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1.7: Exercises

  • Page ID
    98080
    • Henry Dauderis and David Annand
    • Athabasca University via Lyryx Learning

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    EXERCISE 1–1 (LO 1,2,3) Matching

    Ethics Managerial accounting
    Financial accounting Partnership
    International Financial Reporting Standards Separate legal entity
    Limited liability Unlimited liability

    Required: Match each term in the above alphabetized list to the corresponding description below.

    a. The owners pay tax on the business's net income.
    b. Accounting standards followed by PAEs in Canada.
    c. Rules that guide us in interpreting right from wrong.
    d. Accounting aimed at communicating information to external users.
    e. Accounting aimed at communicating information to internal users.
    f. The business is distinct from its owners.
    g. The owner(s) are not responsible for the debts of the business.
    h. If the business is unable to pay its debts, the owner(s) are responsible.

    EXERCISE 1–2 (LO3) Accounting Principles

    Business entity Full disclosure Materiality
    Consistency Going concern Monetary unit
    Cost Matching Recognition

    Required: Identify whether each of the following situations represents a violation or a correct application of GAAP, and which principle is relevant in each instance.

    1. A small storage shed was purchased from a home supply store at a discount sale price of $5,000 cash. The clerk recorded the asset at $6,000, which was the regular price.
    2. One of the business partners of a small architect firm continually charges the processing of his family vacation photos to the business firm.
    3. An owner of a small engineering business, operating as a proprietorship from his home office, also paints and sells watercolour paintings in his spare time. He combines all the transactions in one set of books.
    4. ABS Consulting received cash of $6,000 from a new customer for consulting services that ABS is to provide over the next six months. The transaction was recorded as a credit to revenue.
    5. Tyler Tires, purchased a shop tool for cash of $20 to replace the one that had broken earlier that day. The tool would be useful for several years, but the transaction was recorded as a debit to shop supplies expense instead of to shop equipment (asset).
    6. Embassy Lighting, a small company operating in Canada, sold some merchandise to a customer in California and deposited cash of $5,000 US. The bookkeeper recorded it as a credit to revenue of $7,250 CAD, which was the Canadian equivalent currency at that time.
    7. An owner of a small car repair shop purchased shop supplies for cash of $2,200, which will be used over the next six months. The transaction was recorded as a debit to shop supplies (asset) and will be expensed as they are used.
    8. At the end of each year, a business owner looks at his estimated net income for the year and decides which depreciation method he will use in an effort to reduce his business income taxes to the lowest amount possible.
    9. XYZ is in deep financial trouble and recently was able to obtain some badly needed cash from an investor who was interested in becoming an equity partner. However, a few days ago, the investor unexpectedly changed the terms of his cash investment in XYZ company from the proposed equity partnership to a long-term loan. XYZ does not disclose this to their bank, who they recently applied to for an increase in their overdraft line-of-credit.

    EXERCISE 1–3 (LO4) Calculating Missing Amounts

      Assets = Liabilities + Equity
    a. 50,000 = 20,000 + ?
    b. 10,000 = ? + 1,000
    c. ? = 15,000 + 80,000

    Required: Calculate the missing amounts in a, b, and c above. Additionally, answer each of the questions in d and e below.

    d. Assets are financed by debt and equity. The greatest percentage of debt financing is reflected in a, b, or c?

    e. The greatest percentage of equity financing is reflected in a, b, or c?

    EXERCISE 1–4 (LO4) Calculating Missing Amounts

    Required: Calculate the missing amounts for companies A to E.

      A B C D E
    Cash $3,000 $1,000 $ ? $6,000 $2,500
    Equipment 8,000 6,000 4,000 7,000 ?
    Accounts Payable 4,000 ? 1,500 3,000 4,500
    Share Capital 2,000 3,000 3,000 4,000 500
    Retained Earnings ? 1,000 500 ? 1,000

    EXERCISE 1–5 (LO4) Calculating Missing Amounts

      Assets = Liabilities + Equity
    Balance, Jan. 1, 2023 $50,000   $40,000   ?
    Balance, Dec. 31, 2023 40,000   20,000   ?

    Required: Using the information above, calculate net income under each of the following assumptions.

