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2 Analyzing Chapter and Recording Transactions QUESTIONS 1. a. Common asset accounts: Cash, Accounts Receivable, Notes Receivable, Prepaid Expenses (Rent, Insurance, etc.), Office Supplies, Store Supplies, Equipment, Building, and Land. b. Common liability accounts: Accounts Payable, Notes Payable, Unearned Revenue, Wages Payable, and Taxes Payable. c. 2. Common equity accounts: Owner, Capital; and Owner, Withdrawals. A note payable is formal promise, usually denoted by signing a promissory note to pay a future amount. A note payable can be short-term or long-term, depending on when it is due. An account payable also references an amount owed to an entity. An account payable can be oral or implied, and often arises from the purchase of inventory, supplies, or services. An account payable is usually short-term. There are several steps in processing transactions: (1) Identify and analyze the transaction or event, including the source document(s), (2) apply double-entry accounting, (3) record the transaction or event in a journal, and (4) post the journal entry to the ledger. These steps would be followed by preparation of a trial balance and then with the reporting of financial statements. A general journal can be used to record any business transaction or event. Debited accounts are commonly recorded first. The credited accounts are commonly indented. Expense accounts have debit balances because they are decreases to equity (and equity has a credit balance). A transaction is first recorded in a journal to create a complete record of the transaction in one place. (The journal is often referred to as the book of original entry.) This process reduces the likelihood of errors in ledger accounts. The recordkeeper prepares a trial balance to summarize the contents of the ledger and to verify the equality of total debits and total credits. The trial balance also serves as a helpful internal document for preparing financial statements and other reports. 3. 4. 5. 6. 7. 8. McGraw-Hill Companies, 2007 Solutions Manual, Chapter 2 55 9. The error should be corrected with a separate (subsequent) correcting entry. The entrys explanation should describe why the correction is necessary. 10. The four financial statements are: income statement, balance sheet, statement of owners equity, and statement of cash flows. 11. The income statement lists the types and amounts of revenues and expenses, and reports whether the business earned a net income (also called profit or earnings) or a net loss. 12. An income statement user must know what time period is covered to judge whether the companys performance is satisfactory. For example, a statement user would not be able to assess whether the amounts of revenue and net income are satisfactory without knowing whether they were earned over a week, a month, a quarter, or a year. 13. The balance sheet provides information that helps users understand a companys financial position at a point in time. Accordingly, it is often called the statement of financial position. The balance sheet lists the types and dollar amounts of assets, liabilities, and equity of the business. 14. (a) Assets are probable future economic benefits obtained or controlled by a specific entity as a result of past transactions or events. (b) Liabilities are probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events. (c) Equity is the residual interest in the assets of an entity that remains after deducting its liabilities. (d) Net assets refer to equity. 15. The balance sheet is sometimes referred to as the statement of financial position. 16. Debit balance accounts on the Best Buy balance sheet include: Cash and cash equivalents; Short-term investments; Receivables; Merchandise inventories; Other current assets; Land and buildings; Leasehold improvements; Fixtures and equipment; Property under master and capital lease; Goodwill, Tradename; LongTerm Investments; Other Assets Credit balance accounts on the Best Buy balance sheet include: Accounts payable; Unredeemed gift card liabilities; Accrued compensation and related expenses; Accrued liabilities; Accrued income taxes; Current portion of long-term debt; LongTerm Liabilities; Long-Term Debt; Preferred Stock; Common stock; Additional paid-in capital; Retained earnings; Accumulated other comprehensive income. 17. Assets with receivable in their account title are Accounts receivable, net of allowance for doubtful accounts of $120 and $547 [in thousands], and Retained interests in securitized receivables. The liability with payable in its account title is Accounts payable. 18. Apples revenue account is titled Net Sales. McGraw-Hill Companies, 2007 56 Fundamental Accounting Principles, 18th Edition QUICK STUDIES Quick Study 2-1 (10 minutes) The likely source documents include: a. Sales ticket d. Telephone bill e. Invoice from supplier i. Bank statement Quick Study 2-2 (10 minutes) a. b. c. d. e. f. g. h. i. E B B B I B B B I Statement of owners equity Balance sheet Balance sheet Balance sheet Income statement Balance sheet Balance sheet Balance sheet Income statement Quick Study 2-3 (10 minutes) a. b. c. d. Debit Debit Credit Credit e. f. g. h. Debit Credit Credit Debit i. j. k. l. Credit Debit Debit Credit Quick Study 2-4 (10 minutes) a. b. c. d. Debit Credit Debit Credit e. f. g. h. Debit Credit Credit Credit i. j. Credit Debit McGraw-Hill Companies, 2007 Solutions Manual, Chapter 2 57 Quick Study 2-5 (10 minutes) a. b. c. Debit Debit Credit d. e. f. Debit Debit Debit g. h. i. Credit Debit Credit Quick Study 2-6 (15 minutes) Jan.13 Cash.......................................................................... 70,000 Equipment ................................................................ 30,000 D. Tyler, Capital................................................ 100,000 Owner invests cash and equipment. 21 Office Supplies......................................................... Accounts Payable........................................... Purchased office supplies on credit. 280 280 7,800 7,800 1,000 1,000 29 Cash.......................................................................... Landscaping Services Revenue.................... Received cash for landscaping services. 30 Cash.......................................................................... Unearned Landscaping Services Revenue... Received cash in advance for landscaping services. Quick Study 2-7 (10 minutes) The correct answer is a. Explanation: If a $2,250 debit to Rent Expense is incorrectly posted as a credit, the effect is to understate the Rent Expense debit balance by $4,500. This causes the Debit column total on the trial balance to be $4,500 less than the Credit column total. Quick Study 2-8 (10 minutes) a. b. c. d. I B B I e. f. g. h. B B B I i. j. E B McGraw-Hill Companies, 2007 58 Fundamental Accounting Principles, 18th Edition EXERCISES Exercise 2-1 (15 minutes) Account Accounts Payable...................... Postage Expense........................ Prepaid Insurance...................... Land............................................. Owner, Capital............................ Accounts Receivable................. Owner, Withdrawals................... Cash............................................. Equipment................................... Fees Earned................................ Wages Expense.......................... Unearned Revenue Type of Account liability expense asset asset equity asset equity asset asset revenue expense liability Increase (Dr. or Cr.) a. b. c. d. e. f. g. h. i. j. k. l. credit debit debit debit credit debit debit debit debit credit debit credit Normal Balance credit debit debit debit credit debit debit debit debit credit debit credit Exercise 2-2 (15 minutes) a. Beginning cash balance (debit)........................................... Cash received in October (debits)....................................... Cash disbursed in October (credits)................................... Ending cash balance (debit)................................................. Beginning cash balance (debit)........................................... $ ? 102,500 (103,150) $ 18,600 $ 19,250 $102,500 ? (102,890) $ 89,000 $ 89,390 $152,000 281,000 ( ?) $132,500 $300,500 b. Beginning accounts receivable (debit)............................... Sales on account in October (debits).................................. Collections on account in October (credits)....................... Ending accounts receivable (debit)..................................... Sales on account in October (debits).................................. c. Beginning accounts payable (credit).................................. Purchases on account in October (credits)........................ Payments on accounts in October (debits)........................ Ending accounts payable (credit)........................................ Payments on accounts in October (debits)........................ McGraw-Hill Companies, 2007 Solutions Manual, Chapter 2 59 Exercise 2-3 (15 minutes) The company would make the following entry (not required for answer): Cash................................................................... 10,000 Computer Equipment....................................... 80,000 Note Payable............................................... 28,000 Services Revenue....................................... 62,000 Accepted cash, equipment and note for services. Thus, of the a e items listed, the following effects should be included: a. $28,000 increase in a liability account. b. $10,000 increase in the Cash account. e. $62,000 increase in a revenue account. Explanation: This transaction reflects $62,000 in revenue, which is the value of the service provided. Payment is received in the form of a $10,000 increase in cash, an $80,000 increase in computer equipment, and a $28,000 increase in its liabilities. The net value received by the company is $62,000. Exercise 2-4 (25 minutes) Aug. 1 Cash................................................................... 6,500 Photography Equipment.................................. 33,500 M. Harris, Capital........................................ Owner investment in business. 40,000 2 Prepaid Insurance............................................ Cash............................................................. Acquired 2 years of insurance coverage. 2,100 2,100 880 880 3,331 3,331 675 675 5 Office Supplies................................................. Cash............................................................. Purchased office supplies. 20 Cash................................................................... Photography Fees Earned......................... Collected photography fees. 31 Utilities Expense............................................... Cash............................................................. Paid for August utilities. McGraw-Hill Companies, 2007 60 Fundamental Accounting Principles, 18th Edition Exercise 2-5 (30 minutes) Aug. 1 20 Balance Aug. 5 Aug. 2 Cash 6,500 Aug. 2 3,331 5 31 6,176 Office Supplies 880 Prepaid Insurance 2,100 2,100 880 675 Photography Equipment Aug. 1 33,500 M. Harris, Capital Aug. 1 40,000 Photography Fees Earned Aug. 20 3,331 Aug. 31 Utilities Expense 675 POSE-FOR-PICS Trial Balance August 31 Cash............................................. Office supplies............................ Prepaid insurance....................... Photography equipment............ M. Harris, Capital......................... Photography fees earned........... Utilities expense.......................... Totals............................................ 