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.
Increase in assets and increase in stockholders’ equity.
2.
Increase in assets and increase in liabilities.
3.
Decrease in assets and decrease in stockholders’ equity.
4.
Increase in assets and increase in stockholders’ equity.
5.
Increase in assets and decrease in assets.
6.
Decrease in assets and decrease in stockholders’ equity.
7.
Increase in liabilities and decrease in stockholders’ equity.
8.
Increase in assets and decrease in assets.
9.
Increase in assets and increase in stockholders’ equity.
EXERCISE 1-7B
1.
(c)
2.
(d)
3.
(a)
4.
(b)
5.
(d)
6.
(b)
7.
(e)
8.
(f)
EXERCISE 1-8B
(a) 1.
Stockholders’ invested $20,000 cash in the business.
2.
Purchased office equipment for $5,000, paying $2,000 in cash and the balance of $3,000 on account.
3.
Paid $750 cash for supplies.
4.
Earned $9,300 in revenue, receiving $5,600 cash and $3,700 on account.
5.
Paid $1,500 cash on accounts payable.
© 2008 For Instructor Use Only 1-3

EXERCISE 1-8B (Continued)
6.
Paid a $2,000 cash dividend.
7.
Paid $820 cash for rent.
8.
Collected $450 cash from customers on account.
9.
Paid salaries of $4,900.
10.
Incurred $500 of utilities expense on account.
(b) Investment..............................................................................................
$20,000
Service revenue....................................................................................
9,300
Dividends................................................................................................
Rent expense.........................................................................................
(2,000)
(820)
Salaries expense ..................................................................................
(4,900)
Utilities expense ...................................................................................
(500)
Increase in stockholders’ equity.....................................................
$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 .................................................................
$4,900
Utilities expense ..................................................................
500
Rent expense........................................................................
820
Total expenses............................................................
Net income .....................................................................................
$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.............................................................
$ 2,000
Stockholders’ equity
Common stock ..................................................................
$20,000
Retained earnings ............................................................
1,080 21,080
Total liabilities and stockholders’ equity.........
$23,080
EXERCISE 1-10B
(a) Stockholders’ equity—12/31/07 ($400,000 – $240,000) .........
$160,000
Stockholders’ equity—1/1/07.........................................................
100,000
Increase in stockholders’ equity ..................................................
60,000
Add: Dividends..................................................................................
20,000
Net income for 2007..........................................................................
$ 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 .......................................................
$180,000
160,000
20,000
55,000
Net loss for 2008 ..............................................................................
($ 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) .................................................
$115,000
Total liabilities (beginning of year) ............................................
Total stockholders’ equity (beginning of year)......................
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 .........................................................................................
$ 60,000
30,000
$ 30,000
$215,000
175,000
$ 40,000
Increase in stockholders’ equity........................
$ 30,000
Less: Net income ...................................................
$(40,000)
Add: Dividends......................................................
19,000 ) (21,000)
Additional investment ...........................................
$ 9,000
(c) Total assets (beginning of year) .................................................
Total stockholders’ equity (beginning of year)......................
Total liabilities (beginning of year) ............................................
$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 ..................................................................
$130,000
78,000
$ 52,000
$100,000
61,000
$ 39,000
$ 52,000
$(39,000)
(25,000) (64,000)
$ 12,000
EXERCISE 1-12B
MILDRED CO.
Income Statement
For the Year Ended December 31, 2008
Revenues
Service revenue ..............................................................
Expenses
Salaries expense.............................................................
$30,000
Rent expense ...................................................................
12,000
Utilities expense..............................................................
3,100
Advertising expense......................................................
1,800
Total expenses .......................................................
Net income.................................................................................
$67,000
46,900
$20,100
MILDRED CO.
Retained Earnings Statement
For the Year Ended December 31, 2008
Retained earnings, January 1....................................................................
$18,000
Add: Net income..........................................................................................
20,100
38,100
Less: Dividends ............................................................................................
7,000
Retained earnings, December 31 .............................................................
$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 ............................................................
$18,000
Stockholders’ equity
Common stock..................................................................
$45,000
Retained earnings ($19,500 – $6,000)........................
13,500 58,500
Total liabilities and stockholders’ equity ........
$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)
December 31, 2008
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
For the Year Ended December 31, 2008
Revenues
Ticket revenue ...........................................................
Expenses
Salaries expense.......................................................
Maintenance expense .............................................
Property tax expense ..............................................
Advertising expense................................................
Total expenses .................................................
Net income...........................................................................
$150,000
89,000
11,000
5,500
$370,000
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 .........................................................................................................
$13,750
Accounts receivable ...........................................................................
Craft supplies ........................................................................................
3,000
2,000
Equipment ..............................................................................................
10,000
Total assets...................................................................................
$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
$ 9,000
1,200
10,200
Common stock ..............................................................
$15,200
Retained earnings ........................................................
3,350 18,550
Total liabilities and stockholders’ equity.....
$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............................................................
$2,500
Rent expense ..................................................................
900
Utilities expense.............................................................
175
Advertising expense.....................................................
125
Total expenses ......................................................
Net income................................................................................
$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 ...............................................................
$7,000
$ 5,000
3,100
8,100
Retained earnings .........................................................
5,700 12,700
Total liabilities and stockholders’ equity......
$20,800
© 2008 For Instructor Use Only 1-19

PROBLEM 1-5C
(a) Donatello
Company
(a) $ 32,000
(b) 100,000
(c) 6,000
Raphael
Company
(d) $50,000
(e) 40,000
(f) 33,000
Michelangelo
Company
(g) $129,000
(h) 110,000
(i) 373,000
Leonardo
Company
(j) $ 60,000
(k) 245,000
(l) 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 reported 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