Chapter1-Solution

advertisement

SOLUTIONS TO EXERCISES—SET B

EXERCISE 1-1B R Summarizing economic events.

I Selecting economic activities relevant to the company.

C Reporting information in a standard format.

C Preparing accounting reports.

R Measuring events in dollars and cents.

R Keeping a systematic chronological diary of events.

C Explaining uses, meaning, and limitations of data.

R Classifying economic events.

C Analyzing and interpreting information.

EXERCISE 1-2B (a)

Internal users

Factory Manager Human Resource Worker Vice-President of Finance

External users

Customers Internal Revenue Service Labor Unions Securities and Exchange Commission Suppliers Investors (b) I What price should we set for our product?

E Did the company earn a satisfactory income?

I Should we have more employees?

E How does the company’s profitability compare to other companies?

I What does it cost us to manufacture each unit produced?

I Which product should we emphasize?

E Will the company be able to provide a return to its stockholders?

© 2008 For Instructor Use Only 1-1

EXERCISE 1-3B Ron Turner, president of Bears Company, instructed Rex Grossman, the head of the accounting department, to report the company’s land in their accounting reports at its market value of $225,000 instead of its cost of $125,000, in an effort to make the company appear to be a better investment.

The cost principle requires that assets be recorded and reported at their cost, because cost is reliable and can be objectively measured and verified.

The stakeholders include stockholders and creditors of Bears Company, potential stockholders and creditors, other users of Bears’s accounting reports, Ron Turner, and Rex Grossman. All users of Bears’s accounting reports could be harmed by relying on information which violates accounting principles.

Ron Turner could benefit if the company is able to attract more investors, but would be harmed if the fraudulent reporting is discovered. Similarly, Rex Grossman could benefit by pleasing his boss, but would be harmed if the fraudulent reporting is discovered.

Rex’s alternatives are to report the land at $125,000 or to report it at $225,000.

Reporting the land at $225,000 is not appropriate since it would mislead many people who rely on Bears’s accounting reports to make financial decisions. Rex should report the land at its cost of $125,000. He should try to convince Ron Turner that this is the appropriate course of action, but be prepared to resign his position if Turner insists.

EXERCISE 1-4B 1.

Incorrect. The cost principle requires that assets be recorded and reported at their cost.

2.

Correct. The monetary unit assumption assumes the unit of measure remains sufficiently constant over time.

3.

Incorrect. The economic entity assumption requires that the activities of the entity be kept separate and distinct from the activities of its owner and all other economic entities.

© 2008 For Instructor Use Only 1-2

EXERCISE 1-5B Asset Cash Cleaning equipment Cleaning supplies Accounts receivable Liability Accounts payable Notes payable Rent payable Stockholders’ Equity Common stock EXERCISE 1-6B 1.

2.

3.

4.

5.

6.

7.

8.

9.

Increase in assets and increase in stockholders’ equity.

Increase in assets and increase in liabilities.

Decrease in assets and decrease in stockholders’ equity.

Increase in assets and increase in stockholders’ equity.

Increase in assets and decrease in assets.

Decrease in assets and decrease in stockholders’ equity.

Increase in liabilities and decrease in stockholders’ equity.

Increase in assets and decrease in assets.

Increase in assets and increase in stockholders’ equity.

EXERCISE 1-7B 1.

2.

3.

4.

(c) (d) (a) (b) 5.

6.

7.

8.

(d) (b) (e) (f) EXERCISE 1-8B (a) 1.

2.

3.

4.

5.

Stockholders’ invested $20,000 cash in the business.

Purchased office equipment for $5,000, paying $2,000 in cash and the balance of $3,000 on account.

Paid $750 cash for supplies.

Earned $9,300 in revenue, receiving $5,600 cash and $3,700 on account.

Paid $1,500 cash on accounts payable.

© 2008 For Instructor Use Only 1-3

EXERCISE 1-8B (Continued) 6.

7.

8.

9.

10.

Paid a $2,000 cash dividend.

Paid $820 cash for rent.

Collected $450 cash from customers on account.

Paid salaries of $4,900.

Incurred $500 of utilities expense on account.

(b) Investment..............................................................................................

Service revenue....................................................................................

Dividends................................................................................................

Rent expense.........................................................................................

Salaries expense ..................................................................................

Utilities expense ...................................................................................

Increase in stockholders’ equity.....................................................

$20,000 9,300 (2,000) (820) (4,900) (500) $21,080 (c) Service revenue....................................................................................

Rent expense.........................................................................................

Salaries expense ..................................................................................