675 $43,331 Debit $ 6,176 880 2,100 33,500 $40,000 3,331 ______ $43,331 Credit McGraw-Hill Companies, 2007 Solutions Manual, Chapter 2 61 Exercise 2-6 (30 minutes) (a) (d) (h) Balance Cash 13,325 2,000 2,300 9,340 (b) (e) (g) (i) 475 6,235 775 800 (e) Accounts Payable 6,235 (c) Balance A. Amena, Capital (a) Balance A. Amena, Withdrawals (i) 800 Balance 800 Fees Earned (d) (f) Balance Rent Expense 775 775 6,235 0 13,325 13,325 Accounts Receivable (f) 3,300 (h) Balance 1,000 Office Supplies 475 475 2,300 (b) Balance 2,000 3,300 5,300 (c) Balance Office Equipment 6,235 6,235 (g) Balance Exercise 2-7 (15 minutes) AMENA COMPANY Trial Balance May 31, 2008 Cash..................................................... Accounts receivable.......................... Office supplies.................................... Office equipment................................ Accounts payable............................... A. Amena, Capital............................... A. Amena, Withdrawals...................... Fees earned........................................ Rent expense...................................... Totals................................................... Debit $ 9,340 1,000 475 6,235 Credit $ 800 775 $18,625 0 13,325 5,300 ______ $18,625 McGraw-Hill Companies, 2007 62 Fundamental Accounting Principles, 18th Edition Exercise 2-8 (20 minutes) Transactions that created revenues: b. Accounts Receivable.......................................... 2,300 Services Revenue......................................... Provided services on credit. 2,300 c. Cash..................................................................... Services Revenue......................................... Provided services for cash. 875 875 [Note: Revenues are inflows of assets (or decreases in liabilities) received in exchange for goods or services provided to customers.] Transactions that did not create revenues along with the reasons are: a. This transaction brought in cash, but this is an owner investment. d. This transaction brought in cash, but it created a liability because the services have not yet been provided to the client. e. This transaction changed the form of the asset from accounts receivable to cash. Total assets were not increased (revenue was recognized when the receivable was originally recorded). f. This transaction brought in cash and increased assets, but it also increased a liability by the same amount (no goods or services were provided to generate revenue). McGraw-Hill Companies, 2007 Solutions Manual, Chapter 2 63 Exercise 2-9 (20 minutes) Transactions that created expenses: b. Salaries Expense......................................... Cash........................................................ Paid salary of receptionist. 1,233 1,233 870 870 d. Utilities Expense.......................................... Cash........................................................ Paid utilities for the office. [Note: Expenses are outflows or using up of assets (or the creation of liabilities) that occur in the process of providing goods or services to customers.] Transactions a, c, and e are not expenses for the following reasons: a. This transaction decreased assets in settlement of a previously existing liability, and equity did not change. Cash payment does not mean the same as using up of assets (expense is recorded when the supplies are used). c. This transaction involves the purchase of an asset. The form of the companys assets changed, but total assets did not change, and the equity did not decrease. e. This transaction is a distribution of cash to the owner. Even though equity decreased, the decrease did not occur in the process of providing goods or services to customers. Exercise 2-10 (15 minutes) ONTECH Income Statement For Month Ended October 31 Revenues Consulting fees earned......................... Expenses Salaries expense................................... Rent expense......................................... Telephone expense............................... Miscellaneous expenses...................... Total expenses....................................... Net income.................................................. $14,000 $7,000 3,550 760 580 11,890 $ 2,110 McGraw-Hill Companies, 2007 64 Fundamental Accounting Principles, 18th Edition Exercise 2-11 (15 minutes) ONTECH Statement of Owners Equity For Month Ended October 31 D. Shabazz, Capital, October 1.................. Add: Investment by owner...................... Net income (from Exercise 2-10)...... Less: Withdrawals by owner.................... D. Shabazz, Capital, October 31................ $ 0 84,000 2,110 86,110 2,000 $84,110 Exercise 2-12 (15 minutes) ONTECH Balance Sheet October 31 Assets Cash............................... $11,360 Accounts receivable.... 14,000 Office supplies.............. 3,250 Office equipment.......... 18,000 Patents.......................... 46,000 Total assets................... $92,610 * Liabilities Accounts payable................ Equity D. Shabazz, Capital*............. Total liabilities & equity....... $ 8,500 84,110 _______ $92,610 Computation shown in Exercise 2-11. McGraw-Hill Companies, 2007 Solutions Manual, Chapter 2 65 Exercise 2-13 (20 minutes) a. Beginning of the year....... End of the year.................. Net increase in equity....... Net Income......................... Plus owner investments... Less owner withdrawals. . Change in equity............... Therefore, income must equal $29,000. b. Net income.......................................................... Plus owner investments.................................... Less owner withdrawals ($1,250/mo. x 12 mo.) Change in equity................................................ $ ? 0 (15,000) $29,000 Assets $ 60,000 105,000 - Liabilities $20,000 36,000 = Equity = $40,000 = 69,000 $29,000 $ ? 0 (0) $29,000 Therefore, net income must equal ($29,000 + $15,000) = $44,000 c. Net income......................................................... Plus owner investment..................................... Less withdrawals by owner.............................. Change in equity................................................ $ ? 55,000 (0) $29,000 Therefore, the net loss must equal ($29,000 - $55,000) = $(26,000) d. Net income.......................................................... Plus owner investment...................................... Less owner withdrawals ($1,250/mo. x 12 mo.) Change in equity................................................ $ ? 35,000 (15,000) $29,000 Therefore, income must equal ($29,000+$15,000-$35,000)= $9,000 McGraw-Hill Companies, 2007 66 Fundamental Accounting Principles, 18th Edition Exercise 2-14 (15 minutes) (a) (b) (c) (d) Answers Computations: Equity, Dec. 31, 2007.... Owner's investments... Owners withdrawals. . . Net income (loss)......... $(28,000) $ 0 $42,000 $ 0 $73,000 $ 0 $(45,000) $ 0 110,000 (28,000) 22,000 42,000 (47,000) 90,000 $85,000 87,000 (10,000) (4,000) $73,000 210,000 (55,000) (45,000) $110,000 Equity, Dec. 31, 2008.... $104,000 Exercise 2-15 (25 minutes) a. Belle created a new business and invested $6,000 cash, $7,600 of equipment, and $12,000 in automobiles. b. Paid $4,800 cash in advance for insurance coverage. c. Paid $900 cash for office supplies. d. Purchased $300 of office supplies and $9,700 of equipment on credit. e. Received $4,500 cash for delivery services provided. f. Paid $1,600 cash towards accounts payable. g. Paid $820 cash for gas and oil expenses. McGraw-Hill Companies, 2007 Solutions Manual, Chapter 2 67 Exercise 2-16 (30 minutes) a. Cash............................................................................ Equipment.................................................................. Automobiles............................................................... D. Belle, Capital.................................................. Owner investment in company. Prepaid Insurance..................................................... Cash.................................................................... Purchased insurance coverage. Office Supplies.......................................................... Cash.................................................................... Purchased supplies with cash. Office Supplies.......................................................... Equipment.................................................................. Accounts Payable.............................................. Purchased supplies and equipment on credit. Cash............................................................................ Delivery Services Revenue............................... Received cash from customer. Accounts Payable..................................................... Cash.................................................................... Made payment on payables. Gas and Oil Expense................................................. Cash.................................................................... Paid for gas and oil. 6,000 7,600 12,000 25,600 4,800 4,800 900 900 300 9,700 10,000 4,500 4,500 1,600 1,600 820 820 b. c. d. e. f. g. McGraw-Hill Companies, 2007 68 Fundamental Accounting Principles, 18th Edition Exercise 2-17 (20 minutes) (1) (2) Difference between Column Debit and with the Credit Larger Columns Total $2,260 Credit (3) Identify account(s) incorrectly stated Rent Expense (4) Amount that account(s) is overstated or understated Description a. $3,600 debit to Rent Expense is posted as a $1,340 debit. is posted twice as two credits to Cash. Withdrawals account is debited to Owners Capital Rent Expense is understated by $2,260 Cash is understated by $6,500 Owner, Capital is understated by $10,900 Owner, Withdrawals is understated by $10,900 Prepaid Insurance is understated by $2,050 Insurance Expense is overstated by $2,050 Machinery is understated by $38,000 Accounts Payable is understated by $38,000 Services Revenue is understated by $5,265 b. $6,500 credit to Cash c. $10,900 debit to the $6,500 Credit Cash Owner, Capital $0 Owner, Withdrawals Prepaid Insurance d. $2,050 debit to Prepaid Insurance is posted as a debit to Insurance Expense. $0 Insurance Expense Machinery e. $38,000 debit to Machinery is posted as a debit to Accounts Payable. $5,850 credit to Services Revenue is posted as a $585 credit. Supplies is not posted. $0 Accounts Payable Services Revenue f. $5,265 Debit g. $1,390 debit to Store $1,390 Credit Store Supplies Store Supplies is understated by $1,390 McGraw-Hill Companies, 2007 Solutions Manual, Chapter 2 69 Exercise 2-18 (15 minutes) a. The debit column is correctly stated because the erroneous debit (to Accounts Payable) is deducted from an account with a (larger assumed) credit balance. The credit column is understated by $37,900 because Accounts Payable was debited it should have been credited. The Office Equipment account balance is correctly stated. The Accounts Payable account balance is understated by $37,900. It should have been increased (credited) by $18,950 but the posting error decreased (debited) it by $18,950. The credit column is $37,900 less than the debit column, or $322,100 in total ($360,000 - $37,900). b. c. d. e. Exercise 2-19 (15 minutes) a. Co. Liabilities / Assets Debt = Ratio Net Income / Average Assets = ROA 1 2 3 4 5 6 $12,000 47,000 26,500 56,000 31,000 51,500 $ 90,500 64,000 32,500 147,000 92,000 104,500 0.13 0.73 0.82 0.38 0.34 0.49 $20,000 3,800 660 21,000 7,500 12,000 $100,000 40,000 50,000 200,000 40,000 70,000 0.200 0.095 0.013 0.105 0.188 0.171 b. Company 3 relies most heavily on creditor (non-owner) financing with 82% of its assets financed by liabilities. c. Company 1 relies least on creditor (non-owner) financing at only 13%. This implies that 87% of the assets are financed by equity (owners). d. The companies with the highest debt ratios indicate the greatest risk. The two companies with the highest debt ratios are 2 and 3. e. Company 1 yields the highest return on assets at 20%; followed by Company 5 at 18.8%. f. As an investor, one prefers high returns at low risk. Company 1 is the preferred investment since it yields the lowest risk (debt ratio is 13.3%) and highest return on assets (20%). McGraw-Hill Companies, 2007 70 Fundamental Accounting Principles, 18th Edition PROBLEM SET A Problem 2-1A (90 minutes) Part 1 a. Cash................................... .........................101 100,000 Office Equipment.......................................163 5,000 Drafting Equipment....................................164 60,000 J. Aracel, Capital............................... ..301 Owner invested cash and equipment. 