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SOLUTION MANUAL FOR ACCOUNTING TEXT AND CASES
13TH EDITION ANTHONY, HAWKINS, MERCHANT
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-Accounting-Text-and-Cases-13th-Edition-A
ext-and-Cases-13th-Edition-Anthon
nthon!!"a#kins!-Merchant
The Chapter has been updated.
Approach
It is helpful if students understand from the outset that financial accounting is being discussed in two
cycles. In the first cycle, Chapters 2 through , we go through the entire accounting process !uickly, to
establish an o"er"iew. #e then go through the process a second time, in Chapters $ through %, and go
into the same topics in much greater depth. Thus, students should not be concerned if they do not
understand all the fine points in Chapters 2&, for these will be discussed again in subse!uent chapters.
'either should they be permitted to belabor !uestions that in"ol"e fine distinctions( the ob)ecti"e here is
to get the broad, o"erall picture.
*ur e+perience in"ariably has been that beginning students find the introduction to accounting !uite
confusing. lthough they may be able to do the work assigned each day, they are unable to "isuali-e the
whole structure of accounts. This leads to a feeling of frustration that may last se"eral weeks. Then, all of
a sudden, the pieces fall into place. From that time forward they ha"e no special trouble and can fit each
new concept into its proper place without difficulty. sually, the great awakening0 comes by Chapter 1,
but it may not come until e"en later.
later. #e
#e do not know of any way of
of eliminating this initial
initial frustration.
frustration.
#e go through the te+t briefly, mostly to encourage !uestions that will help clear up obscure points. #e
usually e+plain that we do not e+pect that all matters discussed in this chapter will immediately be clear.
For this reason, students may wish to refer back to this and to other chapters in art %, as the need arises.
3any instructors like to emphasi-e the notion of balance sheet changes, and this can be done by adding
more transactions to 3usic 3art. Transactions can be called out as fast as the instructor or students think
of them, and students should see that it is possible to record any transaction whatsoe"er in terms of its
effect on the balance sheet. This lays a foundation that is often helpful when comple+ or mechanical
matters are discussed later on.
In this and the ne+t two or three chapters, a fairly uniform terminology has been used in both te+t and
cases. This is artificial since practice in companies "aries widely, but it ser"es to reduce some of the initial
confusion on the part of the student. 4eginning with Chapter 1, "ariations in terminology appear with
increasing fre!uency in the cases, but the te+t retains terminology that seems to be fa"ored by the F54,
so far as we can glean from its pronouncements and those of predecessor bodies. lso, in the te+t, we
ha"e made an effort to use financial statement formats that reflect F54 preferences 6although, unless
specifically noted, the financial statements can be constructed e!ually well with other formats and format
should not be o"erly emphasi-ed.7
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5ome readers of this material ha"e said that it tends to belittle accounting and accountants. #e certainly
do not intend to gi"e such impression. It is true that the te+t does attempt to set forth the limitations on
accounting information, and it does not imply that accounting is an e+act science. This is not done to
belittle the sub)ect or its practitioners, howe"er. 5tudents who are permitted to get the impression that
accounting is e+act, or that it does gi"e an accurate picture of a business, are in for a rude awakening
when they get out into actual business situations. #e think, therefore, that it is most unfortunate if such an
impression is permitted to de"elop. 5e"eral Cs and controllers who ha"e participated in e+ecuti"e
de"elopment programs ha"e said that one of the chief "alues of our approach is that it does show the
limitations as well as the usefulness of accounting. They say that one of their principal practical problems
is that some uninformed people e+pect too much of accounting and are disappointed or disgruntled when
the accountant cannot furnish them with precise or complete information. It is possible that
misconceptions of these people are generated from e+posure to a course in which the "alue of accounting
was o"eremphasi-ed and its limitations omitted.
The foregoing does not mean that one should e"er apologi-e for the limitations of accounting. From time
to time it should be pointed out that these limitations are inherent in the )ob of attempting to reduce the
comple+ities of an actual business situation to a few monetary figures. Incidentally, we understand that
physics teachers got themsel"es into considerable trouble some years ago by o"eremphasi-ing the
accuracy and completeness of our knowledge about physical phenomena. Their current practice, we
understand, is to e+plain what is not known.
