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SOLUTIONS MANUAL for Accounting 28th Edition
by Carl Warren, Christine Jonick & Jennifer
Schneider. (Complete Chapters 1-26)
CHAPTER 1
INTRODUCTION TO ACCOUNTING AND BUSINESS
DISCUSSION QUESTIONS
1. Some users of accounting information include managers, employees, investors, creditors,
customers, and the government.
2. The role of accounting is to provide information for managers to use in operating the business.
In addition, accounting provides information to others to use in assessing the economic
performance and condition of the business.
3. The corporate form allows the company to obtain large amounts of resources by issuing stock.
For this reason, most companies that require large investments in property, plant, and equipment
are organized as corporations.
4. No. The business entity concept limits the recording of economic data to transactions directly
affecting the activities of the business. The payment of the interest of $4,500 is a personal
transaction of Josh Reilly and should not be recorded by Dispatch Delivery Service.
5. The land should be recorded at its cost of $167,500 to Reliable Repair Service. This is consistent
with the cost concept.
6. a. No. The offer of $2,000,000 and the increase in the assessed value should not be recognized
in the accounting records because land is recorded on the cost basis.
b. Cash would increase by $2,125,000, land would decrease by $900,000, and owner’s equity
would increase by $1,225,000.
7. 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 records of the seller is an account payable in the records of the purchaser.
8. (b) The business realized net income of $91,000 ($679,000 – $588,000).
9. (a) The business incurred a net loss of $75,000 ($640,000 – $715,000).
10. (a) Net income or net loss
(b) Owner’s equity at the end of the period
(c) Cash at the end of the period
1-1
CHAPTER 1 Introduction to Accounting and Business
PE 1-1A
PRACTICE EXERCISES
$597,000. Under the cost concept, the land should be recorded at the cost to Boulder
Repair Service.
PE 1-1B
$369,500. Under the cost concept, the land should be recorded at the cost to
Clementine Repair Service.
PE 1-2A
a. A = L + OE
$518,000
OE
=
=
$165,000 + OE
$353,000
b. A = L + OE
+$86,200 = +$25,000 + OE
OE = +$61,200
OE on December 31, 20Y9 = $353,000 + $61,200
= $414,200
PE 1-2B
a. A = L + OE
$382,000
OE
=
=
$94,000 + OE
$288,000
b. A
–$63,000
OE
OE on December 31, 20Y9
=
=
=
=
=
L + OE
+$35,000 + OE
–$98,000
$288,000 – $98,000
$190,000
PE 1-3A
(2) Asset (Accounts Receivable) increases by $22,400;
Owner’s Equity (Delivery Service Fees) increases by $22,400.
(3) Liability (Accounts Payable) decreases by $4,100;
Asset (Cash) decreases by $4,100.
(4) Asset (Cash) increases by $14,700;
Asset (Accounts Receivable) decreases by $14,700.
(5) Asset (Cash) decreases by $1,600;
Owner’s Equity (Terry Young, Drawing) decreases by $1,600.
CHAPTER 1 Introduction to Accounting and Business
PE 1-3B
(2) Owner’s Equity (Advertising Expense, increases) decreases by $6,750;
Asset (Cash) decreases by $6,750.
(3) Asset (Supplies) increases by $2,920;
Liability (Accounts Payable) increases by $2,920.
(4) Asset (Accounts Receivable) increases by $20,460;
Owner’s Equity (Delivery Service Fees) increases by $20,460.
(5) Asset (Cash) increases by $11,410;
Asset (Accounts Receivable) decreases by $11,410.
PE 1-4A
Up-in-the-Air Travel Service
Income Statement
For the Year Ended April 30, 20Y7
Fees earned $1,870,000
Expenses:
Wages expense $1,115,000
Office expense 343,000
Miscellaneous expense 21,000
Total expenses 1,479,000
Net income $ 391,000
PE 1-4B
Zenith Travel Service
Income Statement
For the Year Ended August 31, 20Y4
Fees earned $899,600
Expenses:
Wages expense $539,800
Office expense 353,800
Miscellaneous expense 14,400
Total expenses 908,000
Net loss $ (8,400)
CHAPTER 1 Introduction to Accounting and Business
PE 1-5A
Up-in-the-Air Travel Service
Statement of Owner’s Equity
For the Year Ended April 30, 20Y7
Jerome Foley, capital, May 1, 20Y6 $ 876,000
Additional investment by owner during year $ 52,000
Net income for the year 391,000
Withdrawals (34,000)
Increase in owner’s equity 409,000
Jerome Foley, capital, April 30, 20Y7 $1,285,000
PE 1-5B
Zenith Travel Service
Statement of Owner’s Equity
For the Year Ended August 31, 20Y4
Megan Cox, capital, September 1, 20Y3 $456,000
Additional investment by owner during year $ 43,200
Net loss for the year (8,400)
Withdrawals (21,600)
Increase in owner’s equity 13,200
Megan Cox, capital, August 31, 20Y4 $469,200
PE 1-6A
Up-in-the-Air Travel Service
Balance Sheet
April 30, 20Y7
Assets
Cash $ 170,000
Accounts receivable 417,000
Supplies 16,000
Land 772,000
Total assets $1,375,000
Liabilities
Accounts payable $ 90,000
Owner’s Equity
Jerome Foley, capital 1,285,000
Total liabilities and owner’s equity $1,375,000
CHAPTER 1 Introduction to Accounting and Business
PE 1-6B
Zenith Travel Service
Balance Sheet
August 31, 20Y4
Assets
Cash $ 54,500
Accounts receivable 90,600
Supplies 5,600
Land 372,000
Total assets $522,700
Liabilities
Accounts payable $ 53,500
Owner’s Equity
Megan Cox, capital 469,200
Total liabilities and owner’s equity $522,700
PE 1-7A
Up-in-the-Air Travel Service
Statement of Cash Flows
For the Year Ended April 30, 20Y7
Cash flows from (used for) operating activities:
Cash received from customers $ 1,803,000
Cash paid for operating expenses (1,479,000)
Net cash flows from operating activities $ 324,000
Cash flows from (used for) investing activities:
Cash paid for purchase of land (347,000)
Cash flows from (used for) financing activities:
Cash received from owner as investment $ 52,000
Cash withdrawals by owner (34,000)
Net cash flows from financing activities 18,000
Net decrease in cash $ (5,000)
Cash balance, May 1, 20Y6 175,000
Cash balance, April 30, 20Y7 $ 170,000
CHAPTER 1 Introduction to Accounting and Business
1-6
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PE 1-7B
Zenith Travel Service
Statement of Cash Flows
For the Year Ended August 31, 20Y4
Cash flows from (used for) operating activities:
Cash received from customers $ 881,000
Cash paid for operating expenses (895,000)
Net cash flows used for operating activities $(14,000)
Cash flows from (used for) investing activities:
Cash paid for purchase of land (60,000)
Cash flows from (used for) financing activities:
Cash received from owner as investment $ 43,200
Cash withdrawals by owner (21,600)
Net cash flows from financing activities 21,600
Net decrease in cash $(52,400)
Cash balance, September 1, 20Y3 106,900
Cash balance, August 31, 20Y4 $ 54,500
PE 1-8A
a. Dec. 31, Dec. 31,
20Y6 20Y5
Total liabilities……………………………………………… $598,000 $569,900
Total owner’s equity……………………………………… $460,000 $410,000
Ratio of liabilities to owner’s equity…………………… 1.30 * 1.39**
* $598,000 ÷ $460,000
** $569,900 ÷ $410,000
b. Decreased
PE 1-8B
a. Dec. 31, Dec. 31,
20Y6 20Y5
Total liabilities……………………………………………… $4,042,000 $3,096,000
Total owner’s equity……………………………………… $4,300,000 $3,600,000
Ratio of liabilities to owner’s equity…………………… 0.94* 0.86**
* $4,042,000 ÷ $4,300,000
** $3,096,000 ÷ $3,600,000
b. Increased
CHAPTER 1 Introduction to Accounting and Business
Ex. 1-1
EXERCISES
a. 1. manufacturing 6. service 11. service
2. manufacturing 7. service 12. service
3. manufacturing 8. service 13. manufacturing
4. service 9. manufacturing 14. service
5. merchandise 10. merchandise 15. merchandise
b. The accounting equation is relevant to all of the companies. It serves as the basis
of the accounting information system.
Ex. 1-2
As in many ethics issues, there is no one right answer. Oftentimes, disclosing
only what is legally required may not be enough. In this case, it would be best
for the company’s chief executive officer to disclose both reports to the county
representatives. In doing so, the chief executive officer could point out any flaws
or deficiencies in the fired researcher’s report.
Ex. 1-3
a. 1. K 5. B 9. X
2. G 6. B 10. B
3. B 7. X
4. K 8. G
b. A business transaction is an economic event or condition that directly
changes an entity’s financial condition or results of operations.
Ex. 1-4
Dunkin’s stockholders’ equity: $3,457 – $4,170 = ($713)
Starbucks’ stockholders’ equity: $24,156 – $22,981 = $1,175
Ex. 1-5
Dollar Tree’s stockholders’ equity: $13,501 – $7,858 = $5,643
Target’s stockholders’ equity: $41,290 – $29,993 = $11,297
CHAPTER 1 Introduction to Accounting and Business
Ex. 1-6
1-8
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a. $4,474,000 ($633,000 + $3,841,000)
b. $387,500 ($6,124,500 – $5,737,000)
c. $1,232,900 ($1,981,800 – $748,900)
Ex. 1-7
a. $494,000 ($659,000 – $165,000)
b. $555,000 ($494,000 + $88,000 – $27,000)
c. $330,000 ($494,000 – $151,000 – $13,000)
d. $662,000 ($494,000 + $152,000 + $16,000)
e. Net income: $92,000 ($782,000 – $196,000 – $494,000)
Ex. 1-8
a. (1) asset
b. (2) liability
c. (1) asset
d. (3) owner’s equity (revenue)
e. (1) asset
f. (3) owner’s equity (expense)
g. (1) asset
Ex. 1-9
a. Increases assets and increases owner’s equity.
b. Decreases assets and decreases owner’s equity.
c. Increases assets and decreases assets.
d. Increases assets and increases liabilities.
e. Increases assets and increases owner’s equity.
Ex. 1-10
a. (1) Total assets increased $183,000 ($298,000 – $115,000).
(2) No change in liabilities.
(3) Owner’s equity increased $183,000.
b. (1) Total assets decreased $80,000.
(2) Total liabilities decreased $80,000.
(3) No change in owner’s equity.
c. No. It is false that a transaction always affects at least two elements (Assets,
Liabilities, or Owner’s Equity) of the accounting equation. Some transactions
affect only one element of the accounting equation. For example, purchasing
supplies for cash only affects assets.
CHAPTER 1 Introduction to Accounting and Business
Ex. 1-11
1-9
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1. (b) decrease
2. (a) increase
3. (b) decrease
4. (a) increase
Ex. 1-12
1. c 6. c
2. a 7. d
3. e 8. a
4. e 9. e
5. c 10. e
Ex. 1-13
a. (1) Provided catering services for cash, $71,800.
(2) Purchase of land for cash, $15,000.
(3) Payment of cash for expenses, $47,500.
(4) Purchase of supplies on account, $1,100.
(5) Withdrawal of cash by owner, $5,000.
(6) Payment of cash to creditors, $4,000.
(7) Recognition of cost of supplies used, $1,500.
b. $300 ($40,300 – $40,000)
c. $17,800 (–$5,000 + $71,800 – $49,000)
d. $22,800 ($71,800 – $49,000)
e. $17,800 ($22,800 – $5,000)
Ex. 1-14
No. It would be incorrect to say that the business had incurred a net loss of
$8,000. The excess of the withdrawals over the net income for the period is a
decrease in the amount of owner’s equity in the business.
CHAPTER 1 Introduction to Accounting and Business
Ex. 1-15
1-10
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Dakota
Owner’s equity at end of year ($928,000 – $352,000)………………………… $576,000
Deduct owner’s equity at beginning of year ($605,000 – $237,000)………… 368,000
Net income (increase in owner’s equity)…………………………………… $208,000
Jersey
Increase in owner’s equity (as determined for Dakota)……………………… $208,000
Add withdrawals……………………………………………………………………… 40,000
Net income (increase in owner’s equity)…………………………………… $248,000
Carolina
Increase in owner’s equity (as determined for Dakota)……………………… $208,000
Deduct additional investment……………………………………………………… 66,000
Net income (increase in owner’s equity)…………………………………… $142,000
Iowa
Increase in owner’s equity (as determined for Dakota)……………………… $208,000
Deduct additional investment……………………………………………………… 66,000
$142,000
Add withdrawals……………………………………………………………………… 40,000
Net income (increase in owner’s equity)…………………………………… $182,000
Ex. 1-16
Balance sheet items: 1, 2, 3, 4, 6, 8, 10
Ex. 1-17
Income statement items: 5, 7, 9
CHAPTER 1 Introduction to Accounting and Business
Ex. 1-18
a.
1-11
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Pegasus Product Company
Statement of Owner’s Equity
For the Month Ended April 30, 20Y7
Brian Walinsky, capital, April 1, 20Y7 $373,000
Net income for April $161,000
Withdrawals (24,000)
Increase in owner’s equity 137,000
Brian Walinsky, capital, April 30, 20Y7 $510,000
b. The statement of owner’s equity is prepared before the April 30, 20Y7, balance
sheet because Brian Walinsky, Capital as of April 30, 20Y7, is needed for the
balance sheet.
Ex. 1-19
Hermes Services
Income Statement
For the Month Ended August 31, 20Y2
Fees earned $627,600
Expenses:
Wages expense $440,800
Rent expense 28,100
Supplies expense 6,800
Miscellaneous expense 9,300
Total expenses 485,000
Net income $142,600
CHAPTER 1 Introduction to Accounting and Business
Ex. 1-12
1-12
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In each case, solve for a single unknown, using the following equation:
Owner’s Equity (beginning) + Investments – Withdrawals + Revenues – Expenses
= Owner’s Equity (ending)
Freeman
J
Owner’s equity at end of year ($1,260,000 – $330,000)……………… $930,000
Owner’s equity at beginning of year ($900,000 – $360,000)………… 540,000
Increase in owner’s equity……………………………………………… $390,000
Deduct increase due to net income ($570,000 – $240,000)………… 330,000
Increase due to additional investment less withdrawals…………… $ 60,000
Add withdrawals………………………………………………….………… 75,000
Additional investment in the business ................................................(a) $135,000
H yward
Owner’s equity at end of year ($675,000 – $220,000)………………… $455,000
Owner’s equity at beginning of year ($490,000 – $260,000)………… 230,000
Increase in owner’s equity……………………………………………… $225,000
Add withdrawals………………………………………………….………… 32,000
Increase due to additional investment and net income…………… $257,000
Deduct additional investment…………………………………………… 150,000
Increase due to net income……………………………………………… $107,000
Add expenses………………………………………………….…………… 128,000
Revenue………………………………………………….……………… (b) $235,000
nes
Owner’s equity at end of year ($100,000 – $80,000)………………… $ 20,000
Owner’s equity at beginning of year ($115,000 – $81,000)………… 34,000
Decrease in owner’s equity……………………………………………… $(14,000)
Add decrease due to net loss ($115,000 – $122,500)………………… (7,500)
Decrease due to withdrawals less additional investment………… $ (6,500)
Deduct additional investment…………………………………………… 10,000
Withdrawals from the business……………………………………… (c) $(16,500)
R mirez
Owner’s equity at end of year ($270,000 – $136,000)………………… $134,000
Add decrease due to net loss ($115,000 – $128,000)………………… (13,000)
Add withdrawals………………………………………………….………… 39,000
Beginning owner’s equity plus additional investment ……………… $186,000
Deduct additional investment…………………………………………… 55,000
Owner’s equity at beginning of year…………………………………… $131,000
Add liabilities at beginning of year……………………………………… 120,000
Assets at beginning of year………………………………………… (d) $251,000
CHAPTER 1 Introduction to Accounting and Business
Ex. 1-21
a.
1-13
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Rockwell Interiors
Balance Sheet
February 29, 20Y0
Assets
Cash $ 290,000
Accounts receivable 720,000
Supplies 30,000
Total assets $1,040,000
Liabilities
Accounts payable $ 280,000
Owner’s Equity
David Patel, capital 760,000
Total liabilities and owner’s equity $1,040,000
Rockwell Interiors
Balance Sheet
March 31, 20Y0
Assets
Cash $ 340,000
Accounts receivable 870,000
Supplies 32,000
Total assets $1,242,000
Liabilities
Accounts payable $ 360,000
Owner’s Equity
David Patel, capital 882,000
Total liabilities and owner’s equity $1,242,000
b. Owner’s equity, March 31… ................................................................................. $882,000
Owner’s equity, February 29…………………….…………………………… 760,000
Net income…………………………………………………………………… $122,000
c. Owner’s equity, March 31 .........................................................................................$882,000
Owner’s equity, February 29…………………….…………………………… 760,000
Increase in owner’s equity………………………………………………… $122,000
Add withdrawal………………………………………………………………… 50,000
Net income…………………………………………………………………… $172,000
CHAPTER 1 Introduction to Accounting and Business
1-14
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Ex. 1-22
a. Balance sheet: 1, 2, 3, 4, 6, 7, 8, 9, 10, 11, 13
Income statement: 5, 12, 14, 15
b. Yes. An item can appear on more than one financial statement. For example,
cash appears on both the balance sheet and statement of cash flows. However,
the same item cannot appear on both the income statement and balance sheet.
c. Yes. The accounting equation is relevant to all companies, including Exxon
Mobil Corporation.
Ex. 1-23
1. (a) operating activity
2. (a) operating activity
3. (b) investing activity
4. (c) financing activity
Ex. 1-24
Ethos Consulting Group
Statement of Cash Flows
For the Year Ended May 31, 20Y6
Cash flows from (used for) operating activities:
Cash received from customers $ 637,500
Cash paid for operating expenses (475,000)
Net cash flows from operating activities $162,500
Cash flows from (used for) investing activities:
Cash paid for purchase of land (90,000)
Cash flows from (used for) financing activities:
Cash received from owner as investment $ 62,500
Cash withdrawals by owner (17,500)
Net cash flows from financing activities 45,000
Net increase in cash $117,500
Cash balance, June 1, 20Y5 58,000
Cash balance, May 31, 20Y6 $175,500
CHAPTER 1 Introduction to Accounting and Business
Ex. 1-25
1-15
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1. All financial statements should contain the name of the business in their
heading. The statement of owner’s equity is incorrectly headed as “Omar
Farah” rather than We-Sell Realty. The heading of the balance sheet needs
the name of the business.
2. The income statement and statement of owner’s equity cover a period of time
and should be labeled “For the Month Ended August 31, 20Y9.”
3. The year in the heading for the statement of owner’s equity should be 20Y9
rather than 20Y8.
4. The balance sheet should be labeled “August 31, 20Y9,” rather than “For the
Month Ended August 31, 20Y9.”
5. In the income statement, the miscellaneous expense amount should be listed
as the last expense.
6. In the income statement, the total expenses are incorrectly subtracted from
the sales commissions, resulting in an incorrect net income amount. The
correct net income should be $24,150. This also affects the statement of
owner’s equity and the amount of Omar Farah, Capital, that appears on
the balance sheet.
7. In the statement of owner’s equity, the additional investment should be added
first to Omar Farah, capital, as of August 1, 20Y9. The net income should be
presented next, followed by the amount of withdrawals, which is subtracted
from the net income to yield the increase in owner’s equity. The increase in
owner’s equity is added to Omar Farah, capital on August 1, 20Y9, to determine
Omar Farah, capital on August 31, 20Y9.
8. Accounts payable should be listed as a liability on the balance sheet.
9. Accounts receivable and supplies should be listed as assets on the balance
sheet.
10. The balance sheet assets should equal the sum of the liabilities and owner’s
equity.
