PAGE 1 Practice exercise Chapter 1 and 2 practice exercise Name ACC: 201 Instructor: Date Exercise 1-2: Assume that Kennedy Company acquires $1,600 cash from creditors and $1,800 cash from investors. Required a. Explain the primary differences between investors and creditors. Answer: a) The primary difference between creditors and investors is a creditor you must pay back the money borrowed and most of the time there is interest. An investor is someone that is investing in the company and normally has stock from doing so. If the company does not make it and dissolves creditors get paid first, and if there is still money left, investors get it. b. If Kennedy has a net loss of $1,600 cash and then liquidates, what amount of cash will the creditors receive? What amount of cash will the investors receive? Answer: b) The creditors will get $1,600, or all of their money, and the investors will get $200. c. If Kennedy has net income of $1,600 and then liquidates, what amount of cash will the creditors receive? What amount of cash will the investors receive? Answer: c) The creditors will get all of their money ($1,600), and the investors will get all of the rest which is their original $1,800 + 1,600 = $3,400. Exercise 1-4: Kenneth Chang recently started a business. During the first few days of operation, Mr. Chang transferred $30,000 from his personal account into a business account for a company he named Chang Enterprises. Chang Enterprises borrowed $40,000 from First Bank. Mr. Chang’s father-in-law, Jim Harwood, invested $64,000 into the business for which he received a 25 percent ownership interest. Chang Enterprises purchased a building from Morton Realty Company. The building cost $120,000 cash. Chang Enterprises earned $28,000 in revenue from the company's customers and paid its employees $25,000 for salaries expense. Answer 1. $30,000 from Kenneth Changs personal account – goes into Assets under Cash and in the Statement of cash flows. 2. $40,000 Borrowed from First Bank – goes into Assets under Cash and in the Statement of cash flows. 3. $64,000 from Jim Harwood (father-in-law) He received 25% ownership interest – goes into Assets and Common Stock and then in the Statement of cash flows. 4. $120,000 went toward buying a building – this would be in the Land column 5. $28,000 Revenue – would be in the Income statement under Rev. and Net Inc., and back in the Balance sheet under Cash and Ret, Earn. Columns. This is also listed in the Statement of cash flows 6. $25,000 Employee salaries – is listed in Assets under Cash and Ret. Earn. Then in the Income Statement under Exp. And Net Inc., and then under the Statement of cash flows. Required: Identify the entities that were mentioned in the scenario and explain what happened to the cash accounts of each entity that you identify. Exercise 1-9: The December 31, 2012, balance sheet for Classic Company showed total stockholders’ equity of $82,500. Total stockholders’ equity increa.

1. PAGE
1
Practice exercise
Chapter 1 and 2 practice exercise
Name
ACC: 201
Instructor:
Date
Exercise 1-2: Assume that Kennedy Company acquires $1,600
cash from creditors and $1,800 cash from investors.
Required
a. Explain the primary differences between investors and
creditors.
Answer:
a) The primary difference between creditors and investors is a
creditor you must pay back the money borrowed and most of the
time there is interest. An investor is someone that is investing
in the company and normally has stock from doing so. If the
company does not make it and dissolves creditors get paid first,
and if there is still money left, investors get it.
b. If Kennedy has a net loss of $1,600 cash and then liquidates,
what amount of cash will the creditors receive? What amount of
cash will the investors receive?
Answer:
b) The creditors will get $1,600, or all of their money, and the
investors will get $200.
c. If Kennedy has net income of $1,600 and then liquidates,
what amount of cash will the creditors receive? What amount of

2. cash will the investors receive?
Answer:
c) The creditors will get all of their money ($1,600), and the
investors will get all of the rest which is their original $1,800 +
1,600 = $3,400.
Exercise 1-4: Kenneth Chang recently started a business. During
the first few days of operation, Mr. Chang transferred $30,000
from his personal account into a business account for a company
he named Chang Enterprises. Chang Enterprises borrowed
$40,000 from First Bank. Mr. Chang’s father-in-law, Jim
Harwood, invested $64,000 into the business for which he
received a 25 percent ownership interest. Chang Enterprises
purchased a building from Morton Realty Company. The
building cost $120,000 cash. Chang Enterprises earned $28,000
in revenue from the company's customers and paid its
employees $25,000 for salaries expense.
Answer
1. $30,000 from Kenneth Changs personal account – goes into
Assets under Cash and in the Statement of cash flows.
2. $40,000 Borrowed from First Bank – goes into Assets under
Cash and in the Statement of cash flows.
3. $64,000 from Jim Harwood (father-in-law) He received 25%
ownership interest – goes into Assets and Common Stock and
then in the Statement of cash flows.
4. $120,000 went toward buying a building – this would be in
the Land column
5. $28,000 Revenue – would be in the Income statement under
Rev. and Net Inc., and back in the Balance sheet under Cash and
Ret, Earn. Columns. This is also listed in the Statement of cash
flows

