SOLUTION MANUAL FOR
Financial Accounting 11th Edition
by Robert Libby, All Chapters 1 - 13
TABLE OF CONTENTS
CHAPTER 1: Financial Statements and Business Decisions
Focus Company: Le-Nature’s Inc.
CHAPTER 2: Investing and Financing Decisions and the Accounting
System Focus Company: Chipotle Mexican Grill
CHAPTER 3: Operating Decisions and the Accounting
System Focus Company: Chipotle Mexican Grill
CHAPTER 4: Adjustments, Financial Statements, and the Closing Process
Focus Company: Chipotle Mexican Grill
CHAPTER 5: Communicating and Analyzing Accounting Information
Focus Company: Apple Inc.
CHAPTER 6: Reporting and Interpreting Sales Revenue, Receivables, and
Cash Focus Company: Skechers U.S.A.
CHAPTER 7: Reporting and Interpreting Cost of Goods Sold and Inventory
Focus Company: Harley-Davidson, Inc.
CHAPTER 8: Reporting and Interpreting Property, Plant, and Equipment; Intangibles; and
Natural Resources
Focus Company: FedEx Corporation
CHAPTER 9: Reporting and Interpreting
Liabilities Focus Company: Starbucks
CHAPTER 10: Reporting and Interpreting Bond Securities
Focus Company: Amazon
CHAPTER 11: Reporting and Interpreting Stockholders’ Equity
Focus Company: Microsoft
CHAPTER 12: Statement of Cash Flows
Focus Company: National Beverage Corporation
CHAPTER 13: Analyzing Financial Statements
Focus Company: The Home Depot
Chapter 1
Financial Statements and Business Decisions
ANSWERS TO QUESTIONS
1. Accounting is a system that collects and processes (analyzes, measures, and
records) financial information about an organization and reports that information to
decision makers.
2. Financial accounting involves preparation of the four basic financial statements and
related disclosures for external decision makers. Managerial accounting involves
the preparation of detailed plans, budgets, forecasts, and performance reports for
internal decision makers.
3. Financial reports are used by both internal and external groups and individuals. The
internal groups are comprised of the various managers of the entity. The external
groups include the owners, investors, creditors, governmental agencies, other
interested parties, and the public at large.
4. Investors purchase all or part of a business and hope to gain by receiving part of
what the company earns and/or selling their ownership interest in the company in
the future at a higher price than they paid. Creditors lend money to a company for
a specific length of time and hope to gain by charging interest on the loan.
5. In a society, each organization can be defined as a separate accounting entity. An
accounting entity is the organization for which financial data are to be collected.
Typical accounting entities are a business, a church, a governmental unit, a
university and other nonprofit organizations such as a hospital and a welfare
organization. A business typically is defined and treated as a separate entity
because the owners, creditors, investors, and other interested parties need to
evaluate its performance and its potential separately from other entities and from its
owners.
6.
Name of Statement
(a) Income Statement
(b) Balance Sheet
(c) Cash Flow Statement
Alternative Title
(a) Statement of Earnings; Statement of
Income; Statement of Operations
(b) Statement of Financial Position
(c) Statement of Cash Flows
7. The heading of each of the four required financial statements should include the
following:
(a) Name of the entity
(b) Name of the statement
(c) Date of the statement, or the period of time
(d) Unit of measure
8. (a)
(b)
(c)
(d)
The purpose of the income statement is to present information about the
revenues, expenses, and the net income of an entity for a specified period of
time.
The purpose of the balance sheet is to report the financial position of an entity
at a given date, that is, to report information about the assets, liabilities and
stockholders’ equity of the entity as of a specific date.
The purpose of the statement of cash flows is to present information about the
flow of cash into the entity (sources), the flow of cash out of the entity (uses),
and the net increase or decrease in cash during the period.
The statement of stockholders’ equity reports the changes in each of the
company’s stockholders’ equity accounts during the accounting period,
including issue and repurchase of stock and the way that net income and
distribution of dividends affected the retained earnings of the company during
that period.
9. The income statement and the statement of cash flows are dated ―For the Year
Ended December 31‖ because they report the inflows and outflows of resources
during a period of time. In contrast, the balance sheet is dated ―At December
31‖ because it represents the resources, obligations, and stockholders’ equity at
a specific date.
10. Assets are important to creditors and investors because assets provide a basis for
judging whether sufficient resources are available to operate the company. Assets
are also important because they could be sold for cash in the event the company
goes out of business. Liabilities are important to creditors and investors because
the company must be able to generate sufficient cash from operations or further
borrowing to meet the payments required by debt agreements. If a business does
not pay its creditors, the law may give the creditors the right to force the sale of
assets sufficient to meet their claims.
11. Net income is the excess of total revenues over total expenses. Net loss is
the excess of total expenses over total revenues.
12. The equation for the income statement is Revenues - Expenses = Net Income (or
Net Loss if the amount is negative). Thus, the three major items reported on the
income statement are (1) revenues, (2) expenses, and (3) net income.
13. The equation for the balance sheet (also known as the basic accounting equation)
is: Assets = Liabilities + Stockholders’ Equity. Assets are the probable (expected)
future economic benefits owned by the entity as a result of past transactions. They
are the resources owned by the business at a given point in time such as cash,
receivables, inventory, machinery, buildings, land, and patents. Liabilities are
probable (expected) debts or obligations of the entity as a result of past transactions
that will be paid with assets or services in the future. They are the
obligations of the entity such as accounts payable, notes payable, and bonds
payable. Stockholders’ equity is financing provided by owners of the business and
operations. It is the claim of the owners to the assets of the business after the
creditors’ claims have been satisfied. It may be thought of as the residual interest
because it represents assets minus liabilities.
14. The equation for the statement of cash flows is: Cash flows from operating activities
+ Cash flows from investing activities + Cash flows from financing activities =
Change in cash for the period. The net cash flows for the period represent the
increase or decrease in cash that occurred during the period. Cash flows from
operating activities are cash flows directly related to earning income (normal
business activity including interest paid and income taxes paid). Cash flows from
investing activities include cash flows that are related to the acquisition or sale of
productive assets used by the company. Cash flows from financing activities are
directly related to the financing of the enterprise itself.
