# 1.7: Exercises

• 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.

### 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 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.

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) .