    1. During 2023, no share capital was issued and no dividends were declared.
    2. During 2023, no share capital was issued and dividends of $5,000 were declared.
    3. During 2023, share capital of $12,000 was issued and no dividends were declared.
    4. During 2023, share capital of $8,000 was issued and $12,000 of dividends were declared.

    EXERCISE 1–6 (LO4) Identifying Assets, Liabilities, Equity Items

    Required: Indicate whether each of the following is an asset (A), liability (L), or an equity (E) item.

    a. Accounts Payable k. Dividends
    b. Accounts Receivable l. Interest Receivable
    c. Bank Loan Payable m. Retained Earnings
    d. Building n. Interest Revenue
    e. Cash o. Interest Payable
    f. Share Capital p. Interest Expense
    g. Loan Payable q. Prepaid Insurance
    h. Office Supplies r. Insurance Expense
    i. Prepaid Insurance s. Insurance Revenue
    j. Utilities Expense t. Machinery

    EXERCISE 1–7 (LO4) Calculating Financial Statement Components

    The following information is taken from the records of Jasper Inc. at January 31, 2023, after its first month of operations. Assume no dividends were declared in January.

    Cash $33,000 Equipment $30,000
    Accounts Receivable 82,000 Bank Loan 15,000
    Unused Supplies 2,000 Accounts Payable 27,000
    Land 25,000 Share Capital ?
    Building 70,000 Net Income 40,000

    Required:

    1. Calculate total assets.
    2. Calculate total liabilities.
    3. Calculate share capital.
    4. Calculate retained earnings.
    5. Calculate total equity.

    EXERCISE 1–8 (LO4) Net Income, Shares Issued

    Accounts Receivable $4,000 Miscellaneous Expense $ 2,500
    Accounts Payable 5,000 Office Supplies Expense 1,000
    Cash 1,000 Service Revenue 20,000
    Equipment 8,000 Share Capital ?
    Insurance Expense 1,500 Wages Expense 9,000

    Required: Using the alphabetized information above for EDW Inc. after its first month of operations, complete the income statement, statement of changes in equity, and balance sheet using the templates provided below.

    EDW Inc. EDW Inc.
    Income Statement Statement of Changes in Equity
    Month Ended March 31, 2023 Month Ended March 31, 2023
    Revenues                  
    Service Revenue     $   Share Capital   Retained Earnings   Total Equity
    Expenses       Opening Balance $   $   $
    Wages Expense $     Shares Issued          
    Miscellaneous Expense       Net Income          
    Insurance Expense       Ending Balance $   $   $
    Office Supplies Expense                  
    Net Income     $            
    EDW Inc.
    Balance Sheet
    March 31, 2023
    Assets   Liabilities
    Cash $   Accounts Payable     $
    Accounts Receivable            
    Equipment     Equity
          Share Capital $    
          Retained Earnings      
          Total Equity      
    Total Assets $   Total Liabilities and Equity     $

    EXERCISE 1–9 (LO4) Net Income, Dividends

    Accounts Receivable $17,000 Machinery $14,000
    Accounts Payable 3,000 Note Payable 18,000
    Advertising Expense 5,000 Retained Earnings 6,000
    Cash 9,000 Salaries Expense 64,000
    Dividends 2,000 Service Revenue 81,000
    Insurance Expense 7,000 Share Capital 10,000

    Required: Algonquin Inc. began operations on August 1, 2021. After its second year, Algonquin Inc.'s accounting system showed the information above. During the second year, no additional shares were issued. Complete the income statement, statement of changes in equity, and balance sheet using the templates provided below.

    Algonquin Inc. Algonquin Inc.
    Income Statement Statement of Changes in Equity
    Year Ended July 31, 2023 Year Ended July 31, 2023
    Revenues         Share   Retained   Total
    Service Revenue     $   Capital   Earnings   Equity
    Expenses       Opening Balance $ 10,000   $ 6,000   $ 16,000
    Advertising Expense $     Net Income          
    Insurance Expense       Dividends          
    Salaries Expense       Ending Balance $   $   $
    Net Income     $            
    Algonquin Inc.
    Balance Sheet
    July 31, 2023
    Assets Liabilities
    Cash $ Accounts Payable $  
    Accounts Receivable   Note Payable    
    Machinery   Total Liabilities   $
        Equity
        Share Capital $  
        Retained Earnings    
        Total Equity    
    Total Assets $ Total Liabilities and Equity   $

    EXERCISE 1–10 (LO4) Net Income, Dividends, Shares Issued

    Required: Refer to EXERCISE 1–9. Use the same information EXCEPT assume that during the second year, additional shares were issued for cash of $3,000. Complete the income statement, statement of changes in equity, and balance sheet using the templates provided below.