Utilities expense ...................................................................................

Net income .............................................................................................

$9,300 (820) (4,900) (500) $3,080 EXERCISE 1-9B NILE & CO.

Income Statement For the Month Ended August 31, 2008 Revenues Service revenue...................................................................

Expenses Salaries expense .................................................................

Utilities expense ..................................................................

Rent expense........................................................................

Total expenses............................................................

Net income .....................................................................................

$4,900 500 820 $9,300 6,220 $3,080

© 2008 For Instructor Use Only 1-4

EXERCISE 1-9B (Continued) NILE & CO.

Retained Earnings Statement For the Month Ended August 31, 2008 Retained earnings, August 1 .................................................

Add: Net income .....................................................................

Less: Dividends........................................................................

Retained earnings, August 31...............................................

$ 0 3,080 3,080 2,000 $1,080 NILE & CO.

Balance Sheet August 31, 2008 Assets Cash ...............................................................................................

Accounts receivable.................................................................

Supplies........................................................................................

Office equipment .......................................................................

Total assets ........................................................................

$14,080 3,250 750 5,000 $23,080 Liabilities and Stockholders’ Equity Liabilities Accounts payable.............................................................

Stockholders’ equity Common stock ..................................................................

Retained earnings ............................................................

Total liabilities and stockholders’ equity.........

$20,000 1,080 $ 2,000 21,080 $23,080 EXERCISE 1-10B (a) Stockholders’ equity—12/31/07 ($400,000 – $240,000) .........

Stockholders’ equity—1/1/07.........................................................

Increase in stockholders’ equity ..................................................

Add: Dividends..................................................................................

Net income for 2007..........................................................................

$160,000 100,000 60,000 20,000 $ 80,000

© 2008 For Instructor Use Only 1-5

EXERCISE 1-10B (Continued) (b) Stockholders’ equity—12/31/08 ($460,000 – $280,000)........

Stockholders’ equity—1/1/08—see (a) ......................................

Increase in stockholders’ equity.................................................

Less: Additional investment .......................................................

Net loss for 2008 ..............................................................................

$180,000 160,000 20,000 55,000 ($ 35,000) (c) Stockholders’ equity—12/31/09 ($590,000 – $360,000)........

Stockholders’ equity—1/1/09—see (b)......................................

Increase in stockholders’ equity.................................................

Less: Additional investment .......................................................

Add: Dividends...............................................................................

Net income for 2009 ........................................................................

$230,000 180,000 50,000 10,000 40,000 30,000 $ 70,000 EXERCISE 1-11B (a) Total assets (beginning of year) .................................................

Total liabilities (beginning of year) ............................................

Total stockholders’ equity (beginning of year)......................

$115,000 85,000 $ 30,000 (b) Total stockholders’ equity (end of year) ..................................

Total stockholders’ equity (beginning of year)......................

Increase in stockholders’ equity.................................................

Total revenues ..................................................................................

Total expenses..................................................................................

Net income .........................................................................................

Increase in stockholders’ equity........................

Less: Net income ...................................................

Add: Dividends......................................................

Additional investment ...........................................

$(40,000) 19,000 ) (c) Total assets (beginning of year) .................................................

Total stockholders’ equity (beginning of year)......................

Total liabilities (beginning of year) ............................................

$ 60,000 30,000 $ 30,000 $215,000 175,000 $ 40,000 $ 30,000 (21,000) $ 9,000 $129,000 78,000 $ 51,000

© 2008 For Instructor Use Only 1-6

EXERCISE 1-11B (Continued) (d) Total stockholders’ equity (end of year)..................................

Total stockholders’ equity (beginning of year) .....................

Increase in stockholders’ equity ................................................

Total revenues ..................................................................................

Total expenses .................................................................................

Net income.........................................................................................

Increase in stockholders’ equity .......................

Less: Net income...................................................

Additional investment..............................

Dividends ..................................................................

$(39,000) (25,000) $130,000 78,000 $ 52,000 $100,000 61,000 $ 39,000 $ 52,000 (64,000) $ 12,000 EXERCISE 1-12B MILDRED CO.

Income Statement For the Year Ended December 31, 2008 Revenues Service revenue ..............................................................

Expenses Salaries expense.............................................................

Rent expense ...................................................................

Utilities expense..............................................................

Advertising expense......................................................

Total expenses .......................................................

Net income.................................................................................

$30,000 12,000 3,100 1,800 $67,000 46,900 $20,100 MILDRED CO.

Retained Earnings Statement For the Year Ended December 31, 2008 Retained earnings, January 1....................................................................

