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Business LibreTexts

1.11: Solutions

  • Page ID
    28319
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    • Contributed by Henry Dauderis and David Annand
    • Athabasca University
    • Sourced from Lyryx Learning

    Discussion Questions

    1. Generally accepted accounting principles (GAAP) are a set of principles and assumptions that guide the preparation of financial statements, and that have gained wide-spread acceptance among users and practitioners.
    2. The revenue recognition principle assumes that revenue is earned by the entity at the time when a service is provided or when a sale is made, not necessarily when cash is received.
    3. The matching concept states that revenue is recognized in the time period when goods and services are provided and that the assets of the entity that have been used up during the time period (expenses) must be matched with the asset inflows (revenues) during the same period.
    4. Accounting information should be comparable, verifiable, timely and understandable. Accounting information should only be disclosed if it is material – that is, of sufficient size or importance to influence the judgement of a reasonably knowledgeable user. Accounting information should also be disclosed in such a manner that the benefits of doing so outweigh the costs.
    5. An asset is anything of value that is owned by the entity. Assets are economic resources controlled by an entity. They have some future value to the entity, usually for generating revenue.
    6. A liability is an obligation to pay an asset or to provide services or goods in the future. Until the obligations are paid, creditors have claims against the assets of the entity.

      Equity represents the amount of assets owing to the owners of the entity. The total assets of an entity belong either to the shareholders or to the creditors.

    7. The exchange of assets or obligations by a business entity, expressed in monetary terms like dollars, is called a financial transaction. The exchange of cash for land or a building is an example of such a transaction.
    8. The three forms of business organization are corporations, sole proprietorships, and partnerships.
    9. A business entity is a unit of accountability that exists independently from other units. A set of accounting records is kept for each unit or entity. The entity exists separately from its owners. This concept is important because it keeps separate all the various activities in which the owner is involved; lumping all the activities together would not yield useful information for keeping track of the financial performance each financial unit.
    10. Financial statements evaluate the performance of an entity and measure its progress. Financial information is collected, then summarized and reported in the financial statements (balance sheet, income statement, statement of cash flows, and statement of changes in equity).
    11. The date line on the income statement, statement of changes in equity, and statement of cash flows represents a period of time. The income statement details the revenues and expenses that occurred over a given period of time. The statement of changes in equity shows how equity changed over a given period of time. The statement of cash flows shows how the balance in cash changed over a given period of time. The date line on the balance sheet is a point in time because each account listed on the balance sheet identifies the account balance on a specific date.
    12. The purpose of the income statement is to communicate the inflow of assets, in the form of revenues, and the outflow or consumption of assets, in the form of expenses, over a period of time. Total inflows greater than total outflows creates net income or profit, which is reported on the Income statement and in retained earnings in the equity section of the balance sheet. The purpose of the balance sheet is to communicate what the entity owns (its assets), what the entity owes (its liabilities), and the difference between assets and liabilities (its equity) at a point in time.

      If revenue is recorded on the income statement, there is usually a corresponding increase in assets on the balance sheet. Similarly, if expenses are recorded on the income statement, there is generally a decrease in assets or increase of liabilities on the balance sheet.

    13. Revenue is an increase in an entity's assets or a decrease in liabilities in return for services performed or goods sold, expressed in monetary units like dollars. An expense is an asset belonging to the entity that is used up or obligations incurred in selling goods or performing services.
    14. Net income is the difference between revenues and expenses. It communicates whether the activities of the entity are being conducted profitably. Thus it is one measure of the success of the entity. Net income is one of the criteria used to determine the amount of dividends to be declared.
    15. The statement of changes in equity shows why share capital and retained earnings have changed over a specified period of time – for instance, when shares are issued or net income is earned. The statement of cash flows explains to the users of the financial statements the entity's sources (inflows) and the uses (outflows) of cash over a specified period of time.
    16. Financial statements are prepared at regular intervals to keep a number of interested groups informed about the financial performance of an entity. The timing is determined in response to the needs of management in running the entity or of outside parties, such as bankers to aid in granting loans to the entity, shareholders, or others interested in evaluating the progress of the entity. They are generally used as a means to inform investing and lending decisions.
    17. The accounting equation has the following form:
      ASSETS = LIABILITIES + EQUITY
      (economic resources owned by an entity) (creditors' claims to assets) (owners' claims to assets – residual claims)

      The entity has assets, which are the resources it owns. The total assets owned by an entity must always equal the total claims of creditors and owners, who have the residual claims.

