Exercises_ Chapter 2 _ Principles of Accounting I.pdf -...

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Unformatted text preview: SHORT ANSWER QUESTIONS, EXERCISES AND PROBLEMS Questions: ➢ Accounting has often been called the language of busi- ness. In what respects would you agree with this description? How might you argue that this description is deficient? ➢ Define asset, liability, and stockholders’ equity. ➢ How do liabilities and stockholders’ equity differ? How are they similar? ➢ How do accounts payable and notes payable differ? How are they similar? ➢ Define revenues. How are revenues measured? ➢ Define expenses. How are expenses measured? ➢ What is a balance sheet? On what aspect of a business does the balance sheet provide information? ➢ What is an income statement? On what aspect of a busi- ness does this statement provide information? ➢ What information does the statement of retained earnings provide? ➢ Identify the three types of activities shown in a statement of cash flows. ➢ What is a transaction? What use does the accountant make of transactions? Why? ➢ What is the accounting equation? Why must it always balance? ➢ Give an example from your personal life that illustrates your use of accounting information in reaching a decision. ➢ You have been elected to the governing board of your church. At the first meeting you attend, mention is made of building a new church. What accounting information would the board need in deciding whether or not to go ahead? ➢ A company purchased equipment for $2,000 cash. The vendor stated that the equipment was worth $2,400. At what amount should the equipment be recorded? ➢ What is meant by money measurement? ➢ Of what significance is the exchange-price (or cost) con- cept? How is the cost to acquire an asset determined? ➢ What effect does the going-concern (continuity) concept have on the amounts at which long-term assets are carried on the balance sheet? ➢ Of what importance is the periodicity (time periods) con- cept to the preparation of financial statements? ➢ Describe a transaction that would: Increase both an asset and capital stock. Increase both an asset and a liability. Increase one asset and decrease another asset. Decrease both a liability and an asset. Increase both an asset and retained earnings. Decrease both an asset and retained earnings. Increase a liability and decrease retained earnings. Decrease both an asset and retained earnings. Identify the causes of increases and decreases in stockholders’ equity B) Accounting Exercises: Exercise 1. Applying Basic Accounting Equation Royals Palm, Inc. reports the following assets and liabilities. Compute the totals that would appear in the corporation’s basic accounting equation (Assets = Liabilities + Stockholders’ Equity (Capital Stock)). Cash………………………….$55,000 Accounts Payable……………25,000 Office Supplies………………. 1, 500 Loan Payable…………………..7,000 Accounts Receivable………….10,000 Answer: Assets = Liabilities + Stockholders’ Equity Exercise 2. Applying Basic Accounting Equation Dan and Den, Inc. reports the following assets and liabilities. Compute the totals that would appear in the corporation’s basic accounting equation (Assets = Liabilities + Stockholders’ Equity (Capital Stock)). Cash………………………….$37,000 Accounts Payable……………15,000 Supplies……………………….1, 800 Loan Payable…………………..9,000 Inventory……………………….12,000 Answer: Assets = Liabilities + Stockholders’ Equity Exercise 3. Complete missing amounts in fundamental accounting equation for several businesses: Assets = Liabilities 578,000 + Stockholders’ Equity 152,000 25,000 127,000 17,000 269,000 45,000 850,000 180,500 675,000 250,000 657,450 Exercise 4. Perez Company had the following transactions during January: 1. Jan 1 Issued $100,000 in stock to owners in exchange for cash to start the business. 2. Jan 5 Borrowed $50,000 from the bank by signing a notes payable. 3. Jan 10 Purchase equipment by paying cash for $25,000. 3. Jan 15 Paid January rent of $2,400 for the office space (hint: since this is for January, record as rent expense) 4. Jan 18 Performed services for customers and received cash immediately for $8,000. 