CHAPTER 1 Introduction to Accounting and Business
1-16
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Ex. 1-25 (Concluded)
Corrected financial statements appear as follows:
We-Sell Realty
Income Statement
For the Month Ended August 31, 20Y9
Sales commissions $140,000
Expenses:
Office salaries expense $87,000
Rent expense 18,000
Automobile expense 7,500
Supplies expense 1,150
Miscellaneous expense 2,200
Total expenses 115,850
Net income $ 24,150
We-Sell Realty
Statement of Owner’s Equity
For the Month Ended August 31, 20Y9
Omar Farah, capital, August 1, 20Y9 $ 0
Investment on August 1, 20Y9 $ 15,000
Net income for August 24,150
Withdrawals during August (10,000)
Increase in owner’s equity 29,150
Omar Farah, capital, August 31, 20Y9 $29,150
We-Sell Realty
Balance Sheet
August 31, 20Y9
Assets
Cash $ 8,900
Accounts receivable 38,600
Supplies 4,000
Total assets $51,500
Liabilities
Accounts payable $22,350
Owner’s Equity
Omar Farah, capital 29,150
Total liabilities and owner’s equity $51,500
CHAPTER 1 Introduction to Accounting and Business
1-17
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Ex. 1-26
a. Year 2: $43,075 ($44,529 – $1,454)
Year 1: $38,633 ($42,966 – $4,333)
b. Year 2: 29.63 ($43,075 ÷ $1,454)
Year 1: 8.92 ($38,633 ÷ $4,333)
c. The ratio of liabilities to stockholders’ equity increased from 8.92 to 29.63
indicating an increase in risk for creditors from Year 1 to Year 2.
Ex. 1-27
a. Year 2: $5,873 ($35,291 – $29,418)
Year 1: $6,434 ($34,408 – $27,974)
b. Year 2: 5.01 ($29,418 ÷ $5,873)
Year 1: 4.35 ($27,974 ÷ $6,434)
c. The risk for creditors has increased from 4.35 in Year 1 to 5.01 in Year 2.
d. The Home Depot’s ratio of liabilities to stockholders’ equity (29.63 in Year 2 and
8.92 in Year 1) is more in both years than is Lowe’s ratio of liabilities to
stockholders’ equity (5.01 in Year 2 and 4.35 in Year 1). Thus, the risk to creditors
of The Home Depot is more than that of Lowe’s.
CHAPTER 1 Introduction to Accounting and Business
PROBLEMS
Prob. 1-1A
1. Assets = Liabilities + Owner’s Equity
Pamela Pamela
Accts. Accts. Schatz, Schatz, Fees Rent Salaries Supplies Auto Misc.
Cash + Rec. + Supplies = Payable + Capital – Drawing + Earned – Expense – Expense – Expense – Exp. – Exp.
(a) + 55,000 + 55,000
(b) + 3,300 + 3,300
Bal. 55,000 3,300 3,300 55,000
(c) + 18,300 + 18,300
Bal. 73,300 3,300 3,300 55,000 18,300
(d) – 8,300 – 8,300
Bal. 65,000 3,300 3,300 55,000 18,300 – 8,300
(e) – 2,290 – 2,290
Bal. 62,710 3,300 1,010 55,000 18,300 – 8,300
(f) + 30,800 + 30,800
Bal. 62,710 30,800 3,300 1,010 55,000 49,100 – 8,300
(g) – 3,180 – 1,380 – 1,800
Bal. 59,530 30,800 3,300 1,010 55,000 49,100 – 8,300 – 1,380 – 1,800
(h) – 7,300 – 7,300
Bal. 52,230 30,800 3,300 1,010 55,000 49,100 – 8,300 – 7,300 – 1,380 – 1,800
(i) – 2,050 – 2,050
Bal. 52,230 30,800 1,250 1,010 55,000 49,100 – 8,300 – 7,300 – 2,050 – 1,380 – 1,800
(j) – 13,800 – 13,800
Bal. 38,430 30,800 1,250 1,010 55,000 – 13,800 49,100 – 8,300 – 7,300 – 2,050 – 1,380 – 1,800
2. Owner’s equity is the right of owners to the assets of the business. These rights are increased by owner’s investments and revenues
and decreased by owner’s withdrawals and expenses.
3. $28,270 ($49,100 – $8,300 – $7,300 – $2,050 – $1,380 – $1,800)
4. June’s transactions increased Pamela Schatz’s capital to $69,470 ($55,000 + $28,270 – $13,800), which is the initial capital investment of $55,000 plus
June’s net income of $28,270 less Pamela Schatz’s withdrawals of $13,800.
1-18
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CHAPTER 1 Introduction to Accounting and Business
1-19
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Prob. 1-2A
1.
2.
3.
4. James Brewster, Capital of $1,012,700
Excalibur Travel Agency
Income Statement
For the Year Ended December 31, 20Y5
Fees earned $967,000
Expenses:
Wages expense $540,400
Rent expense 38,100
Utilities expense 30,200
Supplies expense 4,300
Miscellaneous expense 6,800
Total expenses 619,800
Net income $347,200
Excalibur Travel Agency
Statement of Owner’s Equity
For the Year Ended December 31, 20Y5
James Brewster, capital, January 1, 20Y5 $ 710,000
Net income for the year $347,200
Withdrawals (44,500)
Increase in owner’s equity 302,700
James Brewster, capital, December 31, 20Y5 $1,012,700
Excalibur Travel Agency
Balance Sheet
December 31, 20Y5
Assets
Cash $ 201,900
Accounts receivable 302,000
Supplies 5,800
Land 576,500
Total assets $1,086,200
Liabilities
Accounts payable $ 73,500
Owner’s Equity
James Brewster, capital 1,012,700
Total liabilities and owner’s equity $1,086,200
CHAPTER 1 Introduction to Accounting and Business
Prob. 1-3A
1.
2.
3.
1-20
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Reliance Financial Services
Income Statement
For the Month Ended July 31, 20Y2
Fees earned $144,500
Expenses:
Salaries expense $55,000
Rent expense 33,000
Auto expense 16,000
Supplies expense 4,500
Miscellaneous expense 4,800
Total expenses 113,300
Net income $ 31,200
Reliance Financial Services
Statement of Owner’s Equity
For the Month Ended July 31, 20Y2
Seth Feye, capital, July 1, 20Y2 $ 0
Investment on July 1, 20Y2 $ 50,000
Net income for July 31,200
Withdrawals (15,000)
Increase in owner’s equity 66,200
Seth Feye, capital, July 31, 20Y2 $66,200
Reliance Financial Services
Balance Sheet
July 31, 20Y2
Assets
Cash $32,600
Accounts receivable 34,500
Supplies 2,500
Total assets $69,600
Liabilities
Accounts payable $ 3,400
Owner’s Equity
Seth Feye, capital 66,200
Total liabilities and owner’s equity $69,600
CHAPTER 1 Introduction to Accounting and Business
Prob. 1-3A (Concluded)
1-21
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4. (Optional)
Reliance Financial Services
Statement of Cash Flows
For the Month Ended July 31, 20Y2
Cash flows from (used for) operating activities:
Cash received from customers $ 110,000
Cash paid for expenses and to creditors* (112,400)
Net cash flows from operating activities $ (2,400)
Cash flows from (used for) investing activities 0
Cash flows from (used for) financing activities:
Cash received from owner as investment $ 50,000
Cash withdrawal by owner (15,000)
Net cash flows from financing activities 35,000
Net increase in cash $32,600
Cash balance, July 1, 20Y2 0
Cash balance, July 31, 20Y2 $32,600
* $3,600 + $33,000 + $20,800 + $55,000; these amounts are taken from the Cash column
shown in the problem.
CHAPTER 1 Introduction to Accounting and Business
Prob. 1-4A
1. Assets = Liabilities + Owner’s Equity
Cash + Supplies =
Accts.
Payable
Pat Glenn,
+ Capital
Pat Glenn,
– Drawing +
Sales
Comm.
Salaries
– Exp. –
Rent
Exp.
Auto
– Exp.
Supplies
– Exp. –
Misc.
Exp.
(a) + 25,000 + 25,000
1-22
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(b) + 1,850 + 1,850
Bal. 25,000 1,850 1,850 25,000
(c) – 1,200 – 1,200
Bal.
(d) +
23,800
41,500
1,850 650 25,000
+ 41,500
Bal. 65,300 1,850 650 25,000 41,500
(e) – 3,600 – 3,600
Bal. 61,700 1,850 650 25,000 41,500 – 3,600
(f) – 4,000 – 4,000
Bal. 57,700 1,850 650 25,000 – 4,000 41,500 – 3,600
(g) – 4,650 – 3,050 – 1,600
Bal. 53,050 1,850 650 25,000 – 4,000 41,500 – 3,600 – 3,050 – 1,600
(h) – 5,000 – 5,000
Bal. 48,050 1,850 650 25,000 – 4,000 41,500 – 5,000 – 3,600 – 3,050 – 1,600
(i) – 900 – 900
Bal. 48,050 950 650 25,000 – 4,000 41,500 – 5,000 – 3,600 – 3,050 – 900 – 1,600
CHAPTER 1 Introduction to Accounting and Business
1-23
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Prob. 1-4A (Concluded)
2.
Half Moon Realty
Statement of Owner’s Equity
For the Month Ended July 31, 20Y7
Pat Glenn, capital, July 1, 20Y7 $ 0
Investment on July 1, 20Y7 $25,000
Net income for July 27,350
Withdrawals (4,000)
Increase in owner’s equity 48,350
Pat Glenn, capital, July 31, 20Y7 $48,350
Half Moon Realty
Balance Sheet
July 31, 20Y7
Assets
Cash $48,050
Supplies 950
Total assets $49,000
Liabilities
Accounts payable $ 650
Owner’s Equity
Pat Glenn, capital 48,350
Total liabilities and owner’s equity $49,000
Half Moon Realty
Income Statement
For the Month Ended July 31, 20Y7
Sales commissions $41,500
Expenses:
Salaries expense $5,000
Rent expense 3,600
Auto expense 3,050
Supplies expense 900
Miscellaneous expense 1,600
Total expenses 14,150
Net income $27,350
CHAPTER 1 Introduction to Accounting and Business
1-24
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Prob. 1-5A
1. Assets = Liabilities + Owner’s Equity
Cash +
Accounts
Receivable + Supplies + Land
Accounts
= Payable + Joel Palk, Capital
$45,000 + $93,000 + $7,000 + $75,000 = $40,000 + Joel Palk, Capital
$220,000 = $40,000 + Joel Palk, Capital
$180,000 = Joel Palk, Capital
CHAPTER 1 Introduction to Accounting and Business
Prob. 1-5A (Continued)
1-25
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2. Assets = Liabilities + Owner’s Equity
Cash +
Accts.
Rec. + Supplies + Land =
Accts.
Payable +
Joel Palk, Joel Palk,
Capital – Drawing
Bal. 45,000 93,000 7,000 75,000 40,000 180,000
(a) + 35,000 + 35,000
Bal. 80,000 93,000 7,000 75,000 40,000 215,000
(b) – 50,000 + 50,000
Bal. 30,000 93,000 7,000 125,000 40,000 215,000
(c) + 32,125
Bal. 62,125 93,000 7,000 125,000 40,000 215,000
(d) – 6,000
Bal. 56,125 93,000 7,000 125,000 40,000 215,000
(e) + 2,500 + 2,500
Bal. 56,125 93,000 9,500 125,000 42,500 215,000
(f) – 22,800 – 22,800
Bal. 33,325 93,000 9,500 125,000 19,700 215,000
(g) + 84,750
Bal. 33,325 177,750 9,500 125,000 19,700 215,000
(h) + 29,500
Bal. 33,325 177,750 9,500 125,000 49,200 215,000
(i) – 14,000
Bal. 19,325 177,750 9,500 125,000 49,200 215,000
(j) + 88,000 – 88,000
Bal. 107,325 89,750 9,500 125,000 49,200 215,000
(k) – 3,600
Bal. 107,325 89,750 5,900 125,000 49,200 215,000
(l) – 12,000 – 12,000
Bal. 95,325 89,750 5,900 125,000 49,200 215,000 – 12,000
CHAPTER 1 Introduction to Accounting and Business
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Prob. 1-5A (Continued)
Owner’s Equity (Continued)
Dry
Cleaning
Dry
Cleaning Wages Rent Supplies Truck Utilities Misc.
+ Revenue – Exp. – Exp. – Exp. – Exp. – Exp. – Exp. – Exp.
Bal.
(a)
Bal.
(b)
Bal.
(c) + 32,125
Bal. 32,125
(d) – 6,000
Bal. 32,125 – 6,000
(e)
Bal. 32,125 – 6,000
(f)
Bal. 32,125 – 6,000
(g) + 84,750
Bal. 116,875 – 6,000
(h) – 29,500
Bal. 116,875 – 29,500 – 6,000
(i) – 7,500 – 2,500 – 1,300 – 2,700
Bal. 116,875 – 29,500 – 7,500 – 6,000 – 2,500 – 1,300 – 2,700
(j)
Bal. 116,875 – 29,500 – 7,500 – 6,000 – 2,500 – 1,300 – 2,700
(k) – 3,600
Bal. 116,875 – 29,500 – 7,500 – 6,000 – 3,600 – 2,500 – 1,300 – 2,700
(l)
Bal. 116,875 – 29,500 – 7,500 – 6,000 – 3,600 – 2,500 – 1,300 – 2,700
CHAPTER 1 Introduction to Accounting and Business
Prob. 1-5A (Continued)
1-27
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3.
D’Lite Dry Cleaners
Statement of Owner’s Equity
For the Month Ended July 31, 20Y6
Joel Palk, capital, July 1, 20Y6 $180,000
Additional investment during July $ 35,000
Net income for July 63,775
Withdrawals (12,000)
Increase in owner’s equity 86,775
Joel Palk, capital, July 31, 20Y6 $266,775
D’Lite Dry Cleaners
Balance Sheet
July 31, 20Y6
Assets
Cash $ 95,325
Accounts receivable 89,750
Supplies 5,900
Land 125,000
Total assets $315,975
Liabilities
Accounts payable $ 49,200
Owner’s Equity
Joel Palk, capital 266,775
Total liabilities and owner’s equity $315,975
D’Lite Dry Cleaners
Income Statement
For the Month Ended July 31, 20Y6
Dry cleaning revenue $116,875
Expenses:
Dry cleaning expense $29,500
Wages expense 7,500
Rent expense 6,000
Supplies expense 3,600
Truck expense 2,500
Utilities expense 1,300
Miscellaneous expense 2,700
Total expenses 53,100
Net income $ 63,775
CHAPTER 1 Introduction to Accounting and Business
1-28
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Prob. 1-5A (Concluded)
4. (Optional)
D’Lite Dry Cleaners
Statement of Cash Flows
For the Month Ended July 31, 20Y6
Cash flows from (used for) operating activities:
Cash received from customers* $120,125
Cash paid for expenses and to creditors** (42,800)
Net cash flows from operating activities $ 77,325
Cash flows from (used for) investing activities:
Cash paid for purchase of land (50,000)
Cash flows from (used for) financing activities:
Cash received from owner as investment $ 35,000
Cash withdrawal by owner (12,000)
Net cash flows from financing activities 23,000
Net increase in cash $ 50,325
Cash balance, July 1, 20Y6 45,000
Cash balance, July 31, 20Y6 $ 95,325
* $32,125 + $88,000; these amounts are taken from the Cash column of the spreadsheet in Part 2.
** $6,000 + $22,800 + $14,000; these amounts are taken from the Cash column of the spreadsheet
in Part 2.
CHAPTER 1 Introduction to Accounting and Business
1-29
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Prob. 1-6A
a. Fees earned, $750,000 ($275,000 + $475,000)
b. Supplies expense, $30,000 ($475,000 – $300,000 – $100,000 – $20,000 – $25,000)
c. Dakota Rowe, capital, April 1, 20Y3, $0; Wolverine Realty was organized on
April 1, 20Y3.
d. Net income for April, $275,000 from income statement
e. Increase in owner’s equity, $525,000 ($375,000 + $275,000 – $125,000)
f. Dakota Rowe, capital, April 30, 20Y3, $525,000
g. Total assets, $625,000 ($462,500 + $12,500 + $150,000)
h. Dakota Rowe, capital, $525,000 ($625,000 – $100,000)
i. Total liabilities and owner’s equity, $625,000 ($100,000 + $525,000); same as (g)
j. Cash received from customers, $750,000; this is the same as fees
earned (a) since there are no accounts receivable.
k. Net cash flows from operating activities, $362,500 ($750,000 – $387,500)
l. Cash payments for acquisition of land, ($150,000)
m. Cash received as owner’s investment, $375,000
n. Cash withdrawal by owner, ($125,000)
o. Net cash flows from financing activities, $250,000 ($375,000 – $125,000)
p. Net increase in cash, $462,500 ($362,500 – $150,000 + $250,000)
q. April 30, 20Y3, cash balance, $462,500
CHAPTER 1 Introduction to Accounting and Business
Prob. 1-1B
1. Assets = Liabilities + Owner’s Equity
2. Owner’s equity is the right of owners to the assets of the business. These rights are increased by owner’s investments and revenues and decreased
by owner’s withdrawals and expenses.
3. $16,050 ($26,300 – $5,000 – $2,500 – $1,300 – $1,150 – $300)
4. March’s transactions increased Amy Austin’s capital to $62,150 ($50,000 + $16,050 – $3,900), which is the initial investment of $50,000 plus the
excess of March’s net income of $16,050 over Amy Austin’s withdrawals of $3,900.
1-30
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Amy
Accts. Accts. Amy Austin, Austin, Fees Rent Salaries Supplies Auto Misc.
Cash + Rec. + Supplies = Payable + Capital – Drawing + Earned – Expense – Expense – Expense – Exp. – Exp.
(a) + 50,000 + 50,000
(b) + 4,000 + 4,000
Bal. 50,000 4,000 4,000 50,000
(c) – 2,300 – 2,300
Bal. 47,700 4,000 1,700 50,000
(d) + 13,800 + 13,800
Bal. 61,500 4,000 1,700 50,000 13,800
(e) – 5,000 – 5,000
Bal. 56,500 4,000 1,700 50,000 13,800 – 5,000
(f) – 1,450 – 1,150 – 300
Bal. 55,050 4,000 1,700 50,000 13,800 – 5,000 – 1,150 – 300
(g) – 2,500 – 2,500
Bal. 52,550 4,000 1,700 50,000 13,800 – 5,000 – 2,500 – 1,150 – 300
(h) – 1,300 – 1,300
Bal. 52,550 2,700 1,700 50,000 13,800 – 5,000 – 2,500 – 1,300 – 1,150 – 300
(i) + 12,500 + 12,500
Bal. 52,550 12,500 2,700 1,700 50,000 26,300 – 5,000 – 2,500 – 1,300 – 1,150 – 300
(j) – 3,900 – 3,900
Bal. 48,650 12,500 2,700 1,700 50,000 – 3,900 26,300 – 5,000 – 2,500 – 1,300 – 1,150 – 300
CHAPTER 1 Introduction to Accounting and Business
1-31
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Prob. 1-2B
1.
2.
3.
4. Net income of $200,000
Wilderness Travel Service
Income Statement
For the Year Ended April 30, 20Y5
Fees earned $875,000
Expenses:
Wages expense $525,000
Rent expense 75,000
Utilities expense 38,000
Supplies expense 12,000
Taxes expense 10,000
Miscellaneous expense 15,000
Total expenses 675,000
Net income $200,000
Wilderness Travel Service
Statement of Owner’s Equity
For the Year Ended April 30, 20Y5
Harper Borg, capital, May 1, 20Y4 $180,000
Net income for the year $200,000
Withdrawals (40,000)
Increase in owner’s equity 160,000
Harper Borg, capital, April 30, 20Y5 $340,000
Wilderness Travel Service
Balance Sheet
April 30, 20Y5
Assets
Cash $146,000
Accounts receivable 210,000
Supplies 9,000
Total assets $365,000
Liabilities
Accounts payable $ 25,000
Owner’s Equity
Harper Borg, capital 340,000
Total liabilities and owner’s equity $365,000
CHAPTER 1 Introduction to Accounting and Business
Prob. 1-3B
1.
2.
3.
1-32
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Bronco Consulting
Income Statement
For the Month Ended August 31, 20Y2
Fees earned $125,000
Expenses:
Salaries expense $58,000
Rent expense 27,000
Auto expense 15,500
Supplies expense 6,100
Miscellaneous expense 7,500
Total expenses 114,100
Net income $ 10,900
Bronco Consulting
Statement of Owner’s Equity
For the Month Ended August 31, 20Y2
Jose Loder, capital, August 1, 20Y2 $ 0
Investment on August 1, 20Y2 $ 75,000
Net income for August 10,900
Withdrawals (15,000)
Increase in owner’s equity 70,900
Jose Loder, capital, August 31, 20Y2 $70,900
Bronco Consulting
Balance Sheet
August 31, 20Y2
Assets
Cash $38,000
Accounts receivable 33,000
Supplies 2,900
Total assets $73,900
Liabilities
Accounts payable $ 3,000
Owner’s Equity
Jose Loder, capital 70,900
Total liabilities and owner’s equity $73,900
CHAPTER 1 Introduction to Accounting and Business
Prob. 1-3B (Concluded)
1-33
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4. (Optional)
Bronco Consulting
Statement of Cash Flows
For the Month Ended August 31, 20Y2
Cash flows from (used for) operating activities:
Cash received from customers $ 92,000
Cash paid for expenses and to creditors* (114,000)
Net cash flows from operating activities $(22,000)
Cash flows from (used for) investing activities 0
Cash flows from (used for) financing activities:
Cash received from owner as investment $ 75,000
Cash withdrawal by owner (15,000)
Net cash flows from financing activities 60,000
Net increase in cash $ 38,000
Cash balance, August 1, 20Y2 0
Cash balance, August 31, 20Y2 $ 38,000
* $27,000 + $6,000 + $23,000 + $58,000; these amounts are taken from the Cash column shown
in the problem.