15. The retained earnings equation is: Beginning Retained Earnings + Net Income Dividends = Ending Retained Earnings. It begins with beginning-of-the-year
Retained Earnings which is the prior year’s ending retained earnings reported on
the balance sheet. The current year's Net Income reported on the income
statement is added and the current year's Dividends are subtracted from this
amount. The ending Retained Earnings amount is reported on the end-of-period
balance sheet.
16. Marketing managers and credit managers use customers' financial statements to
decide whether to extend them credit for their purchases. Purchasing managers
use potential suppliers' financial statements to judge whether the suppliers have the
resources necessary to meet current and future demand. Human resource
managers use financial statements as a basis for contract negotiations, to
determine what pay rates the company can afford. The net income figure even
serves as a basis to pay bonuses not only to management, but to other employees
through profit sharing plans.
17. The Securities and Exchange Commission (SEC) is the U.S. government agency
which determines the financial statements that public companies must provide to
stockholders and the measurement rules used in producing those statements. The
Financial Accounting Standards Board (FASB) is the private sector body given the
primary responsibility to work out the detailed rules which become generally
accepted accounting principles.
18. Management is responsible for preparing the financial statements and other
information contained in the annual report and for the maintenance of a system of
internal accounting policies, procedures and controls. These measures are
intended to provide reasonable assurance, at appropriate cost, that transactions are
processed in accordance with company authorization as well as properly recorded
and reported in the financial statements, and that assets are adequately
safeguarded. Independent auditors examine the financial reports (prepared by
management) and the underlying records to assure that the reports represent what
they claim and conform with generally accepted accounting principles (GAAP).
19. A sole proprietorship is an unincorporated business owned by one individual. A
partnership is an unincorporated association of two or more individuals to carry on a
business. A corporation is a business that is organized under the laws of a
particular state whereby a charter is granted and the entity is authorized to issue
shares of stock as evidence of ownership by the owners (i.e., stockholders).
20. A CPA firm normally renders three services: auditing, management advisory
services, and tax services. Auditing involves examination of the records and
financial reports to determine whether they ―fairly present‖ the financial position
and results of operations of the entity. Management advisory services involve
management advice to individual business enterprises and other entities, much like
those provided by a consulting firm. Tax services involve providing tax planning
advice to clients (both individuals and businesses) and preparation of their tax
returns.
ANSWERS TO MULTIPLE CHOICE
1. b)
6. d)
2. d)
7. a)
3. d)
8. a)
4. c)
9. c)
5. a)
10. b)
Authors' Recommended Solution Time
(Time in minutes)
Mini-exercises
No.
Time
1
5
2
5
3
5
Exercises
No.
Time
1
12
2
12
3
12
4
20
5
25
6
20
7
15
8
25
9
25
10
25
11
30
12
30
13
15
14
35
15
12
Problems
No.
Time
1
45
2
45
3
45
Alternate
Problems
No.
Time
1
45
2
45
3
45
Continuing
Problem
1
45
Cases and
Projects
No.
Time
1
20
2
30
3
30
4
45
5
60
6
30
7
20
8
*
* Due to the nature of these cases and projects, it is very difficult to estimate the amount
of time students will need to complete the assignment. As with any open-ended project,
it is possible for students to devote a large amount of time to these assignments. While
students often benefit from the extra effort, we find that some become frustrated by the
perceived difficulty of the task. You can reduce student frustration and anxiety by
making your expectations clear. For example, when our goal is to sharpen research
skills, we devote class time to discussing research strategies. When we want the
students to focus on a real accounting issue, we offer suggestions about possible
companies or industries.
MINI-EXERCISES
M1–1.
Element
B
D
A
C*
B
D
A
D
(1) Expenses
(2) Cash flow from investing activities
(3) Assets
(4) Dividends
(5) Revenues
(6) Cash flow from operating activities
(7) Liabilities
(8) Cash flow from financing activities
Financial Statement
A. Balance sheet
B. Income statement
C. Statement of stockholders’ equity
D. Statement of cash flows
*Dividends paid in cash are also subtracted in the Financing section of the Statement of
Cash Flows
M1–2.
SE
A
R
A
E
A
E
L
A
(1) Retained earnings
(2) Accounts receivable
(3) Sales revenue
(4) Property, plant, and equipment
(5) Cost of goods sold expense
(6) Inventories
(7) Interest expense
(8) Accounts payable
(9) Land
M1–3.
(1)
(2)
(3)
(4)
Abbreviation
CPA
GAAP
SEC
FASB
Full Designation
Certified Public Accountant
Generally Accepted Accounting Principles
Securities and Exchange Commission
Financial Accounting Standards Board
EXERCISES
E1–1.
J
F
H
E
A
D
I
L
C
K
G
B
M
Term or Abbreviation
(1) SEC
(2) Audit
(3) Sole proprietorship
(4) Corporation
(5) Accounting
(6) Accounting entity
(7) Audit report
(8) Publicly traded
(9) Partnership
(10) FASB
(11) CPA
(12) Relevant
(13) information
GAAP
Definition
A. A system that collects and processes financial
information about an organization and reports that
information to decision makers.
B. Information that helps evaluate the company’s past
behavior and predict its future.
C. An unincorporated business owned by two or more
persons.
D. The organization for which financial data are to be
collected (separate and distinct from its owners).
E. An incorporated entity that issues shares of stock as
evidence of ownership.
F. An examination of the financial reports to ensure that
they represent what they claim and conform with
generally accepted accounting principles.
G. Certified Public Accountant.
H. An unincorporated business owned by one person.
I. A report that describes the auditor’s opinion of the
fairness of the financial statement presentations and
the evidence gathered to support that opinion.