Cases
Cases 2&% and 2&2 pro"ide practice work for beginning students. These two are mechanical problems to be
worked as the te+t material is studied. Lone Pine Cafe (A) re!uires the student to think about the
application of basic concepts.
Additional Cases
5ome instructors like to use one of the Chapter % cases with this chapter. ny of the concepts described
can be dealt with in the conte+t of those cases.
Probl! Sol"#$o%&
%roble& '-1
*wners8 e!uity e!uals 9$$,.
;iabilities e!ual 92$,.
'oncurrent assets e!ual 9<,.
*wners8 e!uity is 9<=,.
Current assets 9==, > 'oncurrent assets 9$$, ? Total assets 9@@,.
Current liabilities are 9%$, 69==, / 2.27
Total liabilities and *wners8 A!uity ? 9@@,.
*wners8 e!uity 9<=, ? Total liabilities and *wners8 e!uity 9@@, & Current liabilities 9%$,.
2&2
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Current ratio is %. 69=$, / 92$,7
Current assets 9=$, ? Total assets 9B$, & 'oncurrent assets 91,.
Current liabilities 92$, ? Total assets 9B$, & *wner8s e!uity 9<,.
This problem tests students8 understanding of balance sheet relationships using the basic accounting
e!uation and financial ratio.
%roble& '-'
Assets
(.). *+E*,+ C,M%A
A)ACE S"EET! (0E 3! ----.
)iabilities
Cash...................................................................................................................................................................................
9 @B,
ccounts payable...................................................................
9 2%,
3arketable securities.........................................................................................................................................................
=<B,
Ta+es payable.........................................................................
%2$,
ccounts recei"able...........................................................................................................................................................
$$,
ccrued e+penses..................................................................
%<,
In"entories
$%=,
Current liabilities...................................................................
<=,
Current assets................................................................................................................................................................
%,@1,
'otes payable.........................................................................
2,
;and...................................................................................................................................................................................
2=,
4onds payable........................................................................
<,
4uildings............................................................................................................................................................................
%,%2,
Total liabilities......................................................................
%,=<=,
ccumulated depreciation..................................................................................................................................................
6$=@,7
A!uipment..........................................................................................................................................................................
<1%,
*wners8 A!uity
ccumulated depreciation..................................................................................................................................................
6=@1,7
Capital stock..........................................................................
%,,
In"estments........................................................................................................................................................................
=2,
etained earnings..................................................................
12,
Total liabilities
Total assets
92,BB=,
and owners8 e!uity.............................................................
92,BB=,
5ome students may want to test the notes payable as a current liability. 'otes payable are usually debt
instruments longer than one year, but in the absence of any details listing them as a current liability is
acceptable.
%roble& '-3
Cash > 9%,( Capital stock > 9%,.
4onds payable & 92$,( Capital stock > 92$,.
etained earnings 6Depreciation e+pense7 & 9@,$.
ccumulated depreciation on plant and e!uipment > 9@,$.
Cash & 9%$,B( In"entory > 9%$,B.
In"entory > 9B,( ccounts payable > 9B,.
In"entory & 9,$( ccounts recei"able > 9<,2( etained earnings > 92,<
Cash > 9=,$( ccounts recei"able & 9=,$.
2&=
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Di"idends payable > 9=,( etained earnings & 9=,.
Cash & 9=,( Di"idends payable & 9=,.
'o effect.
5ome students may simply show the net effect on assets, liabilities, and owners8 e!uity without
reference to the specific accounts. #hile this is acceptable, students should be pushed to identify both
the net effect and the particular accounts in"ol"ed. This will help students to become familiar with the
balance sheet account names.
%roble& '-2
CA+S, )E*ATT %A+TE+S"%
A)ACE S"EET AS ,4 (0E 1! ----.
Assets
Capital Accounts
Cash...............................................................................................................................................................................................
9 $,
Carson................................................................................................
9 $,
In"entory........................................................................................................................................................................................
$,
;egatt................................................................................................
$,
Total assets................................................................................................................................................................................
9%,
Total capital...................................................................................