165,000 b. Land............................................................172 Cash....................................................101 Note Payable.......................................250 Purchased land with cash and note payable. 49,000 6,300 42,700 c. Building.................................................. .....170 Cash....................................................101 Purchased building. 55,000 55,000 d. Prepaid Insurance......................................108 Cash....................................................101 Purchased 18-month insurance policy. 3,000 3,000 e. Cash................................... .........................101 Engineering Fees Earned..................402 Collected cash for completed work. 6,200 6,200 f. Drafting Equipment....................................164 Cash....................................................101 Note Payable.......................................250 Purchased equipment with cash and note payable. 20,000 9,500 10,500 g. Accounts Receivable.................................106 Engineering Fees Earned..................402 Completed services for client. 14,000 14,000 h. Office Equipment.......................................163 Accounts Payable..............................201 1,150 1,150 McGraw-Hill Companies, 2007 71 Solutions Manual, Chapter 2 Purchased equipment on credit. McGraw-Hill Companies, 2007 72 Fundamental Accounting Principles, 18th Edition Problem 2-1A (Part 1 Continued) i. Accounts Receivable.................................106 Engineering Fees Earned..................402 Billed client for completed work. 22,000 22,000 1,333 1,333 j. Equipment Rental Expense.......................602 Accounts Payable..............................201 Incurred equipment rental expense. k. Cash................................... .........................101 Accounts Receivable.........................106 Collected cash on account. 7,000 7,000 l. Wages Expense..........................................601 Cash....................................................101 Paid assistants wages. 1,200 1,200 1,150 m. Accounts Payable......................................201 Cash...................................................101 Paid amount due on account. 1,150 925 n. Repairs Expense........................................604 Cash...................................................101 Paid for repair of equipment. 925 9,480 9,480 1,200 1,200 2,500 2,500 o. J. Aracel, Withdrawals...............................302 Cash....................................................101 Owner withdrew cash for personal use. p. Wages Expense..........................................601 Cash....................................................101 Paid assistants wages. q. Advertising Expense..................................603 Cash....................................................101 Paid for advertising expense. McGraw-Hill Companies, 2007 Solutions Manual, Chapter 2 73 Problem 2-1A (Continued) Part 2 Cash Date PR (a) (b) (c) (d) (e) (f) (k) (l) (m) (n) (o) (p) (q) Debit 100,000 Credit 6,300 55,000 3,000 6,200 9,500 7,000 1,200 1,150 925 9,480 1,200 2,500 No. 101 Balance 100,000 93,700 38,700 35,700 41,900 32,400 39,400 38,200 37,050 36,125 26,645 25,445 22,945 Accounts Payable Date PR (h) (j) (m) Debit 1,150 No. 201 Credit Balance 1,150 1,150 1,333 2,483 1,333 No. 250 Credit Balance 42,700 42,700 10,500 53,200 No. 301 Credit Balance 165,000 165,000 No. 302 Balance 9,480 Notes Payable Date PR (b) (f) Debit J. Aracel, Capital Date PR (a) Debit Accounts Receivable No. 106 Date PR Debit Credit Balance (g) 14,000 14,000 (i) 22,000 36,000 (k) 7,000 29,000 Prepaid Insurance Date PR Debit (d) 3,000 No. 108 Credit Balance 3,000 No. 163 Balance 5,000 6,150 No. 164 Balance 60,000 80,000 No. 170 Balance 55,000 No. 172 Balance 49,000 J. Aracel, Withdrawals Date PR Debit Credit (o) 9,480 Engineering Fees Earned Date PR (e) (g) (i) Debit No. 402 Credit Balance 6,200 6,200 14,000 20,200 22,000 42,200 Credit No. 601 Balance 1,200 2,400 No. 602 Balance 1,333 No. 603 Balance 2,500 No. 604 Balance 925 Office Equipment Date PR (a) (h) Date PR (a) (f) Debit 5,000 1,150 Debit 60,000 20,000 Debit 55,000 Debit 49,000 Credit Wages Expense Date PR Debit (l) 1,200 (p) 1,200 Date PR (j) Debit 1,333 Drafting Equipment Credit Equipment Rental Expense Credit Building Date PR (c) Credit Advertising Expense Date PR Debit Credit (q) 2,500 Land Date PR (b) 74 Repairs Expense Date PR (n) Debit 925 Credit Credit McGraw-Hill Companies, 2007 Fundamental Accounting Principles, 18th Edition Problem 2-1A (Concluded) Part 3 ARACEL ENGINEERING Trial Balance June 30 Debit Cash............................................................. $ 22,945 Accounts receivable.................................. 29,000 Prepaid insurance...................................... 3,000 Office equipment........................................ 6,150 Drafting equipment.................................... 80,000 Building....................................................... 55,000 Land............................................................. 49,000 Accounts payable....................................... Notes payable............................................. J. Aracel, Capital......................................... J. Aracel, Withdrawals............................... 9,480 Engineering fees earned............................ Wages expense........................................... 2,400 Equipment rental expense......................... 1,333 Advertising expense.................................. 2,500 Repairs expense......................................... 925 Totals........................................................... $261,733 Credit $ 1,333 53,200 165,000 42,200 $261,733 McGraw-Hill Companies, 2007 Solutions Manual, Chapter 2 75 Problem 2-2A (90 minutes) Part 1 Mar. 1 Cash................................... .........................101 150,000 Office Equipment.......................................163 22,000 D. Brooks, Capital..............................301 Owner invested cash and equipment. 172,000 2 Prepaid Rent................................. ..............131 Cash....................................................101 Prepaid six months rent. 6,000 6,000 3,000 1,200 4,200 4,000 4,000 7,500 7,500 4,200 4,200 5,000 5,000 3,500 3,500 3,820 3,820 5,100 5,100 600 600 3 Office Equipment.......................................163 Office Supplies...........................................124 Accounts Payable..............................201 Purchased equipment and supplies on credit. 6 Cash................................... .........................101 Services Revenue...............................403 Received cash for services. 9 Accounts Receivable.................................106 Services Revenue...............................403 Billed client for completed work. 12 Accounts Payable......................................201 Cash....................................................101 Paid balance due on account. 19 Prepaid Insurance......................................128 Cash....................................................101 Paid premium for insurance. 22 Cash................................... .........................101 Accounts Receivable.........................106 Collected part of amount owed by client. 25 Accounts Receivable.................................106 Services Revenue...............................403 Billed client for completed work. 29 D. Brooks, Withdrawals.............................302 Cash....................................................101 Owner withdrew cash for personal use. 30 Office Supplies...........................................124 Accounts Payable..............................201 Purchased supplies on account. McGraw-Hill Companies, 2007 76 Fundamental Accounting Principles, 18th Edition 31 Utilities Expense........................................690 Cash....................................................101 Paid monthly utility bill. 500 500 McGraw-Hill Companies, 2007 Solutions Manual, Chapter 2 77 Problem 2-2A (Continued) Part 2 Date Mar. Explanation 1 2 6 12 19 22 29 31 Cash PR G1 G1 G1 G1 G1 G1 G1 G1 Debit 150,000 4,000 3,500 Acct. No. 101 Credit Balance 150,000 6,000 144,000 148,000 4,200 143,800 5,000 138,800 142,300 5,100 137,200 500 136,700 Acct. No. 106 Credit Balance 7,500 3,500 4,000 7,820 Acct. No. 124 Credit Balance 1,200 1,800 Acct. No. 128 Credit Balance 5,000 Acct. No. 131 Credit Balance 6,000 Acct. No. 163 Credit Balance 22,000 25,000 Date Mar. 9 22 25 Accounts Receivable Explanation PR Debit G1 7,500 G1 G1 3,820 Office Supplies Explanation PR G1 G1 Prepaid Insurance Explanation PR G1 Prepaid Rent Explanation PR G1 Office Equipment Explanation PR G1 G1 Debit 1,200 600 Debit 5,000 Debit 6,000 Debit 22,000 3,000 Date Mar. 3 30 Date Mar. Date Mar. Date Mar. 19 2 1 3 McGraw-Hill Companies, 2007 78 Fundamental Accounting Principles, 18th Edition Problem 2-2A (Continued) Date Mar. Accounts Payable Explanation PR G1 G1 G1 D. Brooks, Capital Explanation PR G1 D. Brooks, Withdrawals Explanation PR G1 Services Revenue Explanation PR G1 G1 G1 Utilities Expense Explanation PR G1 Debit 4,200 Acct. No. 201 Credit Balance 4,200 4,200 0 600 600 Acct. No. 301 Credit Balance 172,000 172,000 Acct. No. 302 Credit Balance 5,100 Acct. No. 403 Credit Balance 4,000 4,000 7,500 11,500 3,820 15,320 Acct. No. 690 Credit Balance 500 3 12 30 Date Mar. Date Mar. Date Mar. Debit 1 29 Debit 5,100 Debit 6 9 25 Date Mar. 31 Debit 500 McGraw-Hill Companies, 2007 Solutions Manual, Chapter 2 79 Problem 2-2A (Concluded) Part 3 VENTURE CONSULTANTS Trial Balance March 31 Debit Cash ...................................................................... $136,700 Accounts receivable............................................ 7,820 Office supplies...................................................... 1,800 Prepaid insurance................................................ 5,000 Prepaid rent.......................................................... 6,000 Office equipment.................................................. 25,000 Accounts payable................................................. D. Brooks, Capital................................................ D. Brooks, Withdrawals....................................... 5,100 Services revenue.................................................. Utilities expense................................................... 