J. Securities and Exchange Commission.
K. Financial Accounting Standards Board.
L. A company with stock that can be bought and sold by
investors on established stock exchanges.
M. Generally accepted accounting principles.
E1–2.
A
(1)
A
(2)
R
(3)
L
(4)
L
(5)
SE (6)
E
(7)
E
(8)
E
(9)
L (10)
A (11)
A (12)
L (13)
A (14)
E (15)
Accounts receivable
Cash and cash equivalents
Net sales
Debt due within one year
Taxes payable
Retained earnings
Cost of products sold
Selling, general, and administrative expense
Income taxes
Accounts payable
Trademarks and other intangible assets
Property, plant, and equipment
Long-term debt
Inventories
Interest expense
E1–3.
L (1) Bank loans
E (2) Selling, marketing, and
administrative expenses
L (3) Accounts payable
L (4) Dividends payable
SE (5) Retained earnings
A (6) Cash and cash equivalents
A (7) Accounts receivable
E (8) Provision for income taxes*
E (9) Product cost of goods sold
A
(10) Machinery and equipment
R (11) Net product sales
A
A
A
A
L
E
A
(12)
(13)
(14)
(15)
(16)
(17)
(18)
Inventories
Trademarks
Buildings
Land
Income taxes payable
Rental and royalty costs
Investments (in other companies)
*Note that ―Provision for income taxes‖ is a common synonym for ―Income tax expense.‖
E1–4.
Honda Motor Corporation
Balance Sheet
As of March 31, Current Year
(in billions of Yen)
Assets
Cash and cash equivalents
Trade accounts, notes, and other receivables
Inventories
Investments
Net property, plant, and equipment
Other assets
Total assets
Liabilities
Accounts payable and other current liabilities
Long-term debt
Other liabilities
Total liabilities
Stockholders’ Equity
Common stock
Retained earnings
Total stockholders’ equity
Total liabilities and stockholders’ equity
¥ 2,106
3,085
1,364
597
3,200
8,606
¥18,958
¥ 5,429
4,022
1,938
11,389
231
7,338
7,569
¥18,958
E1–5.
Req. 1
COLE VALLEY BOOK STORE
Balance Sheet
At December 31, Current Year
ASSETS
LIABILITIES
Cash
Accounts receivable
Store and office equipment
$ 75,600 Accounts payable
39,000 Note payable
73,000 Interest payable
Total liabilities
$ 12,000
3,000
300
15,300
STOCKHOLDERS’ EQUITY
Total assets
Common stock
Retained earnings
Total stockholders’ equity
Total liabilities and
$187,600 stockholders' equity
160,000
12,300
172,300
$187,600
Req. 2
Net income for the year was $12,300. This is the first year of operations and no
dividends were declared or paid to stockholders; therefore, the ending retained earnings
of $12,300 includes net income for one year.
E1–6.
CAMPUS CONNECTION
Income Statement
For the Month of January, Current Year
Revenues:
Sales: Cash
On credit
Total sales revenue
Expenses:
Cost of goods sold
Salaries, rent, supplies, and other
expenses (paid in cash)
Utilities
Total expenses
Net Income
$150,000
2,500
$152,500
70,000
37,000
900
107,900
$ 44,600
E1–7.
SYSCO CORP.
Income Statement
For the Year Ended June 30, Current Year
(in millions)
Revenues:
Sales
Other revenues
Total revenues
Expenses:
Cost of sales
Selling, general and
administration expense
Interest expense
Total expenses
Earnings before income taxes
Income taxes
Net earnings
$55,371
16
$55,387
44,814
8,504
303
53,621
1,766
371
$ 1,395
E1–8.
NEIGHBORHOOD REALTY, INCORPORATED
Income Statement
For the Year Ended December 31, Current Year
Revenues
Commissions earned ($150,900+$16,800)
Rental service fees
Total revenues
Expenses
Salaries expense
Commission expense
Payroll tax expense
Rent expense ($2,475+$225)*
Utilities expense
Promotion and advertising expense
Miscellaneous expenses
Total expenses (excluding income taxes)
Pretax income
Income tax expense
Net Income
$167,700
20,000
$187,700
62,740
35,330
2,500
2,700
1,600
7,750
500
113,120
74,580
15,660
$ 58,920
*$2,475 has been paid for 11 months ($225 per month) plus $225 owed for December.
E1–9.
Net Income (or Loss) = Revenues - Expenses
Assets = Liabilities + Stockholders’ Equity
A
Net Income = $93,500 - $75,940 = $17,560;
Stockholders’ Equity = $140,200 - $56,500 = $83,700.
B
Total Revenues = $75,834 + $14,740 = $90,574;
Total Liabilities = $107,880 - $77,500 = $30,380.
C
Net Loss = $68,120 - $76,430 = ($8,310);
Stockholders’ Equity = $98,200 - $69,850 = $28,350.
D
Total Expenses = $55,804 - $21,770 = $34,034;
Total Assets = $20,300 + $78,680 = $98,980.
E
Net Income = $84,840 - $75,320 = $9,520;
Total Assets = $25,520 + $80,000 = $105,520.
E1–10.
Net Income (or Loss) = Revenues - Expenses
Assets = Liabilities + Stockholders’ Equity
A
Net Income = $242,300 - $196,700 = $45,600;
Stockholders’ Equity = $253,500 - $75,000 = $178,500.
B
Total Revenues = $186,500 + $29,920 = $216,420;
Total Liabilities = $590,000 - $350,600 = $239,400.
C
Net Loss = $73,500 - $91,890 = ($18,390);
Stockholders’ Equity = $260,400 - $190,760 = $69,640.
D
Total Expenses = $35,840 - $9,840 = $26,000;
Total Assets = $190,430 + $97,525 = $287,955.
E
Net Income = $224,130 - $209,500= $14,630;
Total Assets = $173,650 + $360,100 = $533,750.
E1–11.