CHAPTER 1 Introduction to Accounting and Business
Prob. 1-4B
1. Assets = Liabilities + Owner’s Equity
Maria Maria
Accts. Adams, Adams, Sales Rent Salaries Auto Supplies Misc.
Cash + Supplies = Payable + Capital – Drawing + Comm. – Exp. – Exp. – Exp. – Exp. – Exp.
(a) + 24,000 + 24,000
(b) – 3,600 – 3,600
Bal. 20,400 24,000 – 3,600
(c) – 1,950 – 1,350 – 600
Bal. 18,450 24,000 – 3,600 – 1,350 – 600
(d) + 1,200 + 1,200
Bal. 18,450 1,200 1,200 24,000 – 3,600 – 1,350 – 600
(e) + 19,800 + 19,800
Bal. 38,250 1,200 1,200 24,000 19,800 – 3,600 – 1,350 – 600
(f) – 750 – 750
Bal. 37,500 1,200 450 24,000 19,800 – 3,600 – 1,350 – 600
(g) – 2,500 – 2,500
Bal. 35,000 1,200 450 24,000 19,800 – 3,600 – 2,500 – 1,350 – 600
(h) – 3,500 – 3,500
Bal. 31,500 1,200 450 24,000 – 3,500 19,800 – 3,600 – 2,500 – 1,350 – 600
(i) – 900 – 900
Bal. 31,500 300 450 24,000 – 3,500 19,800 – 3,600 – 2,500 – 1,350 – 900 – 600
1-34
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CHAPTER 1 Introduction to Accounting and Business
1-35
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Prob. 1-4B (Concluded)
2.
Custom Realty
Statement of Owner’s Equity
For the Month Ended April 30, 20Y7
Maria Adams, capital, April 1, 20Y7 $ 0
Investment on April 1, 20Y7 $24,000
Net income for April 10,850
Withdrawals (3,500)
Increase in owner’s equity 31,350
Maria Adams, capital, April 30, 20Y7 $31,350
Custom Realty
Balance Sheet
April 30, 20Y7
Assets
Cash $31,500
Supplies 300
Total assets $31,800
Liabilities
Accounts payable $ 450
Owner’s Equity
Maria Adams, capital 31,350
Total liabilities and owner’s equity $31,800
Custom Realty
Income Statement
For the Month Ended April 30, 20Y7
Sales commissions $19,800
Expenses:
Rent expense $3,600
Salaries expense 2,500
Auto expense 1,350
Supplies expense 900
Miscellaneous expense 600
Total expenses 8,950
Net income $10,850
CHAPTER 1 Introduction to Accounting and Business
1-36
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Prob. 1-5B
1. Assets = Liabilities + Owner’s Equity
Cash +
Accounts
Receivable + Supplies + Land =
Accounts
Payable + Beverly Zahn, Capital
$39,000 + $80,000 + $11,000 + $50,000 = $31,500 + Beverly Zahn, Capital
$180,000 = $31,500 + Beverly Zahn, Capital
$148,500 = Beverly Zahn, Capital
CHAPTER 1 Introduction to Accounting and Business
Prob. 1-5B (Continued)
1-37
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2. Assets = Liabilities + Owner’s Equity
Beverly Beverly
Cash +
Accts.
Rec. + Supplies + Land =
Accts.
Payable +
Zahn,
Capital
Zahn,
– Drawing
Bal. 39,000 80,000 11,000 50,000 31,500 148,500
(a) + 21,000 + 21,000
Bal. 60,000 80,000 11,000 50,000 31,500 169,500
(b) – 35,000 + 35,000
Bal. 25,000 80,000 11,000 85,000 31,500 169,500
(c) – 4,000
Bal. 21,000 80,000 11,000 85,000 31,500 169,500
(d) + 72,000
Bal. 21,000 152,000 11,000 85,000 31,500 169,500
(e) – 20,000 – 20,000
Bal. 1,000 152,000 11,000 85,000 11,500 169,500
(f) + 8,000 + 8,000
Bal. 1,000 152,000 19,000 85,000 19,500 169,500
(g) + 38,000
Bal. 39,000 152,000 19,000 85,000 19,500 169,500
(h) + 77,000 – 77,000
Bal. 116,000 75,000 19,000 85,000 19,500 169,500
(i) + 29,450
Bal. 116,000 75,000 19,000 85,000 48,950 169,500
(j) – 29,200
Bal. 86,800 75,000 19,000 85,000 48,950 169,500
(k) – 7,200
Bal. 86,800 75,000 11,800 85,000 48,950 169,500
(l) – 5,000 – 5,000
Bal. 81,800 75,000 11,800 85,000 48,950 169,500 – 5,000
CHAPTER 1 Introduction to Accounting and Business
1-38
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Prob. 1-5B (Continued)
Owner’s Equity (Continued)
Dry
Cleaning
Dry
Cleaning Wages Supplies Rent Truck Utilities Misc.
+ Revenue – Exp. – Exp. – Exp. – Exp. – Exp. – Exp. – Exp.
Bal.
(a)
Bal.
(b)
Bal.
(c) – 4,000
Bal. – 4,000
(d) + 72,000
Bal. 72,000 – 4,000
(e)
Bal. 72,000 – 4,000
(f)
Bal. 72,000 – 4,000
(g) + 38,000
Bal. 110,000 – 4,000
(h)
Bal. 110,000 – 4,000
(i) – 29,450
Bal. 110,000 – 29,450 – 4,000
(j) – 24,000 – 2,100 – 1,800 – 1,300
Bal. 110,000 – 29,450 – 24,000 – 4,000 – 2,100 – 1,800 – 1,300
(k) – 7,200
Bal. 110,000 – 29,450 – 24,000 – 7,200 – 4,000 – 2,100 – 1,800 – 1,300
(l)
Bal. 110,000 – 29,450 – 24,000 – 7,200 – 4,000 – 2,100 – 1,800 – 1,300
CHAPTER 1 Introduction to Accounting and Business
Prob. 1-5B (Continued)
1-39
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3.
Bev’s Dry Cleaners
Statement of Owner’s Equity
For the Month Ended November 30, 20Y6
Beverly Zahn, capital, November 1, 20Y6 $148,500
Additional investment during November $21,000
Net income for November 40,150
Withdrawals (5,000)
Increase in owner’s equity 56,150
Beverly Zahn, capital, November 30, 20Y6 $204,650
Bev’s Dry Cleaners
Balance Sheet
November 30, 20Y6
Assets
Cash $ 81,800
Accounts receivable 75,000
Supplies 11,800
Land 85,000
Total assets $253,600
Liabilities
Accounts payable $ 48,950
Owner’s Equity
Beverly Zahn, capital 204,650
Total liabilities and owner’s equity $253,600
Bev’s Dry Cleaners
Income Statement
For the Month Ended November 30, 20Y6
Dry cleaning revenue $110,000
Expenses:
Dry cleaning expense $29,450
Wages expense 24,000
Supplies expense 7,200
Rent expense 4,000
Truck expense 2,100
Utilities expense 1,800
Miscellaneous expense 1,300
Total expenses 69,850
Net income $ 40,150
CHAPTER 1 Introduction to Accounting and Business
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Prob. 1-5B (Concluded)
4. (Optional)
Bev’s Dry Cleaners
Statement of Cash Flows
For the Month Ended Novemer 30, 20Y6
Cash flows from (used for) operating activities:
Cash received from customers* $115,000
Cash paid for expenses and to creditors** (53,200)
Net cash flows from operating activities $ 61,800
Cash flows from (used for) investing activities:
Cash paid for purchase of land (35,000)
Cash flows from (used for) financing activities:
Cash received from owner as investment $ 21,000
Cash withdrawal by owner (5,000)
Net cash flows from financing activities 16,000
Net increase in cash $ 42,800
Cash balance, November 1, 20Y6 39,000
Cash balance, November 30, 20Y6 $ 81,800
* $38,000 + $77,000; these amounts are taken from the Cash column of the spreadsheet
in Part 2.
** $4,000 + $20,000 + $29,200; these amounts are taken from the Cash column of the
spreadsheet in Part 2.
CHAPTER 1 Introduction to Accounting and Business
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Prob. 1-6B
a. Wages expense, $203,200 ($288,000 – $48,000 – $17,600 – $14,400 – $4,800)
b. Net income, $112,000 ($400,000 – $288,000)
c. LuAnn Martin, capital, May 1, 20Y3, $0; Atlas Realty was organized on May 1, 20Y3.
d. Investment on May 1, 20Y3, $160,000; from statement of cash flows
e. Net income for May, $112,000; from (b)
f. Withdrawals, $64,000; from statement of cash flows
g. Increase in owner’s equity, $208,000 ($160,000 + $112,000 – $64,000)
h. LuAnn Martin, capital, May 31, 20Y3, $208,000
i. Land, $120,000; from statement of cash flows
j. Total assets, $256,000 ($123,200 + $12,800 + $120,000)
k. LuAnn Martin, capital, $208,000
l. Total liabilities and owner’s equity, $256,000 ($48,000 + $208,000)
m. Cash received from customers, $400,000; this is the same as fees earned
since there are no accounts receivable.
n. Net cash flows from operating activities, $147,200 ($400,000 – $252,800)
o. Net cash flows from financing activities, $96,000 ($160,000 – $64,000)
p. Net increase in cash, $123,200 ($147,200 – $120,000 + $96,000)
q. May 31, 20Y3, cash balance, $123,200
CHAPTER 1 Introduction to Accounting and Business
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1. Assets
CONTINUING PROBLEM
= Liabilities + Owner’s Equity
Peyton Peyton
Cash +
Accts.
Rec. + Supplies =
Accts.
Payable +
Smith,
Capital
Smith,
– Drawing +
Fees
Earned
June 1 + 4,000 + 4,000
June 2 + 3,500 + 3,500
Bal. 7,500 4,000 3,500
June 2 – 800
Bal. 6,700 4,000 3,500
June 4 + 350 + 350
Bal. 6,700 350 350 4,000 3,500
June 6 – 500
Bal. 6,200 350 350 4,000 3,500
June 8 – 675
Bal. 5,525 350 350 4,000 3,500
June 12 – 350
Bal. 5,175 350 350 4,000 3,500
June 13 – 100 – 100
Bal. 5,075 350 250 4,000 3,500
June 16 + 300 + 300
Bal. 5,375 350 250 4,000 3,800
June 22 + 1,000 + 1,000
Bal. 5,375 1,000 350 250 4,000 4,800
June 25 + 500 + 500
Bal. 5,875 1,000 350 250 4,000 5,300
June 29 – 240
Bal. 5,635 1,000 350 250 4,000 5,300
June 30 + 900 + 900
Bal. 6,535 1,000 350 250 4,000 6,200
June 30 – 400
Bal. 6,135 1,000 350 250 4,000 6,200
June 30 – 300
Bal. 5,835 1,000 350 250 4,000 6,200
June 30 – 180
Bal. 5,835 1,000 170 250 4,000 6,200
June 30 – 415
Bal. 5,420 1,000 170 250 4,000 6,200
June 30 – 1,000
Bal. 4,420 1,000 170 250 4,000 6,200
June 30 – 500 – 500
Bal. 3,920 1,000 170 250 4,000 – 500 6,200
CHAPTER 1 Introduction to Accounting and Business
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Continuing Problem (Continued)
Owner’s Equity (Continued)
Music
Office
Rent
Equip.
Rent
Adver-
tising Wages Utilities Supplies Misc.
– Exp. – Exp. – Exp. – Exp. – Exp. – Exp. – Exp. – Exp.
June 1
June 2
Bal.
June 2 – 800
Bal. – 800
June 4
Bal. – 800
June 6 – 500
Bal. – 800 – 500
June 8 – 675
Bal. – 800 – 675 – 500
June 12 – 350
Bal. – 350 – 800 – 675 – 500
June 13
Bal. – 350 – 800 – 675 – 500
June 16
Bal. – 350 – 800 – 675 – 500
June 22
Bal. – 350 – 800 – 675 – 500
June 25
Bal. – 350 – 800 – 675 – 500
June 29 – 240
Bal. – 590 – 800 – 675 – 500
June 30
Bal. – 590 – 800 – 675 – 500
June 30 – 400
Bal. – 590 – 800 – 675 – 500 – 400
June 30 – 300
Bal. – 590 – 800 – 675 – 500 – 400 – 300
June 30 – 180
Bal. – 590 – 800 – 675 – 500 – 400 – 300 – 180
June 30 – 415
Bal. – 590 – 800 – 675 – 500 – 400 – 300 – 180 – 415
June 30 – 1,000
Bal. – 1,590 – 800 – 675 – 500 – 400 – 300 – 180 – 415
June 30
Bal. – 1,590 – 800 – 675 – 500 – 400 – 300 – 180 – 415
CHAPTER 1 Introduction to Accounting and Business
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Continuing Problem (Concluded)
2.
3.
4.
PS Music
Income Statement
For the Month Ended June 30, 20Y9
Fees earned: $6,200
Expenses:
Music expense $1,590
Office rent expense 800
Equipment rent expense 675
Advertising expense 500
Wages expense 400
Utilities expense 300
Supplies expense 180
Miscellaneous expense 415
Total expenses 4,860
Net income $1,340
PS Music
Statement of Owner’s Equity
For the Month Ended June 30, 20Y9
Peyton Smith, capital, June 1, 20Y9 $ 0
Investment on June 1, 20Y9 $4,000
Net income for June 1,340
Withdrawals (500)
Increase in owner’s equity 4,840
Peyton Smith, capital, June 30, 20Y9 $4,840
PS Music
Balance Sheet
June 30, 20Y9
Assets
Cash $3,920
Accounts receivable 1,000
Supplies 170
Total assets $5,090
Liabilities
Accounts payable $ 250
Owner’s Equity
Peyton Smith, capital 4,840
Total liabilities and owner’s equity $5,090
CHAPTER 1 Introduction to Accounting and Business
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CASES & PROJECTS
CP 1-1
1. The car repair is a personal expense and is Marco’s personal responsibility. By
using partnership funds to pay for the repair, Marco is behaving unethically
because he is violating the business entity assumption. The business entity
assumption treats the business as a separate entity from its owners. By taking
money from the partnership for a personal expense, Marco is effectively stealing
from his partners.
2. The partnership’s net income will be reduced by the $2,000 Marco has taken.
This will reduce the amount of net income available to Marco’s partners.
3. Marco could ask his partners for a loan from the partnership. The loan could be
repaid out of his salary or from his share of the partnership income.
CP 1-2
1. Acceptable professional conduct requires that Colleen Fernandez supply First
Federal Bank with all the relevant financial statements necessary for the bank
to make an informed decision. Therefore, Colleen should provide the complete
set of financial statements. These can be supplemented with a discussion of
the net loss in the past year or other data explaining why granting the loan is
a good investment for the bank.
2. a. Owners are generally willing to provide bankers with information about the
operating and financial condition of the business, such as the following:
● Operating Information:
● Description of business operations
● Results of past operations
● Preliminary results of current operations
● Plans for future operations
● Financial Condition:
● List of assets and liabilities (balance sheet)
● Estimated current values of assets
● Owner’s personal investment in the business
● Owner’s commitment to invest additional funds in the business
Owners are normally reluctant to provide the following types of information
to bankers:
● Proprietary Operating Information. Such information, which could hurt
the business if it becomes known by competitors, might include special
processes used by the business or future plans to expand operations
into areas that are not currently served by a competitor.
CHAPTER 1 Introduction to Accounting and Business
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CP 1-2 (Concluded)
● Personal Financial Information. Owners may have little choice here
because banks often require owners of small businesses to pledge their
personal assets as security for a business loan. Personal financial
information requested by bankers often includes the owner’s net worth,
salary, and other income. In addition, bankers usually request
information about factors that might affect the personal financial
condition of the owner. For example, a pending divorce by the owner
might significantly affect the owner’s personal wealth.
b. Bankers typically want as much information as possible about the ability
of the business and the owner to repay the loan with interest. Examples of
such information are described above.
c. Both bankers and business owners share the common interest of the
business doing well and being successful. If the business is successful,
the bankers will receive their loan payments on time with interest and the
owners will increase their personal wealth.
CP 1-3
A sample solution based on Nike Inc.’s Form 10-K for the fiscal year ended May 31,
2018, is as follows:
1. Nike, Inc.
2. Beaverton, Oregon
3. Mark G. Parker
4. Manufacturing
5. Our principal business activity is the design, development, and worldwide
marketing and selling of athletic footwear, apparel, equipment, accessories, and
services.
6. Income statement, statement of comprehensive income, balance sheet, statement
of stockholders’ equity, statement of cash flows
Note to Instructor: The statement of comprehensive income is discussed in the
appendix to Chapter 15. Since students will see this statement in a company’s annual
report or 10-K, we listed it as part of the answer.
CHAPTER 1 Introduction to Accounting and Business
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CP 1-4
Example Memo
To: My Teacher
From: Ima Student
Date: January 1, 20XX
Re: Causes of Accounting Fraud
Business and accounting fraud typically result from either a failure of individual
character or a culture of greed within an organization. Managers and accountants
often face pressure to meet or exceed a company’s financial goals. At times,
supervisors can place pressure on individuals to violate accounting standards to
improve a company’s reported financial results. Individuals who give in to these
pressures exhibit a failure of individual character. In other situations, the organization
may expect employees to violate accounting rules as part of their job. This occurs in
organizations that do not value ethical decision making or fair financial reporting and
exhibit a culture of ethical indifference.
CP 1-5
The difference in the two bank balances, $55,000 ($80,000 – $25,000), may not be
pure profit from an accounting perspective. To determine the accounting profit for
the six-month period, the revenues for the period would need to be matched with
the related expenses. The revenues minus the expenses would indicate whether
the business generated net income (profit) or a net loss for the period. Using only
the difference between the two bank account balances ignores such factors as
amounts due from customers (receivables), liabilities (accounts payable) that need
to be paid for wages or other operating expenses, additional investments that Dr.
Cousins may have made in the business during the period, or withdrawals during
the period that Dr. Cousins might have taken for personal reasons unrelated to the
business.
Some businesses that have few, if any, receivables or payables may use a “cash”
basis of accounting. The cash basis of accounting ignores receivables and payables
because they are assumed to be insignificant in amount. However, even with the
cash basis of accounting, additional investments during the period and any
withdrawals during the period must be considered in determining the net income
(profit) or net loss for the period.
CHAPTER 1 Introduction to Accounting and Business
CP 1-6
1. Assets = Liabilities +
Accts.
Lisa
Duncan,
Lisa
Duncan, Fees
Owner’s Equity
Salaries Rent Supplies Misc.
Cash + Supplies = Payable + Capital – Drawing + Earned – Expense – Expense – Expense – Exp.
(a) + 950 + 950
(b) – 300 + 300
Bal. 650 300 950
(c) – 275 – 275
Bal. 375 300 950 – 275
(d) – 100 + 150 – 250
Bal. 275 300 150 950 – 525
(e) + 1,750 + 1,750
Bal. 2,025 300 150 950 1,750 – 525
(f) + 600 + 600
Bal. 2,625 300 150 950 2,350 – 525
(g) – 800 – 800
Bal. 1,825 300 150 950 2,350 – 800 – 525
(h) – 290 – 290
Bal. 1,535 300 150 950 2,350 – 800 – 525 – 290
(i) + 1,300 + 1,300
Bal. 2,835 300 150 950 3,650 – 800 – 525 – 290
(j) – 120 – 120
Bal.
(k)
2,835
– 400
180 150 950
– 400
3,650 – 800 – 525 – 120 – 290
Bal. 2,435 180 150 950 – 400 3,650 – 800 – 525 – 120 – 290
1-48
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CHAPTER 1 Introduction to Accounting and Business
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CP 1-6 (Continued)
2.
3.
4.
