2.8: Exercises- Unit 2
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\(\newcommand{\avec}{\mathbf a}\) \(\newcommand{\bvec}{\mathbf b}\) \(\newcommand{\cvec}{\mathbf c}\) \(\newcommand{\dvec}{\mathbf d}\) \(\newcommand{\dtil}{\widetilde{\mathbf d}}\) \(\newcommand{\evec}{\mathbf e}\) \(\newcommand{\fvec}{\mathbf f}\) \(\newcommand{\nvec}{\mathbf n}\) \(\newcommand{\pvec}{\mathbf p}\) \(\newcommand{\qvec}{\mathbf q}\) \(\newcommand{\svec}{\mathbf s}\) \(\newcommand{\tvec}{\mathbf t}\) \(\newcommand{\uvec}{\mathbf u}\) \(\newcommand{\vvec}{\mathbf v}\) \(\newcommand{\wvec}{\mathbf w}\) \(\newcommand{\xvec}{\mathbf x}\) \(\newcommand{\yvec}{\mathbf y}\) \(\newcommand{\zvec}{\mathbf z}\) \(\newcommand{\rvec}{\mathbf r}\) \(\newcommand{\mvec}{\mathbf m}\) \(\newcommand{\zerovec}{\mathbf 0}\) \(\newcommand{\onevec}{\mathbf 1}\) \(\newcommand{\real}{\mathbb R}\) \(\newcommand{\twovec}[2]{\left[\begin{array}{r}#1 \\ #2 \end{array}\right]}\) \(\newcommand{\ctwovec}[2]{\left[\begin{array}{c}#1 \\ #2 \end{array}\right]}\) \(\newcommand{\threevec}[3]{\left[\begin{array}{r}#1 \\ #2 \\ #3 \end{array}\right]}\) \(\newcommand{\cthreevec}[3]{\left[\begin{array}{c}#1 \\ #2 \\ #3 \end{array}\right]}\) \(\newcommand{\fourvec}[4]{\left[\begin{array}{r}#1 \\ #2 \\ #3 \\ #4 \end{array}\right]}\) \(\newcommand{\cfourvec}[4]{\left[\begin{array}{c}#1 \\ #2 \\ #3 \\ #4 \end{array}\right]}\) \(\newcommand{\fivevec}[5]{\left[\begin{array}{r}#1 \\ #2 \\ #3 \\ #4 \\ #5 \\ \end{array}\right]}\) \(\newcommand{\cfivevec}[5]{\left[\begin{array}{c}#1 \\ #2 \\ #3 \\ #4 \\ #5 \\ \end{array}\right]}\) \(\newcommand{\mattwo}[4]{\left[\begin{array}{rr}#1 \amp #2 \\ #3 \amp #4 \\ \end{array}\right]}\) \(\newcommand{\laspan}[1]{\text{Span}\{#1\}}\) \(\newcommand{\bcal}{\cal B}\) \(\newcommand{\ccal}{\cal C}\) \(\newcommand{\scal}{\cal S}\) \(\newcommand{\wcal}{\cal W}\) \(\newcommand{\ecal}{\cal E}\) \(\newcommand{\coords}[2]{\left\{#1\right\}_{#2}}\) \(\newcommand{\gray}[1]{\color{gray}{#1}}\) \(\newcommand{\lgray}[1]{\color{lightgray}{#1}}\) \(\newcommand{\rank}{\operatorname{rank}}\) \(\newcommand{\row}{\text{Row}}\) \(\newcommand{\col}{\text{Col}}\) \(\renewcommand{\row}{\text{Row}}\) \(\newcommand{\nul}{\text{Nul}}\) \(\newcommand{\var}{\text{Var}}\) \(\newcommand{\corr}{\text{corr}}\) \(\newcommand{\len}[1]{\left|#1\right|}\) \(\newcommand{\bbar}{\overline{\bvec}}\) \(\newcommand{\bhat}{\widehat{\bvec}}\) \(\newcommand{\bperp}{\bvec^\perp}\) \(\newcommand{\xhat}{\widehat{\xvec}}\) \(\newcommand{\vhat}{\widehat{\vvec}}\) \(\newcommand{\uhat}{\widehat{\uvec}}\) \(\newcommand{\what}{\widehat{\wvec}}\) \(\newcommand{\Sighat}{\widehat{\Sigma}}\) \(\newcommand{\lt}{<}\) \(\newcommand{\gt}{>}\) \(\newcommand{\amp}{&}\) \(\definecolor{fillinmathshade}{gray}{0.9}\)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:
- Company received cash from clients for services, $4,500
- Larson paid to creditors $500,
- Paid office rent for the month of December, $750,
- Company billed client for accounting services on account, $5,200
- Supplies were purchased on account, $650,
- Company received cash from clients billed previously, $6,000
- Larson received an invoice for office equipment repair services from Office Extra for December (the invoice will be paid next month), $850,
- Larson paid monthly salaries, $2,700,
- Utilities expense were paid, $280,
- Miscellaneous expense were paid, $350,
- 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 | |
| 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 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 |
- Company received cash from clients for services, $7,500
- Cast 77 paid to creditors $600,
- Paid office rent for the month of December, $950,
- Company billed client for accounting services on account, $8,200
- Supplies were purchased on account, $450,
- Company received cash from clients billed previously, $4,200
- Cast 77 received an invoice for services from Copy Plus for December (the invoice will be paid next month), $550,
- Cast 77 paid monthly salaries, $4,700,
- Utilities expense were paid, $380,
- Miscellaneous expense were paid, $250,
- Paid for monthly insurance, $200
- Dividends were paid, $750.
- 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.
- 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