PAINTER CORPORATION
Income Statement
For the Month of January, Current Year
Total revenues
Less: Total expenses (excluding income tax)
Pretax income
Less: Income tax expense
Net income
$305,000
189,000
116,000
25,000
$ 91,000
PAINTER CORPORATION
Balance Sheet
At January 31, Current Year
Assets
Cash
Receivables from customers
Merchandise inventory
Total assets
$ 65,150
44,700
94,500
$204,350
Liabilities
Payables to suppliers
Income taxes payable
Total liabilities
$ 25,950
25,000
50,950
Stockholders' Equity
Common stock
Retained earnings (from income statement above)
Total stockholders’ equity
Total liabilities and stockholders' equity
62,400
91,000
153,400
$204,350
E1–12.
ANALYTICS CORPORATION
Income Statement
For the Year Ended December 31, Current Year
Total revenues
Less: Total expenses (excluding income tax)
Pretax income
Less: Income tax expense
Net income
$299,000
184,000
115,000
34,500
$ 80,500
ANALYTICS CORPORATION
Balance Sheet
At December 31, Current Year
Assets
Cash
Receivables from customers
Merchandise inventory
Total assets
$ 70,150
34,500
96,600
$201,250
Liabilities
Payables to suppliers
Income taxes payable
Total liabilities
$ 26,450
34,500
60,950
Stockholders' Equity
Common stock
Retained earnings (from income statement above)
Total stockholders’ equity
Total liabilities and stockholders' equity
59,800
80,500
140,300
$201,250
E1–13.
PLUMMER STONEWORK CORPORATION
Statement of Stockholders’ Equity
For the Year Ended December 31, 2023
Balance December 31, 2022*
Net income
Dividends
Balance December 31, 2023
Common Stock Retained Earnings
$100,000
$16,800
42,000
(18,700)
$100,000
$40,100
* Beginning retained earnings + Net income – Dividends = Ending retained earnings
For 2022: $0 + $31,000 – $14,200 = $16,800;
Ending retained earnings for 2022 becomes beginning retained earnings for 2023.
E1-14
BENNETT INC.
Income Statement
For the Year Ended December 31, Current
Year
Revenues
$1,401
Expenses
1,301
Net income
$ 100
BENNETT INC.
Statement of Stockholders’ Equity
For the Year Ended December 31, Current Year
Common
Retained
Stock
Earnings
Beginning
$120
$193
+Net income
100
-Dividends
(20)
Ending
$120
$273
E1–15.
(I)
O
(F)
(O)
(O)
(O)
I
(F)
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
Purchases of property, plant, and equipment
Cash received from customers
Cash paid for dividends to stockholders
Cash paid to suppliers
Income taxes paid
Cash paid to employees
Cash proceeds received from sale of investment in another company
Repayment of borrowings
PROBLEMS
(Note to the instructor: Most students find the Problems in this chapter to be quite
challenging.)
P1–1.
Req. 1
HIGHLIGHT CONSTRUCTION COMPANY
Income Statement
For the Year Ended December 31, Current Year
Total sales revenue (given)
Total expenses (given)
Pretax income
Income tax expense ($48,200 x 30%)
Net income
$128,400
80,200
48,200
14,460
$ 33,740
Req. 2
HIGHLIGHT CONSTRUCTION COMPANY
Statement of Stockholders’ Equity
For the Year Ended December 31, Current Year
Balance January 1, Current year
Stock issuance (given)
+Net income (from req. 1)
–Dividends (given)
Balance December 31, Current year
Common Stock Retained Earnings
$
0
$
0
87,000
33,740
(10,000)
$ 87,000
$ 23,740
Req. 3
HIGHLIGHT CONSTRUCTION COMPANY
Balance Sheet
At December 31, Current Year
Assets
Cash (given)
Receivables from customers (given)
Inventory of merchandise (given)
Equipment (given)
Total assets
Liabilities
Accounts payable (given)
Salary payable (given)
Total liabilities
Stockholders' Equity
Common stock (given)
Retained earnings (from req. 2)
Total stockholders' equity
$ 25,600
10,800
81,000
42,000
$159,400
$46,140
2,520
$ 48,660
$87,000
23,740
110,740
Total liabilities and stockholders' equity
$159,400
P1–2.
Req. 1
JAMES COOK LAWN SERVICE
Income Statement
For the Three Months Ended August 31
Revenues from Services
Lawn service–cash
–credit
Total revenues
Expenses
Gas, oil, and lubrication ($1,050+$180)
Pickup repairs
Mower repair
Miscellaneous supplies used
Helpers (wages)
Payroll taxes
Preparation of payroll tax forms
Insurance
Telephone
Interest expense on note paid
Equipment use cost (depreciation)
Total expenses
Net Income
$15,000
700
$15,700
1,230
250
110
80
5,400
190
25
125
110
78
600
8,198
$ 7,502
Req. 2
Because the above report reflects only revenues, expenses, and net income, it is
reasonable to suppose that James would need the following:
(1)
(2)
A balance sheet–that is, a statement that reports for the business, at the end of
August, each asset (name and amount, such as Cash, $XX), each liability (such
as Wages Payable, $XX), and stockholders’ equity.
A statement of stockholders’ equity that shows how income and dividends (if any)
affect retained earnings on the balance sheet.
P1–3.
Req. 1
Transaction Income
(a)
+$66,000
Req. 2–Explanation
Cash
+$55,000
All services performed increase income;
cash received during the period:
$66,000 – $11,000 = $55,000.
(b)
–0–
+56,000
Cash borrowed is not income.
(c)
–0–
–12,500
Purchase of the truck does not represent
an expense until the truck is used (it is an asset);
cash outflow was $12,500.
(d)
–25,000
–12,500
All of the wages incurred reduce income,
$25,000; cash paid during the quarter:
$25,000 x 1/2 = $12,500. The $12,500
owed will be paid on the next payroll date.
(e)
–2,900
–3,800
Not all of the supplies were used; expense is
the amount used: $3,800 – $900 = $2,900.
Cash paid during the quarter was $3,800.