500 Totals..................................................................... $187,920 Credit $ 600 172,000 15,320 $187,920 McGraw-Hill Companies, 2007 80 Fundamental Accounting Principles, 18th Edition Problem 2-3A (90 minutes) Part 1 April 1 Cash................................... .........................101 Office Equipment.......................................163 K. Lanelle, Capital..............................301 Owner invested cash and equipment. 80,000 26,000 106,000 9,000 9,000 8,000 3,600 11,600 4,000 4,000 6,000 6,000 11,600 11,600 2,400 2,400 4,400 4,400 2,890 2,890 5,500 5,500 600 600 2 Prepaid Rent................................. ..............131 Cash....................................................101 Prepaid twelve months rent. 3 Office Equipment.......................................163 Office Supplies...........................................124 Accounts Payable..............................201 Purchased equip. & supplies on credit. 6 Cash................................... .........................101 Services Revenue...............................403 Received cash for services. 9 Accounts Receivable.................................106 Services Revenue...............................403 Billed client for completed work. 13 Accounts Payable......................................201 Cash....................................................101 Paid balance due on account. 19 Prepaid Insurance......................................128 Cash....................................................101 Paid premium for insurance. 22 Cash................................... .........................101 Accounts Receivable.........................106 Collected part of amount owed by client. 25 Accounts Receivable.................................106 Services Revenue...............................403 Billed client for completed work. 28 K. Lanelle, Withdrawals.............................302 Cash....................................................101 Owner withdrew cash for personal use. 29 Office Supplies...........................................124 Accounts Payable..............................201 Purchased supplies on account. McGraw-Hill Companies, 2007 Solutions Manual, Chapter 2 81 30 Utilities Expense........................................690 Cash....................................................101 Paid monthly utility bill. 435 435 McGraw-Hill Companies, 2007 82 Fundamental Accounting Principles, 18th Edition Problem 2-3A (Continued) Part 2 Date April Explanation 1 2 6 13 19 22 28 30 Cash PR G1 G1 G1 G1 G1 G1 G1 G1 Debit 80,000 4,000 4,400 Acct. No. 101 Credit Balance 80,000 9,000 71,000 75,000 11,600 63,400 2,400 61,000 65,400 5,500 59,900 435 59,465 Acct. No. 106 Credit Balance 6,000 4,400 1,600 4,490 Acct. No. 124 Credit Balance 3,600 4,200 Acct. No. 128 Credit Balance 2,400 Acct. No. 131 Credit Balance 9,000 Acct. No. 163 Credit Balance 26,000 34,000 Date April 9 22 25 Accounts Receivable Explanation PR Debit G1 6,000 G1 G1 2,890 Office Supplies Explanation PR G1 G1 Debit 3,600 600 Date April 3 29 Date April 19 Date April Date April Prepaid Insurance Explanation PR Debit G1 2,400 Prepaid Rent Explanation PR G1 Office Equipment Explanation PR G1 G1 Debit 9,000 Debit 26,000 8,000 2 1 3 McGraw-Hill Companies, 2007 Solutions Manual, Chapter 2 83 Problem 2-3A (Continued) Date April Accounts Payable Explanation PR G1 G1 G1 K. Lanelle, Capital Explanation PR G1 K. Lanelle, Withdrawals Explanation PR G1 Services Revenue Explanation PR G1 G1 G1 Utilities Expense Explanation PR G1 Debit 11,600 Acct. No. 201 Credit Balance 11,600 11,600 0 600 600 Acct. No. 301 Credit Balance 106,000 106,000 Acct. No. 302 Credit Balance 5,500 Acct. No. 403 Credit Balance 4,000 4,000 6,000 10,000 2,890 12,890 Acct. No. 690 Credit Balance 435 3 13 29 Date April Debit 1 Date April 28 Date April Debit 5,500 Debit 6 9 25 Date April 30 Debit 435 McGraw-Hill Companies, 2007 84 Fundamental Accounting Principles, 18th Edition Problem 2-3A (Continued) Part 3 VIVA CONSULTANTS Trial Balance April 30 Debit Cash....................................................................... $ 59,465 Accounts receivable............................................ 4,490 Office supplies...................................................... 4,200 Prepaid insurance................................................ 2,400 Prepaid rent.......................................................... 9,000 Office equipment.................................................. 34,000 Accounts payable................................................. K. Lanelle, Capital................................................ K. Lanelle, Withdrawals....................................... 5,500 Services revenue.................................................. Utilities expense................................................... 435 Total....................................................................... $119,490 Credit $ 600 106,000 12,890 $119,490 McGraw-Hill Companies, 2007 Solutions Manual, Chapter 2 85 Problem 2-4A (60 minutes) Part 1 FAVIANA ADRIANO SHIPPING Balance Sheet December 31, 2007 Assets Liabilities Cash............................... $ 64,300 Accounts payable................$ 3,500 Accounts receivable.... 26,240 Office supplies.............. 3,160 Trucks............................ 148,000 Equity Office equipment.......... 44,000 Total equity........................... 282,200 Total assets................... $285,700 Total liabilities and equity... $285,700 FAVIANA ADRIANO SHIPPING Balance Sheet December 31, 2008 Assets Liabilities Cash............................... $ 15,640 Accounts payable................. $ 33,500 Accounts receivable.... 19,390 Note payable.......................... 40,000 Office supplies.............. 1,960 Total liabilities....................... 73,500 Trucks............................ 157,000 Office equipment.......... 44,000 Building......................... 80,000 Equity Land............................... 60,000 Total equity............................ 304,490 Total assets................... $377,990 Total liabilities and equity.... $377,990 Part 2 Computation of 2008 net income: Equity, December 31, 2007........................................................... Equity, December 31, 2008........................................................... Increase in equity during 2008.................................................... Owner investment......................................................................... Add net income............................................................................. Deduct withdrawals by owner ($3,000 x 12)............................... Increase in equity during 2008.................................................... ............... $282,200 (304,490) $ 22,290 35,000 ? (36,000) $ 22,290 McGraw-Hill Companies, 2007 86 Fundamental Accounting Principles, 18th Edition Therefore, net income must equal ($22,290+$36,000- $35,000) = $ 23,290 Part 3 Debt Ratio = $73,500 / $377,990 = 19.4% McGraw-Hill Companies, 2007 Solutions Manual, Chapter 2 87 Problem 2-5A (35 minutes) Part 1 MIN ENGINEERING Trial Balance May 31 Cash............................................................. Office supplies............................................ Prepaid insurance...................................... Office equipment........................................ Accounts payable....................................... Y. Min, Capital............................................. Y. Min, Withdrawals.................................... 3,329 Engineering fees earned............................ Rent expense.............................................. 7,540 Totals........................................................... $66,900 Part 2: Likely transactions (following order of trial balance). 1. Purchased $890 of office supplies for cash. 2. Paid $4,600 insurance premium in advance. 3. Purchased $12,900 of office equipment on credit (with account payable). 4. Yi Min invested $18,000 cash in the business. 5. Yi Min withdrew $3,329 cash for personal use. 6. Earned $36,000 cash for engineering services, all in cash. 7. Paid $7,540 cash for rent expense. Part 3 Report of Cash Received and Paid Cash received Owner investment .................................... $18,000 Engineering fees ....................................... 36,000 Total cash received .................................. Cash paid Office supplies .......................................... 890 Insurance premium .................................. 4,600 Withdrawals by owner............................... 3,329 Rent............................................................. 7,540 Total cash paid .......................................... Ending balance ........................................... McGraw-Hill Companies, 2007 88 Fundamental Accounting Principles, 18th Edition Debit $37,641 890 4,600 12,900 Credit $12,900 18,000 36,000 . $66,900 $54,000 16,359 $37,641 Problem 2-6A (90 minutes) Part 1 a. Cash..........................................................101 Office Equipment.....................................163 H. Venedict, Capital..........................301 Owner invested cash and equipment. 60,000 25,000 85,000 b. Land..........................................................172 40,000 Building.....................................................170 160,000 Cash...................................................101 Notes Payable...................................250 Purchased land and building with cash and note payable. 30,000 170,000 c. Office Supplies.........................................108 Accounts Payable............................201 Purchased office supplies on account. 2,000 2,000 d. Automobiles.............................................164 H. Venedict, Capital..........................301 Owner contributed automobile to business. 16,500 16,500 e. Office Equipment.....................................163 Accounts Payable............................201 Purchased office equipment on account. 5,600 5,600 f. Salaries Expense.....................................601 Cash...................................................101 Paid assistants salary. 1,800 1,800 g. Cash..........................................................101 Fees Earned......................................402 Provided services for cash. 8,000 8,000 h. Utilities Expense......................................602 Cash...................................................101 Paid cash for utilities. 635 635 McGraw-Hill Companies, 2007 Solutions Manual, Chapter 2 89 Problem 2-6A (Part 1 Continued) i. Accounts Payable....................................201 Cash...................................................101 Paid cash on account. 2,000 2,000 20,300 20,300 j. Office Equipment.....................................163 Cash...................................................101 Purchased new equipment with cash. k. Accounts Receivable...............................106 Fees Earned......................................402 Provided services on account. 6,250 6,250 l. Salaries Expense.....................................601 Cash...................................................101 Paid assistants salary. 