1.16: Exercises

Exercise B Assume that retained earnings increased by USD 3,600 from 2010 June 30, to 2011 June 30. A cash dividend of USD 300 was declared and paid during the year.

a. Compute the net income for the year.

b. Assume expenses for the year were USD 9,000. Compute the revenue for the year.

Exercise C On 2010 December 31, Perez Company had assets of USD 150,000, liabilities of USD 97,500, and capital stock of USD 30,000. During 2011, Perez earned revenues of USD 45,000 and incurred expenses of USD 33,750. Dividends declared and paid amounted to USD 3,000.

a. Compute the company’s retained earnings on 2010 December 31.

b. Compute the company’s retained earnings on 2011 December 31.

Exercise D At the start of the year, a company had liabilities of USD 50,000 and capital stock of USD 150,000. At the end of the year, retained earnings amounted to USD 135,000. Net income for the year was USD 45,000, and USD 15,000 of dividends were declared and paid. Compute retained earnings and total assets at the beginning of the year.

Exercise E For each of the following events, determine if it has an effect on the specific items (such as cash) in the accounting equation. For the events that do have an effect, present an analysis of the transaction showing its two sides or dual nature.

1. Purchased equipment for cash, USD 12,000.
2. Purchased a truck for USD 40,000, signed a note (with no interest) promising payment in 10 days.
3. Paid USD 1,600 for the current month’s utilities.
4. Paid for the truck purchased in (b).
5. Employed Mary Childers as a salesperson at USD 1,200 per month. She is to start work next week.
6. Signed an agreement with a bank in which the bank agreed to lend the company up to USD 200,000 any time within the next two years.

Exercise F Bradley Company, engaged in a courier service business, completed the following selected transactions during July 2010:

1. Purchased office equipment on account.
2. Paid an account payable.
3. Earned service revenue on account.
4. Borrowed money by signing a note at the bank.
5. Paid salaries for month to employees.
6. Received cash on account from a charge customer.
7. Received gas and oil bill for month.
8. Purchased delivery truck for cash.
9. Declared and paid a cash dividend.

Using a tabular form similar to Exhibit 4 (Part A), indicate the effect of each transaction on the accounting equation using (+) for increase and (–) for decrease. No dollar amounts are needed, and you need not fill in the Explanation column.

Exercise G Indicate the amount of change (if any) in the stockholders’ equity balance based on each of the following transactions:

1. The stockholders invested USD 100,000 cash in the business by purchasing capital stock.
2. Land costing USD 40,000 was purchased by paying cash.
3. The company performed services for a customer who agreed to pay USD 18,000 in one month.
4. Paid salaries for the month, USD 12,000.
5. Paid USD 14,000 on an account payable.

Exercise H Give examples of transactions that would have the following effects on the items in a firm’s financial statements:

1. Increase cash; decrease some other asset.
2. Decrease cash; increase some other asset.
3. Increase an asset; increase a liability.
4. Decrease retained earnings; decrease an asset.
5. Increase an asset other than cash; increase retained earnings.
6. Decrease an asset; decrease a liability.

Exercise I Which of the following transactions results in a decrease in retained earnings? Why?

1. Employees were paid USD 20,000 for services received during the month.
2. USD 175,000 was paid to acquire land.
3. Paid an USD 18,000 note payable. No interest was involved.
4. Paid a USD 200 account payable.

Exercise J Assume that the following items were included in the Retained Earnings column in the summary of transactions for Cinck Company for July 2010:

Prepare an income statement for July 2010.

Exercise K Given the following facts, prepare a statement of retained earnings for Brindle Company, a tanning salon, for August 2010:

Balance in retained earnings at end of July, USD 188,000.

Dividends paid in August, USD 63,600.

Net income for August, USD 72,000.

The column totals of a summary of transactions for Speedy Printer Repair, Inc., as of 2010 December 31, were as follows:

Prepare a balance sheet. We have purposely listed the accounts out of order.

Exercise M Merck & Co., Inc. is a world leader in the discovery, development, manufacture and marketing of a broad range of human and animal health products. The company, which has 70,000 employees, spends over USD 2 billion every year on the research and development of new drugs. As of the end of 2, its 2.2 billion shares are valued in the stock market for a total of USD 132 billion. Given the following data for Merck, calculate the equity ratios for 2003 and 2002. Then comment on the results.