      A company's accounting equation is expanded to include major categories of the balance sheet, like cash and share capital. An expanded form of the accounting equation could be as follows:

      ASSETS = LIABILITIES + EQUITY
      Cash+Accounts Receivable+Equipment+Truck Accounts Payable Share Capital+Retained Earnings
    18. The double entry accounting system reflects the fact that each financial transaction affects at least two items in the accounting equation, in order to maintain the equality of the equation. For example,
      1. A truck is sold for cash: The asset truck decreases and the asset cash increases.
      2. An obligation is paid: The liability accounts payable decreases and the asset cash decreases.
      3. An account is collected: The asset cash increases and the asset accounts receivable decreases.

      In this way, the equation always remains in balance after each transaction is recorded.

    19. A year-end is the last day of the fiscal year of the entity. The income statement, statement of cash flows, and statement of changes in equity reflect financial translations for the year up to this date. The balance sheet reflects the financial position of the entity at the year-end date. Interim financial statements may be prepared more frequently, say quarterly or monthly; these are prepared for each entity only if required by certain users, usually shareholders of large corporations with many shareholders. Year-end financial statements must be prepared for all entities.
    20. A fiscal year refers to a 12-month accounting period and that may not coincide with the calendar year. A company whose fiscal year-end coincides with the calendar year has a December 31 year-end.

    Exercises

    EXERCISE 1–1

    1. Partnership
    2. International Financial Reporting Standards
    3. Ethics
    4. Financial accounting
    5. Managerial accounting
    6. Separate legal entity
    7. Limited liability
    8. Unlimited liability

    EXERCISE 1–2

    1. Violation Cost principle
    2. Violation: Business entity principle
    3. Violation: Business entity principle
    4. Violation: Revenue recognition principle
    5. Correct: Materiality principle
    6. Correct: Monetary unit principle
    7. Correct: Matching principle
    8. Violation: Consistency principle
    9. Violation: Full disclosure principle and possibly going concern principle if the company is no longer viable

    EXERCISE 1–3

    1. 30,000
    2. 9,000
    3. 95,000
    4. In a, debt financing = (20,000/50,000) × 100=40%. In b, debt financing = (9,000/10,000) × 100=90%. In c, debt financing = (15,000/95,000) × 100 = 15.79% (rounded to two decimal places). Therefore, the greatest percentage of debt financing is reflected in b.
    5. In a, equity financing = 100 − 40 = 60%. In b, equity financing = 100 − 90 = 10%. In c, equity financing = 100 − 15.79 = 84.21%. Therefore, the greatest percentage of equity financing is reflected in c.

    EXERCISE 1–4

    ASSETS = LIABILITIES + EQUITY
    Cash + Equipment = Accounts Payable + Share Capital + Retained Earnings
    A. Retained earnings = $5,000 (3,000 + 8,000 − 4,000 − 2,000)
    B. Accounts payable = $3,000 (1,000 + 6,000 − 3,000 − 1,000)
    C. Cash = $1,000 (4,000 − 1,500 − 3,000 − 500)
    D. Retained earnings = $6,000 (6,000 + 7,000 − 3,000 − 4,000)
    E. Equipment = $3,500 (2,500 −4,500 − 500 − 1,000)

    EXERCISE 1–5

    1. ASSETS = LIABILITIES + EQUITY

      Equity at Jan. 1 = $10,000 ($50,000 − 40,000)

      Equity at Dec. 31 = $20,000 ($40,000 − 20,000)

      The increase in equity during the year was $10,000 ($20,000 ending equity − 10,000 beginning equity). Given that during the year no share capital was issued and no dividends were declared, $10,000 is the amount of net income earned during 2015.