9%,
CA+S, )E*ATT %A+TE+S"%
A)ACE S"EET AS ,4 (0E 3! ----.
Assets
)iabilities
Cash...............................................................................................................................................................................................
9 22,%
4ank loan...........................................................................................
9 $,
In"entory........................................................................................................................................................................................
$@,$
Capital & Carson.................................................................................
$%,$$
;and...............................................................................................................................................................................................
2$,
Capital & ;egatt..................................................................................
$,$
4uilding.........................................................................................................................................................................................
$,
EEEEEEEE
9%$$,1
9%$$,1
CA+S, )E*ATT %A+TE+S"%
ACC,0TS! (0E 3! ----.
Carson
Capital & une %........................................................................................................................
9$,
dditions...............................................................................................................................
<,<$
#ithdrawals.............................................................................................................................
6 1,27
Capital & une =......................................................................................................................
9$%,$$
Legatt
Capital & une %........................................................................................................................
9$,
dditions...............................................................................................................................
<,<$
#ithdrawals.............................................................................................................................
6 =,<7
Capital & une =......................................................................................................................
9$,$
2&
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%roble& '-5
an. :
an. 1:
an. @:
an. %%:
an. %1:
an. 21:
an. 2B:
an. =%:
etained earnings 65ales7 > 9%2,( Cash > 9%2, In"entory & 9<, (etained earnings
6Cost of goods sold7 & 9<,
'o effect.
In"entory > 9<,( ccounts ayable > 9<,
In"entory & 9%,$( Cash > 92,$( etained earnings 65ales7 > 92,$( etained earnings
6Cost of goods sold7 & 9%,$
In"entory & 92,( etained earnings 6Cost of goods sold7 & 92,( ccounts recei"able >
9=,( etained earnings 65ales7 > 9=,
Cash & 9,2( etained earnings 6#ages7 & 9,2
Cash & 92,( ;and > 92,
Cash & 92,@( repaid insurance > 92,@
MA+6 C,M%A
A)ACE S"EET AS ,4 (A0A+ 31! ----.
Assets
)iabilities
Cash...................................................................................................................................................................................
9%2,$
ccounts payable............................................................
9 <,
ccounts recei"able...........................................................................................................................................................
=,
Total current liabilities....................................................
9<,
In"entory............................................................................................................................................................................
1,$
Current assets.....................................................................................................................................................................
12,
'otes payable.................................................................
2,
;and...................................................................................................................................................................................
2,
Total liabilities.................................................................
2<,
repaid insurance...............................................................................................................................................................
2,@
*wner8s A!uity
Capital.............................................................................
$$,
EEEEEEE
etained earnings............................................................
=,2
Total assets..................................................................................................................................................................
9@$,2
Total liabilities
and owners8 e!uity...................................................
9@$,2
%roble& '-7
+A C,M%A
C0++ET ASSETS A8 )A)TES AS ,4 8ECEME+ 31! ----.
Current Assets
Current )iabilities
Cash...................................................................................................................................................................................
9 2,
ccounts payable............................................................
9$,
3arketable securities.........................................................................................................................................................
=,$
#ages payable................................................................
%,$
ccounts recei"able...........................................................................................................................................................
<,
4onds due G current portion............................................
2,
Current assets.....................................................................................................................................................................
9%2,$
Current liabilities............................................................
9@,$
Current ratio ?....................................................................................................................................................................
9%2,$ 9@,$ ? %.<
The current ratio is an indication of an entity8s ability to meet its current obligations.
2&$
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C'&&
Case 2- 1: Maynard Company (A)
ote: This case is unchanged from Twelfth Edition.
Ans#ers to 9uestions
Question 1
Two suggested balance sheets as re!uired by Huestion % are shown below.
Question 2
This !uestion pro"ides an opportunity for students to step back and think about the information in a
financial statement, rather than focusing on the details of constructing a financial statement. 5tudents can
begin to analy-e and use the information that the financial statements contain. 5tudents can be asked to
identify which accounts ha"e changed significantly between the beginning and ending balance sheets.