1,800 1,800 4,000 4,000 2,800 2,800 m. Cash..........................................................101 Accounts Receivable.......................106 Received cash due on account. n. H. Venedict, Withdrawals........................302 Cash...................................................101 Owner withdrew cash for personal use. McGraw-Hill Companies, 2007 90 Fundamental Accounting Principles, 18th Edition Problem 2-6A (Continued) Part 2 Cash Date PR (a) (b) (g) (f) (h) (i) (j) (l) (m) (n) Debit 60,000 Credit 30,000 1,800 8,000 635 2,000 20,300 1,800 4,000 2,800 No. 101 Balance 60,000 30,000 28,200 36,200 35,565 33,565 13,265 11,465 15,465 12,665 Land Date PR (b) Debit 40,000 Credit No. 172 Balance 40,000 Accounts Payable Date PR (c) (e) (i) Debit 2,000 No. 201 Credit Balance 2,000 2,000 5,600 7,600 5,600 No. 250 Credit Balance 170,000 170,000 Notes Payable Date PR (b) Debit Accounts Receivable No. 106 Date PR Debit Credit Balance (k) 6,250 6,250 (m) 4,000 2,250 H. Venedict, Capital Date PR (a) (d) Debit Office Supplies Date PR (c) Debit 2,000 Credit No. 108 Balance 2,000 No. 163 Balance 25,000 30,600 50,900 No. 301 Credit Balance 85,000 85,000 16,500 101,500 H. Venedict, Withdrawals Office Equipment Date PR (a) (e) (j) Debit 25,000 5,600 20,300 Credit Date PR (n) Debit 2,800 Credit No. 302 Balance 2,800 Fees Earned Date PR (g) (k) Debit No. 402 Credit Balance 8,000 8,000 6,250 14,250 No. 601 Balance 1,800 3,600 No. 602 Balance 635 Automobiles Date PR (d) Debit 16,500 Credit No. 164 Balance 16,500 No. 170 Balance 160,000 Salaries Expense Date PR (f) (l) Debit 1,800 1,800 Credit Building Date PR (b) Debit 160,000 Credit Utilities Expense Date PR (h) Debit 635 Credit McGraw-Hill Companies, 2007 Solutions Manual, Chapter 2 91 Problem 2-6A (Concluded) Part 3 HV CONSULTING Trial Balance September 30 Debit Cash ............................................................ $ 12,665 Accounts receivable.................................. 2,250 Office supplies............................................ 2,000 Office equipment........................................ 50,900 Automobiles................................................ 16,500 Building....................................................... 160,000 Land............................................................. 40,000 Accounts payable....................................... Long-term notes payable........................... H. Venedict, Capital ................................... H. Venedict, Withdrawals........................... 2,800 Fees earned................................................ Salaries expense........................................ 3,600 Utilities expense......................................... 635 ................................................................................ Total............................................................. $291,350 Credit $ 5,600 170,000 101,500 14,250 $291,350 McGraw-Hill Companies, 2007 92 Fundamental Accounting Principles, 18th Edition PROBLEM SET B Problem 2-1B (90 minutes) Part 1 a. Cash................................... .........................101 Office Equipment.......................................163 Computer Equipment.................................164 B. Grechus, Capital............................301 Owner invested cash and equipment. 65,000 5,750 30,000 100,750 b. Land............................................................172 Cash....................................................101 Note Payable.......................................250 Purchased land with cash and note payable. 22,000 5,000 17,000 c. Building.................................................. .....170 Cash....................................................101 Purchased building. 34,500 34,500 d. Prepaid Insurance......................................108 Cash....................................................101 Purchased 24-month insurance policy. 5,000 5,000 e. Cash................................... .........................101 Fees Earned........................................402 Collected cash for completed work. 4,600 4,600 f. Computer Equipment.................................164 Cash....................................................101 Note Payable.......................................250 Purchased equipment with cash and note payable. 4,500 800 3,700 g. Accounts Receivable.................................106 Fees Earned........................................402 Completed services for client. 4,250 4,250 h. Office Equipment.......................................163 Accounts Payable..............................201 950 950 McGraw-Hill Companies, 2007 Solutions Manual, Chapter 2 93 Purchased equipment on credit. McGraw-Hill Companies, 2007 94 Fundamental Accounting Principles, 18th Edition Problem 2-1B (Part 1 Continued) i. Accounts Receivable.................................106 Fees Earned........................................402 Billed client for completed work. 10,200 10,200 580 580 j. Computer Rental Expense........................602 Accounts Payable..............................201 Incurred computer rental expense. k. Cash................................... .........................101 Accounts Receivable.........................106 Collected cash on account. 5,100 5,100 l. Wages Expense..........................................601 Cash....................................................101 Paid assistants wages. 1,800 1,800 950 950 608 608 6,230 6,230 1,800 1,800 750 750 m. Accounts Payable......................................201 Cash....................................................101 Paid amount due on account. n. Repairs Expense........................................604 Cash....................................................101 Paid for repair of equipment. o. B. Grechus, Withdrawals...........................302 Cash....................................................101 Owner withdrew cash for personal use. p. Wages Expense..........................................601 Cash....................................................101 Paid assistants wages. q. Advertising Expense..................................603 Cash....................................................101 Paid for advertising expense. McGraw-Hill Companies, 2007 Solutions Manual, Chapter 2 95 Problem 2-1B (Continued) Part 2 Cash Date PR (a) (b) (c) (d) (e) (f) (k) (l) (m) (n) (o) (p) (q) Date PR (g) (i) (k) Debit 65,000 Credit 5,000 34,500 5,000 4,600 800 5,100 1,800 950 608 6,230 1,800 750 Debit 4,250 10,200 No. 101 Balance 65,000 60,000 25,500 20,500 25,100 24,300 29,400 27,600 26,650 26,042 19,812 18,012 17,262 Accounts Payable Date PR (h) (j) (m) Debit 950 No. 201 Credit Balance 950 950 580 1,530 580 No. 250 Credit Balance 17,000 17,000 3,700 20,700 No. 301 Credit Balance 100,750 100,750 No. 302 Balance 6,230 Notes Payable Date PR (b) (f) Debit B. Grechus, Capital Date PR (a) Debit Accounts Receivable No. 106 Credit Balance 4,250 14,450 5,100 9,350 No. 108 Credit Balance 5,000 No. 163 Balance 5,750 6,700 No. 164 Balance 30,000 34,500 No. 170 Balance 34,500 No. 172 Balance 22,000 B. Grechus, Withdrawals Date PR Debit Credit (o) 6,230 Fees Earned Date PR (e) (g) (i) Date PR (l) (p) Date PR (j) Debit Prepaid Insurance Date PR (d) Date PR (a) (h) Date PR (a) (f) Debit 5,000 Debit 5,750 950 Debit 30,000 4,500 Debit 34,500 Debit 22,000 No. 402 Credit Balance 4,600 4,600 4,250 8,850 10,200 19,050 Credit No. 601 Balance 1,800 3,600 No. 602 Balance 580 No. 603 Balance 750 No. 604 Balance 608 Office Equipment Credit Wages Expense Debit 1,800 1,800 Debit 580 Computer Equipment Credit Computer Rental Expense Credit Building Date PR (c) Credit Advertising Expense Date PR (q) Date PR (n) Debit 750 Debit 608 Credit Land Date PR (b) 96 Repairs Expense Credit Credit McGraw-Hill Companies, 2007 Fundamental Accounting Principles, 18th Edition Problem 2-1B (Concluded) Part 3 SOFTWORKS Trial Balance April 30 Debit Cash .............................................................. $ 17,262 Accounts receivable..................................... 9,350 Prepaid insurance......................................... 5,000 Office equipment........................................... 6,700 Computer equipment.................................... 34,500 Building.......................................................... 34,500 Land............................................................... 22,000 Accounts payable......................................... Notes payable................................................ B. Grechus, Capital....................................... B. Grechus, Withdrawals............................. 6,230 Fees earned................................................... Wages expense............................................. 3,600 Computer rental expense............................. 580 Advertising expense..................................... 750 Repairs expense........................................... 608 Totals............................................................. $141,080 Credit $ 580 20,700 100,750 19,050 $141,080 McGraw-Hill Companies, 2007 Solutions Manual, Chapter 2 97 Problem 2-2B (90 minutes) Part 1 Nov. 1 Cash................................... .........................101 Office Equipment.......................................163 C. Diella, Capital.................................301 Owner invested cash and equipment. 30,000 15,000 45,000 4,500 4,500 2,500 600 3,100 3,400 3,400 10,200 10,200 3,100 3,100 1,800 1,800 5,200 5,200 1,750 1,750 5,300 5,300 249 249 2 Prepaid Rent................................. ..............131 Cash....................................................101 Prepaid six months rent. 4 Office Equipment.......................................163 Office Supplies...........................................124 Accounts Payable..............................201 Purchased equipment and supplies on credit. 8 Cash................................... .........................101 Services Revenue...............................403 Received cash for services. 12 Accounts Receivable.................................106 Services Revenue...............................403 Billed client for completed work. 13 Accounts Payable......................................201 Cash....................................................101 Paid balance due on account. 19 Prepaid Insurance......................................128 Cash....................................................101 Paid premium for 24 months of insurance. 22 Cash................................... .........................101 Accounts Receivable.........................106 Collected part of amount owed by client. 24 Accounts Receivable.................................106 Services Revenue...............................403 Billed client for completed work. 28 C. Diella, Withdrawals................................302 Cash....................................................101 Owner withdrew cash for personal use. 29 Office Supplies...........................................124 Accounts Payable..............................201 Purchased supplies on account. McGraw-Hill Companies, 2007 98 Fundamental Accounting Principles, 18th Edition 30 Utilities Expense........................................690 Cash....................................................101 Paid monthly utility bill. 831 831 McGraw-Hill Companies, 2007 Solutions Manual, Chapter 2 99 Problem 2-2B (Continued) Part 2 Date Nov. Explanation 1 2 8 13 19 22 28 30 Cash PR G1 G1 G1 G1 G1 G1 G1 G1 Debit 30,000 3,400 5,200 Acct. No. 101 Credit Balance 30,000 4,500 25,500 28,900 3,100 25,800 1,800 24,000 29,200 5,300 23,900 831 23,069 Acct. No. 106 Credit Balance 10,200 5,200 5,000 6,750 Acct. No. 124 Credit Balance 600 849 Acct. No. 128 Credit Balance 1,800 Acct. No. 131 Credit Balance 4,500 Acct. No. 163 Credit Balance 15,000 17,500 Acct. No. 201 Credit Balance 3,100 3,100 0 249 249 Date Nov. 12 22 24 Accounts Receivable Explanation PR Debit G1 10,200 G1 G1 1,750 Office Supplies Explanation PR G1 G1 Debit 600 249 Date Nov. 4 29 Date Nov. Date Nov. Date Nov. 19 Prepaid Insurance Explanation PR Debit G1 1,800 Prepaid Rent Explanation PR G1 Office Equipment Explanation PR G1 G1 Debit 4,500 Debit 15,000 2,500 Debit 3,100 2 1 4 Accounts Payable Date Explanation PR Nov. 4 G1 13 G1 29 G1 Problem 2-2B (Continued) McGraw-Hill Companies, 2007 100 Fundamental Accounting Principles, 18th Edition Date Nov. Date Nov. Date Nov. 1 C. Diella, Capital Explanation PR G1 C. Diella, Withdrawals Explanation PR G1 Services Revenue Explanation PR G1 G1 G1 Utilities Expense Explanation PR G1 Debit Acct. No. 301 Credit Balance 45,000 45,000 Acct. No. 302 Credit Balance 5,300 Acct. No. 403 Credit Balance 3,400 3,400 10,200 13,600 1,750 15,350 Acct. No. 690 Credit Balance 831 28 Debit 5,300 Debit 8 12 24 Date Nov. Part 3 30 Debit 831 DIELLA MANAGEMENT SERVICES Trial Balance November 30 Debit Cash.................................................................. $23,069 Accounts receivable....................................... 