    2. ASSETS = LIABILITIES + EQUITY

      Equity at Jan. 1 = $10,000 ($50,000 − 40,000)

      Equity at Dec. 31 = $20,000 ($40,000 − 20,000)

      The increase in equity during the year was $10,000 ($20,000 ending equity − 10,000 beginning equity). Given that during the year no share capital was issued and $5,000 of dividends were declared, $15,000 is the amount of net income earned during 2015 [calculated as net income − $5,000 dividends = $10,000 increase in equity; net income = 10,000 + 5,000 or 15,000].

    3. ASSETS = LIABILITIES + EQUITY

      Equity at Jan. 1 = $10,000 ($50,000 − 40,000)

      Equity at Dec. 31 = $20,000 ($40,000 − 20,000)

      The increase in equity during the year was $10,000 ($20,000 ending equity − 10,000 beginning equity). Given that during the year $12,000 of share capital was issued and no dividends were declared, a net loss of $2,000 was realized for 2015 (calculated as net income + $12,000 share capital issued = $10,000 increase in equity; net income = $10,000 − $12,000; net income is therefore a negative $2,000 which represents a net loss).

    4. ASSETS = LIABILITIES + EQUITY

      Equity at Jan. 1 = $10,000 ($50,000 − 40,000)

      Equity at Dec. 31 = $20,000 ($40,000 − 20,000)

      The increase in equity during the year was $10,000 ($20,000 ending equity − 10,000 beginning equity). Given that during the year $8,000 of share capital was issued and $12,000 of dividends were declared, $14,000 is the amount of net income earned during 2015 (calculated as net income + $8,000 share capital issued − $12,000 dividends = $10,000 increase in equity; net income = $10,000 − $8,000 + $12,000; net income = $14,000).

    EXERCISE 1–6

    a. L h. A o. L
    b. A i. A p. E
    c. L j. E q. A
    d. A k. E r. E
    e. A l. A s. E
    f. E m. E t. A
    g. L n. E

    EXERCISE 1–7

    1. ASSETS = Cash + Accounts Receivable + Unused Supplies + Land + Building+ Equipment
    = $33,000 + $82,000 + $2,000 + $25,000 + $70,000 + $30,000
    = $242,000 Total Assets
    2. LIABILITIES = Bank Loan + Accounts Payable
    = $15,000 + $27,000
    = $42,000 Total Liabilities
    3. ASSETS = LIABILITIES + EQUITY
    EQUITY = $242,000 Total Assets − $42,000 Total Liabilities
    = $200,000 Total Equity

    Since equity is $200,000 and retained earnings is $40,000, share capital must be $160,000.

    EXERCISE 1–8

    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

    $20,000
    Expenses Opening Balance $ -0- $ -0- $ -0-

    Wages Expense

    $9,000 Shares Issued 2,000 2,000

    Miscellaneous Expense

    2,500 Net Income 6,000 6,000
    Insurance Expense 1,500 Ending Balance $2,000 $6,000 $8,000
    Office Supplies Expense 1,000 14,000
    Net Income $6,000

    EDW Inc.

    Balance Sheet

    March 31, 2015

    Assets Liabilities

    Cash

    $1,000

    Accounts Payable

    $5,000

    Accounts Receivable

    4,000

    Equipment

    8,000 Equity

    Share Capital

    $2,000

    Retained Earnings

    6,000

    Total Equity

    8,000
    Total Assets $13,000 Total Liabilities and Equity $13,000

    NOTE:

    The $2,000 amount for shares issued was calculated using A = L + E or, using the accounts in the order given in the alphabetized information; 4,000 + 1,000 + 8,000 = 5,000 − 1,500 − 2,500 − 1,000 + 20,000 + Share Capital − 9,000; 13,000 = 11,000 + Share Capital; 13,000 − 11,000 = 2,000 Share Capital.