(f)
–38,000
–31,500
All expenses incurred reduce income; cash
expended: $38,000 – $-6,500 = $31,500.
(g)
Based only
on the above:
Income (loss) $ 100
Cash inflow
(outflow)
$ 50,700
ALTERNATE PROBLEMS
AP1–1.
Req. 1
INFLUENCE CORPORATION
Income Statement
For the Year Ended December 31, Current Year
Total sales revenue (given)
Total expenses (given)
Pretax income
Income tax expense ($31,500 x 30%)
Net income
$100,000
68,500
31,500
9,450
$ 22,050
Req. 2
INFLUENCE CORPORATION
Statement of Stockholders’ Equity
For the Year Ended December 31, Current Year
Balance, January 1, Current year
Common stock issuance (given)
+Net income (from req. 1)
–Dividends (given)
Balance, December 31, Current year
Common Stock Retained Earnings
$
0
$
0
62,000
22,050
0
$ 22,050
$ 62,000
Req. 3
INFLUENCE CORPORATION
Balance Sheet
At December 31, Current Year
Assets
Cash (given)
Receivables from customers (given)
Inventory of merchandise (given)
Equipment (given)
Total assets
Liabilities
Accounts payable (given)
Salary payable (given)
Total liabilities
Stockholders' Equity
Common stock (given)
Retained earnings (from req. 2)
Total stockholders' equity
Total liabilities and stockholders' equity
$ 13,150
10,900
27,000
66,000
$117,050
$31,500
1,500
$ 33,000
62,000
22,050
84,050
$117,050
AP1–2.
Req. 1
LIST ELECTRIC REPAIR COMPANY, INC.
Income Statement
For the Three Months Ended December 31
Revenues from Services
Electric repair services–cash
–credit
Total revenues
Expenses
Electrician's assistant (wages)
Payroll taxes
Supplies used on jobs
Oil, gas, and maintenance on truck
Insurance
Rent ($500+$250)
Utilities and telephone
Miscellaneous expenses
Depreciation of truck and tools (use)
Total expenses
Pretax Income
Income taxes
Net Income
$32,000
3,500
$35,500
7,500
175
9,500
1,200
700
750
825
600
1,200
22,450
13,050
3,930
$ 9,120
Req. 2
Because the above report reflects only revenues, expenses, and net income, it is
reasonable to suppose that Sam would have need for the following:
(1)
(2)
(3)
A statement that reports for the business, on December 31, each asset (name
and amount such as Cash, $XX), and each liability (such as rent payable, $XX),
and stockholders' equity; that is, a balance sheet.
A statement of the sources and uses of cash during the period; that is, a
statement of cash flows.
A statement of stockholders’ equity that shows the change in common stock and
how net income and dividends affect retained earnings on the balance sheet.
AP1–3.
Req. 1
Cash
Transaction Income
(a)
+$85,000
+$70,000
Req. 2–Explanation
All services performed increase income;
cash received during the period was:
$85,000 – $15,000 = $70,000.
(b)
–0–
+25,000
Cash borrowed is not income.
(c)
–0–
–8,000
Purchase of the truck does not represent
an expense until the truck is used (it is an asset);
cash outflow was $8,000.
(d)
–36,000
–30,000
All of the wages incurred reduce income,
$36,000; cash paid during the quarter was:
$36,000 x 5/6 = $30,000. The $6,000
owed will be paid on the next payroll date.
(e)
–3,000
–4,000
Not all of the supplies were used; expense is
the amount used: $4,000 – $1,000 = $3,000.
Cash paid during the quarter was $4,000.
(f)
–31,000
–15,500
All expenses incurred reduce income; cash
expended was: $31,000 – $15,500 = $15,500.
(g)
Based only
on the above:
Income (loss) $15,000
Cash inflow
(outflow)
$ 37,500
CONTINUING PROBLEM
CON1–1.
Req. 1
Penny’s Pool Service & Supply, Inc.
Income Statement
For the Year Ended December 31, Current Year
Revenues
Sales revenue
Expenses
Cost of supplies used
Wage expense
Other administrative expenses
Total expenses
Pretax income
Income tax expense
Net income
$ 60,000
8,200
24,000
4,500
36,700
23,300
4,000
$19,300
Req. 2
Penny’s Pool Service & Supply, Inc.
Statement of Stockholders' Equity
For the Year Ended December 31, Current Year
Common
Retained
Stock
Earnings
Balance January 1, Current Year
$
0
$
0
Issue common stock
20,000
Net income for Current Year
19,300
Dividends for Current Year
(10,000)
Balance December 31, Current Year
$ 20,000
$ 9,300
CON1–1. (continued)
Req. 3
Penny’s Pool Service & Supply, Inc.
Balance Sheet
At December 31, Current Year
Assets:
Cash
Accounts receivable
Inventories
Equipment
Total assets
Liabilities and Stockholders' Equity:
Liabilities
Accounts payable
Note payable to bank
Total liabilities
Stockholders' equity
Common stock (1,000 shares)
Retained earnings
Total stockholders' equity
Total liabilities and stockholders' equity
$ 2,900
2,300
4,600
28,000
$ 37,800
$ 3,500
5,000
8,500
20,000
9,300
29,300
$ 37,800
CASES AND PROJECTS
CP1–1.
1. c.
2. c.
3. b.
4. a.
5. a.
6. d.
7. a.
CP1–2.
(dollars in millions)
1. Consolidated net income was $13,706.
2. Revenue was $559,151.
3. Inventories is $44,949.
4. Cash and cash equivalents was $17,741.
5. The auditor is Ernst & Young LLP.
CP1–3.
1. b. Walmart.
2. b. Walmart
3. d. Inventory or Inventories
FINANCIAL REPORTING AND ANALYSIS CASES
CP1–4.
Req. 1
The personal residences of the organizers are not resources of the business entity.
Therefore, they should be excluded.
Req. 2
What do the amounts for service trucks ($57,000) and service equipment ($30,000)
represent? It is not indicated whether the $87,000 is their cost when acquired or the
current market value on December 31 of the current year.