6,750 Office supplies................................................. 849 Prepaid insurance........................................... 1,800 Prepaid rent..................................................... 4,500 Office equipment............................................. 17,500 Accounts payable............................................ C. Diella, Capital.............................................. C. Diella, Withdrawals..................................... 5,300 Services revenue............................................. Utilities expense.............................................. 831 Totals................................................................ $60,599 Credit $ 249 45,000 15,350 $60,599 McGraw-Hill Companies, 2007 Solutions Manual, Chapter 2 101 Problem 2-3B (90 minutes) Part 1 Sept.1 Cash..........................................................101 Office Equipment.....................................163 J. Hussein, Capital...........................301 Owner invested in the business. 38,000 15,000 53,000 9,000 9,000 8,000 2,400 10,400 3,280 3,280 15,400 15,400 10,400 10,400 1,900 1,900 7,700 7,700 2,100 2,100 5,300 5,300 550 550 860 860 2 Prepaid Rent.............................................131 Cash...................................................101 Prepaid twelve months rent. 4 Office Equipment.....................................163 Office Supplies.........................................124 Accounts Payable............................201 Purchased equipment and supplies on credit. 8 Cash..........................................................101 Service Fees Earned........................401 Received cash for services. 12 Accounts Receivable...............................106 Service Fees Earned........................401 Billed client for completed work. 13 Accounts Payable....................................201 Cash...................................................101 Paid balance due on account. 19 Prepaid Insurance....................................128 Cash...................................................101 Paid premium for insurance. 22 Cash..........................................................101 Accounts Receivable.......................106 Collected part of amount owed by client. 24 Accounts Receivable..............................106 Service Fees Earned........................401 Billed client for completed work. 28 J. Hussein, Withdrawals..........................302 Cash...................................................101 Owner withdrew cash for personal use. 29 Office Supplies.........................................124 Accounts Payable............................201 Purchased supplies on account. 30 Utilities Expense......................................690 Cash...................................................101 Paid monthly utility bill. McGraw-Hill Companies, 2007 102 Fundamental Accounting Principles, 18th Edition Problem 2-3B (Continued) Part 2 Date Sept. Explanation 1 2 8 13 19 22 28 30 Cash PR G1 G1 G1 G1 G1 G1 G1 G1 Debit 38,000 3,280 7,700 Acct. No. 101 Credit Balance 38,000 9,000 29,000 32,280 10,400 21,880 1,900 19,980 27,680 5,300 22,380 860 21,520 Acct. No. 106 Credit Balance 15,400 7,700 7,700 9,800 Acct. No. 124 Credit Balance 2,400 2,950 Date Sept. 12 22 24 Accounts Receivable Explanation PR Debit G1 15,400 G1 G1 2,100 Office Supplies Explanation PR Debit G1 2,400 G1 550 Date Sept. 4 29 Date Sept. Date Sept. 19 Prepaid Insurance Explanation PR G1 Prepaid Rent Explanation PR G1 Office Equipment Explanation PR G1 G1 Debit 1,900 Debit 9,000 Acct. No. 128 Credit Balance 1,900 Acct. No. 131 Credit Balance 9,000 Acct. No. 163 Credit Balance 15,000 23,000 2 Date Sept. 1 4 Debit 15,000 8,000 McGraw-Hill Companies, 2007 Solutions Manual, Chapter 2 103 Problem 2-3B (Continued) Date Sept. Accounts Payable Explanation PR G1 G1 G1 J. Hussein, Capital Explanation PR G1 Debit 10,400 Acct. No. 201 Credit Balance 10,400 10,400 0 550 550 Acct. No. 301 Credit Balance 53,000 53,000 Acct. No. 302 Credit Balance 5,300 Acct. No. 401 Credit Balance 3,280 3,280 15,400 18,680 2,100 20,780 Acct. No. 690 Credit Balance 860 4 13 29 Date Sept. Debit 1 Date Sept. 28 J. Hussein, Withdrawals Explanation PR Debit G1 5,300 Service Fees Earned Explanation PR Debit G1 G1 G1 Utilities Expense Explanation PR G1 Debit 860 Date Sept. 8 12 24 Date Sept. 30 McGraw-Hill Companies, 2007 104 Fundamental Accounting Principles, 18th Edition Problem 2-3B (Concluded) Part 3 HUSSEIN MANAGEMENT SERVICES Trial Balance September 30 Debit Cash.................................................................. $21,520 Accounts receivable....................................... 9,800 Office supplies................................................. 2,950 Prepaid insurance........................................... 1,900 Prepaid rent..................................................... 9,000 Office equipment............................................. 23,000 Accounts payable............................................ J. Hussein, Capital......................................... J. Hussein, Withdrawals................................. 5,300 Service fees earned......................................... Utilities expense.............................................. 860 Totals ............................................................... $74,330 Credit $ 550 53,000 20,780 . $74,330 McGraw-Hill Companies, 2007 Solutions Manual, Chapter 2 105 Problem 2-4B (60 minutes) Part 1 TAMA CO. Balance Sheet December 31, 2007 Assets Cash................................. $ 20,000 Accounts receivable...... 35,000 .......................................... Office supplies................ 8,000 Office equipment............ 40,000 Machinery........................ 28,500 Total assets..................... $131,500 Liabilities Accounts payable............ $ 4,000 Equity Total equity....................... 127,500 Total liabilities & equity... $131,500 TAMA CO. Balance Sheet December 31, 2008 Assets Cash................................. $ 5,000 Accounts receivable...... 25,000 Office supplies................ 13,500 Office equipment............ 40,000 Machinery........................ 28,500 Building........................... 250,000 Land................................. 50,000 Total assets..................... $412,000 Part 2 Calculation of 2008 net income: Equity, December 31, 2007........................................................... $127,500 Equity, December 31, 2008........................................................... (150,000) Increase in equity during 2008..................................................... $ 22,500 Owner investment during 2008................................................... $ 15,000 2008 Net income............................................................................ ? Owner withdrawals during 2008 ($250 x 12)............................... (3,000) Increase in equity during 2008..................................................... $ 22,500 Therefore, 2008 Income must equal ($22,500+ $3,000- $15,000) = $ 10,500 McGraw-Hill Companies, 2007 106 Fundamental Accounting Principles, 18th Edition Liabilities Accounts payable............ $ 12,000 Note payable..................... 250,000 Total liabilities.................. 262,000 Equity Total equity....................... 150,000 Total liabilities & equity... $412,000 Part 3 Debt ratio = $262,000 / $412,000 = 63.6% McGraw-Hill Companies, 2007 Solutions Manual, Chapter 2 107 Problem 2-5B (35 minutes) Part 1 GOULD SOLUTIONS Trial Balance April 30 Cash ...................................................................... Office supplies ..................................................... Prepaid rent ......................................................... Office equipment ................................................. Accounts payable................................................. R. Gould, Capital.................................................. R. Gould, Withdrawals......................................... 5,200 Consulting fees earned ....................................... Operating expenses ............................................ 7,658 Totals..................................................................... $47,650 Part 2: Likely transactions (following order of trial balance). 1. Purchased $760 of office supplies for cash. 2. Paid $1,800 cash for prepaid rent. 3. Purchased $12,250 office equipment on credit. 4. Gould invested $15,000 cash in the business. 5. Owner withdrew $5,200 cash for personal use. 6. Earned $20,400 cash in consulting fees. 7. Paid $7,658 cash for operating expenses. Part 3 Report of Cash Received and Paid Cash received Owner investment.................................... $15,000 Consulting fees ....................................... 20,400 Total cash received ................................. Cash paid Office supplies ......................................... 760 Prepaid rent ............................................. 1,800 Withdrawals by owner ............................ 5,200 Operating expenses ................................ 7,658 Total cash paid......................................... Ending balance........................................... McGraw-Hill Companies, 2007 108 Fundamental Accounting Principles, 18th Edition Debit $19,982 760 1,800 12,250 Credit $12,250 15,000 20,400 $47,650 $35,400 15,418 $19,982 Problem 2-6B (90 minutes) Part 1 a. Cash................................... .........................101 Office Equipment.......................................163 A. Nuncio, Capital................................301 Owner invested cash and equipment. 35,000 11,000 46,000 b. Land............................................................172 Building.................................................. .....170 Cash....................................................101 Notes Payable.....................................250 Purchased land and building with cash and note payable. 7,500 40,000 15,000 32,500 c. Office Supplies...........................................108 Accounts Payable..............................201 Purchased office supplies on account. 500 500 d. Automobiles...............................................164 A. Nuncio, Capital...............................301 Owner contributed automobile to business. 8,000 8,000 e. Office Equipment.......................................163 Accounts Payable..............................201 Purchased office equipment on account. 1,200 1,200 f. Salaries Expense...................................... ..601 Cash....................................................101 Paid assistants salary. 