separate-entity 3.
(a)
The assumption requires that business transactions are separate from the transactions of the owners. For example, the purchase of a truck by the owner for personal use is not recorded as an asset of the business. The unit-of-measure assumption requires information to be reported in the national monetary unit. That means that each business will account for and report its financial results primarily in terms of the national monetary unit, such as Yen in Japan and Australian dollars in Australia. Under the continuity or going-concern assumption, businesses are assumed to operate into the foreseeable future. That is, they are not expected to liquidate. The historical cost principle requires assets to be recorded at the cash-equivalent cost on the date of the transaction. Cashequivalent cost is the cash paid plus the dollar value of all noncash considerations.
(b)
(c)
(d)
E25 Req. 1 Event a.
Assets Buildings Equipment Cash +182.0 +21.9 48.1 +253.6
=
Liabilities Notes payable (long-term) +155. 8
+ Stockholders' Equity
b. c. d.
Cash
Contributed capital Dividends payable +179.2 Retained earnings
+253. 6 179.2
Investments (short-term) Cash No effects Cash Short-term Investments
+400. 8 400.8 +1.4 1.4
e. f.
Req. 2 The separate-entity assumption states that transactions of the business are separate from transactions of the owners. Since transaction (e) occurs between the owners and others in the stock market, there is no effect on the business.
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Multiple- choice Questions: bddadcadba P22. Req. 1 Cornell Home Healthcare Services was organized as a corporation. Only a corporation issues shares of capital stock to its owners in exchange for their investment, as Cornell did in transaction (a). Req. 2 (On next page) Req. 3 The transaction between the two stockholders (Event d) was not included in the tabulation. Since the transaction in (d) occurs between the owners, there is no effect on the business due to the separate-entity assumption. Req. 4 (a) Total assets = $111,500 + $18,000 + $5,000 + $510,500 + $160,000 + $65,000 = $870,000 (b) (c) (d) (e) Total liabilities = $280,000 Total stockholders' equity = Total assets Total liabilities = $870,000 $280,000 = $590,000 Cash balance = $50,000 + $90,000 $9,000 $18,000 $5,000 + $3,500 = $111,500 Total current assets = $111,500 + $18,000 + $5,000 = $134,500
Req. 5 Financial = Average Total Assets = ($700,000+$870,000) / 2 = $785,000 = 1.44 Leverage Average Stockholders' ($500,000+$590,000) / 2 $545,000 Equity This suggests that Cornell uses significantly more than equity debt to finance the company's assets
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P22. (continued) Req. 2 Assets = Liabilities + Stockholders' Equity Short-term Notes Notes Contributed Retained Cash Investments Receivable Land Building Equipment Payable Capital Earnings 50,000 500,000 100,000 50,000 = 200,000 100,000 400,000 +90,000 9,000 18,000 5,000 +3,500 +111,500 +18,000 +18,000 +5,000 3,500 +5,000 +510,500 +160,000 +14,000 +60,000 = +15,000 = = = = +65,000 = +280,000 +190,000 +400,000 +80,000 +90,000
Beg. (a) (b) (c) (e) (f)
(d) No effect
$870,000
$280,000
$590,000
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Extra Practices E22. Req. 1 Received (a) (b) (c) (d) (e) (f) (g) Equipment (A) Equipment (A) Cash (A) Building (A) [or Construction in progress] [or Copyright] Intangibles (A) [or Computer equipment] [or Delivery truck] Cash (A) -- Contributed capital (SE) Cash (A) Cash (A) Given Note payable (L)
No exchange transaction
Retained earnings (SE) [Received a reduction Cash (A) in the amount available for payment to stockholders] Investments (A) Land (A) Intangibles (A) Cash (A) Note payable (L) promise to pay] [Received a reduction in its [or Patents] No exchange transaction Cash (A) Cash (A) Cash (A) and Note payable (L) -- Short-term note payable (L) Cash (A)
(h) (i) (j) (k) (l) (m)
Req. 2 The truck in (b) would be recorded as an asset of $21,000. The land in (i) would be recorded as an asset of $50,000. These are applications of the cost principle. Req. 3 The agreement in (c) involves no exchange or receipt of cash, goods, or services and thus is not a transaction. Since transaction (k) occurs between the owner and others, there is no effect on the business because of the separate-entity assumption.
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E24. Event a. b. c. Cash Equipment Cash Note receivable Cash d. e. Cash Land Cash P21. Balance Sheet Classification (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14) Retained Earnings Note and Loans Payable (short-term) Materials and Supplies Long-term Debt Prepaid Taxes and Expenses Patents (an intangible asset) Income Taxes Payable Contributed Capital Property, Plant, and Equipment Notes and Accounts Receivable (short-term) Cash and Cash Equivalents Accounts Payable Investments (long-term) Crude Oil Products, and Merchandise SE CL CA NCL CA NCA CL SE NCA CA CA CL NCA CA Debit or Credit Balance Credit Credit Debit Credit Debit Debit Credit Credit Debit Debit Debit Credit Debit Debit Assets +24,000 +8,000 1,000 +500 500 +7,000 +15,000 4,000 Notes payable Mortgage note payable +7,000 +11,000 Notes payable +7,000 = Liabilities + Stockholders' Equity Contributed capital +24,000
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