1.9: Exercises

EXERCISE 1–1 (LO1,2,3) 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, 2015	$50,000		$40,000		?
Balance, Dec. 31, 2015	40,000		20,000		?

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

1. During 2015, no share capital was issued and no dividends were declared.
2. During 2015, no share capital was issued and dividends of $5,000 were declared.
3. During 2015, share capital of $12,000 was issued and no dividends were declared.
4. During 2015, 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, 2015, 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. Income Statement Month Ended March 31, 2015			EDW Inc. Statement of Changes in Equity Month Ended March 31, 2015
Revenues				Share Capital	Retained Earnings	Total Equity
Service Revenue		$		Capital	Earnings	Equity
Expenses			Opening Balance	$	$	$
Wages Expense	$		Shares Issues
Miscellaneous Expense			Net Income
Insurance Expense			Ending Balance	$	$	$
Office Supplies Expense
Net Income		$

EDW Inc. Balance Sheet March 31, 2015
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, 2013. 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. Income Statement Year Ended July 31, 2015			Algonquin Inc. Statement of Changes in Equity Year Ended July 31, 2015
Revenues				Share Capital	Retained Earnings	Total Equity
Service Revenue		$
Expenses			Opening Balance	$10,000	$6,000	$16,000
Advertising Expenses	$		Net Income
Insurance Expense			Dividends
Salaries Expense			Ending Balance	$	$	$
Net Income		$

Algonquin Inc. Balance Sheet July 31, 2015
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. Income Statement Year Ended July 31, 2015			Algonquin Inc. Statement of Changes in Equity Year Ended July 31, 2015
Revenues				Share Capital	Retained Earnings	Total Equity
Service Revenue		$
Expenses			Opening Balance	$	$	$
Advertising Expense	$		Shares Issued
Insurance Expense			Net Income
Salaries Expense			Dividends
Net Income		$	Ending Balance	$	$	$

Algonquin Inc. Balance Sheet July 31, 2015
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, 2014. 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. Income Statement Month Ended March 31, 2015			Wallaby Inc. Statement of Changes in Equity Month Ended March 31, 2015
Revenues				Share Capital	Retained Earnings	Total Equity
Fees Earned		$
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, 2015
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, 2015
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, 2015, 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, 2015, 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, 2015
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, 2015
	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, 2015
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, 2015	$100,000		$60,000		$40,000
					?	Shares issued in April
					?	April net income(loss)
					?	Dividends paid in April
Balances at April 30, 2015	$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, 2015	$160,000		$100,000		$60,000
					?	Shares issued in June
					?	June net income(loss)
					?	Dividends paid in June
Balances at June 30, 2015	$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.