Req. 3
The lists of company resources (i.e., assets) and company obligations suggests the
following areas of concern:
Company resources:
(1)
Cash, inventories, and bills due from customers (i.e., accounts receivable)–
these items tend to fluctuate; they may be significantly more or less at date of
the loan and during the term of the loan.
(2)
Service trucks and equipment–as noted above, it is not indicated whether the
$87,000 is cost when acquired or current market value on December 31 of the
current year.
(3)
Personal residences–as noted above, these items are not resources of the
business entity and should be excluded.
Company obligations:
(4)
Unpaid wages of $19,000, which are now due, pose a serious problem because
only $12,000 of cash is currently available.
(5)
Unpaid taxes and accounts payable to suppliers–it is not clear when these
payments of $8,000 and $10,000, respectively, are due (cash needed to pay
them is a problem).
(6)
The $45,000 owed on the service trucks probably is long term; however, shortterm installments may be required–these details are very important to the bank.
(7)
Loan from organizer–the expected payment date and interest rate are
important issues for which details are not provided. This is a major cash
demand.
In general, the bank should request more details about the specific resources and
debts. The personal residences are not a part of the resources of the business entity.
The bank should request that the owners provide audited information about the entity's
assets and debts.
CP1–4. (continued)
Req. 4
The amount of stockholders’ equity (i.e., assets minus liabilities) for Northwest
Company, assuming the amounts provided by the owners are acceptable, would be:
Assets ($311,000–$190,000)
Liabilities
Stockholders’ equity
$121,000
92,000
$ 29,000
CP1–5.
Req. 1–Deficiencies:
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
Heading: titles of the reports are missing and dates are not in proper form.
Income statement should show revenues and expenses separately and provide
the amount of net income.
Income from sales of merchandise should be ―Sales revenue‖ or
―Merchandise sales revenue.‖
Balance sheet should separately report assets, liabilities, and stockholders'
equity. Resources and Debts are not appropriate captions for the balance sheet.
Retained earnings, $32,250, and Common stock, $65,000, should be reported
under stockholders' equity.
Due from customers, $13,000, should be reported under assets.
Supplies on hand, $15,000, should be reported under assets.
Accumulated depreciation, $12,000, should be subtracted from service vehicles.
CP1–5. (continued)
Req. 2–Financial Statements:
PRECISION CORPORATION
Income Statement
For the Year Ended December 31, 2023
Revenues:
Sales
Services
Total revenues
Expenses:
Cost of goods sold
Selling expenses
Depreciation expense
Salaries and wages
Total expenses (excluding income tax)
Pretax income
Income tax expense
Net income
$180,000
52,000
$232,000
$ 90,000
25,000
12,000
62,000
189,000
43,000
10,750
$ 32,250
PRECISION CORPORATION
Balance Sheet
At December 31, 2023
Assets
Cash
$ 32,000
Accounts receivable (from customers)
13,000
Merchandise inventory (for resale)
42,000
Supplies inventory (for use in rendering services) 15,000 Service
vehicles
$50,000
Less accumulated depreciation
(12,000)
38,000
Total assets
$140,000
Liabilities
Accounts payable (to suppliers)
Note payable (to bank)
Total liabilities
Stockholders' equity
Common stock, 6,500 shares
$65,000
Retained earnings
32,250
Total stockholders' equity
Total liabilities and stockholders' equity
$ 17,750
25,000
42,750
97,250
$140,000
CRITICAL THINKING CASES
CP1–6.
Req. 1 You should forcefully assert the need for an independent audit of the financial
statements each year because this is the best way to assure credibility–
conformance with GAAP, completeness and absence of bias.
You should firmly reject ―Uncle Ray‖ as the auditor because there is no
evidence about his competence as an accountant or auditor. Also, he is related
to the partner who prepares the financial statements; there is a conflict of
interest.
Req. 2 You should strongly recommend the selection of an independent CPA in public
practice because the financial statements should be audited by a competent and
independent professional who must follow prescribed accounting and auditing
standards on a strictly independent basis. An audit by ―Uncle Ray‖ would not
meet any of these requisites, particularly the important one in this case–
independence (and absence of bias).
CP1–7.
The textbook does not explicitly cover the elements of independence. The case is
designed to permit the students to develop their own values. We have found that it is
useful to emphasize the difference between independence in fact and in appearance
during these discussions.
1.
Most students feel that there is no problem with independence if the stock held is
immaterial in amount. When asked about a possible headline that might read
―Auditor who was shareholder is accused of fraud,‖ most students see a
problem with the appearance. In fact, the AICPA does not apply a materiality
threshold where there is a direct financial interest. Any holding of stock is a
problem.
2.
This is an example of an indirect holding of stock. A materiality threshold is
applied in these situations. There could be a question of independence if the
auditor held a material interest in the mutual fund (relative to her net worth) and
the mutual fund held a material interest in the company that she audited.
3.
The AICPA Code of Professional Conduct applies only to audit professionals who
are members (though most state laws incorporate similar rules). Bob's employers
may want to assign him to a different company but there is no conflict with the
Code.
4.
Clearly there is an ethics violation in this case because she would audit
statements that covered a period of time where she was responsible for the
accounting operations of the company. This is a problem both in appearance and
in fact.
5.
The Code indicates that a mortgage loan made to the partner in charge would be
an ethics violation unless all of the following four conditions were met: (1) that the
loan was made under normal lending procedures, terms, and requirements, (2) it
was obtained before the bank became an audit client, (3) the loan is kept current
at all times, and (4) the fair value of the collateral equals or exceeds the
outstanding balance. This issue is an excellent example of how ethics rules can
change over time. The savings and loan debacle and the banking crisis caused
the profession to reconsider the issue of loans to auditors.
YOU AS ANALYST: ONLINE COMPANY RESEARCH (an individual or team project)
CP1–8.
The solutions to this case will depend on the company(ies) and/or accounting periods
selected for analysis.