1,000 1,000 g. Cash................................... .........................101 Fees Earned........................................402 Provided services for cash. 3,200 3,200 h. Utilities Expense........................................602 Cash....................................................101 Paid cash for utilities. 540 540 McGraw-Hill Companies, 2007 Solutions Manual, Chapter 2 109 Problem 2-6B (Part 1 Continued) i. Accounts Payable......................................201 Cash....................................................101 Paid cash on account. 500 500 3,400 3,400 j. Office Equipment.......................................163 Cash....................................................101 Purchased equipment for cash. k. Accounts Receivable.................................106 Fees Earned........................................402 Provided services on account. 4,200 4,200 l. Salaries Expense...................................... ..601 Cash....................................................101 Paid assistants salary. 1,000 1,000 2,200 2,200 1,100 1,100 m. Cash................................... .........................101 Accounts Receivable.........................106 Received cash due on account. n. A. Nuncio, Withdrawals.............................302 Cash....................................................101 Owner withdrew cash for personal use. McGraw-Hill Companies, 2007 110 Fundamental Accounting Principles, 18th Edition Problem 2-6B (Continued) Part 2 Cash Date PR (a) (b) (f) (g) (h) (i) (j) (l) (m) (n) Debit 35,000 Credit 15,000 1,000 3,200 540 500 3,400 1,000 2,200 1,100 No. 101 Balance 35,000 20,000 19,000 22,200 21,660 21,160 17,760 16,760 18,960 17,860 Land Date PR (b) Debit 7,500 Credit No. 172 Balance 7,500 Accounts Payable Date PR (c) (e) (i) Debit 500 No. 201 Credit Balance 500 500 1,200 1,700 1,200 No. 250 Credit Balance 32,500 32,500 Notes Payable Date PR (b) Debit Accounts Receivable Date PR (k) (m) Debit 4,200 No. 106 Credit Balance 4,200 2,200 2,000 No. 108 Balance 500 No. 163 Balance 11,000 12,200 15,600 A. Nuncio, Capital Date PR (a) (d) Debit Office Supplies Date PR (c) Debit 500 Credit No. 301 Credit Balance 46,000 46,000 8,000 54,000 A. Nuncio, Withdrawals Office Equipment Date PR (a) (e) (j) Debit 11,000 1,200 3,400 Credit Date PR (n) Debit 1,100 Credit No. 302 Balance 1,100 Fees Earned Date PR (g) (k) Debit No. 402 Credit Balance 3,200 3,200 4,200 7,400 No. 601 Balance 1,000 2,000 No. 602 Balance 540 Automobiles Date PR (d) Debit 8,000 Credit No. 164 Balance 8,000 No. 170 Balance 40,000 Salaries Expense Date PR (f) (l) Debit 1,000 1,000 Credit Building Date PR (b) Debit 40,000 Credit Utilities Expense Date PR (h) Debit 540 Credit McGraw-Hill Companies, 2007 Solutions Manual, Chapter 2 111 Problem 2-6B (Concluded) Part 3 NUNCIO CONSULTING Trial Balance June 30 Debit Cash ............................................................ $17,860 Accounts receivable.................................. 2,000 Office supplies............................................ 500 Office equipment........................................ 15,600 Automobiles................................................ 8,000 Building....................................................... 40,000 Land............................................................. 7,500 Accounts payable....................................... Notes payable............................................. A. Nuncio, Capital....................................... A. Nuncio, Withdrawals............................. 1,100 Fees earned................................................ Salaries expense........................................ 2,000 Utilities expense......................................... 540 ................................................................................ Total............................................................. $95,100 Credit $ 1,200 32,500 54,000 7,400 $95,100 McGraw-Hill Companies, 2007 112 Fundamental Accounting Principles, 18th Edition Serial Problem Part 1 (120 minutes) 2007 SP 2 Oct. 1 Cash..........................................................101 Office Equipment.....................................163 Computer Equipment..............................167 A. Lopez, Capital..............................301 Owner invests cash and equipment. 75,000 10,000 25,000 110,000 3,500 3,500 1,600 1,600 2,400 2,400 6,200 6,200 1,600 1,600 2 Prepaid Rent.............................................131 Cash...................................................101 Paid four months rent in advance. 3 Computer Supplies..................................126 Accounts Payable............................201 Purchased supplies on credit. 5 Prepaid Insurance....................................128 Cash...................................................101 Paid 12 months premium in advance. 6 Accounts Receivable ..............................106 Computer Services Revenue...........403 Billed customer for services. 8 Accounts Payable ...................................201 Cash...................................................101 Paid balance due on account payable. No entry necessary in the journal. 10 12 Accounts Receivable ..............................106 Computer Services Revenue...........403 Billed customer for services. 1,950 1,950 6,200 6,200 900 900 1,790 1,790 1,950 1,950 15 Cash..........................................................101 Accounts Receivable ......................106 Collected accounts receivable. 17 Repairs ExpenseComputer.................684 Cash...................................................101 Paid for computer repairs. 20 Advertising Expense...............................655 Cash...................................................101 Purchased ad in local newspaper. 22 Cash..........................................................101 Accounts Receivable ......................106 Collected accounts receivable. McGraw-Hill Companies, 2007 Solutions Manual, Chapter 2 113 Serial Problem, Success Systems (Continued) 28 Accounts Receivable ..............................106 Computer Services Revenue ..........403 Billed customer for services. 7,300 7,300 1,050 1,050 4,000 4,000 384 384 3,600 3,600 1,750 1,750 6,500 6,500 31 Wages Expense........................................623 Cash ..................................................101 Paid employee for part-time work. 31 A. Lopez, Withdrawals.............................302 Cash ..................................................101 Owner withdrew cash for personal use. Nov. 1 Mileage Expense......................................676 Cash ..................................................101 Reimbursed Lopez for mileage. 2 Cash..........................................................101 Computer Services Revenue...........403 Collected cash revenue from client. 5 Computer Supplies..................................126 Cash ..................................................101 Purchased computer supplies for cash. 8 Accounts Receivable ..............................106 Computer Services Revenue ..........403 Billed customer for services. 13 No entry necessary. (No revenue recognized until work is performed.) 18 Cash..........................................................101 5,000 Accounts Receivable.......................106 Collected accounts receivable. 5,000 22 Miscellaneous Expenses*.......................677 Cash...................................................101 24 Accounts Receivable...............................106 Computer Services Revenue...........403 Billed customer for services. 300 300 7,000 7,000 Record donation. *(Some companies set up a Donations account.) 25 No entry necessary. 28 Mileage Expense......................................676 Cash...................................................101 Reimbursed Lopez for mileage. 480 480 2,100 2,100 2,500 2,500 30 Wages Expense........................................623 Cash...................................................101 Paid employee for part-time work. 30 A. Lopez, Withdrawals.............................302 Cash...................................................101 Owner withdrew cash for personal use. McGraw-Hill Companies, 2007 114 Fundamental Accounting Principles, 18th Edition Serial Problem, Success Systems (Continued) Part 2 General Ledger accounts Cash Date Oct. 1 2 5 8 15 17 20 22 31 31 Nov. 1 2 5 18 22 28 30 30 Explanation PR Debit 75,000 Acct. No. 101 Credit Balance 75,000 3,500 71,500 2,400 69,100 1,600 67,500 73,700 900 72,800 1,790 71,010 72,960 1,050 71,910 4,000 67,910 384 67,526 71,126 1,750 69,376 74,376 300 74,076 480 73,596 2,100 71,496 2,500 68,996 Acct. No.106 Credit Balance 6,200 8,150 6,200 1,950 1,950 0 7,300 13,800 5,000 8,800 15,800 Acct. No. 126 Credit Balance 1,600 3,350 McGraw-Hill Companies, 2007 Solutions Manual, Chapter 2 115 6,200 1,950 3,600 5,000 Date Oct. 6 12 15 22 28 Nov. 8 18 24 Accounts Receivable Explanation PR Debit 6,200 1,950 7,300 6,500 7,000 Date Oct. 3 Nov. 5 Computer Supplies Explanation PR Debit 1,600 1,750 Serial Problem, Success Systems (Continued) Date Oct. 5 Prepaid Insurance Explanation PR Debit 2,400 Acct. No. 128 Credit Balance 2,400 Date Oct. 2 Prepaid Rent Explanation PR Debit 3,500 Acct. No. 131 Credit Balance 3,500 Date Oct. 1 Office Equipment Explanation PR Debit 10,000 Acct. No. 163 Credit Balance 10,000 Date Oct. 1 Computer Equipment Explanation PR Debit 25,000 Acct. No. 167 Credit Balance 25,000 Date Oct. 3 8 Accounts Payable Explanation PR Debit 1,600 Acct. No. 201 Credit Balance 1,600 1,600 0 Date Oct. 1 A. Lopez, Capital Explanation PR Acct. No. 301 Debit Credit Balance 110,000 110,000 Date Oct. 31 Nov.30 A. Lopez, Withdrawals Explanation PR Debit 4,000 2,500 Acct. No. 302 Credit Balance 4,000 6,500 McGraw-Hill Companies, 2007 116 Fundamental Accounting Principles, 18th Edition Serial Problem, Success Systems (Concluded) Computer Services Revenue Explanation PR Debit Acct. No. 403 Credit Balance 6,200 6,200 1,950 8,150 7,300 15,450 3,600 19,050 6,500 25,550 7,000 32,550 Acct. No. 623 Credit Balance 1,050 3,150 Date Oct. 6 12 28 Nov. 2 8 24 Date Oct. 31 Nov.30 Wages Expense Explanation PR Debit 1,050 2,100 Date Oct. 20 Advertising Expense Explanation PR Debit 1,790 Acct. No. 655 Credit Balance 1,790 Date Nov. 1 28 Mileage Expense Explanation PR Debit 384 480 Acct. No. 676 Credit Balance 384 864 Date Nov.22 Miscellaneous Expenses Explanation PR Debit 300 Acct. No. 677 Credit Balance 300 Date Oct. 17 Repairs ExpenseComputer Explanation PR Debit 900 Acct. No. 684 Credit Balance 900 McGraw-Hill Companies, 2007 Solutions Manual, Chapter 2 117 Serial Problem, Success Systems (Continued) Part 3 SUCCESS SYSTEMS Trial Balance November 30 Debit Cash.................................................................. $ 68,996 Accounts receivable....................................... 15,800 Computer supplies.......................................... 3,350 Prepaid insurance........................................... 2,400 Prepaid rent..................................................... 3,500 Office equipment............................................. 10,000 Computer equipment...................................... 25,000 Accounts payable............................................ A. Lopez, Capital............................................. A. Lopez, Withdrawals.................................... 6,500 Computer services revenue........................... Wages expense................................................ 3,150 Advertising expense....................................... 1,790 Mileage expense.............................................. 