Serve-N-Volley
Income Statement
For the Month Ended September 30, 20Y7
Fees earned: $3,650
Expenses:
Salaries expense $800
Rent expense 525
Supplies expense 120
Miscellaneous expense 290
Total expenses 1,735
Net income $1,915
Serve-N-Volley
Statement of Owner’s Equity
For the Month Ended September 30, 20Y7
Lisa Duncan, capital, September 1, 20Y7 $ 0
Investment on September 1, 20Y7 $ 950
Net income for September 1,915
Withdrawals (400)
Increase in owner’s equity 2,465
Lisa Duncan, capital, September 30, 20Y7 $2,465
Serve-N-Volley
Balance Sheet
September 30, 20Y7
Assets
Cash $2,435
Supplies 180
Total assets $2,615
Liabilities
Accounts payable $ 150
Owner’s Equity
Lisa Duncan, capital 2,465
Total liabilities and owner’s equity $2,615
CHAPTER 1 Introduction to Accounting and Business
CP 1-6 (Concluded)
5. a. Serve-N-Volley would provide Lisa with $715 more income per month than
working as a waitress. This amount is computed as follows:
Net income of Serve-N-Volley, per month………………………………… $1,915
Earnings as waitress, per month:
30 hours per week × $10 per hour × 4 weeks………………………… 1,200
Difference……………………………………………………………………… $ 715
b. Other factors that Lisa should consider before discussing a long-term
arrangement with the Phoenix Tennis Club include the following:
Lisa should consider whether the results of operations for September are
indicative of what to expect each month. For example, Lisa should consider
whether club members will continue to request lessons or use the ball
machine during the fall months when interest in tennis may slacken. Lisa
should evaluate whether the additional income of $715 per month from
Serve-N-Volley is worth the risk being taken and the effort being expended.
Lisa should also consider how much her investment in Serve-N-Volley
could have earned if invested elsewhere. For example, if the initial
investment of $950 had been invested to earn a rate of return of 6%
per year, it would have earned $4.75 in September, or $57 for the year.
Note to Instructors: Numerous other considerations could be mentioned by
students, such as the ability of Lisa to withdraw cash from Serve-N-Volley for
personal use. For example, some of her investment in Serve-N-Volley will be
in the form of supplies (tennis balls, for example), which are readily convertible
to cash. The objective of this case is not to mention all possible considerations
but, rather, to encourage students to begin thinking about the use of accounting
information in making business decisions.
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CHAPTER 1 Introduction to Accounting and Business
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CP 1-7
Note to Instructors: The purpose of this activity is to familiarize students with the
certification requirements and their online availability. You might use this as an
opportunity to discuss the advantages and disadvantages of careers in public
accounting (CPA), management accounting (CMA), and internal auditing (CIA).
The following websites provide students with useful information (such as starting
salaries) on careers in accounting:
American Institute of Certified Public Accountants (AICPA)
https://www.aicpa.org/becomeacpa.html
Institute of Certified Management Accountants (IMA)
http://www.imanet.org/cma-certification/cma-certification-overview
Institute of Internal Auditors (IIA)
https://na.theiia.org/about-us/Pages/About-The-Institute-of-Internal-Auditors.aspx
CP 1-8
Net cash flows from (used for)
First Second Third
Year Year Year
operating activities negative positive positive
Net cash flows from (used for)
investing activities negative negative negative
Net cash flows from (used for)
financing activities positive positive positive
Start-up companies normally experience negative net cash flows from operating
activities; however, Amazon.com was able to generate positive net cash flows
from operations by its second year. Start-up companies normally have negative
net cash flows from investing activities as they build up their infrastructure through
purchases of property, plant, and equipment. This was the case with Amazon.com
for each of its first three years. Likewise, start-up companies normally have positive
net cash flows from financing activities from raising capital. This is also the case
for Amazon.com.
CHAPTER 2
ANALYZING TRANSACTIONS
DISCUSSION QUESTIONS
1. An account is a form designed to record changes in a particular asset, liability, owner’s equity,
revenue, or expense. A ledger is a group of related accounts.
2. The terms debit and credit may signify either an increase or a decrease, depending upon the nature
of the account. For example, debits signify an increase in asset and expense accounts but a decrease
in liability, owner’s equity, and revenue accounts.
3. a. Assuming that no errors have occurred, the credit balance in the cash account resulted from
drawing checks for $1,850 in excess of the amount of cash on deposit.
b. The $1,850 credit balance in the cash account as of December 31 is a liability owed to the bank.
It is usually referred to as an “overdraft.”
4. a. The revenue was earned in October.
b. (1) Debit Accounts Receivable and credit Fees Earned or another appropriately titled revenue
account in October.
(2) Debit Cash and credit Accounts Receivable in November.
5. No. Errors may have been made that had the same erroneous effect on both debits and credits, such
as failing to record and/or post a transaction, recording the same transaction more than once, and
posting a transaction correctly but to the wrong account.
6. Recording $9,800 instead of the correct amount of $8,900 is a transposition. Recording $100 instead
of the correct amount of $1,000 is a slide.
7. a. No. Because the same error occurred on both the debit side and the credit side of the trial
balance, the trial balance would not be out of balance.
b. Yes. The trial balance would not balance. The error would cause the debit total of the trial
balance to exceed the credit total by $90.
8. a. The equality of the trial balance would not be affected.
b. On the income statement, total operating expenses (salary expense) would be overstated by
$7,500, and net income would be understated by $7,500. On the statement of owner’s equity,
the beginning and ending owner’s capital would be correct. The understatement of net income
understates owner’s equity by $7,500, while the understatement of withdrawals overstates
owner’s equity by $7,500. Thus, ending owner’s equity is correct. The balance sheet is not
affected by the error.
9. a. The equality of the trial balance would not be affected.
b. On the income statement, revenues (fees earned) would be overstated by $300,000, and net
income would be overstated by $300,000. On the statement of owner’s equity, the beginning
capital would be correct. However, net income and ending capital would be overstated by
$300,000. The balance sheet total assets is correct. However, liabilities (notes payable) is
understated by $300,000, and owner’s equity is overstated by $300,000. The understatement
of liabilities is offset by the overstatement of owner’s equity, and thus, total liabilities and
owner’s equity is correct.
10. a. From the viewpoint of Surety Storage, the balance of the checking account represents an asset.
b. From the viewpoint of Ada Savings Bank, the balance of the checking account represents a
liability.
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CHAPTER 2 Analyzing Transactions
2-2
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PE 2-1A
PRACTICE EXERCISES
1. Debit and credit entries (c), normal debit balance
2. Credit entries only (b), normal credit balance
3. Credit entries only (b), normal credit balance
4. Debit entries only (a), normal debit balance
5. Credit entries only (b), normal credit balance
6. Debit and credit entries (c), normal credit balance `
PE 2-1B
1. Debit and credit entries (c), normal credit balance
2. Debit and credit entries (c), normal debit balance
3. Debit entries only (a), normal debit balance
4. Debit entries only (a), normal debit balance
5. Debit entries only (a), normal debit balance
6. Credit entries only (b), normal credit balance
PE 2-2A
Feb. 19 Office Equipment 14,800
Cash 3,600
Accounts Payable 11,200
PE 2-2B
Sept. 30 Office Supplies 1,900
Cash 600
Accounts Payable 1,300
CHAPTER 2 Analyzing Transactions
PE 2-3A
2-3
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Apr. 30 Accounts Receivable 12,980
Fees Earned 12,980
PE 2-3B
Aug. 13 Cash 7,480
Fees Earned 7,480
PE 2-4A
Dec. 23 Graeme Schneider, Drawing 27,000
Cash 27,000
PE 2-4B
June 30 Claire Hope, Drawing 9,500
Cash 9,500
PE 2-5A
Using the following T account, solve for the amount of cash receipts (indicated
by ? below).
Cash
July 1 Bal.
Cash receipts
42,830
?
132,500 Cash payments
July 31 Bal. 33,850
$33,850 = $42,830 + Cash receipts – $132,500
Cash receipts = $33,850 + $132,500 – $42,830 = $123,520
PE 2-5B
Using the following T account, solve for the amount of supplies expense
(indicated by ? below).
Supplies
Aug. 1 Bal. 1,240 ? Supplies expense
Supplies purchased 3,760
Aug. 31 Bal. 1,600
$1,600 = $1,240 + $3,760 – Supplies expense
Supplies expense = $1,240 + $3,760 – $1,600 = $3,400
CHAPTER 2 Analyzing Transactions
2-4
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PE 2-6A
a. The trial balance totals are unequal. The debit total is higher by $900 ($9,800 –
$8,900).
b. The trial balance totals are equal because both the debit and credit entries were
journalized and posted for $530.
c. The trial balance totals are unequal. The debit total is higher by $5,800 ($2,900 +
$2,900).
PE 2-6B
a. The trial balance totals are equal because both the debit and credit entries were
journalized and posted for $14,200.
b. The trial balance totals are unequal. The credit total is higher by $360 ($1,730 –
$1,370).
c. The trial balance totals are unequal. The debit total is higher by $4,500 ($7,250 –
$2,750).
CHAPTER 2 Analyzing Transactions
PE 2-7A
2-5
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a. Journal Entry That Was
Made in Error
Journal Entry That Should
Have Been Made
Miscellaneous Expense 3,220
Rent Expense 3,220
Rent Expense 3,220
Cash 3,220
Comparison
Rent Expense instead of Miscellaneous Expense should have been debited.
Cash instead of Rent Expense should have been credited. The debit and credit
amount of $3,220 is correct.
Correcting Journal Entries
Rent Expense 3,220
Miscellaneous Expense 3,220
Rent Expense 3,220
Cash 3,220
Note: The first entry reverses the incorrect entry, and the second entry is what should have
been recorded initially. These two entries could have been combined into one entry;
however, preparing two entries makes it easier for someone later to understand what
happened and why the entries were necessary.
b. Journal Entry That Was Journal Entry That Should
Made in Error Have Been Made
Cash 5,080 Cash 5,080
Accounts Payable 5,080 Accounts Receivable 5,080
Comparison
Accounts Receivable instead of Accounts Payable should have been credited.
Correcting Journal Entry
Accounts Payable 5,080
Accounts Receivable 5,080
CHAPTER 2 Analyzing Transactions
2-6
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PE 2-7B
a. Journal Entry That Was Journal Entry That Should
Made in Error Have Been Made
Accounts Receivable 10,700 Cash 10,700
Fees Earned 10,700 Fees Earned 10,700
Comparison
Cash instead of Accounts Receivable should have been debited.
Correcting Journal Entry
Cash
Accounts Receivable
10,700
10,700
b. Journal Entry That Was
Made in Error
Journal Entry That Should
Have Been Made
Office Equipment 4,300
Supplies 4,300
Supplies 4,300
Accounts Payable 4,300
Comparison
Supplies instead of Office Equipment should have been debited.
Accounts Payable instead of Supplies should have been credited.
The debit and credit amount of $4,300 is correct.
Correcting Journal Entries
Supplies 4,300
Office Equipment 4,300
Supplies 4,300
Accounts Payable 4,300
Note: The first entry reverses the incorrect entry, and the second entry is what should have
been recorded initially. These two entries could have been combined into one entry;
however, preparing two entries makes it easier for someone later to understand what
happened and why the entries were necessary.
CHAPTER 2 Analyzing Transactions
2-7
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PE 2-8A
Vaughn Company
Income Statements
For the Years Ended December 31
20Y1 20Y0
Increase/(Decrease)
Amount Percent
Fees earned $716,800 $896,000 $(179,200) (20%)
Operating expenses 557,760 672,000 (114,240) (17%)
Net income $159,040 $224,000 $ (64,960) (29%)
PE 2-8B
Satterfield Company
Income Statements
For the Years Ended December 31
20Y1 20Y0 Increase/(Decrease)
Amount Percent
Fees earned $3,068,200 $2,645,000 $423,200 16.0%
Operating expenses 2,281,600 1,984,000 297,600 15.0%
Net income $ 786,600 $ 661,000 $125,600 19.0%
CHAPTER 2 Analyzing Transactions
2-8
© 2021 Cengage Learning, Inc. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Ex. 2-1
EXERCISES
Balance Sheet Accounts Income Statement Accounts
Assets Revenues
Cash Cargo Revenue
Accounts Receivable Passenger Revenue
Property and Equipment
Fuel Inventory
Parts and Supplies
Prepaid Expenses
Liabilities Expenses
Accounts Payable Aircraft Fuel (Expense)
Air Traffic Liabilitya
Aircraft Maintenance (Expense)
Loyalty Program (Obligations)b
Aircraft Rent (Expense)
Accrued Salaries (Obligations) Regional Carriers Expensec
Landing Fees (Expense)d
Passenger Commissions (Expense)e
Owner’s Equity
None
a
Passenger ticket sales for future flights
b
Obligations to provide frequent flyers future travel and other benefits
c
Payments to other airlines for passenger travel under Delta tickets
d
Fees paid to airports for landing rights
e
Commissions paid to travel agents for passenger bookings
Ex. 2-2
Account
Account
Number
Accounts Payable 21
Accounts Receivable 12
Cash 11
Fees Earned 41
Fred Biggs, Capital 31
Fred Biggs, Drawing 32
Land 13
Miscellaneous Expense 53
Supplies Expense 52
Wages Expense 51
Note: Expense accounts are normally listed in order of magnitude from largest to
smallest with Miscellaneous Expense always listed last. Since Wages Expense is
normally larger than Supplies Expense, Wages Expense is listed as account
number 51 and Supplies Expense as account number 52.
CHAPTER 2 Analyzing Transactions
Ex. 2-3
2-9
© 2021 Cengage Learning, Inc. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Balance Sheet Accounts Income Statement Accounts
1. Assets 4. Revenue
11 Cash 41 Fees Earned
12 Accounts Receivable
13 Supplies 5. Expenses
14 Prepaid Insurance 51 Wages Expense
15 Equipment 52 Rent Expense
53 Supplies Expense
2. Liabilities
21 Accounts Payable
22 Unearned Rent
3. Owner’s Equity
31 Lorri Ross, Capital
32 Lorri Ross, Drawing
59 Miscellaneous Expense
Note: The order of some of the accounts within the major classifications is
somewhat arbitrary, as in accounts 13–14, accounts 21–22, and accounts 51–53.
In a new business, the order of magnitude of balances in such accounts is not
determinable in advance. The magnitude may also vary from period to period.
Ex. 2-4
a. debit g. debit
b. credit h. credit
c. debit i. debit
d. credit j. credit
e. credit k. debit
f. debit l. debit
Ex. 2-5
1. debit and credit entries (c)
2. debit and credit entries (c)
3. debit and credit entries (c)
4. credit entries only (b)
5. debit entries only (a)
6. debit entries only (a)
7. debit entries only (a)
CHAPTER 2 Analyzing Transactions
2-10
© 2021 Cengage Learning, Inc. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Ex. 2-6
a. Liability—credit e. Asset—debit
b. Asset—debit f. Revenue—credit
c. Owner’s equity g. Asset—debit
(Ashley Griffin, Capital)—credit h. Expense—debit
d. Owner’s equity i. Asset—debit
(Ashley Griffin, Drawing)—debit j. Expense—debit
Ex. 2-7
20Y3
Oct. 1 Rent Expense 4,800
Cash 4,800
3 Advertising Expense 2,500
Cash 2,500
5 Supplies 1,390
Cash 1,390
6 Office Equipment 10,670
Accounts Payable 10,670
10 Cash 19,730
Accounts Receivable 19,730
15 Accounts Payable 9,480
Cash 9,480
27 Miscellaneous Expense 530
Cash 530
30 Utilities Expense 220
Cash 220
31 Accounts Receivable 38,620
Fees Earned 38,620
31 Utilities Expense 1,540
Cash 1,540
31 Michael Short, Drawing 6,700
Cash 6,700
CHAPTER 2 Analyzing Transactions
Ex. 2-8
2-11
© 2021 Cengage Learning, Inc. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
a.
JOURNAL Page 87
Date Description
Post.
Ref. Debit Credit
20Y4
Sept. 18 Supplies 15 8,710
Accounts Payable 21 8,710
Purchased supplies on account.
b., c., d.
Account: Supplies Account No. 15
Date Item
Post.
Ref. Debit Credit
Balance
Debit Credit
20Y4
Sept. 1 Balance  2,960
18 87 8,710 11,670
Account: Accounts Payable Account No. 21
Date Item
Post.
Ref. Debit Credit
Balance
Debit Credit
20Y4
Sept. 1 Balance  38,400
18 87 8,710 47,110
e. Yes. The rules of debit and credit apply to all companies.
Ex. 2-9
a. (1)
(2)
(3)
(4)
Accounts Receivable 73,900
Fees Earned 73,900
Supplies 1,960
Accounts Payable 1,960
Cash 62,770
Accounts Receivable 62,770
Accounts Payable 820
Cash 820
CHAPTER 2 Analyzing Transactions
2-12
© 2021 Cengage Learning, Inc. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
(2)
Supplies
1,960
Fees Earned
(1) 73,900
Accounts Receivable
(1) 73,900 (3) 62,770
Cash
X
515,000
200,000
375,000
Ex. 2-9 (Concluded)
b.
Cash
(3) 62,770 (4) 820
c. No. An error may not have necessarily occurred. A credit balance in Accounts
Receivable could occur if a customer overpaid his or her account. Regardless,
the credit balance should be investigated to verify that an error has not occurred.
Ex. 2-10
a. The increase of $140,000 ($515,000 – $375,000) in the cash account does not
indicate net income of that amount. Net income is the excess of revenues
over expenses and is normally not the same as the change in the cash account.
b. $60,000 ($200,000 – $140,000)
or
X + $515,000 – $375,000 = $200,000
X = $200,000 – $515,000 + $375,000
X = $60,000
Accounts Payable
(4) 820 (2) 1,960
CHAPTER 2 Analyzing Transactions
Ex. 2-11
2-13
© 2021 Cengage Learning, Inc. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
a. Accounts Payable
194,500
Feb. 1 X
210,400
Feb. 28 62,500
X + $210,400 – $194,500 = $62,500
X = $62,500 + $194,500 – $210,400
X = $46,600
b. Accounts Receivable
Oct. 1 121,100
X
470,500
Oct. 31 136,800
$121,100 + X – $470,500 = $136,800
X = $136,800 + $470,500 – $121,100
X = $486,200
c. Cash
X
$48,350 + $260,060 – X = $59,390
X = $48,350 + $260,060 – $59,390
X = $249,020
Ex. 2-12
a. Credit balance of $170,000 ($500,000 – $10,000 – $320,000).
b. Yes. The balance sheet prepared at December 31 will balance, with Terrace
Waters, Capital, being reported in the owner’s equity section as $170,000.
Apr. 1 48,350
260,060
Apr. 30 59,390
CHAPTER 2 Analyzing Transactions
2-14
© 2021 Cengage Learning, Inc. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Ex. 2-13
a. and b.
Account Debited Account Credited
Transaction Type Effect Type Effect
(1) asset + owner’s equity +
(2) asset + asset –
(3) asset + asset –
liability +
(4) expense + asset –
(5) asset + revenue +
(6) liability – asset –
(7) asset + asset –
(8) expense + asset –
(9) drawing + asset –
Ex. 2-14
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
Cash 97,000
Mary Silva, Capital 97,000
Supplies 1,160
Cash 1,160
Equipment 10,350
Accounts Payable 8,280
Cash 2,070
Operating Expenses 8,120
Cash 8,120
Accounts Receivable 15,910
Fees Earned 15,910
Accounts Payable 3,490
Cash 3,490
Cash 10,540
Accounts Receivable 10,540
Operating Expenses 850
Supplies 850
Mary Silva, Drawing 3,200
Cash 3,200
CHAPTER 2 Analyzing Transactions
Ex. 2-15
2-15
© 2021 Cengage Learning, Inc. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
a.
b. Net income, $6,940 ($15,910 – $8,970)
Emerald Tours Co.