These would include accounts recei"able, note recei"able, e!uipment, accounts payable, ta+es payable,
and the bank note payable, in addition to the cash account. The only ratio e+plained in Chapter 2 of the
te+t is the current ratio, so students should be encouraged to ascertain what has happened to the current
ratio between une % and une =. Cash has increased largely due to increased accounts and notes
payable, as well as cash generated by operations. Cash appears to ha"e been increased by the collection of
2&1
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the note recei"able, but as e+plained in Huestion = below, this was offset by the declaration of an identical
di"idend, so that the net effect on cash of these two transactions was -ero. A!uipment purchases were a
ma)or use of cash. s a result of these e"ents, the une = current ratio has fallen to 2.%$ from its une %
le"el of .=$. A"en though the le"erage ratios ha"e not yet been introduced in the te+t, the instructor
might want to encourage students to obser"e that the proportion of liabilities on the right&hand side of the
balance sheet has increased, with a complementary decrease in the proportion of e!uities. The
capitali-ation ratio Total ;iabilities/Total ;iabilities > A!uities has increased from  on une % to B on
une =. #hile these ratios are still "ery low, students can be made aware of the importance of identifying
trends early.
Question 3
etained Aarnings has not increased by the amount of net income for the month, 9%B,1=$, since Diane
3aynard as the sole shareholder declared a di"idend of 9%%,<, which she then used to cancel her loan
of 9%%,< from the company. Jence, etained Aarnings increased by 9<,B=$ during the month of une.
Question 
This !uestion is intended to emphasi-e early in the course that shareholder8s e!uity does not necessarily
reflect what the entity is worth. Time permitting, the instructor can ha"e students estimate the cash
proceeds of piecemeal sale of the assets by a li!uidation company, which, net of liabilities, will certainly
be less than 91%B,1. Then the "alue of the company as a going concern can be discussed( if une8s
9%B,1=$ net income is typical, the firm would be worth more than 91%B,1 as a going concern.
Capitali-ing une8s net income on an annual basis 69%B,1=$ + %27 at % times earning gi"es the company a
"alue in e+cess of 92 million. The company8s return on e!uity is "ery high. *n an annual basis it may be
as high as =2. This figure is %2 months8 income 69%B,1=$ + %27 di"ided by pro)ected year&end e!uity
691%B,1 > 9%B,1=$ + 17. This is not a typical business. It is better.
MAA+8 C,M%A
A)ACE S"EETS AS ,4 (0E 1 A8 (0E 3
Assets
Current Assets!
As of "une #
As of "une 3$!
Cash...................................................................................................................................................................................
9 =,B@=
9 11,11
ccounts recei"able...........................................................................................................................................................
2%,<B@
21,$$
'ote recei"able................................................................................................................................................................
%%,<

3erchandise in"entory.......................................................................................................................................................
2B,@=$
21,$2
5upplies on hand................................................................................................................................................................
$,$$B
1,1=
repaid insurance...............................................................................................................................................................
=,%$
2,@21
Total current assets
9%<,2$
9%2B,%%
%oncurrent assets!
;and...................................................................................................................................................................................
@B,<
@B,<
4uilding.............................................................................................................................................................................
$@$,
$@$,
;ess: ccumulated depreciation....................................................................................................................................
6%$1,7
2B,
6 %$<,B$7
2<,$
A!uipment..........................................................................................................................................................................
%=,21
=1,11
;ess: ccumulated depreciation....................................................................................................................................
6 $,=7
<,B$1
6 $,B2@7
=,<=2
*ther noncurrent assets......................................................................................................................................................
,@$<
$,21$
Total noncurrent assets..................................................................................................................................................
$=%,$%=
$$2,<<
Total assets.......................................................................................................................................................
91=@,$=@
91@%,@@@
2&<
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Lia&ilities and 'hareholders Euit*
Current lia&ilities!
ccounts payable...........................................................................................................................................................................
9@,$%<
9 2%,=%$
4ank notes payable........................................................................................................................................................................
@,=@$
2B,2$
Ta+es payable.................................................................................................................................................................................
$,<
<,22
ccrued wages payable..................................................................................................................................................................
%,B<
2,22
Total current liabilities...............................................................................................................................................................
9 2,$<1
9 $B,BB%
*ther noncurrent liabilities.............................................................................................................................................................