BUSINESS ANALYTICS AND DATA VISUALIZATION WITH EXCEL AND TABLEAU
The solutions to these exercises are auto graded on Connect, as assigned by the
instructor.
Chapter 2
Investing and Financing Decisions and
the Accounting System
ANSWERS TO QUESTIONS
1.
(a)
The separate entity assumption requires that business transactions are
separate from the transactions of the owners. For example, the purchase of a
truck by the owner for personal use is not recorded as an asset of the business.
(b)
The monetary unit assumption requires information to be reported in the
national monetary unit without any adjustment for changes in purchasing
power. That means that each business will account for and report its
financial results primarily in terms of the national monetary unit, such as
Yen in Japan and Australian dollars in Australia.
(c)
Under the going concern assumption, businesses are assumed to operate
into the foreseeable future. That is, they are not expected to liquidate.
(d)
The historical cost principle is a measurement model that requires assets
to be recorded at the cash-equivalent cost on the date of the transaction.
Cash-equivalent cost is the cash paid plus the dollar value of all noncash
considerations.
2.
Accounting assumptions are necessary because they reflect the scope of
accounting and the expectations that set certain limits on the way accounting
information is reported.
3.
(a)
An asset is an economic resource owned or controlled by a company; it
has measurable value and is expected to benefit the company by
producing cash inflows or reducing cash outflows in the future.
(b)
A current asset is an asset that will be used or turned into cash within one
year.
(c)
A liability is a measurable obligation resulting from a past transaction; it is
expected to be settled in the future by transferring assets or providing
services.
(d)
A current liability is a short-term obligation that will be paid in cash (or
other current assets) within the current operating cycle or one year,
whichever is longer.
(e)
Additional paid-in capital is the owner-provided financing to the business
that represents the amount of contributed capital less the par value of the
stock.
Retained earnings are the cumulative earnings of a company that are not
distributed to the owners and are reinvested in the business.
An account is a standardized format used by organizations to accumulate the
dollar effects of transactions on each financial statement item.
(f)
4.
5.
The accounting equation is: Assets = Liabilities + Stockholders' Equity
6.
A business transaction is:
(a) an exchange of resources (assets) and obligations (debts) between a
business and one or more outside parties, and
(b) a measurable internal event that directly affects the entity but where there is
no exchange with external parties.
An example of situation (a) is the sale of goods or services to customers.
An example of situation (b) is the use of equipment in operations.
7.
Debit is the left side of a journal entry and T-account and credit is the right side of
a journal entry and T-account. A debit is an increase in assets and a decrease in
liabilities and stockholders' equity. A credit is the opposite -- a decrease in assets
and an increase in liabilities and stockholders' equity.
8.
Transaction analysis is the process of studying a transaction to determine its
economic effect on the entity in terms of the accounting equation:
Assets = Liabilities + Stockholders' Equity
The two principles underlying the process are:
* every transaction affects at least two accounts.
* the accounting equation must remain in balance after each
transaction.
The three steps in transaction analysis are:
(1) determine what the company received: identify and classify accounts
and the direction and amount of the effects.
(2) determine what the company gave: identify and classify accounts
and the direction and amount of the effects.
(3) determine that the accounting equation (A = L + SE) remains in
balance.
9.
The equalities that must be maintained in transaction analysis are:
(a) Assets = Liabilities + Stockholders' Equity
(b) Debits = Credits
10.
A journal entry is an accounting method for expressing the effects of a
transaction on accounts in a debits-equal-credits format. The title(s) of the
account(s) to be debited is (are) listed first and the title(s) of the account(s) to be
credited is (are) listed underneath the debited accounts. The debited amounts
are placed in a left-hand column and the credited amounts are placed in a righthand column.
11.
The T-account is a tool for summarizing transaction effects for each account,
determining balances, and drawing inferences about a company's activities. It is
a simplified representation of a ledger account with a debit column on the left and
a credit column on the right.
12.
The current ratio is computed as current assets divided by current liabilities. It
measures a company’s liquidity -- the ability of the company to pay its short-term
obligations with current assets. A ratio above 1.0 normally suggests that the
company has sufficient current assets to settle short-term obligations.
Sophisticated cash management systems allow many companies to minimize
funds invested in current assets and have a current ratio below 1.0. However, a
ratio that is too high in relation to other competitors in the industry may indicate
inefficient use of resources.
13.
Investing activities on the statement of cash flows include the buying and selling
of productive assets and investments. Financing activities include borrowing and
repaying debt, issuing and repurchasing stock, and paying dividends.
MULTIPLE CHOICE
1. d
2. d
3. a
4. a
5. d
6. c
7. a
8. d
9. b
10. a
(Time in minutes)
Mini-exercises
No.
Time
1
3
2
3
3
4
4
4
5
4
6
5
7
3
8
3
9
6
10
6
11
6
12
6
13
4
14
4
Exercises
No.
Time
1
8
2
15
3
8
4
10
5
10
6
10
7
10
8
15
9
20
10
20
11
20
12
20
13
20
14
30
15
20
16
20
17
10
18
10
19
10
20
10
21
15
Problems
No.
Time
1
20
2
25
3
40
4
15
5
40
Alternate
Problems
No.
Time
1
20
2
25
3
40
4
15
5
40
Cases and
Projects
No.
Time
1
15
2
15
3
15
4
20
5
15
6
20
7
30
8
20
9
*
Continuing
Problem
1
40
* Due to the nature of these cases and projects, it is very difficult to estimate the
amount of time students will need to complete the assignment. As with any open-ended
project, it is possible for students to devote a large amount of time to these
assignments. While students often benefit from the extra effort, we find that some
become frustrated by the perceived difficulty of the task. You can reduce student
frustration and anxiety by making your expectations clear. For example, when our goal
is to sharpen research skills, we devote class time to discussing research strategies.
When we want the students to focus on a real accounting issue, we offer suggestions
about possible companies or industries.