    Alternatively, you could have inserted all the values from the alphabetized information into the financial statements and then solved for the unknown Share Capital amount. There is often more than one approach to solving math related questions.

    EXERCISE 1–9

    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

    $81,000
    Expenses Opening Balance $10,000 $6,000 $16,000

    Advertising Expense

    $5,000 Net Income 5,000 5,000

    Insurance Expense

    7,000 Dividends (2,000) (2,000)

    Salaries Expense

    64,000 76,000 Ending Balance $10,000 $9,000 $19,000
    Net Income $5,000

    Algonquin Inc.

    Balance Sheet

    July 31, 2015

    Assets Liabilities

    Cash

    $9,000

    Accounts Payable

    $3,000

    Accounts Receivable

    17,000

    Note Payable

    18,000

    Machinery

    14,000

    Total Liabilities

    $21,000
    Equity

    Share Capital

    $10,000

    Retained Earnings

    9,000

    Total Equity

    19,000
    Total Assets $40,000 Total Liabilities and Equity $40,000

    EXERCISE 1–10

    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

    $81,000
    Expenses Opening Balance $7,000 $6,000 $13,000

    Advertising Expense

    $5,000 Shares Issued 3,000 3,000

    Insurance Expense

    7,000 Net Income 5,000 5,000

    Salaries Expense

    64,000 76,000 Dividends (2,000) (2,000)
    Net Income $5,000 Ending Balance $10,000 $9,000 $19,000

    Algonquin Inc.

    Balance Sheet

    July 31, 2015

    Assets Liabilities

    Cash

    $9,000

    Accounts Payable

    $3,000

    Accounts Receivable

    17,000

    Note Payable

    18,000

    Machinery

    14,000

    Total Liabilities

    $21,000
    Equity

    Share Capital

    $10,000

    Retained Earnings

    9,000

    Total Equity

    19,000
    Total Assets $40,000 Total Liabilities and Equity $40,000

    NOTE:

    Given that additional shares were issued for cash of $3,000 during the year ended July 31, 2015 and share capital had a balance of $10,000 at July 31, 2015, the end of the year, the beginning balance in share capital must have been $7,000.

    EXERCISE 1–11

    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

    $12,000
    Expenses Opening Balance $6,400 $4,000 $10,400

    Equipment Rental Expense

    $9,400 Net Loss (1,300) (1,300)

    Wages Expense

    3,400 Ending Balance $6,400 $2,700 $9,100

    Fuel Expense

    500 13,300
    Net Loss $1,300

    Wallaby Inc.

    Balance Sheet

    March 31, 2015

    Assets Liabilities

    Cash

    $6,000

    Rent Payable

    $2,500

    Accounts Receivable

    1,600

    Note Payable

    18,000

    Truck

    22,000

    Total Liabilities

    $20,500
    Equity

    Share Capital

    $6,400

    Retained Earnings

    2,700

    Total Equity

    9,100
    Total Assets $29,600 Total Liabilities and Equity $29,600

    EXERCISE 1–12

    Adams Ltd.

    Income Statement

    For the Month Ended January 31, 2015

    Revenue

    Service Revenue

    $3,335
    Expenses

    Rent expense

    $300

    Repairs expense

    500

    Salaries expense

    1,000

    Miscellaneous expense

    335

    Total expenses

    2,135
    Net Income $1,200

    Adams Ltd.

    Statement of Changes in Equity

    For the Month Ended January 31, 2015

    Share Capital Retained Earnings Total Equity
    Opening balance $ -0- $ -0- $ -0-
    Shares issued 3,000 -0- 3,000
    Net income -0- 1,200 1,200
    Ending balance $3,000 $1,200 $4,200

    Adams Ltd.