Unadjusted Trial Balance
May 31, 20Y5
Debit
Balances
Credit
Balances
Cash 89,500
Accounts Receivable 5,370
Supplies 310
Equipment 10,350
Accounts Payable 4,790
Mary Silva, Capital 97,000
Mary Silva, Drawing 3,200
Fees Earned 15,910
Operating Expenses 8,970
117,700 117,700
CHAPTER 2 Analyzing Transactions
2-16
© 2021 Cengage Learning, Inc. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
IF YOU WANT THIS TEST BANK OR SOLUTION
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Solution Manual For Accounting 28th Edition by Carl S. Warren, Christine Jonick Verified Chapter's 1 - 26 Complete.docx

  • 1. SOLUTIONS MANUAL for Accounting 28th Edition by Carl Warren, Christine Jonick & Jennifer Schneider. (Complete Chapters 1-26)
  • 2. CHAPTER 1 INTRODUCTION TO ACCOUNTING AND BUSINESS DISCUSSION QUESTIONS 1. Some users of accounting information include managers, employees, investors, creditors, customers, and the government. 2. The role of accounting is to provide information for managers to use in operating the business. In addition, accounting provides information to others to use in assessing the economic performance and condition of the business. 3. The corporate form allows the company to obtain large amounts of resources by issuing stock. For this reason, most companies that require large investments in property, plant, and equipment are organized as corporations. 4. No. The business entity concept limits the recording of economic data to transactions directly affecting the activities of the business. The payment of the interest of $4,500 is a personal transaction of Josh Reilly and should not be recorded by Dispatch Delivery Service. 5. The land should be recorded at its cost of $167,500 to Reliable Repair Service. This is consistent with the cost concept. 6. a. No. The offer of $2,000,000 and the increase in the assessed value should not be recognized in the accounting records because land is recorded on the cost basis. b. Cash would increase by $2,125,000, land would decrease by $900,000, and owner’s equity would increase by $1,225,000. 7. 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 records of the seller is an account payable in the records of the purchaser. 8. (b) The business realized net income of $91,000 ($679,000 – $588,000). 9. (a) The business incurred a net loss of $75,000 ($640,000 – $715,000). 10. (a) Net income or net loss (b) Owner’s equity at the end of the period (c) Cash at the end of the period 1-1
  • 3.
  • 4. CHAPTER 1 Introduction to Accounting and Business PE 1-1A PRACTICE EXERCISES $597,000. Under the cost concept, the land should be recorded at the cost to Boulder Repair Service. PE 1-1B $369,500. Under the cost concept, the land should be recorded at the cost to Clementine Repair Service. PE 1-2A a. A = L + OE $518,000 OE = = $165,000 + OE $353,000 b. A = L + OE +$86,200 = +$25,000 + OE OE = +$61,200 OE on December 31, 20Y9 = $353,000 + $61,200 = $414,200 PE 1-2B a. A = L + OE $382,000 OE = = $94,000 + OE $288,000 b. A –$63,000 OE OE on December 31, 20Y9 = = = = = L + OE +$35,000 + OE –$98,000 $288,000 – $98,000 $190,000 PE 1-3A (2) Asset (Accounts Receivable) increases by $22,400; Owner’s Equity (Delivery Service Fees) increases by $22,400. (3) Liability (Accounts Payable) decreases by $4,100; Asset (Cash) decreases by $4,100. (4) Asset (Cash) increases by $14,700; Asset (Accounts Receivable) decreases by $14,700. (5) Asset (Cash) decreases by $1,600; Owner’s Equity (Terry Young, Drawing) decreases by $1,600.
  • 5. CHAPTER 1 Introduction to Accounting and Business PE 1-3B (2) Owner’s Equity (Advertising Expense, increases) decreases by $6,750; Asset (Cash) decreases by $6,750. (3) Asset (Supplies) increases by $2,920; Liability (Accounts Payable) increases by $2,920. (4) Asset (Accounts Receivable) increases by $20,460; Owner’s Equity (Delivery Service Fees) increases by $20,460. (5) Asset (Cash) increases by $11,410; Asset (Accounts Receivable) decreases by $11,410. PE 1-4A Up-in-the-Air Travel Service Income Statement For the Year Ended April 30, 20Y7 Fees earned $1,870,000 Expenses: Wages expense $1,115,000 Office expense 343,000 Miscellaneous expense 21,000 Total expenses 1,479,000 Net income $ 391,000 PE 1-4B Zenith Travel Service Income Statement For the Year Ended August 31, 20Y4 Fees earned $899,600 Expenses: Wages expense $539,800 Office expense 353,800 Miscellaneous expense 14,400 Total expenses 908,000 Net loss $ (8,400)
  • 6. CHAPTER 1 Introduction to Accounting and Business PE 1-5A Up-in-the-Air Travel Service Statement of Owner’s Equity For the Year Ended April 30, 20Y7 Jerome Foley, capital, May 1, 20Y6 $ 876,000 Additional investment by owner during year $ 52,000 Net income for the year 391,000 Withdrawals (34,000) Increase in owner’s equity 409,000 Jerome Foley, capital, April 30, 20Y7 $1,285,000 PE 1-5B Zenith Travel Service Statement of Owner’s Equity For the Year Ended August 31, 20Y4 Megan Cox, capital, September 1, 20Y3 $456,000 Additional investment by owner during year $ 43,200 Net loss for the year (8,400) Withdrawals (21,600) Increase in owner’s equity 13,200 Megan Cox, capital, August 31, 20Y4 $469,200 PE 1-6A Up-in-the-Air Travel Service Balance Sheet April 30, 20Y7 Assets Cash $ 170,000 Accounts receivable 417,000 Supplies 16,000 Land 772,000 Total assets $1,375,000 Liabilities Accounts payable $ 90,000 Owner’s Equity Jerome Foley, capital 1,285,000 Total liabilities and owner’s equity $1,375,000
  • 7. CHAPTER 1 Introduction to Accounting and Business PE 1-6B Zenith Travel Service Balance Sheet August 31, 20Y4 Assets Cash $ 54,500 Accounts receivable 90,600 Supplies 5,600 Land 372,000 Total assets $522,700 Liabilities Accounts payable $ 53,500 Owner’s Equity Megan Cox, capital 469,200 Total liabilities and owner’s equity $522,700 PE 1-7A Up-in-the-Air Travel Service Statement of Cash Flows For the Year Ended April 30, 20Y7 Cash flows from (used for) operating activities: Cash received from customers $ 1,803,000 Cash paid for operating expenses (1,479,000) Net cash flows from operating activities $ 324,000 Cash flows from (used for) investing activities: Cash paid for purchase of land (347,000) Cash flows from (used for) financing activities: Cash received from owner as investment $ 52,000 Cash withdrawals by owner (34,000) Net cash flows from financing activities 18,000 Net decrease in cash $ (5,000) Cash balance, May 1, 20Y6 175,000 Cash balance, April 30, 20Y7 $ 170,000
  • 8. CHAPTER 1 Introduction to Accounting and Business 1-6 © 2021 Cengage Learning, Inc. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. PE 1-7B Zenith Travel Service Statement of Cash Flows For the Year Ended August 31, 20Y4 Cash flows from (used for) operating activities: Cash received from customers $ 881,000 Cash paid for operating expenses (895,000) Net cash flows used for operating activities $(14,000) Cash flows from (used for) investing activities: Cash paid for purchase of land (60,000) Cash flows from (used for) financing activities: Cash received from owner as investment $ 43,200 Cash withdrawals by owner (21,600) Net cash flows from financing activities 21,600 Net decrease in cash $(52,400) Cash balance, September 1, 20Y3 106,900 Cash balance, August 31, 20Y4 $ 54,500 PE 1-8A a. Dec. 31, Dec. 31, 20Y6 20Y5 Total liabilities……………………………………………… $598,000 $569,900 Total owner’s equity……………………………………… $460,000 $410,000 Ratio of liabilities to owner’s equity…………………… 1.30 * 1.39** * $598,000 ÷ $460,000 ** $569,900 ÷ $410,000 b. Decreased PE 1-8B a. Dec. 31, Dec. 31, 20Y6 20Y5 Total liabilities……………………………………………… $4,042,000 $3,096,000 Total owner’s equity……………………………………… $4,300,000 $3,600,000 Ratio of liabilities to owner’s equity…………………… 0.94* 0.86** * $4,042,000 ÷ $4,300,000 ** $3,096,000 ÷ $3,600,000 b. Increased
  • 9. CHAPTER 1 Introduction to Accounting and Business Ex. 1-1 EXERCISES a. 1. manufacturing 6. service 11. service 2. manufacturing 7. service 12. service 3. manufacturing 8. service 13. manufacturing 4. service 9. manufacturing 14. service 5. merchandise 10. merchandise 15. merchandise b. The accounting equation is relevant to all of the companies. It serves as the basis of the accounting information system. Ex. 1-2 As in many ethics issues, there is no one right answer. Oftentimes, disclosing only what is legally required may not be enough. In this case, it would be best for the company’s chief executive officer to disclose both reports to the county representatives. In doing so, the chief executive officer could point out any flaws or deficiencies in the fired researcher’s report. Ex. 1-3 a. 1. K 5. B 9. X 2. G 6. B 10. B 3. B 7. X 4. K 8. G b. A business transaction is an economic event or condition that directly changes an entity’s financial condition or results of operations. Ex. 1-4 Dunkin’s stockholders’ equity: $3,457 – $4,170 = ($713) Starbucks’ stockholders’ equity: $24,156 – $22,981 = $1,175 Ex. 1-5 Dollar Tree’s stockholders’ equity: $13,501 – $7,858 = $5,643 Target’s stockholders’ equity: $41,290 – $29,993 = $11,297
  • 10. CHAPTER 1 Introduction to Accounting and Business Ex. 1-6 1-8 © 2021 Cengage Learning, Inc. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. a. $4,474,000 ($633,000 + $3,841,000) b. $387,500 ($6,124,500 – $5,737,000) c. $1,232,900 ($1,981,800 – $748,900) Ex. 1-7 a. $494,000 ($659,000 – $165,000) b. $555,000 ($494,000 + $88,000 – $27,000) c. $330,000 ($494,000 – $151,000 – $13,000) d. $662,000 ($494,000 + $152,000 + $16,000) e. Net income: $92,000 ($782,000 – $196,000 – $494,000) Ex. 1-8 a. (1) asset b. (2) liability c. (1) asset d. (3) owner’s equity (revenue) e. (1) asset f. (3) owner’s equity (expense) g. (1) asset Ex. 1-9 a. Increases assets and increases owner’s equity. b. Decreases assets and decreases owner’s equity. c. Increases assets and decreases assets. d. Increases assets and increases liabilities. e. Increases assets and increases owner’s equity. Ex. 1-10 a. (1) Total assets increased $183,000 ($298,000 – $115,000). (2) No change in liabilities. (3) Owner’s equity increased $183,000. b. (1) Total assets decreased $80,000. (2) Total liabilities decreased $80,000. (3) No change in owner’s equity. c. No. It is false that a transaction always affects at least two elements (Assets, Liabilities, or Owner’s Equity) of the accounting equation. Some transactions affect only one element of the accounting equation. For example, purchasing supplies for cash only affects assets.
  • 11. CHAPTER 1 Introduction to Accounting and Business Ex. 1-11 1-9 © 2021 Cengage Learning, Inc. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 1. (b) decrease 2. (a) increase 3. (b) decrease 4. (a) increase Ex. 1-12 1. c 6. c 2. a 7. d 3. e 8. a 4. e 9. e 5. c 10. e Ex. 1-13 a. (1) Provided catering services for cash, $71,800. (2) Purchase of land for cash, $15,000. (3) Payment of cash for expenses, $47,500. (4) Purchase of supplies on account, $1,100. (5) Withdrawal of cash by owner, $5,000. (6) Payment of cash to creditors, $4,000. (7) Recognition of cost of supplies used, $1,500. b. $300 ($40,300 – $40,000) c. $17,800 (–$5,000 + $71,800 – $49,000) d. $22,800 ($71,800 – $49,000) e. $17,800 ($22,800 – $5,000) Ex. 1-14 No. It would be incorrect to say that the business had incurred a net loss of $8,000. The excess of the withdrawals over the net income for the period is a decrease in the amount of owner’s equity in the business.
  • 12. CHAPTER 1 Introduction to Accounting and Business Ex. 1-15 1-10 © 2021 Cengage Learning, Inc. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Dakota Owner’s equity at end of year ($928,000 – $352,000)………………………… $576,000 Deduct owner’s equity at beginning of year ($605,000 – $237,000)………… 368,000 Net income (increase in owner’s equity)…………………………………… $208,000 Jersey Increase in owner’s equity (as determined for Dakota)……………………… $208,000 Add withdrawals……………………………………………………………………… 40,000 Net income (increase in owner’s equity)…………………………………… $248,000 Carolina Increase in owner’s equity (as determined for Dakota)……………………… $208,000 Deduct additional investment……………………………………………………… 66,000 Net income (increase in owner’s equity)…………………………………… $142,000 Iowa Increase in owner’s equity (as determined for Dakota)……………………… $208,000 Deduct additional investment……………………………………………………… 66,000 $142,000 Add withdrawals……………………………………………………………………… 40,000 Net income (increase in owner’s equity)…………………………………… $182,000 Ex. 1-16 Balance sheet items: 1, 2, 3, 4, 6, 8, 10 Ex. 1-17 Income statement items: 5, 7, 9
  • 13. CHAPTER 1 Introduction to Accounting and Business Ex. 1-18 a. 1-11 © 2021 Cengage Learning, Inc. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Pegasus Product Company Statement of Owner’s Equity For the Month Ended April 30, 20Y7 Brian Walinsky, capital, April 1, 20Y7 $373,000 Net income for April $161,000 Withdrawals (24,000) Increase in owner’s equity 137,000 Brian Walinsky, capital, April 30, 20Y7 $510,000 b. The statement of owner’s equity is prepared before the April 30, 20Y7, balance sheet because Brian Walinsky, Capital as of April 30, 20Y7, is needed for the balance sheet. Ex. 1-19 Hermes Services Income Statement For the Month Ended August 31, 20Y2 Fees earned $627,600 Expenses: Wages expense $440,800 Rent expense 28,100 Supplies expense 6,800 Miscellaneous expense 9,300 Total expenses 485,000 Net income $142,600
  • 14. CHAPTER 1 Introduction to Accounting and Business Ex. 1-12 1-12 © 2021 Cengage Learning, Inc. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. In each case, solve for a single unknown, using the following equation: Owner’s Equity (beginning) + Investments – Withdrawals + Revenues – Expenses = Owner’s Equity (ending) Freeman J Owner’s equity at end of year ($1,260,000 – $330,000)……………… $930,000 Owner’s equity at beginning of year ($900,000 – $360,000)………… 540,000 Increase in owner’s equity……………………………………………… $390,000 Deduct increase due to net income ($570,000 – $240,000)………… 330,000 Increase due to additional investment less withdrawals…………… $ 60,000 Add withdrawals………………………………………………….………… 75,000 Additional investment in the business ................................................(a) $135,000 H yward Owner’s equity at end of year ($675,000 – $220,000)………………… $455,000 Owner’s equity at beginning of year ($490,000 – $260,000)………… 230,000 Increase in owner’s equity……………………………………………… $225,000 Add withdrawals………………………………………………….………… 32,000 Increase due to additional investment and net income…………… $257,000 Deduct additional investment…………………………………………… 150,000 Increase due to net income……………………………………………… $107,000 Add expenses………………………………………………….…………… 128,000 Revenue………………………………………………….……………… (b) $235,000 nes Owner’s equity at end of year ($100,000 – $80,000)………………… $ 20,000 Owner’s equity at beginning of year ($115,000 – $81,000)………… 34,000 Decrease in owner’s equity……………………………………………… $(14,000) Add decrease due to net loss ($115,000 – $122,500)………………… (7,500) Decrease due to withdrawals less additional investment………… $ (6,500) Deduct additional investment…………………………………………… 10,000 Withdrawals from the business……………………………………… (c) $(16,500) R mirez Owner’s equity at end of year ($270,000 – $136,000)………………… $134,000 Add decrease due to net loss ($115,000 – $128,000)………………… (13,000) Add withdrawals………………………………………………….………… 39,000 Beginning owner’s equity plus additional investment ……………… $186,000 Deduct additional investment…………………………………………… 55,000 Owner’s equity at beginning of year…………………………………… $131,000 Add liabilities at beginning of year……………………………………… 120,000 Assets at beginning of year………………………………………… (d) $251,000
  • 15. CHAPTER 1 Introduction to Accounting and Business Ex. 1-21 a. 1-13 © 2021 Cengage Learning, Inc. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Rockwell Interiors Balance Sheet February 29, 20Y0 Assets Cash $ 290,000 Accounts receivable 720,000 Supplies 30,000 Total assets $1,040,000 Liabilities Accounts payable $ 280,000 Owner’s Equity David Patel, capital 760,000 Total liabilities and owner’s equity $1,040,000 Rockwell Interiors Balance Sheet March 31, 20Y0 Assets Cash $ 340,000 Accounts receivable 870,000 Supplies 32,000 Total assets $1,242,000 Liabilities Accounts payable $ 360,000 Owner’s Equity David Patel, capital 882,000 Total liabilities and owner’s equity $1,242,000 b. Owner’s equity, March 31… ................................................................................. $882,000 Owner’s equity, February 29…………………….…………………………… 760,000 Net income…………………………………………………………………… $122,000 c. Owner’s equity, March 31 .........................................................................................$882,000 Owner’s equity, February 29…………………….…………………………… 760,000 Increase in owner’s equity………………………………………………… $122,000 Add withdrawal………………………………………………………………… 50,000 Net income…………………………………………………………………… $172,000
  • 16. CHAPTER 1 Introduction to Accounting and Business 1-14 © 2021 Cengage Learning, Inc. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Ex. 1-22 a. Balance sheet: 1, 2, 3, 4, 6, 7, 8, 9, 10, 11, 13 Income statement: 5, 12, 14, 15 b. Yes. An item can appear on more than one financial statement. For example, cash appears on both the balance sheet and statement of cash flows. However, the same item cannot appear on both the income statement and balance sheet. c. Yes. The accounting equation is relevant to all companies, including Exxon Mobil Corporation. Ex. 1-23 1. (a) operating activity 2. (a) operating activity 3. (b) investing activity 4. (c) financing activity Ex. 1-24 Ethos Consulting Group Statement of Cash Flows For the Year Ended May 31, 20Y6 Cash flows from (used for) operating activities: Cash received from customers $ 637,500 Cash paid for operating expenses (475,000) Net cash flows from operating activities $162,500 Cash flows from (used for) investing activities: Cash paid for purchase of land (90,000) Cash flows from (used for) financing activities: Cash received from owner as investment $ 62,500 Cash withdrawals by owner (17,500) Net cash flows from financing activities 45,000 Net increase in cash $117,500 Cash balance, June 1, 20Y5 58,000 Cash balance, May 31, 20Y6 $175,500
  • 17. CHAPTER 1 Introduction to Accounting and Business Ex. 1-25 1-15 © 2021 Cengage Learning, Inc. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 1. All financial statements should contain the name of the business in their heading. The statement of owner’s equity is incorrectly headed as “Omar Farah” rather than We-Sell Realty. The heading of the balance sheet needs the name of the business. 2. The income statement and statement of owner’s equity cover a period of time and should be labeled “For the Month Ended August 31, 20Y9.” 3. The year in the heading for the statement of owner’s equity should be 20Y9 rather than 20Y8. 4. The balance sheet should be labeled “August 31, 20Y9,” rather than “For the Month Ended August 31, 20Y9.” 5. In the income statement, the miscellaneous expense amount should be listed as the last expense. 6. In the income statement, the total expenses are incorrectly subtracted from the sales commissions, resulting in an incorrect net income amount. The correct net income should be $24,150. This also affects the statement of owner’s equity and the amount of Omar Farah, Capital, that appears on the balance sheet. 7. In the statement of owner’s equity, the additional investment should be added first to Omar Farah, capital, as of August 1, 20Y9. The net income should be presented next, followed by the amount of withdrawals, which is subtracted from the net income to yield the increase in owner’s equity. The increase in owner’s equity is added to Omar Farah, capital on August 1, 20Y9, to determine Omar Farah, capital on August 31, 20Y9. 8. Accounts payable should be listed as a liability on the balance sheet. 9. Accounts receivable and supplies should be listed as assets on the balance sheet. 10. The balance sheet assets should equal the sum of the liabilities and owner’s equity.
  • 18. CHAPTER 1 Introduction to Accounting and Business 1-16 © 2021 Cengage Learning, Inc. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Ex. 1-25 (Concluded) Corrected financial statements appear as follows: We-Sell Realty Income Statement For the Month Ended August 31, 20Y9 Sales commissions $140,000 Expenses: Office salaries expense $87,000 Rent expense 18,000 Automobile expense 7,500 Supplies expense 1,150 Miscellaneous expense 2,200 Total expenses 115,850 Net income $ 24,150 We-Sell Realty Statement of Owner’s Equity For the Month Ended August 31, 20Y9 Omar Farah, capital, August 1, 20Y9 $ 0 Investment on August 1, 20Y9 $ 15,000 Net income for August 24,150 Withdrawals during August (10,000) Increase in owner’s equity 29,150 Omar Farah, capital, August 31, 20Y9 $29,150 We-Sell Realty Balance Sheet August 31, 20Y9 Assets Cash $ 8,900 Accounts receivable 38,600 Supplies 4,000 Total assets $51,500 Liabilities Accounts payable $22,350 Owner’s Equity Omar Farah, capital 29,150 Total liabilities and owner’s equity $51,500
  • 19. CHAPTER 1 Introduction to Accounting and Business 1-17 © 2021 Cengage Learning, Inc. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Ex. 1-26 a. Year 2: $43,075 ($44,529 – $1,454) Year 1: $38,633 ($42,966 – $4,333) b. Year 2: 29.63 ($43,075 ÷ $1,454) Year 1: 8.92 ($38,633 ÷ $4,333) c. The ratio of liabilities to stockholders’ equity increased from 8.92 to 29.63 indicating an increase in risk for creditors from Year 1 to Year 2. Ex. 1-27 a. Year 2: $5,873 ($35,291 – $29,418) Year 1: $6,434 ($34,408 – $27,974) b. Year 2: 5.01 ($29,418 ÷ $5,873) Year 1: 4.35 ($27,974 ÷ $6,434) c. The risk for creditors has increased from 4.35 in Year 1 to 5.01 in Year 2. d. The Home Depot’s ratio of liabilities to stockholders’ equity (29.63 in Year 2 and 8.92 in Year 1) is more in both years than is Lowe’s ratio of liabilities to stockholders’ equity (5.01 in Year 2 and 4.35 in Year 1). Thus, the risk to creditors of The Home Depot is more than that of Lowe’s.