Add: Net income..........................................................................................

Less: Dividends ............................................................................................

Retained earnings, December 31 .............................................................

$18,000 20,100 38,100 7,000 $31,100

© 2008 For Instructor Use Only 1-7

EXERCISE 1-13B HAIR COMPANY Balance Sheet December 31, 2008 Assets Cash ..............................................................................................

Accounts receivable ................................................................

Supplies .......................................................................................

Equipment ...................................................................................

Total assets........................................................................

$11,000 10,500 7,000 48,000 $76,500 Liabilities and Stockholders’ Equity Liabilities Accounts payable ............................................................

Stockholders’ equity Common stock..................................................................

Retained earnings ($19,500 – $6,000)........................

Total liabilities and stockholders’ equity ........

$45,000 13,500 $18,000 58,500 $76,500 EXERCISE 1-14B (a) Camping fee revenues ...................................................

General store revenues..................................................

Total revenue............................................................

Expenses ............................................................................

Net income .........................................................................

$150,000 60,000 210,000 145,000 $ 65,000 (b) SUNFLOWER INC.

Balance Sheet December 31, 2008 Assets Cash .....................................................................................

Supplies ..............................................................................

Equipment ..........................................................................

Total assets...............................................................

$ 21,000 3,500 99,000 $123,500

© 2008 For Instructor Use Only 1-8

EXERCISE 1-14B (Continued) SUNFLOWER INC.

Balance Sheet (Continued) Liabilities and Stockholders’ Equity Liabilities Notes payable ................................................................

Accounts payable.........................................................

Total liabilities.......................................................

Stockholders’ equity Common stock .............................................................. $40,000 $ 50,000 12,000 62,000 Retained earnings ($123,500 – $62,000 – $40,000).............................. 21,500 61,500 Total liabilities and stockholders’ equity.....

$123,500 EXERCISE 1-15B BREEZY CRUISE COMPANY Income Statement Revenues Ticket revenue ...........................................................

Expenses Salaries expense.......................................................

Maintenance expense .............................................

Property tax expense ..............................................

Advertising expense................................................

Total expenses .................................................

Net income...........................................................................

$370,000 $150,000 89,000 11,000 5,500 255,500 $114,500

© 2008 For Instructor Use Only 1-9

EXERCISE 1-16B KEVIN CARR, ATTORNEY AT LAW INC.

Retained Earnings Statement For the Year Ended December 31, 2008 Retained earnings, January 1 ................................................................

Add: Net income ($340,000 – $231,000) ...........................................

Less: Dividends.........................................................................................

Retained earnings, December 31..........................................................

$ 37,000 109,000 146,000 89,000 $ 57,000

© 2008 For Instructor Use Only 1-10

SOLUTIONS TO PROBLEMS

PROBLEM 1-1C

© 2008 For Instructor Use Only 1-11

PROBLEM 1-1C (Continued) (b) Ending retained earnings..............................................

Add: Dividends ...............................................................

Net income .........................................................................

OR Service revenue................................................................

Expenses Salaries.......................................................................

Advertising................................................................

Rent .............................................................................

Net income .......................................................

$ 7,000 500 $ 7,500 $11,000 $2,200 700 600 3,500 $ 7,500

© 2008 For Instructor Use Only 1-12

PROBLEM 1-2C

© 2008 For Instructor Use Only 1-13

PROBLEM 1-2C (Continued) (b) JENNY BROWN, ATTORNEY AT LAW Income Statement For the Month Ended August 31, 2008 Revenues Service revenue.....................................................

Expenses Salaries expense ...................................................

Rent expense..........................................................

Advertising expense ............................................

Utilities expense ....................................................

Total expenses..............................................

Net income .......................................................................

$2,500 900 400 220 $8,000 4,020 $3,980 JENNY BROWN, ATTORNEY AT LAW Retained Earnings Statement For the Month Ended August 31, 2008 Retained earnings, August 1............................................................

Add: Net income ................................................................................

Less: Dividends...................................................................................

Retained earnings, August 31 .........................................................

$3,800 3,980 7,780 700 $7,080

© 2008 For Instructor Use Only 1-14

PROBLEM 1-2C (Continued) JENNY BROWN, ATTORNEY AT LAW Balance Sheet August 31, 2008 Assets Cash .............................................................................................

Accounts receivable...............................................................

Supplies......................................................................................

Office equipment .....................................................................

Total assets ......................................................................

$ 3,000 5,300 500 8,000 $16,800 Liabilities Liabilities and Stockholders’ Equity Notes payable ..................................................................