    Algonquin Inc. Algonquin Inc.
    Income Statement Statement of Changes in Equity
    Year Ended July 31, 2023 Year Ended July 31, 2023
    Revenues                  
    Service Revenue     $   Share Capital   Retained Earnings   Total Equity
    Expenses       Opening Balance $   $   $
    Advertising Expense $     Shares Issued          
    Insurance Expense       Net Income          
    Salaries Expense       Dividends          
    Net Income     $ Ending Balance $   $   $
    Algonquin Inc.
    Balance Sheet
    July 31, 2023
    Assets Liabilities
    Cash $ Accounts Payable $  
    Accounts Receivable   Note Payable    
    Machinery   Total Liabilities   $
        Equity
        Share Capital $  
        Retained Earnings    
        Total Equity    
    Total Assets $ Total Liabilities and Equity   $

    EXERCISE 1–11 (LO4) Net Loss

    Accounts Receivable $1,600 Rent Payable $2,500
    Cash 6,000 Retained Earnings 4,000
    Equipment Rental Expense 9,400 Share Capital 6,400
    Fees Earned 12,000 Truck 22,000
    Fuel Expense 500 Wages Expense 3,400
    Note Payable 18,000    

    Required: Wallaby Inc. began operations on February 1, 2023. After its second month, Wallaby Inc.'s accounting system showed the information above. During the second month, no dividends were declared and no additional shares were issued. Complete the income statement, statement of changes in equity, and balance sheet using the templates provided below.

    Wallaby Inc.   Wallaby Inc.
    Income Statement   Statement of Changes in Equity
    Month Ended March 31, 2023   Month Ended March 31, 2023
    Revenues                    
    Fees Earned     $     Share Capital   Retained Earnings   Total Equity
    Expenses         Opening Balance $ 6,400   $ 4,000   $ 10,400
    Equipment Rental Expense $       Net Loss          
    Wages Expense         Ending Balance $   $   $
    Fuel Expense                    
    Net Loss     $              
    Wallaby Inc.
    Balance Sheet
    March 31, 2023
    Assets Liabilities
    Cash $ Rent Payable $    
    Accounts Receivable   Note Payable      
    Truck   Total Liabilities     $
        Equity
        Share Capital $    
        Retained Earnings      
        Total Equity      
    Total Assets $ Total Liabilities and Equity     $

    EXERCISE 1–12 (LO4) Correcting Financial Statements

    A junior bookkeeper of Adams Ltd. prepared the following incorrect financial statements at the end of its first month of operations.

    Adams Ltd.
    Income Statement
    For the Month Ended January 31, 2023
    Service Revenue     $3,335
    Expenses      
    Accounts Payable $300    
    Land 1,000    
    Miscellaneous Expenses 335   1,635
    Net Income     $1,700
    Balance Sheet
    Assets   Liabilities and Equity
    Cash $1,000   Rent Expense $300
    Repairs Expense 500   Share Capital 3,000
    Salaries Expense 1,000   Retained Earnings 1,700
    Building 2,500      
      $5,000     $5,000

    Required: Prepare a corrected income statement, statement of changes in equity, and balance sheet.

    EXERCISE 1–13 (LO4) Income Statement

    Below are the December 31, 2023, year-end accounts balances for Mitch's Architects Ltd. This is the business's second year of operations.

    Cash $ 23,000 Share capital $ 30,400
    Accounts receivable   24,000 Retained earnings   5,000
    Office supplies inventory   2,000 Consulting fees earned   150,000
    Prepaid insurance   7,000 Office rent expense   60,000
    Truck   40,000 Salaries and benefits expense   40,000
    Office equipment   15,000 Utilities expense   12,000
    Accounts payable   30,000 Insurance expense   5,000
    Unearned consulting fees   15,000 Supplies and postage expense   2,400

    Additional information:

    1. Included in the share capital account balance was an additional $10,000 of shares issued during the current year just ended.
    2. Included in the retained earnings account balance was dividends paid to the shareholders of $1,000 during the current year just ended.