    Balance Sheet

    At January 31, 2015

    Assets
    Cash $1,000
    Land 1,000
    Building 2,500

    Total assets

    $4,500
    Liabilities
    Accounts payable $300
    Equity
    Share capital $3,000
    Retained earnings 1,200

    Total equity

    4,200

    Total liabilities and equity

    $4,500

    EXERCISE 1–13

    Mitch's Architects Ltd.

    Income Statement

    For the Year Ended December 31, 2015

    Revenues
    Consulting fees earned $150,000
    Expenses
    Office rent expense $60,000
    Salaries and benefits expense 40,000
    Utilities expense 12,000
    Insurance expense 5,000
    Supplies and postage expense 2,400 119,400
    Net income $30,600

    EXERCISE 1–14

    Mitch's Architects Ltd.

    Statement of Changes in Equity

    For the Year Ended December 31, 2015

    Share Capital Retained Earnings Total Equity
    Opening balance* $20,400 $6,000 $26,400
    Shares issued** 10,000 10,000
    Net income 30,600 30,600
    Dividends*** (1,000) (1,000)
    Ending balance $30,400 $35,600 $66,000

    * Share capital opening balance ($30,400−10,000)
    * Retained earnings opening balance ($5,000 balance+1,000 dividends)
    ** Share capital issued during the current year given in the question as $10,000
    *** Dividends paid during the current year given in the question as $1,000

    EXERCISE 1–15

    Mitch's Architects Ltd.

    Balance Sheet

    At December 31, 2015

    Assets Liabilities
    Cash $23,000 Accounts payable $30,000
    Accounts receivable 24,000 Unearned consulting fees 15,000
    Office supplies inventory 2,000

    Total liabilities

    $45,000
    Prepaid insurance 7,000 Equity
    Truck 40,000 Share capital $30,400
    Office equipment 15,000 Retained earnings 35,600

    Total equity

    66,000
    Total assets $111,000 Total liabilities and equity $111,000

    EXERCISE 1–16

    Gillespie Corp.

    Income Statement

    For the Year Ended May 31, 2015

    Revenues
    Service revenue $382,000
    Rent revenue 90,000
    Total Revenue 472,000
    Expenses
    Warehouse rent expense 100,000
    Salaries and benefits expense 110,000
    Utilities expense 42,000
    Insurance expense 15,000
    Shop supplies expense 6,000
    Net income $199,000

    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 199,000 199,000
    Dividends (10,000) (10,000)
    Ending balance $5,000 $329,000 $334,000

    Gillespie Corp.

    Balance Sheet

    For the Year Ended May 31, 2015

    Assets Liabilities
    Cash $50,000 Accounts payable $130,000
    Accounts receivable 85,000 Unearned service revenue 25,000
    Prepaid advertising 17,000

    Total liabilities

    $155,000
    Shop supplies 52,000 Equity
    Building 240,000 Share capital $5,000
    Office equipment 45,000 Retained earnings 329,000

    Total equity

    334,000
    Total assets $489,000 Total liabilities and equity $489,000

    EXERCISE 1–17

    Using the same calculation as the retained earnings column in the statement of changes in equity:

    Opening retained earnings + Net income (or minus net loss) – Dividends = Ending retained earnings

    1. $50,000 + Net income ? – 20,000 = $40,000
      Net income = $40,000 – 50,000 + 20,000 = $10,000
    2. Retained earnings opening balance ? + 150,000 – 40,000 = $130,000
      Retained earnings opening balance = $130,000 – 150,000 + 40,000 = $20,000
    3. $75,000 – 35,000 – Dividends ? = $40,000
      Dividends = $40,000 – 75,000 + 35,000 = 0