3. 6. $25,000 Employee salaries – is listed in Assets under Cash
and Ret. Earn. Then in the Income Statement under Exp. And
Net Inc., and then under the Statement of cash flows.
Required:
Identify the entities that were mentioned in the scenario and
explain what happened to the cash accounts of each entity that
you identify.
Exercise 1-9: The December 31, 2012, balance sheet for Classic
Company showed total stockholders’ equity of $82,500. Total
stockholders’ equity increased by $53,400 between December
31, 2012, and December 31, 2013. During 2013 Classic
Company acquired $13,000 cash from the issue of common
stock. Classic Company paid an $8,000 cash dividend to the
stockholders during 2013.
Answer: To determine the net income or loss Classic reported
on its 2013 income statement you have to take 53,400 – 13,000
+ 8,000 which gives you 48,400.
Exercise 1-12: Marcum Company was started in 2012 when it
issued a note to borrow $6,200 cash.
Required
Write an accounting equation, and record the effects of the
borrowing transaction under the appropriate general ledger
account headings.
Answer:
Exercise 1-18: Davis Company was started on January 1, 2012.
During the month of January, Davis earned $4,600 of revenue
and incurred $3,000 of expense. Davis closes its books on
December 31 of each year.
Answer:
a) 4600 revenue – 3000 expenses = $1600

4. b) Retained earnings are a component of stockholders’ equity
which is an element of financial statements.
c) Nothing happens to the retained earnings account when the
expenses are recognized. This is a closing process and will be
changed at closing of the books.
Exercise 2-1: Valmont, Inc. experienced the following events in
2012, in its first year of operations.
1. Received $20,000 cash from the issue of common stock.
2. Performed services on account for $50,000.
3. Paid the utility expense of $12,500.
4. Collected $39,000 of the accounts receivable.
5. Recorded $9,000 of accrued salaries at the end of the year.
6. Paid a $5,000 cash dividend to the shareholders.
Required
a. Record the events in general ledger accounts under an
accounting equation. In the last column of the table, provide
appropriate account titles for the Retained Earnings amounts.
b. Prepare the income statement, statement of changes in
stockholder's equity, balance sheet, and statement of cash flows
for the 2012 accounting period.
c. Why is the amount of net income different from the amount
of net cash flow from operating activities?
a) Answer

5. Valmont, Inc.
General Ledger Accounts
Event
Assets
=
Liabilities
+
Stockholders’ Equity
Acct. Titles
For RE
Cash
Accounts
Receivable
Salaries
Payable
Common
Stock
Retained
Earnings
1.
20,000

6. 20,000
2.
50,000
50,000
Preformed services
3.
12,500
12,500
Utility expense
4.
39,000
39,000
5.

7. 9,000
9,000
Salary expense
6.
5,000
5,000
Dividend
to shareholders
b) Answer
Valmont, Inc.
Financial Statements
Income Statement
For the Year Ended December 31, 2012

8. Services revenue
$50,000
Salary expense
(9,000 )
Utility expense
(12,500)
Net income
$28,500
Statement of Changes in Stockholders’ Equity
For the Year Ended December 31, 2012
Beginning common stock $
0
Plus: Common stock issued
20,000
Ending common stock
$20,000
Beginning retained earnings
0
Plus: Net income
39,000
Less Dividends
5,000
Ending retained earnings
34,000
Total stockholders’ equity
$54,000
Balance Sheet

9. As of December 31,2012
Assets
Cash
$20,000
Accounts receivable
39,000
Total assets
$59,000
Liabilities
Salaries payable
$ 9,000
Stockholders’ equity
Common stock
$20,000
Retained earnings
34,000
Total stockholders’ equity
54,000
Total liabilities and stockholders’ equity
$63,000
Statement of Cash Flows
For the Year Ended December 31, 2012
Cash flows from operating activities

10. Cash receipts from customers
$39,000
Cash payments for salary expense
(9,000)
Cash payments for utility expenses
(12,500)
Net cash flow from operating activities
$17,500
Cash flow from investing activities
Cash flows from financing activities
Cash receipt from issuing common stock
$20,000
Net cash flow from financing activities
20,000
Net change in cash
$37,500
Plus: Beginning cash balance
0
Ending cash balance
$37,500
c) Answer:
The difference in net income and net cash flow is, not all the
money has come in from everyone and things needed to be paid.
Exercise 2-3: The following events apply to 2012, the first year

11. of operations of Sentry Services.
1. Acquired $45,000 cash from the issue of common stock.
2. Paid $18,000 cash in advance for one-year rental contract for
office space.
3. Provided services for $36,000 cash.
4. Adjusted the records to recognize the use of the office space.
The one-year contract started on May 1, 2012. The adjustment
was made as of December 32, 2012.
Required
a. Write an accounting equation and record the effects of each
accounting event under the appropriate general ledger account
headings.
b. Prepare an income statement and statement of cash flows for
the 2012 accounting period.
c. Explain the difference between the amount of net income and
amount of net cash flow from operating activities.