  • 20. CHAPTER 1 Introduction to Accounting and Business PROBLEMS Prob. 1-1A 1. Assets = Liabilities + Owner’s Equity Pamela Pamela Accts. Accts. Schatz, Schatz, Fees Rent Salaries Supplies Auto Misc. Cash + Rec. + Supplies = Payable + Capital – Drawing + Earned – Expense – Expense – Expense – Exp. – Exp. (a) + 55,000 + 55,000 (b) + 3,300 + 3,300 Bal. 55,000 3,300 3,300 55,000 (c) + 18,300 + 18,300 Bal. 73,300 3,300 3,300 55,000 18,300 (d) – 8,300 – 8,300 Bal. 65,000 3,300 3,300 55,000 18,300 – 8,300 (e) – 2,290 – 2,290 Bal. 62,710 3,300 1,010 55,000 18,300 – 8,300 (f) + 30,800 + 30,800 Bal. 62,710 30,800 3,300 1,010 55,000 49,100 – 8,300 (g) – 3,180 – 1,380 – 1,800 Bal. 59,530 30,800 3,300 1,010 55,000 49,100 – 8,300 – 1,380 – 1,800 (h) – 7,300 – 7,300 Bal. 52,230 30,800 3,300 1,010 55,000 49,100 – 8,300 – 7,300 – 1,380 – 1,800 (i) – 2,050 – 2,050 Bal. 52,230 30,800 1,250 1,010 55,000 49,100 – 8,300 – 7,300 – 2,050 – 1,380 – 1,800 (j) – 13,800 – 13,800 Bal. 38,430 30,800 1,250 1,010 55,000 – 13,800 49,100 – 8,300 – 7,300 – 2,050 – 1,380 – 1,800 2. Owner’s equity is the right of owners to the assets of the business. These rights are increased by owner’s investments and revenues and decreased by owner’s withdrawals and expenses. 3. $28,270 ($49,100 – $8,300 – $7,300 – $2,050 – $1,380 – $1,800) 4. June’s transactions increased Pamela Schatz’s capital to $69,470 ($55,000 + $28,270 – $13,800), which is the initial capital investment of $55,000 plus June’s net income of $28,270 less Pamela Schatz’s withdrawals of $13,800. 1-18 © 2021 Cengage Learning, Inc. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 21. CHAPTER 1 Introduction to Accounting and Business 1-19 © 2021 Cengage Learning, Inc. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Prob. 1-2A 1. 2. 3. 4. James Brewster, Capital of $1,012,700 Excalibur Travel Agency Income Statement For the Year Ended December 31, 20Y5 Fees earned $967,000 Expenses: Wages expense $540,400 Rent expense 38,100 Utilities expense 30,200 Supplies expense 4,300 Miscellaneous expense 6,800 Total expenses 619,800 Net income $347,200 Excalibur Travel Agency Statement of Owner’s Equity For the Year Ended December 31, 20Y5 James Brewster, capital, January 1, 20Y5 $ 710,000 Net income for the year $347,200 Withdrawals (44,500) Increase in owner’s equity 302,700 James Brewster, capital, December 31, 20Y5 $1,012,700 Excalibur Travel Agency Balance Sheet December 31, 20Y5 Assets Cash $ 201,900 Accounts receivable 302,000 Supplies 5,800 Land 576,500 Total assets $1,086,200 Liabilities Accounts payable $ 73,500 Owner’s Equity James Brewster, capital 1,012,700 Total liabilities and owner’s equity $1,086,200
  • 22. CHAPTER 1 Introduction to Accounting and Business Prob. 1-3A 1. 2. 3. 1-20 © 2021 Cengage Learning, Inc. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Reliance Financial Services Income Statement For the Month Ended July 31, 20Y2 Fees earned $144,500 Expenses: Salaries expense $55,000 Rent expense 33,000 Auto expense 16,000 Supplies expense 4,500 Miscellaneous expense 4,800 Total expenses 113,300 Net income $ 31,200 Reliance Financial Services Statement of Owner’s Equity For the Month Ended July 31, 20Y2 Seth Feye, capital, July 1, 20Y2 $ 0 Investment on July 1, 20Y2 $ 50,000 Net income for July 31,200 Withdrawals (15,000) Increase in owner’s equity 66,200 Seth Feye, capital, July 31, 20Y2 $66,200 Reliance Financial Services Balance Sheet July 31, 20Y2 Assets Cash $32,600 Accounts receivable 34,500 Supplies 2,500 Total assets $69,600 Liabilities Accounts payable $ 3,400 Owner’s Equity Seth Feye, capital 66,200 Total liabilities and owner’s equity $69,600
  • 23. CHAPTER 1 Introduction to Accounting and Business Prob. 1-3A (Concluded) 1-21 © 2021 Cengage Learning, Inc. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 4. (Optional) Reliance Financial Services Statement of Cash Flows For the Month Ended July 31, 20Y2 Cash flows from (used for) operating activities: Cash received from customers $ 110,000 Cash paid for expenses and to creditors* (112,400) Net cash flows from operating activities $ (2,400) Cash flows from (used for) investing activities 0 Cash flows from (used for) financing activities: Cash received from owner as investment $ 50,000 Cash withdrawal by owner (15,000) Net cash flows from financing activities 35,000 Net increase in cash $32,600 Cash balance, July 1, 20Y2 0 Cash balance, July 31, 20Y2 $32,600 * $3,600 + $33,000 + $20,800 + $55,000; these amounts are taken from the Cash column shown in the problem.
  • 24. CHAPTER 1 Introduction to Accounting and Business Prob. 1-4A 1. Assets = Liabilities + Owner’s Equity Cash + Supplies = Accts. Payable Pat Glenn, + Capital Pat Glenn, – Drawing + Sales Comm. Salaries – Exp. – Rent Exp. Auto – Exp. Supplies – Exp. – Misc. Exp. (a) + 25,000 + 25,000 1-22 © 2021 Cengage Learning, Inc. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. (b) + 1,850 + 1,850 Bal. 25,000 1,850 1,850 25,000 (c) – 1,200 – 1,200 Bal. (d) + 23,800 41,500 1,850 650 25,000 + 41,500 Bal. 65,300 1,850 650 25,000 41,500 (e) – 3,600 – 3,600 Bal. 61,700 1,850 650 25,000 41,500 – 3,600 (f) – 4,000 – 4,000 Bal. 57,700 1,850 650 25,000 – 4,000 41,500 – 3,600 (g) – 4,650 – 3,050 – 1,600 Bal. 53,050 1,850 650 25,000 – 4,000 41,500 – 3,600 – 3,050 – 1,600 (h) – 5,000 – 5,000 Bal. 48,050 1,850 650 25,000 – 4,000 41,500 – 5,000 – 3,600 – 3,050 – 1,600 (i) – 900 – 900 Bal. 48,050 950 650 25,000 – 4,000 41,500 – 5,000 – 3,600 – 3,050 – 900 – 1,600
  • 25. CHAPTER 1 Introduction to Accounting and Business 1-23 © 2021 Cengage Learning, Inc. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Prob. 1-4A (Concluded) 2. Half Moon Realty Statement of Owner’s Equity For the Month Ended July 31, 20Y7 Pat Glenn, capital, July 1, 20Y7 $ 0 Investment on July 1, 20Y7 $25,000 Net income for July 27,350 Withdrawals (4,000) Increase in owner’s equity 48,350 Pat Glenn, capital, July 31, 20Y7 $48,350 Half Moon Realty Balance Sheet July 31, 20Y7 Assets Cash $48,050 Supplies 950 Total assets $49,000 Liabilities Accounts payable $ 650 Owner’s Equity Pat Glenn, capital 48,350 Total liabilities and owner’s equity $49,000 Half Moon Realty Income Statement For the Month Ended July 31, 20Y7 Sales commissions $41,500 Expenses: Salaries expense $5,000 Rent expense 3,600 Auto expense 3,050 Supplies expense 900 Miscellaneous expense 1,600 Total expenses 14,150 Net income $27,350
  • 26. CHAPTER 1 Introduction to Accounting and Business 1-24 © 2021 Cengage Learning, Inc. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Prob. 1-5A 1. Assets = Liabilities + Owner’s Equity Cash + Accounts Receivable + Supplies + Land Accounts = Payable + Joel Palk, Capital $45,000 + $93,000 + $7,000 + $75,000 = $40,000 + Joel Palk, Capital $220,000 = $40,000 + Joel Palk, Capital $180,000 = Joel Palk, Capital
  • 27. CHAPTER 1 Introduction to Accounting and Business Prob. 1-5A (Continued) 1-25 © 2021 Cengage Learning, Inc. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 2. Assets = Liabilities + Owner’s Equity Cash + Accts. Rec. + Supplies + Land = Accts. Payable + Joel Palk, Joel Palk, Capital – Drawing Bal. 45,000 93,000 7,000 75,000 40,000 180,000 (a) + 35,000 + 35,000 Bal. 80,000 93,000 7,000 75,000 40,000 215,000 (b) – 50,000 + 50,000 Bal. 30,000 93,000 7,000 125,000 40,000 215,000 (c) + 32,125 Bal. 62,125 93,000 7,000 125,000 40,000 215,000 (d) – 6,000 Bal. 56,125 93,000 7,000 125,000 40,000 215,000 (e) + 2,500 + 2,500 Bal. 56,125 93,000 9,500 125,000 42,500 215,000 (f) – 22,800 – 22,800 Bal. 33,325 93,000 9,500 125,000 19,700 215,000 (g) + 84,750 Bal. 33,325 177,750 9,500 125,000 19,700 215,000 (h) + 29,500 Bal. 33,325 177,750 9,500 125,000 49,200 215,000 (i) – 14,000 Bal. 19,325 177,750 9,500 125,000 49,200 215,000 (j) + 88,000 – 88,000 Bal. 107,325 89,750 9,500 125,000 49,200 215,000 (k) – 3,600 Bal. 107,325 89,750 5,900 125,000 49,200 215,000 (l) – 12,000 – 12,000 Bal. 95,325 89,750 5,900 125,000 49,200 215,000 – 12,000
  • 28. CHAPTER 1 Introduction to Accounting and Business 1-26 © 2021 Cengage Learning, Inc. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Prob. 1-5A (Continued) Owner’s Equity (Continued) Dry Cleaning Dry Cleaning Wages Rent Supplies Truck Utilities Misc. + Revenue – Exp. – Exp. – Exp. – Exp. – Exp. – Exp. – Exp. Bal. (a) Bal. (b) Bal. (c) + 32,125 Bal. 32,125 (d) – 6,000 Bal. 32,125 – 6,000 (e) Bal. 32,125 – 6,000 (f) Bal. 32,125 – 6,000 (g) + 84,750 Bal. 116,875 – 6,000 (h) – 29,500 Bal. 116,875 – 29,500 – 6,000 (i) – 7,500 – 2,500 – 1,300 – 2,700 Bal. 116,875 – 29,500 – 7,500 – 6,000 – 2,500 – 1,300 – 2,700 (j) Bal. 116,875 – 29,500 – 7,500 – 6,000 – 2,500 – 1,300 – 2,700 (k) – 3,600 Bal. 116,875 – 29,500 – 7,500 – 6,000 – 3,600 – 2,500 – 1,300 – 2,700 (l) Bal. 116,875 – 29,500 – 7,500 – 6,000 – 3,600 – 2,500 – 1,300 – 2,700
  • 29. CHAPTER 1 Introduction to Accounting and Business Prob. 1-5A (Continued) 1-27 © 2021 Cengage Learning, Inc. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 3. D’Lite Dry Cleaners Statement of Owner’s Equity For the Month Ended July 31, 20Y6 Joel Palk, capital, July 1, 20Y6 $180,000 Additional investment during July $ 35,000 Net income for July 63,775 Withdrawals (12,000) Increase in owner’s equity 86,775 Joel Palk, capital, July 31, 20Y6 $266,775 D’Lite Dry Cleaners Balance Sheet July 31, 20Y6 Assets Cash $ 95,325 Accounts receivable 89,750 Supplies 5,900 Land 125,000 Total assets $315,975 Liabilities Accounts payable $ 49,200 Owner’s Equity Joel Palk, capital 266,775 Total liabilities and owner’s equity $315,975 D’Lite Dry Cleaners Income Statement For the Month Ended July 31, 20Y6 Dry cleaning revenue $116,875 Expenses: Dry cleaning expense $29,500 Wages expense 7,500 Rent expense 6,000 Supplies expense 3,600 Truck expense 2,500 Utilities expense 1,300 Miscellaneous expense 2,700 Total expenses 53,100 Net income $ 63,775
  • 30. CHAPTER 1 Introduction to Accounting and Business 1-28 © 2021 Cengage Learning, Inc. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Prob. 1-5A (Concluded) 4. (Optional) D’Lite Dry Cleaners Statement of Cash Flows For the Month Ended July 31, 20Y6 Cash flows from (used for) operating activities: Cash received from customers* $120,125 Cash paid for expenses and to creditors** (42,800) Net cash flows from operating activities $ 77,325 Cash flows from (used for) investing activities: Cash paid for purchase of land (50,000) Cash flows from (used for) financing activities: Cash received from owner as investment $ 35,000 Cash withdrawal by owner (12,000) Net cash flows from financing activities 23,000 Net increase in cash $ 50,325 Cash balance, July 1, 20Y6 45,000 Cash balance, July 31, 20Y6 $ 95,325 * $32,125 + $88,000; these amounts are taken from the Cash column of the spreadsheet in Part 2. ** $6,000 + $22,800 + $14,000; these amounts are taken from the Cash column of the spreadsheet in Part 2.
  • 31. CHAPTER 1 Introduction to Accounting and Business 1-29 © 2021 Cengage Learning, Inc. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Prob. 1-6A a. Fees earned, $750,000 ($275,000 + $475,000) b. Supplies expense, $30,000 ($475,000 – $300,000 – $100,000 – $20,000 – $25,000) c. Dakota Rowe, capital, April 1, 20Y3, $0; Wolverine Realty was organized on April 1, 20Y3. d. Net income for April, $275,000 from income statement e. Increase in owner’s equity, $525,000 ($375,000 + $275,000 – $125,000) f. Dakota Rowe, capital, April 30, 20Y3, $525,000 g. Total assets, $625,000 ($462,500 + $12,500 + $150,000) h. Dakota Rowe, capital, $525,000 ($625,000 – $100,000) i. Total liabilities and owner’s equity, $625,000 ($100,000 + $525,000); same as (g) j. Cash received from customers, $750,000; this is the same as fees earned (a) since there are no accounts receivable. k. Net cash flows from operating activities, $362,500 ($750,000 – $387,500) l. Cash payments for acquisition of land, ($150,000) m. Cash received as owner’s investment, $375,000 n. Cash withdrawal by owner, ($125,000) o. Net cash flows from financing activities, $250,000 ($375,000 – $125,000) p. Net increase in cash, $462,500 ($362,500 – $150,000 + $250,000) q. April 30, 20Y3, cash balance, $462,500
  • 32. CHAPTER 1 Introduction to Accounting and Business Prob. 1-1B 1. Assets = Liabilities + Owner’s Equity 2. Owner’s equity is the right of owners to the assets of the business. These rights are increased by owner’s investments and revenues and decreased by owner’s withdrawals and expenses. 3. $16,050 ($26,300 – $5,000 – $2,500 – $1,300 – $1,150 – $300) 4. March’s transactions increased Amy Austin’s capital to $62,150 ($50,000 + $16,050 – $3,900), which is the initial investment of $50,000 plus the excess of March’s net income of $16,050 over Amy Austin’s withdrawals of $3,900. 1-30 © 2021 Cengage Learning, Inc. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Amy Accts. Accts. Amy Austin, Austin, Fees Rent Salaries Supplies Auto Misc. Cash + Rec. + Supplies = Payable + Capital – Drawing + Earned – Expense – Expense – Expense – Exp. – Exp. (a) + 50,000 + 50,000 (b) + 4,000 + 4,000 Bal. 50,000 4,000 4,000 50,000 (c) – 2,300 – 2,300 Bal. 47,700 4,000 1,700 50,000 (d) + 13,800 + 13,800 Bal. 61,500 4,000 1,700 50,000 13,800 (e) – 5,000 – 5,000 Bal. 56,500 4,000 1,700 50,000 13,800 – 5,000 (f) – 1,450 – 1,150 – 300 Bal. 55,050 4,000 1,700 50,000 13,800 – 5,000 – 1,150 – 300 (g) – 2,500 – 2,500 Bal. 52,550 4,000 1,700 50,000 13,800 – 5,000 – 2,500 – 1,150 – 300 (h) – 1,300 – 1,300 Bal. 52,550 2,700 1,700 50,000 13,800 – 5,000 – 2,500 – 1,300 – 1,150 – 300 (i) + 12,500 + 12,500 Bal. 52,550 12,500 2,700 1,700 50,000 26,300 – 5,000 – 2,500 – 1,300 – 1,150 – 300 (j) – 3,900 – 3,900 Bal. 48,650 12,500 2,700 1,700 50,000 – 3,900 26,300 – 5,000 – 2,500 – 1,300 – 1,150 – 300
  • 33. CHAPTER 1 Introduction to Accounting and Business 1-31 © 2021 Cengage Learning, Inc. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Prob. 1-2B 1. 2. 3. 4. Net income of $200,000 Wilderness Travel Service Income Statement For the Year Ended April 30, 20Y5 Fees earned $875,000 Expenses: Wages expense $525,000 Rent expense 75,000 Utilities expense 38,000 Supplies expense 12,000 Taxes expense 10,000 Miscellaneous expense 15,000 Total expenses 675,000 Net income $200,000 Wilderness Travel Service Statement of Owner’s Equity For the Year Ended April 30, 20Y5 Harper Borg, capital, May 1, 20Y4 $180,000 Net income for the year $200,000 Withdrawals (40,000) Increase in owner’s equity 160,000 Harper Borg, capital, April 30, 20Y5 $340,000 Wilderness Travel Service Balance Sheet April 30, 20Y5 Assets Cash $146,000 Accounts receivable 210,000 Supplies 9,000 Total assets $365,000 Liabilities Accounts payable $ 25,000 Owner’s Equity Harper Borg, capital 340,000 Total liabilities and owner’s equity $365,000
  • 34. CHAPTER 1 Introduction to Accounting and Business Prob. 1-3B 1. 2. 3. 1-32 © 2021 Cengage Learning, Inc. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Bronco Consulting Income Statement For the Month Ended August 31, 20Y2 Fees earned $125,000 Expenses: Salaries expense $58,000 Rent expense 27,000 Auto expense 15,500 Supplies expense 6,100 Miscellaneous expense 7,500 Total expenses 114,100 Net income $ 10,900 Bronco Consulting Statement of Owner’s Equity For the Month Ended August 31, 20Y2 Jose Loder, capital, August 1, 20Y2 $ 0 Investment on August 1, 20Y2 $ 75,000 Net income for August 10,900 Withdrawals (15,000) Increase in owner’s equity 70,900 Jose Loder, capital, August 31, 20Y2 $70,900 Bronco Consulting Balance Sheet August 31, 20Y2 Assets Cash $38,000 Accounts receivable 33,000 Supplies 2,900 Total assets $73,900 Liabilities Accounts payable $ 3,000 Owner’s Equity Jose Loder, capital 70,900 Total liabilities and owner’s equity $73,900
  • 35. CHAPTER 1 Introduction to Accounting and Business Prob. 1-3B (Concluded) 1-33 © 2021 Cengage Learning, Inc. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 4. (Optional) Bronco Consulting Statement of Cash Flows For the Month Ended August 31, 20Y2 Cash flows from (used for) operating activities: Cash received from customers $ 92,000 Cash paid for expenses and to creditors* (114,000) Net cash flows from operating activities $(22,000) Cash flows from (used for) investing activities 0 Cash flows from (used for) financing activities: Cash received from owner as investment $ 75,000 Cash withdrawal by owner (15,000) Net cash flows from financing activities 60,000 Net increase in cash $ 38,000 Cash balance, August 1, 20Y2 0 Cash balance, August 31, 20Y2 $ 38,000 * $27,000 + $6,000 + $23,000 + $58,000; these amounts are taken from the Cash column shown in the problem.