864 Miscellaneous expense.................................. 300 Repairs expenseComputer......................... 900 Totals................................................................ $142,550 Credit $ 0 110,000 32,550 $142,550 McGraw-Hill Companies, 2007 118 Fundamental Accounting Principles, 18th Edition Reporting in Action BTN 2-1 1. Best Buy reports $5,230,000,000 in liabilities for the fiscal year ended February 28, 2004 and $5,845,000,000 for fiscal year ended February 26, 2005. 2. Best Buy reports $8,652,000,000 in assets for fiscal year ended February 28, 2004 and $10,294,000,000 for fiscal year ended February 26, 2005. 3. Year ended February 28, 2004 Debt Ratio = $5,230 / $8,652 = 60.4% Year ended February 26, 2005 Debt Ratio = $5,845/$10,294 = 56.8% 4. Best Buy employed less financial leverage in fiscal year 2005. In fiscal year 2004, 60.4% of its assets were financed by debt. In 2005, only 56.8% of its assets were financed by debt. 5. Solution depends on the financial statements accessed. Comparative Analysis 1. Best Buy BTN 2-2 Current year debt ratio: $5,845,000/$10,294,000 = 56.8% Prior year debt ratio: 2. Circuit City Current year debt ratio: $1,701,948 / $3,789,382 = 44.9% Prior year debt ratio: $1,506,565 / $3,730,526 = 40.4% $5,230,000 / $8,652,000 = 60.4% 3. Best Buy has the higher degree of financial leverage. Best Buys current year debt ratio is markedly higher (56.8% vs. 44.9%) than that of Circuit City. This indicates that Best Buy carries more debt financing. This also implies that Best Buy is trying to use non-owner financing to make more money for its owners. This is fine provided Best Buys return does not decline below that of what it pays non-owners for use of their money this is the main source of risk. McGraw-Hill Companies, 2007 Solutions Manual, Chapter 2 119 Ethics Challenge BTN 2-3 This case involves a conflict between the need for efficiency and the need for control. While it makes sense to take and process lunch orders quickly, this efficiency is being achieved by using a shortcut that greatly weakens control over cash receipts. Cash could be received and lost or stolen because there would be no initial record of how much was received. The assistant managers explanation about the head manager not arriving until 3 oclock suggests that the head manager doesnt know about the proposed shortcut. Thus, the new employee is faced with the dilemma of deciding whether to accept the assistant managers instructions, suggest to the assistant manager that the shortcut seems wrong, or to ask the head manager to confirm the instructions. Each of these alternatives involves personal risk. It is possible that the assistant manager does not understand the potential for fraud and abuse if this shortcut is used. If the relationship between you and the assistant manager is such that you feel you can do so, you should explain your understanding of how the shortcut could lead to the problems of inaccurate records for tax purposes, gathering inaccurate marketing information, and abuse by other employees who might not be as honest as you and the assistant manager. If the assistant manager insists, you may want to work as instructed to get an idea of whether the shortcut is being abused by the assistant manager and perhaps to find out discreetly whether the head manager knows about it. (Although, this involves personal risk of perceived collusion with the assistant manager.) If you conclude that the assistant manager is committing fraud, you should report the situation to the head manager as quickly as possible. McGraw-Hill Companies, 2007 120 Fundamental Accounting Principles, 18th Edition Communicating in Practice MEMORANDUM To: Lila Corentine From: Subject: Financial statements explanation Date: BTN 2-4 The four major financial statements and their purposes are: Income statement describes a companys revenues and expenses along with the resulting net income or loss over a period of time. It helps explain how equity changes during a period due to earnings activities. Statement of owners equity explains changes in owners capital due to net income (or net loss) and any owners withdrawals over a period of time. Balance sheet describes a companys financial position (assets, liabilities, and equity) at a point in time. Statement of cash flows identifies cash inflows (receipts) and outflows (payments) over a period of time. It also explains how the cash balance on the balance sheet changed from the beginning to the end of a period. These financial statements are linked to each other across time. Specifically, a balance sheet reports an organizations financial position at a point in time. The income statement, statement of owners equity, and statement of cash flows report on performance over a period of time. These three statements link balance sheets from the beginning to the end of a reporting period. That is, they explain how the financial position of an organization changes from one point to another. McGraw-Hill Companies, 2007 Solutions Manual, Chapter 2 121 Taking It to the Net BTN 2-5 1. The fiscal years net income or (loss) for Amazon are: 2004 = $588,451,000 2003 = $35,282,000 2002 = $(149,132,000) 2. In each of the three years net cash is provided by operations as follows: 2004 = $566,560,000 2003 = $392,022,000 2002 = $174,291,000 In 2002, Amazon had a net loss of $149,132,000; and, in that same year, cash increased by $197,972,000. The reason its cash balance increased in 2002 was because operating and financing activities both provided cash for Amazon. Its operating activities were positive because of adjustments to income to account for non-cash transactions. Its financing cash flows were positive mainly due to the proceeds from exercise of stock options. (Note that the investing activities used cash, mainly due to purchases of marketable securities.) 3. Teamwork in Action BTN 2-6 <Instructor note: There is no specific solution to this activity.> The following sample solution gives a summary outline of what a minimum report needs to include. Assume a team member selects assets: Category: Assets a. Increases (decreases) in assets are debits (credits) to asset accounts. Debit means left side, credit means right side. The normal side of an account refers to the side where increases are recorded. For assets, this is the debit, or left, side. b. Owner investment of $10,000 cash in the business. c. Assets = Liabilities + Owner, Capital Owner, Withdrawals + Revenues Expenses + $10,000 = $0 + $10,000 $0 + $0 $0 An owners investment has no effect on the income statement, but it does increase the cash flows from financing by $10,000 on the statement of cash flows (this increases its net cash flow). d. Paid rent expense with $2,000 cash. e. Assets = Liabilities + Owner, Capital Owner, Withdrawals + Revenues Expenses McGraw-Hill Companies, 2007 122 Fundamental Accounting Principles, 18th Edition - $2,000 $2,000 = $0 + $0 $0 + $0 An expense paid in cash will decrease net income on the income statement and decrease operating cash flows on the statement of cash flows. McGraw-Hill Companies, 2007 Solutions Manual, Chapter 2 123 BusinessWeek Activity BTN 2-7 1. XBRL tags allow analysis that can help regulators find possible problems or errors in reported data, and it can allow investors to visit a companys website and create a spreadsheet with information that is of interest to them. They can then do analyses that will allow them to compare companies to determine opportunities. 2. Many companies do not quite understand XBRL and its potential. In addition, it has been difficult to create standard XBRL tags across industries. Finally, many companies are dealing with other reporting issues such as Sarbanes-Oxley and the creation of the XBRL system can be time-consuming and costly. 3. Many companies can use XBRL to compare themselves to other companies to see how they measure up to their competitors. They can also maintain a watch on key ratios (such as return on assets and the debt ratio). McGraw-Hill Companies, 2007 124 Fundamental Accounting Principles, 18th Edition Entrepreneurial Decision 1. BTN 2-8 MARTIN MUSIC SERVICES Balance Sheet December 31, 2008 Assets Liabilities Cash.................................... $ 3,600 Accounts payable................... $ 2,200 Accounts receivable ........ 9,600 Unearned lesson fees ........... 15,600 Prepaid insurance............. 1,500 Total liabilities......................... 17,800 Prepaid rent....................... 9,400 Store supplies.................... 6,600 Equity Equipment ......................... 50,000 Total equity.............................. 62,900 Total assets........................ $80,700 Total liabilities and equity...... $80,700 2. Debt ratio = Total liabilities / Total assets = $17,800 / $80,700 = 22% Return on assets = Net income/Average assets = $40,000/$80,700* = 50% *Ending balance is used per instructions. 3. The prospects of a bank loan are likely to be good. (i) The debt ratio indicates that 78% of the companys funding is from equity. Also, there are no debt obligations requiring periodic payments. This implies low risk. (ii) The level of return on assets is very high. This implies good return. Overall, given the information and the assumption that current performance will continue into the future, the prospects of a bank loan are good. Note: The loan does carry some riskfueling this risk are (i) poor recordkeeping, (ii) lack of information on growth potential, and (iii) a much higher pro forma debt ratiothat is, if the loan is granted, the debt ratio will jump to 43%, computed as: ($17,800 + $30,000) / ($80,700 + $30,000). McGraw-Hill Companies, 2007 Solutions Manual, Chapter 2 125 Entrepreneurial Decision BTN 2-9 There are several issues that Warren Brown should consider. If he chooses to contribute his own funds for the expansion, he will be risking his own savings, but he will not have the expense of interest payments, nor will he have the risk of the inability to repay his loan. If he chooses to borrow, he will have interest and loan payments to make, and he will have more risk (as measured by his debt ratio). If he can pay the interest and loan payments, it may be to his advantage to borrow, as long as his return on assets is high enough. Hitting the Road BTN 2-10 Findings will vary. It is advisable that the instructor obtains a few classified sections from newspapers that were published over the period of the assignment. If student reports lack responses for question 2, it is informative and motivating to bring these (accounting-related job opportunities) sections to class when discussing or returning student reports as many students are not accounting majors. Global Decision BTN 2-11 1. An analysis of return on assets suggests that Best Buy (9.6%) yields the greatest return on assets, while Circuit City (1.6%) yields the lowest return. 2. An analysis of the debt ratio suggests that Dixons (62.1%) presents the greatest risk, while Circuit City (44.9%) presents the least risk. 3. Either Dixons or Best Buy would appear to have some consideration for additional investment. Best Buy has the highest profitability, and has a risk level between the other two. Dixons return is close to that of Best Buy, but its risk is the highest. Circuit City has the lowest risk of the three companies, but it has a markedly low profitability ratio compared to the other two competitors. McGraw-Hill Companies, 2007 126 Fundamental Accounting Principles, 18th Edition ... View Full Document

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