5. Jan 20 Purchased $2,000 in supplies on account. Prepare a transaction analysis for the January transactions. Remember to prove the accounting equation at the end. Assets = Transaction Liability + Eq Cash Supplies Equipment Accounts Payable Notes Payable Comm Stock Jan 1 Issued stock to owners Jan 5 Borrowed money from bank Jan 10 Purchased equipment with cash Jan 15 Paid January rent Jan 18 Performed services Jan 20 Purchased supplies on account Balance: Exercise 5. On December 31, Bryniuk’s Company, the accounting records showed the following information: Cash 49,500 Accounts Receivable 125,000 Supplies 1,500 Prepaid Insurance 12,000 Equipment 70,000 Building 420,000 Land 111,500 Accounts Payable 80,000 Notes Payable 170,000 Common Stock 410,000 Retained Earnings 65,000 Dividends 20,000 Service Revenue 174,000 Interest Revenue 1,000 Salaries Expense 52,000 Advertising Expense 17,000 Insurance Expense 5,000 Utilities Expense 13,750 Interest Expense 2,750 Prepare the Income Statement for year ended December 31. Bryniuk’s Company Income Statement For Year Ended December 31 Revenues: . Total Revenues Expenses: Total Expenses Net Income Exercise 6. Using the information from Exercise 5, prepare the Statement of Retained Earnings for December 31. Bryniuk’s Company Statement of Retained Earnings For Year Ended December 31 Beginning Retained Earnings $65,000 Add: Net Income Subtract: Dividends Ending Retained Earnings Exercise 7. Using the information from Exercises 5 and 6, prepare the Balance Sheet for December 31. Bryniuk’s Company Balance Sheet December 31 Assets Liabilities and Equity Total Liabilities Total Equity Total Assets Total Liabilities and Equity Problem 1: Prepare the financial statements of RodCast Company using the following information: Accounts Payable 43,100.00 Accounts Receivable 85,000.00 Cash 55,320.00 Common Stock 125,000.00 Dividends 28,000.00 Machinery 70,000.00 Rent Expense 24,000.00 Retained Earnings 70,000.00 Salaries Expense 65,000.00 Service Revenue 165,320.00 Supplies 2,350.00 Trucks 60,000.00 Utilities Expense 13,750.00 1. Classify each account by Account Type (Asset, Liability, Equity, Revenue or Expense) and which financial statement (income statement, statement of retained earnings, or balance sheet) it appears on. Account Account Type Financial Statement 2. Prepare the Income Statement, Statement of Retained Earnings and Balance Sheet for the month ended October 31. Comprehensive Problems Example: Larson’s Accounting Company has the following account balances: Cash, $5,000; Accounts Receivable, $2,000; Prepaid Rent $1,500; Supplies, $850; Equipment, $6,000; Trucks, $15,000; Accounts Payable, $2,500; Common Stock, $20,000; Retained Earnings $7,850. Business transactions during December are presented as follows: 1. Company received cash from clients for services, $4,500 2. Larson paid to creditors $500, 3. Paid office rent for the month of December, $750, 4. Company billed client for accounting services on account, $5,200 5. Supplies were purchased on account, $650, 6. Company received cash from clients billed previously, $6,000 7. Larson received an invoice for office equipment repair services from Office Extra for December (the invoice will be paid next month), $850, 8. Larson paid monthly salaries, $2,700, 9. Utilities expense were paid, $280, 10. Miscellaneous expense were paid, $350, 11. Dividends were paid, $550. Assets = Cash Previous Balances $5,000 1 4,500 2 -500 Accounts Receivable Prepaid Rent Supplies Equipment Tru $2,000 $1,500 $850 $6,000 $1 $6,000 $1 3 -750 4 5,200 5 6 650 6,000 -6,000 7 8 -2,700 9 -280 10 -350 11 -550 Ending Balance: $11,120 $1,200 Larson Company Income Statement Month Ended December 31, 2014 $750 $1,500 Fees earned $9,700 Expenses: Rent Expense $750 Repair Expense 850 Wages Expense 2700 Utilities Expense 280 Miscellaneous expense 350 Total Expenses $4,930 Net Income ($9,700 – $4,930)= $4,770 Larson Company Statement of Retained Earnings Month Ended December 31 $ 7,850 Larson Inc., Retained Earnings, December 31 Net income for the month $4,770 Less Dividends – 550 Increase in Stockholders’ Equity + 4,220 Larson Inc., Retained Earnings, December 31 $12,070 Larson Company Balance Sheet Month Ended December 31 Assets Liabilities Cash $11,120 Accounts Receivable 1,200 Prepaid Rent 750 Accounts Payable $3,500 Stockholders’ Equity Supplies 1,500 Common Stock 20,000 Equipment 6,000 Retained Earnings 12,070 Trucks 15,000 Total Assets $35,570 Total Liabilities and Stockholders’ Equity $35,570 Comprehensive Problem 1. Cast 77 Service Company has the following account balances: Cash, $6,000; Accounts Receivable, $7,000; Prepaid Rent, 1,900; Prepaid Insurance, $1,200 Supplies, $950; Equipment, $7,000; Trucks, $10,000; Accounts Payable, $2,700;Common Stock $25,000; Retained Earnings $6,350. Business transactions during December are presented as follows: 1. Company received cash from clients for services, $7,500 2. Cast 77 paid to creditors $600, 3. Paid office rent for the month of December, $950, 4. Company billed client for accounting services on account, $8,200 5. Supplies were purchased on account, $450, 6. Company received cash from clients billed previously, $4,200 7. Cast 77 received an invoice for services from Copy Plus for December (the invoice will be paid next month), $550, ...
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