2,$%
2,$%
Total liabilities...........................................................................................................................................................................
2<,2<
12,2
'hareholders Euit*!
Capital stock...................................................................................................................................................................................
=B,
=B,
etained earnings...........................................................................................................................................................................
22%,$%%
22B,1
Total shareholder8s e!uity..........................................................................................................................................................
1%%,$%%
1%B,1
Total liabilities and shareholders8 e!uity...............................................................................................................................
91=@,$=@
91@%,@@@
Case 2- 2: Music Mart, Inc.
ote: This case is unchanged from the Twelfth Edition.
Approach
This is a "aluable type of problem. The student is in effect analy-ing, )ournali-ing, and posting
transactions without knowing the technicalities, and hence without being encumbered by them. 5ome
instructors prefer to make up similar transactions and gi"e them in class, rather than, or in addition to,
using the set gi"en in this problem. If students can handle these e"ents comfortably, they really
understand the essentials of the balance sheet and of the balance sheet e!uation. They are urged to cross
out old balances, rather than erasing them, both because this aids in tracing errors, and because this is
analogous to what is done in the ledger.
reser"ation of the underlying e!uation in each transaction and the balance sheet should be emphasi-ed
throughout.
For the accounts already established 6e.g., 'otes ayable7, students should use the identical wording. This
helps a"oid sloppy habits when they start to )ournali-e later on. For new accounts 6e.g., 3ortgage
ayable7, they should be gi"en latitude in selecting a title, but ha"ing selected one, they must stick to it.
2&@
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M0SC MA+T! C.
A)ACE S"EET AS ,4 
Assets
Lia&ilities and +wners Euit*
Current assets!
Current lia&ilities!
Cash...................................................................................................................................................................................
92$,1=1
'otes payable...........................................................................
9 1,$
ccounts recei"able...........................................................................................................................................................
2,12
ccounts payable......................................................................
$,
In"entory............................................................................................................................................................................
,<
Total current liabilities.........................................................
%%,$
repaid insurance...............................................................................................................................................................
%,22
Total current assets........................................................................................................................................................
=,%@
+ther lia&ilities!
3ortgage payable......................................................................
B,
Total liabilities..................................................
2,$
.............
+wners euit*
aid&in capital............................................................................
2$,
Pro,ert*!
;and...................................................................................................................................................................................
%2,
etained earnings.....................................................................
1@
Total assets....................................................................................................................................................................
91,%@
Total liabilities
and owners8 e!uity
91,%@
Ans#ers to 9uestions
%. Increase In"entory, 9$,( increase ccounts ayable, 9$,
2. Decrease In"entory, 9%,$( increase Cash, 92,=( increase etained Aarnings, 9@
=. Decrease In"entory, 9%,<( increase ccounts ecei"able, 92,12( increase etained Aarnings, 9B2
6'ote that etained Aarnings increases whether or not the proceeds of the sale are recei"ed in cash.7
. Increase repaid Insurance 6or similar7, 9%,22( decrease Cash, 9%,22
6'ote that current practice is to treat this as a current asset e"en though the policy is in effect three
years( the basis is materiality.7
$. Increase ;and, 92,( decrease Cash, 91,( increase 3ortgage payable 6noncurrent7, 9%@,
6In "iew of what happens subse!uently, it can be argued that the land is a current asset, or that
9%2, of it is. It depends on whether 5mith plans to retain or to sell it. This point should be brought
out, to a"oid the tendency to classify land as a fi+ed asset without thinking.7
1. Increase Cash, 9=,( decrease 3ortgage ayable, 9B,( decrease ;and, 9%2,
'ote the decrease in the liability e"en though it was not paid off0 in cash.7
<. 'o entry. Koodwill is recogni-ed only when it is paid for.
@. Decrease etained Aarnings, 9%,( decrease Cash, 9%,.
B. Decrease etained Aarnings, 9<$( decrease In"entory, 9<$.
6'ote the basic similarity between L@ and LB( the e!uity of 5mith in the business decreases whene"er
he, as an indi"idual, takes out assets of the business. 5tudents can of course handle this with a
drawing account if they wish to get fancy.7
2&B
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%. 'o entry, in accordance with the basic principle of "alue. I think students who argue for appreciation
are on weak ground. They ha"e no support from the te+t. This, together with L1 may be used to
contrast accounting with what some would say is the common sense0 or logical0 way to record the
e"ents, although it is too &uch to expect that the arguments in fa"or of the cost basis of "aluation
will be fully comprehended at this point.