  • 36. CHAPTER 1 Introduction to Accounting and Business Prob. 1-4B 1. Assets = Liabilities + Owner’s Equity Maria Maria Accts. Adams, Adams, Sales Rent Salaries Auto Supplies Misc. Cash + Supplies = Payable + Capital – Drawing + Comm. – Exp. – Exp. – Exp. – Exp. – Exp. (a) + 24,000 + 24,000 (b) – 3,600 – 3,600 Bal. 20,400 24,000 – 3,600 (c) – 1,950 – 1,350 – 600 Bal. 18,450 24,000 – 3,600 – 1,350 – 600 (d) + 1,200 + 1,200 Bal. 18,450 1,200 1,200 24,000 – 3,600 – 1,350 – 600 (e) + 19,800 + 19,800 Bal. 38,250 1,200 1,200 24,000 19,800 – 3,600 – 1,350 – 600 (f) – 750 – 750 Bal. 37,500 1,200 450 24,000 19,800 – 3,600 – 1,350 – 600 (g) – 2,500 – 2,500 Bal. 35,000 1,200 450 24,000 19,800 – 3,600 – 2,500 – 1,350 – 600 (h) – 3,500 – 3,500 Bal. 31,500 1,200 450 24,000 – 3,500 19,800 – 3,600 – 2,500 – 1,350 – 600 (i) – 900 – 900 Bal. 31,500 300 450 24,000 – 3,500 19,800 – 3,600 – 2,500 – 1,350 – 900 – 600 1-34 © 2021 Cengage Learning, Inc. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 37. CHAPTER 1 Introduction to Accounting and Business 1-35 © 2021 Cengage Learning, Inc. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Prob. 1-4B (Concluded) 2. Custom Realty Statement of Owner’s Equity For the Month Ended April 30, 20Y7 Maria Adams, capital, April 1, 20Y7 $ 0 Investment on April 1, 20Y7 $24,000 Net income for April 10,850 Withdrawals (3,500) Increase in owner’s equity 31,350 Maria Adams, capital, April 30, 20Y7 $31,350 Custom Realty Balance Sheet April 30, 20Y7 Assets Cash $31,500 Supplies 300 Total assets $31,800 Liabilities Accounts payable $ 450 Owner’s Equity Maria Adams, capital 31,350 Total liabilities and owner’s equity $31,800 Custom Realty Income Statement For the Month Ended April 30, 20Y7 Sales commissions $19,800 Expenses: Rent expense $3,600 Salaries expense 2,500 Auto expense 1,350 Supplies expense 900 Miscellaneous expense 600 Total expenses 8,950 Net income $10,850
  • 38. CHAPTER 1 Introduction to Accounting and Business 1-36 © 2021 Cengage Learning, Inc. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Prob. 1-5B 1. Assets = Liabilities + Owner’s Equity Cash + Accounts Receivable + Supplies + Land = Accounts Payable + Beverly Zahn, Capital $39,000 + $80,000 + $11,000 + $50,000 = $31,500 + Beverly Zahn, Capital $180,000 = $31,500 + Beverly Zahn, Capital $148,500 = Beverly Zahn, Capital
  • 39. CHAPTER 1 Introduction to Accounting and Business Prob. 1-5B (Continued) 1-37 © 2021 Cengage Learning, Inc. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 2. Assets = Liabilities + Owner’s Equity Beverly Beverly Cash + Accts. Rec. + Supplies + Land = Accts. Payable + Zahn, Capital Zahn, – Drawing Bal. 39,000 80,000 11,000 50,000 31,500 148,500 (a) + 21,000 + 21,000 Bal. 60,000 80,000 11,000 50,000 31,500 169,500 (b) – 35,000 + 35,000 Bal. 25,000 80,000 11,000 85,000 31,500 169,500 (c) – 4,000 Bal. 21,000 80,000 11,000 85,000 31,500 169,500 (d) + 72,000 Bal. 21,000 152,000 11,000 85,000 31,500 169,500 (e) – 20,000 – 20,000 Bal. 1,000 152,000 11,000 85,000 11,500 169,500 (f) + 8,000 + 8,000 Bal. 1,000 152,000 19,000 85,000 19,500 169,500 (g) + 38,000 Bal. 39,000 152,000 19,000 85,000 19,500 169,500 (h) + 77,000 – 77,000 Bal. 116,000 75,000 19,000 85,000 19,500 169,500 (i) + 29,450 Bal. 116,000 75,000 19,000 85,000 48,950 169,500 (j) – 29,200 Bal. 86,800 75,000 19,000 85,000 48,950 169,500 (k) – 7,200 Bal. 86,800 75,000 11,800 85,000 48,950 169,500 (l) – 5,000 – 5,000 Bal. 81,800 75,000 11,800 85,000 48,950 169,500 – 5,000
  • 40. CHAPTER 1 Introduction to Accounting and Business 1-38 © 2021 Cengage Learning, Inc. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Prob. 1-5B (Continued) Owner’s Equity (Continued) Dry Cleaning Dry Cleaning Wages Supplies Rent Truck Utilities Misc. + Revenue – Exp. – Exp. – Exp. – Exp. – Exp. – Exp. – Exp. Bal. (a) Bal. (b) Bal. (c) – 4,000 Bal. – 4,000 (d) + 72,000 Bal. 72,000 – 4,000 (e) Bal. 72,000 – 4,000 (f) Bal. 72,000 – 4,000 (g) + 38,000 Bal. 110,000 – 4,000 (h) Bal. 110,000 – 4,000 (i) – 29,450 Bal. 110,000 – 29,450 – 4,000 (j) – 24,000 – 2,100 – 1,800 – 1,300 Bal. 110,000 – 29,450 – 24,000 – 4,000 – 2,100 – 1,800 – 1,300 (k) – 7,200 Bal. 110,000 – 29,450 – 24,000 – 7,200 – 4,000 – 2,100 – 1,800 – 1,300 (l) Bal. 110,000 – 29,450 – 24,000 – 7,200 – 4,000 – 2,100 – 1,800 – 1,300
  • 41. CHAPTER 1 Introduction to Accounting and Business Prob. 1-5B (Continued) 1-39 © 2021 Cengage Learning, Inc. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 3. Bev’s Dry Cleaners Statement of Owner’s Equity For the Month Ended November 30, 20Y6 Beverly Zahn, capital, November 1, 20Y6 $148,500 Additional investment during November $21,000 Net income for November 40,150 Withdrawals (5,000) Increase in owner’s equity 56,150 Beverly Zahn, capital, November 30, 20Y6 $204,650 Bev’s Dry Cleaners Balance Sheet November 30, 20Y6 Assets Cash $ 81,800 Accounts receivable 75,000 Supplies 11,800 Land 85,000 Total assets $253,600 Liabilities Accounts payable $ 48,950 Owner’s Equity Beverly Zahn, capital 204,650 Total liabilities and owner’s equity $253,600 Bev’s Dry Cleaners Income Statement For the Month Ended November 30, 20Y6 Dry cleaning revenue $110,000 Expenses: Dry cleaning expense $29,450 Wages expense 24,000 Supplies expense 7,200 Rent expense 4,000 Truck expense 2,100 Utilities expense 1,800 Miscellaneous expense 1,300 Total expenses 69,850 Net income $ 40,150
  • 42. CHAPTER 1 Introduction to Accounting and Business 1-40 © 2021 Cengage Learning, Inc. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Prob. 1-5B (Concluded) 4. (Optional) Bev’s Dry Cleaners Statement of Cash Flows For the Month Ended Novemer 30, 20Y6 Cash flows from (used for) operating activities: Cash received from customers* $115,000 Cash paid for expenses and to creditors** (53,200) Net cash flows from operating activities $ 61,800 Cash flows from (used for) investing activities: Cash paid for purchase of land (35,000) Cash flows from (used for) financing activities: Cash received from owner as investment $ 21,000 Cash withdrawal by owner (5,000) Net cash flows from financing activities 16,000 Net increase in cash $ 42,800 Cash balance, November 1, 20Y6 39,000 Cash balance, November 30, 20Y6 $ 81,800 * $38,000 + $77,000; these amounts are taken from the Cash column of the spreadsheet in Part 2. ** $4,000 + $20,000 + $29,200; these amounts are taken from the Cash column of the spreadsheet in Part 2.
  • 43. CHAPTER 1 Introduction to Accounting and Business 1-41 © 2021 Cengage Learning, Inc. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Prob. 1-6B a. Wages expense, $203,200 ($288,000 – $48,000 – $17,600 – $14,400 – $4,800) b. Net income, $112,000 ($400,000 – $288,000) c. LuAnn Martin, capital, May 1, 20Y3, $0; Atlas Realty was organized on May 1, 20Y3. d. Investment on May 1, 20Y3, $160,000; from statement of cash flows e. Net income for May, $112,000; from (b) f. Withdrawals, $64,000; from statement of cash flows g. Increase in owner’s equity, $208,000 ($160,000 + $112,000 – $64,000) h. LuAnn Martin, capital, May 31, 20Y3, $208,000 i. Land, $120,000; from statement of cash flows j. Total assets, $256,000 ($123,200 + $12,800 + $120,000) k. LuAnn Martin, capital, $208,000 l. Total liabilities and owner’s equity, $256,000 ($48,000 + $208,000) m. Cash received from customers, $400,000; this is the same as fees earned since there are no accounts receivable. n. Net cash flows from operating activities, $147,200 ($400,000 – $252,800) o. Net cash flows from financing activities, $96,000 ($160,000 – $64,000) p. Net increase in cash, $123,200 ($147,200 – $120,000 + $96,000) q. May 31, 20Y3, cash balance, $123,200
  • 44. CHAPTER 1 Introduction to Accounting and Business 1-42 © 2021 Cengage Learning, Inc. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 1. Assets CONTINUING PROBLEM = Liabilities + Owner’s Equity Peyton Peyton Cash + Accts. Rec. + Supplies = Accts. Payable + Smith, Capital Smith, – Drawing + Fees Earned June 1 + 4,000 + 4,000 June 2 + 3,500 + 3,500 Bal. 7,500 4,000 3,500 June 2 – 800 Bal. 6,700 4,000 3,500 June 4 + 350 + 350 Bal. 6,700 350 350 4,000 3,500 June 6 – 500 Bal. 6,200 350 350 4,000 3,500 June 8 – 675 Bal. 5,525 350 350 4,000 3,500 June 12 – 350 Bal. 5,175 350 350 4,000 3,500 June 13 – 100 – 100 Bal. 5,075 350 250 4,000 3,500 June 16 + 300 + 300 Bal. 5,375 350 250 4,000 3,800 June 22 + 1,000 + 1,000 Bal. 5,375 1,000 350 250 4,000 4,800 June 25 + 500 + 500 Bal. 5,875 1,000 350 250 4,000 5,300 June 29 – 240 Bal. 5,635 1,000 350 250 4,000 5,300 June 30 + 900 + 900 Bal. 6,535 1,000 350 250 4,000 6,200 June 30 – 400 Bal. 6,135 1,000 350 250 4,000 6,200 June 30 – 300 Bal. 5,835 1,000 350 250 4,000 6,200 June 30 – 180 Bal. 5,835 1,000 170 250 4,000 6,200 June 30 – 415 Bal. 5,420 1,000 170 250 4,000 6,200 June 30 – 1,000 Bal. 4,420 1,000 170 250 4,000 6,200 June 30 – 500 – 500 Bal. 3,920 1,000 170 250 4,000 – 500 6,200
  • 45. CHAPTER 1 Introduction to Accounting and Business 1-43 © 2021 Cengage Learning, Inc. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Continuing Problem (Continued) Owner’s Equity (Continued) Music Office Rent Equip. Rent Adver- tising Wages Utilities Supplies Misc. – Exp. – Exp. – Exp. – Exp. – Exp. – Exp. – Exp. – Exp. June 1 June 2 Bal. June 2 – 800 Bal. – 800 June 4 Bal. – 800 June 6 – 500 Bal. – 800 – 500 June 8 – 675 Bal. – 800 – 675 – 500 June 12 – 350 Bal. – 350 – 800 – 675 – 500 June 13 Bal. – 350 – 800 – 675 – 500 June 16 Bal. – 350 – 800 – 675 – 500 June 22 Bal. – 350 – 800 – 675 – 500 June 25 Bal. – 350 – 800 – 675 – 500 June 29 – 240 Bal. – 590 – 800 – 675 – 500 June 30 Bal. – 590 – 800 – 675 – 500 June 30 – 400 Bal. – 590 – 800 – 675 – 500 – 400 June 30 – 300 Bal. – 590 – 800 – 675 – 500 – 400 – 300 June 30 – 180 Bal. – 590 – 800 – 675 – 500 – 400 – 300 – 180 June 30 – 415 Bal. – 590 – 800 – 675 – 500 – 400 – 300 – 180 – 415 June 30 – 1,000 Bal. – 1,590 – 800 – 675 – 500 – 400 – 300 – 180 – 415 June 30 Bal. – 1,590 – 800 – 675 – 500 – 400 – 300 – 180 – 415
  • 46. CHAPTER 1 Introduction to Accounting and Business 1-44 © 2021 Cengage Learning, Inc. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Continuing Problem (Concluded) 2. 3. 4. PS Music Income Statement For the Month Ended June 30, 20Y9 Fees earned: $6,200 Expenses: Music expense $1,590 Office rent expense 800 Equipment rent expense 675 Advertising expense 500 Wages expense 400 Utilities expense 300 Supplies expense 180 Miscellaneous expense 415 Total expenses 4,860 Net income $1,340 PS Music Statement of Owner’s Equity For the Month Ended June 30, 20Y9 Peyton Smith, capital, June 1, 20Y9 $ 0 Investment on June 1, 20Y9 $4,000 Net income for June 1,340 Withdrawals (500) Increase in owner’s equity 4,840 Peyton Smith, capital, June 30, 20Y9 $4,840 PS Music Balance Sheet June 30, 20Y9 Assets Cash $3,920 Accounts receivable 1,000 Supplies 170 Total assets $5,090 Liabilities Accounts payable $ 250 Owner’s Equity Peyton Smith, capital 4,840 Total liabilities and owner’s equity $5,090
  • 47. CHAPTER 1 Introduction to Accounting and Business 1-45 © 2021 Cengage Learning, Inc. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CASES & PROJECTS CP 1-1 1. The car repair is a personal expense and is Marco’s personal responsibility. By using partnership funds to pay for the repair, Marco is behaving unethically because he is violating the business entity assumption. The business entity assumption treats the business as a separate entity from its owners. By taking money from the partnership for a personal expense, Marco is effectively stealing from his partners. 2. The partnership’s net income will be reduced by the $2,000 Marco has taken. This will reduce the amount of net income available to Marco’s partners. 3. Marco could ask his partners for a loan from the partnership. The loan could be repaid out of his salary or from his share of the partnership income. CP 1-2 1. Acceptable professional conduct requires that Colleen Fernandez supply First Federal Bank with all the relevant financial statements necessary for the bank to make an informed decision. Therefore, Colleen should provide the complete set of financial statements. These can be supplemented with a discussion of the net loss in the past year or other data explaining why granting the loan is a good investment for the bank. 2. a. Owners are generally willing to provide bankers with information about the operating and financial condition of the business, such as the following: ● Operating Information: ● Description of business operations ● Results of past operations ● Preliminary results of current operations ● Plans for future operations ● Financial Condition: ● List of assets and liabilities (balance sheet) ● Estimated current values of assets ● Owner’s personal investment in the business ● Owner’s commitment to invest additional funds in the business Owners are normally reluctant to provide the following types of information to bankers: ● Proprietary Operating Information. Such information, which could hurt the business if it becomes known by competitors, might include special processes used by the business or future plans to expand operations into areas that are not currently served by a competitor.
  • 48. CHAPTER 1 Introduction to Accounting and Business 1-46 © 2021 Cengage Learning, Inc. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CP 1-2 (Concluded) ● Personal Financial Information. Owners may have little choice here because banks often require owners of small businesses to pledge their personal assets as security for a business loan. Personal financial information requested by bankers often includes the owner’s net worth, salary, and other income. In addition, bankers usually request information about factors that might affect the personal financial condition of the owner. For example, a pending divorce by the owner might significantly affect the owner’s personal wealth. b. Bankers typically want as much information as possible about the ability of the business and the owner to repay the loan with interest. Examples of such information are described above. c. Both bankers and business owners share the common interest of the business doing well and being successful. If the business is successful, the bankers will receive their loan payments on time with interest and the owners will increase their personal wealth. CP 1-3 A sample solution based on Nike Inc.’s Form 10-K for the fiscal year ended May 31, 2018, is as follows: 1. Nike, Inc. 2. Beaverton, Oregon 3. Mark G. Parker 4. Manufacturing 5. Our principal business activity is the design, development, and worldwide marketing and selling of athletic footwear, apparel, equipment, accessories, and services. 6. Income statement, statement of comprehensive income, balance sheet, statement of stockholders’ equity, statement of cash flows Note to Instructor: The statement of comprehensive income is discussed in the appendix to Chapter 15. Since students will see this statement in a company’s annual report or 10-K, we listed it as part of the answer.
  • 49. CHAPTER 1 Introduction to Accounting and Business 1-47 © 2021 Cengage Learning, Inc. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CP 1-4 Example Memo To: My Teacher From: Ima Student Date: January 1, 20XX Re: Causes of Accounting Fraud Business and accounting fraud typically result from either a failure of individual character or a culture of greed within an organization. Managers and accountants often face pressure to meet or exceed a company’s financial goals. At times, supervisors can place pressure on individuals to violate accounting standards to improve a company’s reported financial results. Individuals who give in to these pressures exhibit a failure of individual character. In other situations, the organization may expect employees to violate accounting rules as part of their job. This occurs in organizations that do not value ethical decision making or fair financial reporting and exhibit a culture of ethical indifference. CP 1-5 The difference in the two bank balances, $55,000 ($80,000 – $25,000), may not be pure profit from an accounting perspective. To determine the accounting profit for the six-month period, the revenues for the period would need to be matched with the related expenses. The revenues minus the expenses would indicate whether the business generated net income (profit) or a net loss for the period. Using only the difference between the two bank account balances ignores such factors as amounts due from customers (receivables), liabilities (accounts payable) that need to be paid for wages or other operating expenses, additional investments that Dr. Cousins may have made in the business during the period, or withdrawals during the period that Dr. Cousins might have taken for personal reasons unrelated to the business. Some businesses that have few, if any, receivables or payables may use a “cash” basis of accounting. The cash basis of accounting ignores receivables and payables because they are assumed to be insignificant in amount. However, even with the cash basis of accounting, additional investments during the period and any withdrawals during the period must be considered in determining the net income (profit) or net loss for the period.