    Required: Use these accounts to prepare an income statement similar to the example illustrated in Section 1.4.

    EXERCISE 1–14 (LO4) Statement of Changes in Equity

    Required: Using the data in EXERCISE 1–13, prepare a statement of changes in equity similar to the example illustrated in Section 1.4.

    EXERCISE 1–15 (LO4) Balance Sheet

    Required: Using the data in EXERCISE 1–13, prepare a balance sheet similar to the example illustrated in Section 1.4.

    EXERCISE 1–16 (LO4) Financial Statements with Errors

    Below are the May 31, 2023, year-end financial statements for Gillespie Corp., prepared by a summer student. There were no share capital transactions in the year just ended.

    Gillespie Corp.
    Income Statement
    For the Year Ended May 31, 2023
         
    Revenues    
    Service revenue $ 382,000
    Unearned service revenue   25,000
    Rent revenue   90,000
    Expenses    
    Warehouse rent expense   100,000
    Prepaid advertising   17,000
    Salaries and benefits expense   110,000
    Dividends   10,000
    Utilities expense   42,000
    Insurance expense   15,000
    Shop supplies expense   6,000
    Net income $ 197,000
    Gillespie Corp.
    Statement of Changes in Equity
    At May 31, 2023
      Share Capital Retained Earnings Total Equity
    Opening balance $ 5,000 $ 140,000 $ 145,000
    Net income       197,000   197,000
    Ending balance $ 5,000 $ 337,000 $ 342,000
    Gillespie Corp.
    Balance Sheet
    For the Year Ended May 31, 2023
    Assets     Liabilities        
    Cash $ 50,000 Accounts payable $ 130,000    
    Accounts receivable   85,000          
    Office equipment   45,000 Total liabilities     $ 130,000
    Building   240,000 Equity        
    Shop supplies   52,000 Share capital $ 5,000    
          Retained earnings   337,000    
          Total equity       342,000
    Total assets $ 472,000 Total liabilities and equity     $ 472,000

    Required: Using the data above, prepare a corrected set of financial statements similar to the examples illustrated in Section 1.4.

    EXERCISE 1–17 (LO4) Determining Missing Financial Information

    Required: Complete the following calculations for each individual company:

    1. If ColourMePink Ltd. has a retained earnings opening balance of $50,000 at the beginning of the year, and an ending balance of $40,000 at the end of the year, what would be the net income/loss, if dividends paid were $20,000?
    2. If ForksAndSpoons Ltd. has net income of $150,000, dividends paid of $40,000 and a retained earnings ending balance of $130,000, what would be the retained earnings opening balance?
    3. If CupsAndSaucers Ltd. has a retained earnings opening balance of $75,000 at the beginning of the year, and an ending balance of $40,000 at the end of the year, what would be the dividends paid, if the net loss was $35,000?

    EXERCISE 1–18 (LO4,5) Equity – What Causes it to Change

      Assets = Liabilities + Equity  
    Balances at April 1, 2023 $100,000   $60,000   $40,000  
                 
              ? Shares issued in April
                 
              ? April net income(loss)
                 
              ? Dividends paid in April
                 
    Balances at April 30, 2023 $180,000 = $130,000 + ?  

    Required: Using the information provided above, calculate the net income or net loss realized during April under each of the following independent assumptions.

    1. No shares were issued in April and no dividends were paid.
    2. $50,000 of shares were issued in April and no dividends were paid.
    3. No shares were issued in April and $4,000 of dividends were paid in April.

    EXERCISE 1–19 (LO4,5) Equity – What Causes it to Change

      Assets = Liabilities + Equity  
    Balances at June 1, 2023 $160,000   $100,000   $60,000  
                 
              ? Shares issued in June
                 
              ? June net income(loss)
                 
              ? Dividends paid in June
                 
    Balances at June 30, 2023 $200,000 = $90,000 + ?  

    Required: Using the information provided above, calculate the dividends paid in June under each of the following independent assumptions.

    1. In June no shares were issued and a $70,000 net income was earned.
    2. $40,000 of shares were issued in June and a $90,000 net income was earned.
    3. In June $130,000 of shares were issued and an $80,000 net loss was realized.

    EXERCISE 1–20 (LO5) Impact of Transactions on the Accounting Equation

    The following list shows the various ways in which the accounting equation might be affected by financial transactions.