%%. Decrease 'otes ayable, 91,( decrease Cash, 91,.
%2. 'o entry. This is not a transaction of the corporation, but rather a transaction between two outside
parties.
'ote also that the book "alue of the e!uity is not changed, e"en though there is clear e"idence that
book ;alue is less than market "alue or real0 "alue.
%=. Decrease In"entory, 9@$( increase Cash, 9%,=%( increase etained Aarnings, 91.
The final balance sheet is shown on the pre"ious page, classified in perhaps more detail than is
warranted for this simple set of items.
Case 2-3: Lone Pine Cafe (A)
ote: This case and its seuel in Cha,ter 3 are u,dated from the Twelfth Edition .
),E %E CA4<
A)ACE S"EET AS ,4 ,6EME+ '! '=
Assets
Current assets!
Cash......................................................................................................................................................................
9%,%<2
In"entory...............................................................................................................................................................
2,@
repaid e+pense.....................................................................................................................................................
%,2@
Tota% current assets..........................................................................................................................................
9%,
Cafe e!uipment.....................................................................................................................................................
$,1
Total assets.......................................................................................................................................................
91B,
Lia&ilities and +wners Euit*
'ote payable.........................................................................................................................................................
92%,
+wners euit*!.....................................................................................................................................................
3rs. ;anders
9%1,
3r. ntoine
%1,
3rs. ntoine
%1,
@,
Total liabilities and owners8 e!uity...................................................................................................................
91B,
2&%
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),E %E CA4<
A)ACE S"EET AS ,4 MA+C" 3! '1
Assets
Current assets!
Cash..........................................................................................................................................................
9 %,=%
ccounts recei"able..................................................................................................................................
@<
In"entory..................................................................................................................................................
2,=
repaid e+pense.........................................................................................................................................
@==
Total current assets...............................................................................................................................
9$,<
%oncurrent assets!
Cafe e!uipment.........................................................................................................................................
$,1
;ess: ccumulated depreciation................................................................................................................
6 2,$7
$2,%$$
Total assets...........................................................................................................................................
9$<,12B
Lia&ilities and +wners Euit*
Current lia&ilities!
ccounts payable......................................................................................................................................
9%,$@=
+ther lia&ilities!
'ote payable.............................................................................................................................................
%@,B
Total liabilities......................................................................................................................................
2,@=
+wners euit*!
3rs. ;anders.............................................................................................................................................
9%2,=@2
3r. ntoine...............................................................................................................................................
%2,=@2
3rs. ntoine..............................................................................................................................................
%2,=@2
=<,%1
Total liabilities and owners8 e!uity.......................................................................................................
9$<,12B
Approach
This case can be handled in either of two distinctly different ways: %7 It can be played straight( that is,
students can be re!uired to gi"e the answers to !uestions, and they can be discussed. 27 The balance sheet
for 'o"ember 2 can be de"eloped, and then the second balance sheet can be arri"ed at by changing the
original balance sheet for each transaction. #hen the latter approach is used, the beginning balance sheet
is put on the board 6or on a Mugraph7 lea"ing enough room between items so that the additional accounts
can be added as needed. Then each fact described in the case is discussed in order, in terms of its effect on
the balance sheet. The appropriate figures on the original balance sheet are erased and new figures are put
in. 6*r, instead of erasing the figures for each transaction, increases and decreases can be shown opposite
the proper item, thus laying the ground work for the idea of the account.7  separate item should be set up
for etained Aarnings, in which all profit and loss items are entered. The balance in this account is split
among the three partners as the final step in the process. This is a lot easier than attempting to split each
re"enue or e+pense item among the three partners as it is recorded initially.
The second approach is much more difficult than the first, but it has the ad"antage of emphasi-ing the
effect of indi"idual transactions on the balance sheet. It is particularly difficult to see that the decrease of
9@,@=% that is necessary to bring Cash down to its known balance of 9%,=% is accompanied by a 91,<=%
decrease in etained Aarnings. This is a subtle point.