Accounts payable...........................................................

Total liabilities.........................................................

$ 1,500 3,220 4,720 Stockholders’ equity Common stock ................................................................ $5,000 Retained earnings .......................................................... 7,080 12,080 Total liabilities and stockholders’ equity.......

$16,800

© 2008 For Instructor Use Only 1-15

PROBLEM 1-3C (a) DIVINE CREATIONS CO.

Income Statement For the Month Ended June 30, 2008 Revenues Service revenue...................................................

Expenses Supplies expense................................................

Advertising expense ..........................................

Gas and oil expense...........................................

Utilities expense ..................................................

Total expenses............................................

Net income .....................................................................

$1,600 400 200 150 $7,000 2,350 $4,650 DIVINE CREATIONS CO.

Retained Earnings Statement For the Month Ended June 30, 2008 Retained earnings, June 1 ........................................

Less: Dividends...........................................................

Retained earnings, June 30 ......................................

$ 0 4,650 4,650 1,300 $3,350 DIVINE CREATIONS CO.

Balance Sheet June 30, 2008 Assets Cash .........................................................................................................

Accounts receivable ...........................................................................

Craft supplies ........................................................................................

Equipment ..............................................................................................

Total assets...................................................................................

$13,750 3,000 2,000 10,000 $28,750

© 2008 For Instructor Use Only 1-16

PROBLEM 1-3C (Continued) DIVINE CREATIONS CO.

Balance Sheet (Continued) June 30, 2008 Liabilities and Stockholders’ Equity Liabilities Notes payable ................................................................

Accounts payable.........................................................

Total liabilities.......................................................

Stockholders’ equity Common stock ..............................................................

Retained earnings ........................................................

Total liabilities and stockholders’ equity.....

$ 9,000 1,200 10,200 $15,200 3,350 18,550 $28,750 (b) DIVINE CREATIONS CO.

Income Statement For the Month Ended June 30, 2008 Revenues Service revenue ($7,000 + $900) .....................

Expenses Supplies expense ................................................

Advertising expense...........................................

Gas and oil expense ($200 + $150) ................

Utilities expense...................................................

Total expenses ............................................

Net income......................................................................

$1,600 400 350 150 $7,900 2,500 $5,400 DIVINE CREATIONS CO.

Retained Earnings Statement For the Month Ended June 30, 2008 Retained earnings, June 1.........................................

Add: Net income.........................................................

Less: Dividends ...........................................................

Retained earnings, June 30.......................................

$ 0 5,400 5,400 1,300 $4,100

© 2008 For Instructor Use Only 1-17

PROBLEM 1-4C

© 2008 For Instructor Use Only 1-18

PROBLEM 1-4C (Continued) (b) RODRIGUEZ CONSULTING Income Statement For the Month Ended May 31, 2008 Revenues Service revenue ($4,000 + $6,400)............................

Expenses Salaries expense............................................................

Rent expense ..................................................................

Utilities expense.............................................................

Advertising expense.....................................................

Total expenses ......................................................

Net income................................................................................

$2,500 900 175 125 $10,400 3,700 $ 6,700 (c) RODRIGUEZ CONSULTING Balance Sheet May 31, 2008 Assets Cash ............................................................................................

Accounts receivable..............................................................

Supplies.....................................................................................

Office equipment ....................................................................

Total assets .....................................................................

$14,700 2,400 600 3,100 $20,800 Liabilities and Stockholders’ Equity Liabilities Notes payable .................................................................

Accounts payable..........................................................

Total liabilities........................................................

Stockholders’ equity Common stock ...............................................................

Retained earnings .........................................................

Total liabilities and stockholders’ equity......

$7,000 5,700 $ 5,000 3,100 8,100 12,700 $20,800

© 2008 For Instructor Use Only 1-19

PROBLEM 1-5C (a) Donatello Company (a) $ 32,000 (b) 100,000 (c) 6,000 (f) Raphael Company (d) (e) $50,000 40,000 33,000 Michelangelo Company (g) (h) (i) $129,000 110,000 373,000 Leonardo Company (j) (k) (l) $ 60,000 245,000 450,000 (b) The sequence of preparing financial statements is income statement, retained earnings statement, and balance sheet. The interrelationship of the retained earnings statement to the other financial statements results from the fact that net income from the income statement is re ported in the retained earnings statement and ending retained earnings reported in the retained earnings statement is the amount reported for retained earnings on the balance sheet.

© 2008 For Instructor Use Only 1-20

Download