      Assets = Liabilities + Equity
    1. (+)       (+)
    2. (+)   (+)    
    3. (+)(-)        
    4. (-)       (-)
    5. (-)   (-)    
    6.     (+)   (-)
    7.     (-)   (+)
    8.     (+)(-)    
    9.         (+)(-)

    Required: Match one of the above to each of the following financial transactions. If the description below does not represent a financial transaction, indicate 'NT' for 'No Transaction'. The first one is done as an example.

    a. 3 Purchased a truck for cash.
    b.   Issued share capital for cash.
    c.   Incurred a bank loan as payment for equipment.
    d.   Made a deposit for electricity service to be provided to the company in the future.
    e.   Paid rent expense.
    f.   Signed a new union contract that provides for increased wages in the future.
    g.   Wrote a letter of complaint to the prime minister about a mail strike and hired a messenger service to deliver letters
    h.   Received a collect telegram from the prime minister; paid the messenger.
    i.   Billed customers for services performed.
    j.   Made a cash payment to satisfy an outstanding obligation.
    k.   Received a payment of cash in satisfaction of an amount owed by a customer.
    l.   Collected cash from a customer for services rendered.
    m.   Paid cash for truck operation expenses.
    n.   Made a monthly payment on the bank loan; this payment included a payment on part of the loan and also an amount of interest expense. (Hint: This transaction affects more than two parts of the accounting equation.)
    o.   Issued shares in the company to pay off a loan.

    Problems

    PROBLEM 1–1 (LO4,5) Preparing Financial Statements

    Following are the asset, liability, and equity items of Dumont Inc. at January 31, 2015, after its first month of operations.

    ASSETS = LIABILITIES + EQUITY
    Cash $1,300   Bank Loan $8,000   Share Capital $2,000
    Accounts Receivable 2,400   Accounts Payable 1,000   Service Revenue 7,500
    Prepaid Expenses 550         Advertising Expense 500
    Unused Supplies 750         Commissions Expense 720
    Truck 9,000         Insurance Expense 50
                Interest Expense 80
                Rent Expense 400
                Supplies Expense 100
                Telephone Expense 150
                Wages Expense 2,500

    Required:

    1. Prepare an income statement and statement of changes in equity for Dumont's first month ended January 31, 2015.
    2. Prepare a balance sheet at January 31, 2023.

    PROBLEM 1–2 (LO4) Preparing Financial Statements

    Laberge Sheathing Inc. began operations on January 1, 2023. The office manager, inexperienced in accounting, prepared the following statement for the business's most recent month ended August 31, 2023.

    Laberge Sheathing Inc.
    Financial Statement
    Month Ended August 31, 2023
    Cash $400   Accounts Payable $7,800
    Accounts Receivable 3,800   Share Capital 3,200
    Unused Supplies 100   Service Revenue 2,000
    Equipment 8,700   Retained Earnings 4,000
    Advertising Expense 300      
    Interest Expense 500      
    Maintenance Expense 475      
    Supplies Used 125      
    Wages Expense 2,600      
      $17,000     $17,000

    Required:

    1. Prepare an income statement and statement of changes in equity for the month ended August 31, 2023, and a balance sheet at August 31, 2023. No shares were issued in August.
    2. Using the information from the balance sheet completed in Part 1, calculate the percentage of assets financed by equity.

    PROBLEM 1–3 (LO5) Transaction Analysis

    The following transactions of Larson Services Inc. occurred during August 2023, its first month of operations.

    Aug. 1 Issued share capital for $3,000 cash
      1 Borrowed $10,000 cash from the bank
      1 Paid $8,000 cash for a used truck
      3 Signed a contract with a customer to do a $15,000 job beginning in November
      4 Paid $600 for a one-year truck insurance policy effective August 1
      5 Collected fees of $2,000 for work to be performed in September
      7 Billed a client $5,000 for services performed today
      9 Paid $250 for supplies purchased and used today
      12 Purchased $500 of supplies on credit
      15 Collected $1,000 of the amount billed August 7
      16 Paid $200 for advertising in The News that ran the first two weeks of August
      20 Paid $250 of the amount owing regarding the credit purchase of August 12
      25 Paid the following expenses: rent for August, $350; salaries, $2,150; telephone, $50; truck operation, $250
      28 Called clients for payment of the balances owing from August 7
      31 Billed a client $6,000 for services performed today
      31 $500 of the amount collected on August 5 has been earned as of today