5ome of the points that are brought out by the case, and which either can be summed up e+plicitly by the
instructor or left for the students to see for themsel"es, are the following:
A"en at the beginning of our study of accounting, the student can prepare a balance sheet.
The dual aspect concept.
2&%%
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There are a number of places in which different words can be used to describe the same basic fact. 6I
think it is unwise to re!uire or e"en suggest the generally appro"ed language for any item. ny term
that the student wants to propose that is an ade!uate description of the item should, I think, be
accepted and gi"en as much praise as a more customary term. For e+ample, if a student wants to say
owed to "endors0 instead of accounts payable,0 I wouldn8t !uarrel with that at this point.7
There is also room for differences in interpretation of the facts. A"en e+perienced accountants would
disagree on how some of the items should be handled. These are mentioned below.
The business has incurred a large loss, but there is no way from the information we ha"e of finding
out why this loss came about, and therefore no way of suggesting any correcti"e action. This leads
into the usefulness of an income statement, which is the sub)ect of the ne+t chapter.
It is easy to get into a discussion of the business entity idea 6e.g., how about accounting for the "alue
of the board and room of the partnersN7, but I doubt that it is desirable to take much time for this at
this stage.
Instructors may find it interesting to read the actual case from which ;one ine Cafe was
constructed. The name is Duncan ". 4artle and the reference is 2%1 2d %$. It should be
noted, howe"er, that the actual case is not identical with ;one ine Cafe since se"eral of the
facts ha"e been omitted for purposes of simplification, and others ha"e been changed in order
to make certain teaching points. Therefore, one cannot go by the actual decision in
determining a right answer0 to the case.
Co&&ents on 9uestions
The following notes apply to the balance sheet as of 3arch =, 2%:
The net loss for the period was 9%,@$. This was di"ided one&third to each of the partners.
The 9%,2@ paid for local operating licenses is set up as a prepaid e+pense with $/%2 of its original
cost being amorti-ed to the partnership. Due to the !uestionability of the partnership being able to
secure a refund on the unused portion from the local municipality, and the immateriality of the fee,
some students may argue that the total cost should be treated as an e+pense.
3r. ntoine8s clothes are not an asset to the business entity, and therefore are not included on the
balance sheet. It might be argued, howe"er, that these clothes included his cook8s uniforms, which
could be a cafe asset( but there is no way from the information gi"en to assign a "alue to such
uniforms, e"en if they did e+ist.
ccounting for the cash register will be troublesome to some students, since it and its contents ha"e
been remo"ed from the cafO premises. egardless of where these items are and that they were
improperly remo"ed, they ne"ertheless are still assets of the entity.
The balance sheet as of 3arch = shown in the manual is more detailed in format than the situation
re!uires.
2&%2
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Huestion = raises the issue of balance sheet "alues "ersus real "alues. If the business is not
li!uidated, 3rs. ntoine may ha"e no choice but to gi"e the other two partners the amount
shown as their e!uity, since otherwise they might force li!uidation, which 3rs. ntoine does
not want. This is a good time to make the point that owners8 e!uity, which many people still
refer to as net worth,0 is at best only a rough appro+imation of the true worth of a business.
If the cafe were sold as a going concern 6which in this case would mean transferring the
entity name, tangible assets, license and facilities lease7, it might be worth more than the
indicated book "alue0 6assuming it had gained a reputation for ser"ing tasty food7. *n the
other hand, in li!uidation the in"entory is probably "irtually worthless, the prepaid e+pense
has no "alue, and used restaurant e!uipment has a notoriously low "alue when sold at
auction. Thus, in li!uidation, the assets might scarcely bring enough cash to pay the
liabilities.
'ote also that it will be difficult for 3rs. ntoine to pay each of the other partners his or her 9%2,=@2
e!uity. They may ha"e to take a note payable from 3rs. ntoine and hope for the best. If the cafe
assets8 li!uidation "alue is only about 92,$ 6enough to pay the liabilities7, then 3r. ntoine and
3rs. ;anders are no worse off with a note than if they forced li!uidation.
2&%=