($9,700 – $4,930)=		$4,770

Larson Company

Statement of Retained Earnings

Month Ended December 31

Larson Inc., Retained Earnings, December 31		$ 7,850
Net income for the month	$4,770
Less Dividends	– 550
Increase in Stockholders’ Equity		+ 4,220
Larson Inc., Retained Earnings, December 31		$12,070

Larson Company
Balance Sheet
Month Ended December 31
Assets		Liabilities
Cash	$11,120	Accounts Payable	$3,500
Accounts Receivable	1,200
Prepaid Rent	750	Stockholders’ Equity
Supplies	1,500	Common Stock	20,000
Equipment	6,000	Retained Earnings	12,070
Trucks	15,000
Total Assets	$35,570	Total Liabilities and Stockholders’ Equity	$35,570

Comprehensive Problem 1.

Cast 77 Service Company has the following account balances: Cash, $6,000; Accounts Receivable, $7,000; Prepaid Rent, 1,900; Prepaid Insurance, $1,200 Supplies, $950; Equipment, $7,000; Trucks, $10,000; Accounts Payable, $2,700; Common Stock $25,000; Retained Earnings $6,350. Business transactions during December are presented as follows:

1. Company received cash from clients for services, $7,500
2. Cast 77 paid to creditors $600,
3. Paid office rent for the month of December, $950,
4. Company billed client for accounting services on account, $8,200
5. Supplies were purchased on account, $450,
6. Company received cash from clients billed previously, $4,200
7. Cast 77 received an invoice for services from Copy Plus for December (the invoice will be paid next month), $550,
8. Cast 77 paid monthly salaries, $4,700,
9. Utilities expense were paid, $380,
10. Miscellaneous expense were paid, $250,
11. Paid for monthly insurance, $200
12. Dividends were paid, $750.

Required:

• Apply the basic accounting equation (create a spreadsheet, please see comprehensive example) to complete a transaction analysis for each transaction (hint: enter the balances provided first).
• Prepare income statement at the end of December 31.
• Prepare statement of retained earnings equity at the end of December 31.
• Prepare balance sheet at the end of December 31.

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• Accounting Principles: A Business Perspective. Authored by: James Don Edwards, University of Georgia & Roger H. Hermanson, Georgia State University. Provided by: Endeavour International Corporation. Project: The Global Text Project . License: CC BY: Attribution