    Required:

    1. Create a table like the one below by copying the headings shown.
      ASSETS = LIABILITIES + EQUITY
      Cash + Acct. Rec. + Ppd. Exp. + Unused Supplies + Truck = Bank Loan + Acct. Pay. + Unearned Revenue + Share Capital + Retained Earnings
    • Use additions and subtractions in the table created in Part 1 to show the effects of the August transactions. For non-transactions that do not impact the accounting equation items (such as August 3), indicate 'NE' for 'No Effect'.
    • Total each column and prove the accounting equation balances.

    PROBLEM 1–4 (LO4) Preparing Financial Statements

    Required: Refer to your answer for Problem 1–3. Prepare an income statement and a statement of changes in equity for the month ended August 31, 2023. Label the revenue earned as Fees Earned. Prepare a balance sheet at August 31, 2023.

    PROBLEM 1–5 (LO5) Transaction Analysis and Table

    The following transactions occurred for Olivier Bondar Ltd., an restaurant management consulting service, during May, 2024:

    May 1 Received a cheque in the amount of $5,000 from TUV Restaurant Ltd., for a restaurant food cleanliness assessment to be conducted in June.
    May 1 Paid $5,000 for office rent for the month of May.
    May 2 Purchased office supplies for $3,000 on account.
    May 3 Completed a consultation project for McDanny's Restaurant and billed them $27,000 for the work.
    May 4 Purchased a laptop computer for $3,000 in exchange for a note payable due in 45 days.
    May 5 Olivier Bondar was a little short on cash, so the manager made an application for a bank loan in the amount of $20,000. It is expected that the bank will make their decision regarding the loan next week.
    May 6 Received an invoice from the utilities company for electricity in the amount of $300.
    May 10 Bank approved the loan and deposited $20,000 into Olivier Bondar's bank account. First loan payment is due on June 10.
    May 11 Paid for several invoices outstanding from April for goods and services received for a total of $8,000. The breakdown of the invoice costs are: telephone expense $500; advertising expense $3,000; office furniture $2,000; office supplies $2,500.
    May 13 Paid employee salaries owing from May 1 to May 13 in the amount of $3,000.
    May 14 Completed consulting work for a U.S. client and invoiced $18,000 US (US funds). The Canadian equivalent is $25,000 CAD.
    May 15 Received $25,000 cash for work done and invoiced in April.
    May 18 Hired a new employee who will begin work on May 25. Salary will be $2,500 every two weeks.
    May 21 Placed an order request for new shelving for the office. Catalogue price is $2,500.
    May 27 Paid employee salaries owing from May 14 to May 27 in the amount of $3,500.
    May 29 The bookkeeper was going to be away for two weeks, so the June rent of $5,000 was paid.
    May 31 Reimbursed $50 in cash to an employee for use of his personal vehicle for company business on May 20.
    May 31 Shelving unit ordered on May 21 was delivered and installed. Total cost was $3,000, including labour.

    Required: Create a table with the following column headings and opening balances. Below the opening balance, number each row from 1 to 18:

      Cash Accounts receivable  Office supplies Prepaid expenses Equipment Office furniture Accounts payable Note/Loan payable Unearned revenue Share capital Retained earnings
    Open +10,000 +25,000 +2,000 0 +25,000 +15,000 +35,000 0 0 +8,000 +34,000
    Bal                      
    1                      
    2                      
    3                      
    4                      
    5                      
    6                      
    7                      
    8                      
    9                      
    10                      
    11                      
    12                      
    13                      
    14                      
    15                      
    16                      
    17                      
    18                      
    Bal                      

    Using the table as shown in Figure 1.3 of the text, complete the table for the 18 items listed in May and total each column. If any of the items are not to be recorded, leave the row blank.

    PROBLEM 1–6 (LO5) Transaction Analysis and Table

    Required: Using the data from the table in PROBLEM 1–5, prepare the balance sheet as at May 31, 2024.


    This page titled 1.7: Exercises is shared under a CC BY-NC-SA 3.0 license and was authored, remixed, and/or curated by Henry Dauderis and David Annand (Lyryx Learning) .

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