Skip to main content
Business LibreTexts

1.9: Exercises

  • Page ID
    28317
    • girl-160172__340.png
    • Contributed by Henry Dauderis and David Annand
    • Athabasca University
    • Sourced from Lyryx Learning

    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

    Watch Video

    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.