    EXERCISE 1–18

    a. Assets = Liabilities + Equity
    Balances at April 1, 2015 $100,000 $60,000 $40,000
    10,000 April net income(loss)
    Balances at April 30, 2015 $180,000 = $130,000 + $50,000
    b. Assets = Liabilities + Equity
    Balances at April 1, 2015 $100,000 $60,000 $40,000
    $50,000 Shares issued in April
    (40,000) April net income(loss)
    Balances at April 30, 2015 $180,000 = $130,000 + $50,000
    c. Assets = Liabilities + Equity
    Balances at April 1, 2015 $100,000 $60,000 $40,000
    14,000 April net income(loss)
    (4,000) Dividends paid in April
    Balances at April 30, 2015 $180,000 = $130,000 + $50,000

    EXERCISE 1–19

    a. Assets = Liabilities + Equity
    Balances at June 1, 2015 $160,000 $100,000 $60,000
    $70,000 June net income(loss)
    (20,000) Dividends paid in June
    Balances at June 30, 2015 $200,000 = $90,000 + $110,000
    b. Assets = Liabilities + Equity
    Balances at June 1, 2015 $160,000 $100,000 $60,000
    $40,000 Shares issued in June
    $90,000 June net income(loss)
    (80,000) Dividends paid in June
    Balances at June 30, 2015 $200,000 = $90,000 + $110,000
    c. Assets = Liabilities + Equity
    Balances at June 1, 2015 $160,000 $100,000 $60,000
    $130,000 Shares issued in June
    ($80,000) June net income(loss)
    -0- Dividends paid in June
    Balances at June 30, 2015 $200,000 = $90,000 + $110,000

    EXERCISE 1–20

    a. 3 Purchased a truck for cash.
    b. 1 Issued share capital for cash.
    c. 2 Incurred a bank loan as payment for equipment.
    d. 3 Made a deposit for electricity service to be provided to the company in the future.
    e. 4 Paid rent expense.
    f. NT Signed a new union contract that provides for increased wages in the future.
    g. NT Wrote a letter of complaint to the prime minister about a mail strike and hired a messenger service to deliver letters.
    h. 4 Received a collect telegram from the prime minister; paid the messenger.
    i. 1 Billed customers for services performed.
    j. 5 Made a cash payment to satisfy an outstanding obligation.
    k. 3 Received a payment of cash in satisfaction of an amount owed by a customer.
    l. 1 Collected cash from a customer for services rendered.
    m. 4 Paid cash for truck operation expenses.
    n.

    5&4

    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. 7 Issued shares in the company to pay off a loan.

    Problems

    PROBLEM 1–1

    Dumont Inc.

    Income Statement

    For the Month Ended January 31, 2015

    Dumont Inc.

    Balance Sheet

    At January 31, 2015

    Assets
    Cash $1,300
    Revenue Accounts receivable 2,400

    Service revenue

    $7,500 Prepaid expenses 550
    Unused supplies 750
    Expenses Truck 9,000

    Advertising expense

    $500

    Total assets

    $14,000
    Commissions expense 720
    Insurance expense 50
    Interest expense 80 Liabilities
    Rent expense 400 Bank loan $8,000
    Supplies expense 100 Accounts payable 1,000

    Telephone expense

    150

    Total liabilities

    9,000

    Wages expense

    2,500 Equity

    Total expenses

    4,500 Share capital $2,000
    Net income $3,000 Retained earnings 3,000

    Total equity

    5,000
    Total liabilities and equity $14,000

    Dumont Inc.

    Statement of Changes in Equity

    For the Month Ended January 31, 2015

    Share Capital Retained Earnings Total Equity
    Opening balance $ -0- $ -0- $ -0-
    Shares issued 2,000 -0- 2,000
    Net income -0- 3,000 3,000
    Ending balance $2,000 $3,000 $5,000

    PROBLEM 1–2

    1. The income statement and statement of changes in equity are as follows:

      Laberge Sheathing Inc.

      Balance Sheet

      August 31, 2015

      Laberge Sheathing Inc.

