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ACCT2301 Chapter 1 - Solutions Manual-1

ACCT2301 Chapter 1 - Solutions Manual-1 - CHAPTER 1...

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CHAPTER 1 INTRODUCTION TO ACCOUNTING AND BUSINESS EYE OPENERS 1. The objective of most businesses is to earn a profit. Profit is the difference between the amounts received from customers for goods or services provided and the amounts paid for the inputs used to provide those goods or services. 2. A manufacturing business changes basic in- puts into products that are then sold to cus- tomers. A service business provides services rather than products to customers. A restaurant such as Applebee’s has char- acteristics of both a manufacturing and a service business in that Applebee’s takes raw inputs such as cheese, fish, and beef and processes them into products for con- sumption by its customers. At the same time, Applebee’s provides services of wait- ing on its customers as they dine. 3. Some users of accounting information in- clude owners, managers, employees, cus- tomers, creditors, and the government. 4. Simply put, the role of accounting is to provide information for managers to use in operating the business. In addition, account- ing provides information to others to use in assessing the economic performance and condition of the business. 5. The corporate form allows the company to obtain large amounts of resources by issu- ing stock. For this reason, most companies that require large investments in property, plant, and equipment are organized as cor- porations. 6. No. The business entity concept limits the recording of economic data to transactions directly affecting the activities of the busi- ness. The payment of the interest of $3,000 is a personal transaction of Barry Bergan and should not be recorded by Elephant Delivery Service. 7. The land should be recorded at its cost of $115,000 to Gremlin Repair Service. This is consistent with the cost concept. 8. a. No. The offer of $900,000 and the increase in the assessed value should not be recognized in the accounting re- cords. b. Cash would increase by $900,000, land would decrease by $475,000, and own- er’s equity would increase by $425,000. 9. An account receivable is a claim against a customer for goods or services sold. An account payable is an amount owed to a creditor for goods or services purchased. Therefore, an account receivable in the re- cords of the seller is an account payable in the records of the purchaser. 10. (a); the business incurred a net loss of $115,000 ($715,000 – $600,000). 11. (b); the business realized net income of $195,100 ($687,500 – $492,400). 12. Net income or net loss Owner’s equity at the end of the period Cash at the end of the period 1
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PRACTICE EXERCISES PE 1–1A $81,000. Under the cost concept, the land should be recorded at the cost to Snap Repair Service. PE 1–1B $44,000. Under the cost concept, the land should be recorded at the cost to Terri- er Repair Service. PE 1–2A a. A = L + OE b. A = L + OE $475,000 = $115,000 + OE +$90,000 = $28,000 + OE OE = $360,000 OE = +$62,000 OE on December 31, 2010 = $422,000 = $360,000 + $62,000 PE 1–2B a. A = L + OE b. A = L + OE $750,000 = $293,000 + OE +$75,000 = –$30,000 + OE OE = $457,000 OE = +$105,000 OE on December 31, 2010 = $562,000 = $457,000 + $105,000 PE 1–3A (2) Expense (Advertising Expense) increases by $900; Asset (Cash) decreases by $900.
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