  • 50. CHAPTER 1 Introduction to Accounting and Business CP 1-6 1. Assets = Liabilities + Accts. Lisa Duncan, Lisa Duncan, Fees Owner’s Equity Salaries Rent Supplies Misc. Cash + Supplies = Payable + Capital – Drawing + Earned – Expense – Expense – Expense – Exp. (a) + 950 + 950 (b) – 300 + 300 Bal. 650 300 950 (c) – 275 – 275 Bal. 375 300 950 – 275 (d) – 100 + 150 – 250 Bal. 275 300 150 950 – 525 (e) + 1,750 + 1,750 Bal. 2,025 300 150 950 1,750 – 525 (f) + 600 + 600 Bal. 2,625 300 150 950 2,350 – 525 (g) – 800 – 800 Bal. 1,825 300 150 950 2,350 – 800 – 525 (h) – 290 – 290 Bal. 1,535 300 150 950 2,350 – 800 – 525 – 290 (i) + 1,300 + 1,300 Bal. 2,835 300 150 950 3,650 – 800 – 525 – 290 (j) – 120 – 120 Bal. (k) 2,835 – 400 180 150 950 – 400 3,650 – 800 – 525 – 120 – 290 Bal. 2,435 180 150 950 – 400 3,650 – 800 – 525 – 120 – 290 1-48 © 2021 Cengage Learning, Inc. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 51. CHAPTER 1 Introduction to Accounting and Business 1-49 © 2021 Cengage Learning, Inc. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CP 1-6 (Continued) 2. 3. 4. Serve-N-Volley Income Statement For the Month Ended September 30, 20Y7 Fees earned: $3,650 Expenses: Salaries expense $800 Rent expense 525 Supplies expense 120 Miscellaneous expense 290 Total expenses 1,735 Net income $1,915 Serve-N-Volley Statement of Owner’s Equity For the Month Ended September 30, 20Y7 Lisa Duncan, capital, September 1, 20Y7 $ 0 Investment on September 1, 20Y7 $ 950 Net income for September 1,915 Withdrawals (400) Increase in owner’s equity 2,465 Lisa Duncan, capital, September 30, 20Y7 $2,465 Serve-N-Volley Balance Sheet September 30, 20Y7 Assets Cash $2,435 Supplies 180 Total assets $2,615 Liabilities Accounts payable $ 150 Owner’s Equity Lisa Duncan, capital 2,465 Total liabilities and owner’s equity $2,615
  • 52. CHAPTER 1 Introduction to Accounting and Business CP 1-6 (Concluded) 5. a. Serve-N-Volley would provide Lisa with $715 more income per month than working as a waitress. This amount is computed as follows: Net income of Serve-N-Volley, per month………………………………… $1,915 Earnings as waitress, per month: 30 hours per week × $10 per hour × 4 weeks………………………… 1,200 Difference……………………………………………………………………… $ 715 b. Other factors that Lisa should consider before discussing a long-term arrangement with the Phoenix Tennis Club include the following: Lisa should consider whether the results of operations for September are indicative of what to expect each month. For example, Lisa should consider whether club members will continue to request lessons or use the ball machine during the fall months when interest in tennis may slacken. Lisa should evaluate whether the additional income of $715 per month from Serve-N-Volley is worth the risk being taken and the effort being expended. Lisa should also consider how much her investment in Serve-N-Volley could have earned if invested elsewhere. For example, if the initial investment of $950 had been invested to earn a rate of return of 6% per year, it would have earned $4.75 in September, or $57 for the year. Note to Instructors: Numerous other considerations could be mentioned by students, such as the ability of Lisa to withdraw cash from Serve-N-Volley for personal use. For example, some of her investment in Serve-N-Volley will be in the form of supplies (tennis balls, for example), which are readily convertible to cash. The objective of this case is not to mention all possible considerations but, rather, to encourage students to begin thinking about the use of accounting information in making business decisions. 1-50 © 2021 Cengage Learning, Inc. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 53. CHAPTER 1 Introduction to Accounting and Business 1-51 © 2021 Cengage Learning, Inc. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CP 1-7 Note to Instructors: The purpose of this activity is to familiarize students with the certification requirements and their online availability. You might use this as an opportunity to discuss the advantages and disadvantages of careers in public accounting (CPA), management accounting (CMA), and internal auditing (CIA). The following websites provide students with useful information (such as starting salaries) on careers in accounting: American Institute of Certified Public Accountants (AICPA) https://www.aicpa.org/becomeacpa.html Institute of Certified Management Accountants (IMA) http://www.imanet.org/cma-certification/cma-certification-overview Institute of Internal Auditors (IIA) https://na.theiia.org/about-us/Pages/About-The-Institute-of-Internal-Auditors.aspx CP 1-8 Net cash flows from (used for) First Second Third Year Year Year operating activities negative positive positive Net cash flows from (used for) investing activities negative negative negative Net cash flows from (used for) financing activities positive positive positive Start-up companies normally experience negative net cash flows from operating activities; however, Amazon.com was able to generate positive net cash flows from operations by its second year. Start-up companies normally have negative net cash flows from investing activities as they build up their infrastructure through purchases of property, plant, and equipment. This was the case with Amazon.com for each of its first three years. Likewise, start-up companies normally have positive net cash flows from financing activities from raising capital. This is also the case for Amazon.com.
  • 54. CHAPTER 2 ANALYZING TRANSACTIONS DISCUSSION QUESTIONS 1. An account is a form designed to record changes in a particular asset, liability, owner’s equity, revenue, or expense. A ledger is a group of related accounts. 2. The terms debit and credit may signify either an increase or a decrease, depending upon the nature of the account. For example, debits signify an increase in asset and expense accounts but a decrease in liability, owner’s equity, and revenue accounts. 3. a. Assuming that no errors have occurred, the credit balance in the cash account resulted from drawing checks for $1,850 in excess of the amount of cash on deposit. b. The $1,850 credit balance in the cash account as of December 31 is a liability owed to the bank. It is usually referred to as an “overdraft.” 4. a. The revenue was earned in October. b. (1) Debit Accounts Receivable and credit Fees Earned or another appropriately titled revenue account in October. (2) Debit Cash and credit Accounts Receivable in November. 5. No. Errors may have been made that had the same erroneous effect on both debits and credits, such as failing to record and/or post a transaction, recording the same transaction more than once, and posting a transaction correctly but to the wrong account. 6. Recording $9,800 instead of the correct amount of $8,900 is a transposition. Recording $100 instead of the correct amount of $1,000 is a slide. 7. a. No. Because the same error occurred on both the debit side and the credit side of the trial balance, the trial balance would not be out of balance. b. Yes. The trial balance would not balance. The error would cause the debit total of the trial balance to exceed the credit total by $90. 8. a. The equality of the trial balance would not be affected. b. On the income statement, total operating expenses (salary expense) would be overstated by $7,500, and net income would be understated by $7,500. On the statement of owner’s equity, the beginning and ending owner’s capital would be correct. The understatement of net income understates owner’s equity by $7,500, while the understatement of withdrawals overstates owner’s equity by $7,500. Thus, ending owner’s equity is correct. The balance sheet is not affected by the error. 9. a. The equality of the trial balance would not be affected. b. On the income statement, revenues (fees earned) would be overstated by $300,000, and net income would be overstated by $300,000. On the statement of owner’s equity, the beginning capital would be correct. However, net income and ending capital would be overstated by $300,000. The balance sheet total assets is correct. However, liabilities (notes payable) is understated by $300,000, and owner’s equity is overstated by $300,000. The understatement of liabilities is offset by the overstatement of owner’s equity, and thus, total liabilities and owner’s equity is correct. 10. a. From the viewpoint of Surety Storage, the balance of the checking account represents an asset. b. From the viewpoint of Ada Savings Bank, the balance of the checking account represents a liability. 2-52 © 2021 Cengage Learning, Inc. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 55.
  • 56. CHAPTER 2 Analyzing Transactions 2-2 © 2021 Cengage Learning, Inc. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. PE 2-1A PRACTICE EXERCISES 1. Debit and credit entries (c), normal debit balance 2. Credit entries only (b), normal credit balance 3. Credit entries only (b), normal credit balance 4. Debit entries only (a), normal debit balance 5. Credit entries only (b), normal credit balance 6. Debit and credit entries (c), normal credit balance ` PE 2-1B 1. Debit and credit entries (c), normal credit balance 2. Debit and credit entries (c), normal debit balance 3. Debit entries only (a), normal debit balance 4. Debit entries only (a), normal debit balance 5. Debit entries only (a), normal debit balance 6. Credit entries only (b), normal credit balance PE 2-2A Feb. 19 Office Equipment 14,800 Cash 3,600 Accounts Payable 11,200 PE 2-2B Sept. 30 Office Supplies 1,900 Cash 600 Accounts Payable 1,300
  • 57. CHAPTER 2 Analyzing Transactions PE 2-3A 2-3 © 2021 Cengage Learning, Inc. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Apr. 30 Accounts Receivable 12,980 Fees Earned 12,980 PE 2-3B Aug. 13 Cash 7,480 Fees Earned 7,480 PE 2-4A Dec. 23 Graeme Schneider, Drawing 27,000 Cash 27,000 PE 2-4B June 30 Claire Hope, Drawing 9,500 Cash 9,500 PE 2-5A Using the following T account, solve for the amount of cash receipts (indicated by ? below). Cash July 1 Bal. Cash receipts 42,830 ? 132,500 Cash payments July 31 Bal. 33,850 $33,850 = $42,830 + Cash receipts – $132,500 Cash receipts = $33,850 + $132,500 – $42,830 = $123,520 PE 2-5B Using the following T account, solve for the amount of supplies expense (indicated by ? below). Supplies Aug. 1 Bal. 1,240 ? Supplies expense Supplies purchased 3,760 Aug. 31 Bal. 1,600 $1,600 = $1,240 + $3,760 – Supplies expense Supplies expense = $1,240 + $3,760 – $1,600 = $3,400
  • 58. CHAPTER 2 Analyzing Transactions 2-4 © 2021 Cengage Learning, Inc. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. PE 2-6A a. The trial balance totals are unequal. The debit total is higher by $900 ($9,800 – $8,900). b. The trial balance totals are equal because both the debit and credit entries were journalized and posted for $530. c. The trial balance totals are unequal. The debit total is higher by $5,800 ($2,900 + $2,900). PE 2-6B a. The trial balance totals are equal because both the debit and credit entries were journalized and posted for $14,200. b. The trial balance totals are unequal. The credit total is higher by $360 ($1,730 – $1,370). c. The trial balance totals are unequal. The debit total is higher by $4,500 ($7,250 – $2,750).
  • 59. CHAPTER 2 Analyzing Transactions PE 2-7A 2-5 © 2021 Cengage Learning, Inc. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. a. Journal Entry That Was Made in Error Journal Entry That Should Have Been Made Miscellaneous Expense 3,220 Rent Expense 3,220 Rent Expense 3,220 Cash 3,220 Comparison Rent Expense instead of Miscellaneous Expense should have been debited. Cash instead of Rent Expense should have been credited. The debit and credit amount of $3,220 is correct. Correcting Journal Entries Rent Expense 3,220 Miscellaneous Expense 3,220 Rent Expense 3,220 Cash 3,220 Note: The first entry reverses the incorrect entry, and the second entry is what should have been recorded initially. These two entries could have been combined into one entry; however, preparing two entries makes it easier for someone later to understand what happened and why the entries were necessary. b. Journal Entry That Was Journal Entry That Should Made in Error Have Been Made Cash 5,080 Cash 5,080 Accounts Payable 5,080 Accounts Receivable 5,080 Comparison Accounts Receivable instead of Accounts Payable should have been credited. Correcting Journal Entry Accounts Payable 5,080 Accounts Receivable 5,080
  • 60. CHAPTER 2 Analyzing Transactions 2-6 © 2021 Cengage Learning, Inc. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. PE 2-7B a. Journal Entry That Was Journal Entry That Should Made in Error Have Been Made Accounts Receivable 10,700 Cash 10,700 Fees Earned 10,700 Fees Earned 10,700 Comparison Cash instead of Accounts Receivable should have been debited. Correcting Journal Entry Cash Accounts Receivable 10,700 10,700 b. Journal Entry That Was Made in Error Journal Entry That Should Have Been Made Office Equipment 4,300 Supplies 4,300 Supplies 4,300 Accounts Payable 4,300 Comparison Supplies instead of Office Equipment should have been debited. Accounts Payable instead of Supplies should have been credited. The debit and credit amount of $4,300 is correct. Correcting Journal Entries Supplies 4,300 Office Equipment 4,300 Supplies 4,300 Accounts Payable 4,300 Note: The first entry reverses the incorrect entry, and the second entry is what should have been recorded initially. These two entries could have been combined into one entry; however, preparing two entries makes it easier for someone later to understand what happened and why the entries were necessary.
  • 61. CHAPTER 2 Analyzing Transactions 2-7 © 2021 Cengage Learning, Inc. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. PE 2-8A Vaughn Company Income Statements For the Years Ended December 31 20Y1 20Y0 Increase/(Decrease) Amount Percent Fees earned $716,800 $896,000 $(179,200) (20%) Operating expenses 557,760 672,000 (114,240) (17%) Net income $159,040 $224,000 $ (64,960) (29%) PE 2-8B Satterfield Company Income Statements For the Years Ended December 31 20Y1 20Y0 Increase/(Decrease) Amount Percent Fees earned $3,068,200 $2,645,000 $423,200 16.0% Operating expenses 2,281,600 1,984,000 297,600 15.0% Net income $ 786,600 $ 661,000 $125,600 19.0%
  • 62. CHAPTER 2 Analyzing Transactions 2-8 © 2021 Cengage Learning, Inc. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Ex. 2-1 EXERCISES Balance Sheet Accounts Income Statement Accounts Assets Revenues Cash Cargo Revenue Accounts Receivable Passenger Revenue Property and Equipment Fuel Inventory Parts and Supplies Prepaid Expenses Liabilities Expenses Accounts Payable Aircraft Fuel (Expense) Air Traffic Liabilitya Aircraft Maintenance (Expense) Loyalty Program (Obligations)b Aircraft Rent (Expense) Accrued Salaries (Obligations) Regional Carriers Expensec Landing Fees (Expense)d Passenger Commissions (Expense)e Owner’s Equity None a Passenger ticket sales for future flights b Obligations to provide frequent flyers future travel and other benefits c Payments to other airlines for passenger travel under Delta tickets d Fees paid to airports for landing rights e Commissions paid to travel agents for passenger bookings Ex. 2-2 Account Account Number Accounts Payable 21 Accounts Receivable 12 Cash 11 Fees Earned 41 Fred Biggs, Capital 31 Fred Biggs, Drawing 32 Land 13 Miscellaneous Expense 53 Supplies Expense 52 Wages Expense 51 Note: Expense accounts are normally listed in order of magnitude from largest to smallest with Miscellaneous Expense always listed last. Since Wages Expense is normally larger than Supplies Expense, Wages Expense is listed as account number 51 and Supplies Expense as account number 52.
  • 63. CHAPTER 2 Analyzing Transactions Ex. 2-3 2-9 © 2021 Cengage Learning, Inc. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Balance Sheet Accounts Income Statement Accounts 1. Assets 4. Revenue 11 Cash 41 Fees Earned 12 Accounts Receivable 13 Supplies 5. Expenses 14 Prepaid Insurance 51 Wages Expense 15 Equipment 52 Rent Expense 53 Supplies Expense 2. Liabilities 21 Accounts Payable 22 Unearned Rent 3. Owner’s Equity 31 Lorri Ross, Capital 32 Lorri Ross, Drawing 59 Miscellaneous Expense Note: The order of some of the accounts within the major classifications is somewhat arbitrary, as in accounts 13–14, accounts 21–22, and accounts 51–53. In a new business, the order of magnitude of balances in such accounts is not determinable in advance. The magnitude may also vary from period to period. Ex. 2-4 a. debit g. debit b. credit h. credit c. debit i. debit d. credit j. credit e. credit k. debit f. debit l. debit Ex. 2-5 1. debit and credit entries (c) 2. debit and credit entries (c) 3. debit and credit entries (c) 4. credit entries only (b) 5. debit entries only (a) 6. debit entries only (a) 7. debit entries only (a)
  • 64. CHAPTER 2 Analyzing Transactions 2-10 © 2021 Cengage Learning, Inc. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Ex. 2-6 a. Liability—credit e. Asset—debit b. Asset—debit f. Revenue—credit c. Owner’s equity g. Asset—debit (Ashley Griffin, Capital)—credit h. Expense—debit d. Owner’s equity i. Asset—debit (Ashley Griffin, Drawing)—debit j. Expense—debit Ex. 2-7 20Y3 Oct. 1 Rent Expense 4,800 Cash 4,800 3 Advertising Expense 2,500 Cash 2,500 5 Supplies 1,390 Cash 1,390 6 Office Equipment 10,670 Accounts Payable 10,670 10 Cash 19,730 Accounts Receivable 19,730 15 Accounts Payable 9,480 Cash 9,480 27 Miscellaneous Expense 530 Cash 530 30 Utilities Expense 220 Cash 220 31 Accounts Receivable 38,620 Fees Earned 38,620 31 Utilities Expense 1,540 Cash 1,540 31 Michael Short, Drawing 6,700 Cash 6,700
  • 65. CHAPTER 2 Analyzing Transactions Ex. 2-8 2-11 © 2021 Cengage Learning, Inc. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. a. JOURNAL Page 87 Date Description Post. Ref. Debit Credit 20Y4 Sept. 18 Supplies 15 8,710 Accounts Payable 21 8,710 Purchased supplies on account. b., c., d. Account: Supplies Account No. 15 Date Item Post. Ref. Debit Credit Balance Debit Credit 20Y4 Sept. 1 Balance  2,960 18 87 8,710 11,670 Account: Accounts Payable Account No. 21 Date Item Post. Ref. Debit Credit Balance Debit Credit 20Y4 Sept. 1 Balance  38,400 18 87 8,710 47,110 e. Yes. The rules of debit and credit apply to all companies. Ex. 2-9 a. (1) (2) (3) (4) Accounts Receivable 73,900 Fees Earned 73,900 Supplies 1,960 Accounts Payable 1,960 Cash 62,770 Accounts Receivable 62,770 Accounts Payable 820 Cash 820
  • 66. CHAPTER 2 Analyzing Transactions 2-12 © 2021 Cengage Learning, Inc. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. (2) Supplies 1,960 Fees Earned (1) 73,900 Accounts Receivable (1) 73,900 (3) 62,770 Cash X 515,000 200,000 375,000 Ex. 2-9 (Concluded) b. Cash (3) 62,770 (4) 820 c. No. An error may not have necessarily occurred. A credit balance in Accounts Receivable could occur if a customer overpaid his or her account. Regardless, the credit balance should be investigated to verify that an error has not occurred. Ex. 2-10 a. The increase of $140,000 ($515,000 – $375,000) in the cash account does not indicate net income of that amount. Net income is the excess of revenues over expenses and is normally not the same as the change in the cash account. b. $60,000 ($200,000 – $140,000) or X + $515,000 – $375,000 = $200,000 X = $200,000 – $515,000 + $375,000 X = $60,000 Accounts Payable (4) 820 (2) 1,960
  • 67. CHAPTER 2 Analyzing Transactions Ex. 2-11 2-13 © 2021 Cengage Learning, Inc. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. a. Accounts Payable 194,500 Feb. 1 X 210,400 Feb. 28 62,500 X + $210,400 – $194,500 = $62,500 X = $62,500 + $194,500 – $210,400 X = $46,600 b. Accounts Receivable Oct. 1 121,100 X 470,500 Oct. 31 136,800 $121,100 + X – $470,500 = $136,800 X = $136,800 + $470,500 – $121,100 X = $486,200 c. Cash X $48,350 + $260,060 – X = $59,390 X = $48,350 + $260,060 – $59,390 X = $249,020 Ex. 2-12 a. Credit balance of $170,000 ($500,000 – $10,000 – $320,000). b. Yes. The balance sheet prepared at December 31 will balance, with Terrace Waters, Capital, being reported in the owner’s equity section as $170,000. Apr. 1 48,350 260,060 Apr. 30 59,390
  • 68. CHAPTER 2 Analyzing Transactions 2-14 © 2021 Cengage Learning, Inc. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Ex. 2-13 a. and b. Account Debited Account Credited Transaction Type Effect Type Effect (1) asset + owner’s equity + (2) asset + asset – (3) asset + asset – liability + (4) expense + asset – (5) asset + revenue + (6) liability – asset – (7) asset + asset – (8) expense + asset – (9) drawing + asset – Ex. 2-14 (1) (2) (3) (4) (5) (6) (7) (8) (9) Cash 97,000 Mary Silva, Capital 97,000 Supplies 1,160 Cash 1,160 Equipment 10,350 Accounts Payable 8,280 Cash 2,070 Operating Expenses 8,120 Cash 8,120 Accounts Receivable 15,910 Fees Earned 15,910 Accounts Payable 3,490 Cash 3,490 Cash 10,540 Accounts Receivable 10,540 Operating Expenses 850 Supplies 850 Mary Silva, Drawing 3,200 Cash 3,200
  • 69. CHAPTER 2 Analyzing Transactions Ex. 2-15 2-15 © 2021 Cengage Learning, Inc. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. a. b. Net income, $6,940 ($15,910 – $8,970) Emerald Tours Co. Unadjusted Trial Balance May 31, 20Y5 Debit Balances Credit Balances Cash 89,500 Accounts Receivable 5,370 Supplies 310 Equipment 10,350 Accounts Payable 4,790 Mary Silva, Capital 97,000 Mary Silva, Drawing 3,200 Fees Earned 15,910 Operating Expenses 8,970 117,700 117,700
  • 70. CHAPTER 2 Analyzing Transactions 2-16 © 2021 Cengage Learning, Inc. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. IF YOU WANT THIS TEST BANK OR SOLUTION MANUAL EMAIL ME donc8246@gmail.com TO RECEIVE ALL CHAPTERS IN PDF FORMAT