Exercises: Chapter 2

 SHORT ANSWER QUESTIONS, EXERCISES AND PROBLEMS

Questions:

➢  Accounting has often been called the language of business. 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 business 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) concept? 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) concept 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 + Stockholders’ Equity
578,000 152,000
25,000 180,500
127,000 17,000
269,000  45,000
850,000  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   = Liability  + Equity + Revenue - Expense
Transaction Cash Supplies Equipment Accounts Payable Notes Payable Common Stock Service Revenue Rent Expense
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 balances: Cash, $5,000; Accounts Receivable, $2,000; Prepaid Rent $1,500; Supplies, $850, $1,500; 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    =  Liabilities  + Stockholders’ Equity  + Net Income   
Cash Accounts Receivable Prepaid Rent Supplies Equipment Trucks Accounts Payable Common Stock + Retained Earnings - Dividends Revenue  - Expenses Expense Type
Previous Balances $5,000 $2,000 $1,500 $850 $6,000 $15,000 $2,500 $20,000 $7,850    
1 4,500 4,500
2 -500 -500
3 -750 750 Rent expense
4 5,200 5,200
5 650 650
6 6,000 -6,000
7 850 850 Repair expense
8 -2,700 2,700 Salary expense
9 -280 280 Utilities expense
10 -350 350 Misc. expense
11 -550 550    
Ending Balance: $11,120 $1,200 $750 $1,500 $6,000 $15,000 $3,500 $20,000 $7,850 $550 $9,700 $4,930  
 
Larson Company
Income Statement
Month Ended December 31, 2014
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
Larson Inc., Retained Earnings, December 31 $ 7,850
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 Payable $3,500
Accounts Receivable    1,200
Prepaid Rent        750 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 balances: Cash, $6,000; Accounts Receivable, $7,000; Prepaid Rent, 1,900; Prepaid Insurance, $1,200  Supplies, $950, $1,500; 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,
  8. Cast 77 paid monthly salaries, $4,700,
  9. Utilities expense were paid, $380,
  10. Miscellaneous expense were paid, $250,
  11. Paid for monthly insurance, $200
  12. Dividends were paid, $750.


Required:
  • Apply the basic accounting equation (create a spreadsheet, please see comprehensive example) to complete a transaction analysis for each transaction (hint:  enter the balances provided first).
  • Prepare income statement at the end of December 31.
  • Prepare statement of retained earnings equity at the end of December 31.
  • Prepare balance sheet at the end of December 31.


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