      Income Statement

      For the Month Ended August 31, 2015

      Assets
      Cash $400
      Accounts receivable 3,800
      Revenue Unused supplies 100

      Service revenue

      $2,000 Equipment 8,700

      Total assets

      $13,000
      Expenses

      Advertising expense

      $300

      Interest expense

      500 Liabilities

      Maintenance expense

      475 Accounts payable $7,800

      Supplies expense

      125

      Wages expense

      2,600 Equity

      Total expenses

      4,000 Share capital 3,200

      Net loss

      $2,000 Retained earnings 2,000 5,200

      Total liabilities and equity

      $13,000

      Laberge Sheathing Inc.

      Statement of Changes in Equity

      Month Ended August 31, 2015

      Share Capital Retained Earnings Total Equity
      Opening balance $3,200 $4,000 $7,200
      Net loss -0- (2,000) (2,000)
      Ending balance $3,200 $2,000 $5,200
    2. The percentage of assets financed by equity is 40% calculated as (5,200/13,000) × 100. Although part 2 of this question did not require that the percentage of assets financed by debt be calculated, it is 60% calculated as 100% − 40%.

    PROBLEM 1–3

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    PROBLEM 1–4

    Larson Services Inc.

    Balance Sheet

    At August 31, 2015

    Larson Services Inc.

    Income Statement

    For the Month Ended August 31, 2015

    Assets
    Cash $3,900
    Accounts receivable 10,000
    Prepaid expenses 600
    Revenues Unused supplies 500

    Fees earned

    $11,500 Truck 8,000
    Total assets $23,000
    Expenses

    Advertising expense

    $200 Liabilities

    Rent expense

    350 Bank loan $10,000

    Salaries expense

    2,150 Accounts payable 250

    Supplies expense

    250 Unearned revenue 1,500

    Telephone expense

    50

    Total liabilities

    11,750

    Truck operation expense

    250

    Total expenses

    3,250 Equity
    Net income $8,250 Share capital 3,000
    Retained earnings 8,250

    Total equity

    11,250
    Total liabilities and equity $23,000

    Larson Services Inc.

    Statement of Changes in Equity

    For the Month Ended August 31, 2015

    Share Capital Retained Earnings Total Equity
    Opening balance $ -0- $ -0- $ -0-
    Shares issued 3,000 -0- 3,000
    Net income -0- 8,250 8,250
    Ending balance $3,000 $8,250 $11,250

    PROBLEM 1–5

    Cash Accounts receivable Office supplies Prepaid expenses Equipment Office furniture Accounts payable Note/Loan payable Unearned revenue Share capital Retained earnings
    Open Bal +10,000 +25,000 +2,000 0 +25,000 +15,000 +35,000 0 0 +8,000 +34,000
    1 +5,000 +5,000
    2 -5,000 -5,000
    3 +3,000 +3,000
    4 +27,000 +27,000
    5 +3,000 +3,000
    6
    7 +300 -300
    8 +20,000 +20,000
    9 -8,000 -8,000
    10 -3,000 -3,000
    11 +25,000 +25,000
    12 +25,000 -25,000
    13
    14
    15 -3,500 -3,500
    16 -5,000 +5,000
    17 -50 -50
    18 +3,000 +3,000
    Bal +35,450 +52,000 +5,000 +5,000 +28,000 +18,000 +33,300 +23,000 +5,000 +8,000 +74,150

    PROBLEM 1–6

    Olivier Bondar Ltd.

    Balance Sheet

    At May 31, 2016

    Assets Liabilities
    Cash $35,450 Accounts payable $33,300
    Accounts receivable 52,000 Note/Loan payable 23,000
    Unearned revenue 5,000
    Office supplies 5,000

    Total liabilities

    $61,300
    Prepaid expenses 5,000
    Equipment 28,000 Equity
    Office furniture 18,000 Share capital $8,000
    Retained earnings 74,150

    Total equity

    82,150
    Total assets $143,450 Total liabilities and equity $143,450
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