MINI-EXERCISES
M2–1.
F
(1) Going concern assumption
H
(2) Historical cost principle
G
(3) Credits
A
(4) Assets
I
(5) Account
D
(1) Journal entry
C
(2) A = L + SE, and Debits = Credits
A
(3) Assets = Liabilities + Stockholders’ Equity
I
(4) Liabilities
B
(5) Income statement, balance sheet, statement of stockholders’ equity, and
statement of cash flows
M2–2.
M2–3.
(1) N
(2) N
(3) Y
(4) Y
(5) Y
(6) N
M2–4.
CL
(1) Accounts Payable CA
(2) Accounts Receivable
NCA
(3) Buildings
CA
(4) Cash
SE
(5) Common Stock
NCA
(6) Land
CA
(7) Merchandise Inventory
CL
(8) Income Taxes Payable
NCA (9) Long-Term Investments
NCL
(10) Notes Payable (due in three years)
CA
(11) Notes Receivable (due in six months)
CA
(12) Prepaid Rent
SE
(13) Retained Earnings
CA
(14) Supplies
CL
(15) Utilities Payable
CL
(16) Wages Payable
M2–5.
SE
(1) Additional Paid-in Capital
NCA
(2) Buildings and Leased Assets
CL
(3) Current Lease Liabilities
CL
(4) Dividends Payable
NCA
(5) Equipment
NCA
(6) Intangible Assets
NCL
(7) Long-Term Lease Liabilities
CL
(8) Notes Payable (due in six months)
CA
(9) Prepaid Insurance
CA
(10) Short-Term Investments
CA
(11) Trade Accounts Receivable
SE
(12) Treasury Stock
CL
(13) Unearned Revenue
M2–6.
Assets
=
a. Cash
+30,000
b. Cash
Notes
receivable
–10,000
c. Cash
d. Cash
Equipment
e.
Liabilities
Notes payable
+
Stockholders’ Equity
+30,000
+10,000
+500
–
5,000
+15,000
Common stock
Additional paidin capital
Notes payable
Dividends
payable
+10
+490
+10,000
+2,000
Retained
earnings
–2,000
M2–7.
Debit
Credit
Assets
Increase
Decrease
Liabilities
Decrease
Increase
Stockholders’ equity
Decrease
Increase
Increase
Decrease
Assets
Debit
Credit
Liabilities
Credit
Debit
Stockholders’ equity
Credit
Debit
M2–8.
M2–9.
a.
b.
c.
d.
e.
Cash (+A) ............................................................................
Notes payable (+L).......................................................
30,000
Notes receivable (+A) ..........................................................
Cash ( A) .....................................................................
10,000
Cash (+A) ............................................................................
Common stock (+SE) ...................................................
Additional paid-in capital
(+SE)………………………….
Equipment (+A) ...................................................................
Cash ( A) .....................................................................
Notes payable (+L).......................................................
500
Retained earnings ( SE) .....................................................
Dividends payable (+L) ................................................
30,000
10,000
10
490
15,000
5,000
10,000
2,000
2,000
M2–10.
Cash
Beg.
900
(a) 30,000 10,000
(c)
500 5,000
16,400
(b)
(d)
Notes Receivable
Beg. 1,000
(b) 10,000
Equipment
Beg. 15,100
(d) 15,000
11,000
30,100
Notes Payable
3,000 Beg.
30,000 (a)
10,000 (d)
43,000
Dividends Payable
0 Beg.
2,000 (e)
Common Stock
1,000 Beg.
10 (c)
1,010
Additional Paid-in Capital
2,000
3,000 Beg.
490 (c)
3,490
Retained Earnings
10,000 Beg.
(e)
2,000
8,000
M2-11.
JonesSpa Corporation
Trial Balance
January 31
Cash
Notes receivable
Equipment
Notes payable
Dividends payable
Common stock
Additional paid-in capital
Retained earnings
Totals
Debit
16,400
11,000
30,100
Credit
43,000
2,000
1,010
3,490
8,000
57,500
57,500
M2–12.
JonesSpa Corporation
Balance Sheet
At January 31
Assets
Current assets:
Cash
Notes receivable
Total current assets
$ 16,400
11,000
27,400
Equipment
Total Assets
30,100
$ 57,500
Liabilities
Current liabilities:
Notes payable
Dividends payable
Total current liabilities
Stockholders’ Equity
Common stock
Additional paid-in capital
Retained earnings
Total stockholders’ equity
Total Liabilities &
Stockholders’ Equity
$ 43,000
2,000
45,000
1,010
3,490
8,000
12,500
$ 57,500
M2–13.
Current Ratio =
Current Assets
÷
Current Liabilities
2018
$280,000
÷
$155,000
=
1.806
2019
$270,000
÷
$ 250,000
=
1.080
This ratio indicates that Matteo’s Taco Company has sufficient current assets to settle
current liabilities, but that the ratio has also decreased between 2018 and 2019 by .726
(40%). Matteo’s Taco Company ratio of 1.080 is lower than Chipotle’s 2019 ratio of
1.609, indicating that Matteo’s Taco Company appears to have weaker liquidity than
Chipotle. Because the restaurant industry typically has high immediate cash inflows
from customers, both companies can maintain a lower current ratio.
M2–14.
(a) F
(b) I
(c) F
(d) I
Transaction (e) for the declaration of cash dividends creates an obligation. Thus, it
would not be included on the statement of cash flows because no cash was paid in
January.
EXERCISES
E2–1.
E
(1) Transaction
F
(2) Going concern assumption
B
(3) Balance sheet
P
(4) Liabilities
K
(5) Assets = Liabilities + Stockholders’ Equity
M
(6) Notes payable
L
(7) Common stock
H
(8) Historical cost principle
I
(9) Account
Q
(10) Dual effects
O
(11) Retained earnings
A
(12) Current assets
C
(13) Separate entity assumption
X
(14) Par value
D
(15) Debits
J
(16) Accounts receivable
N
(17) Monetary unit assumption
R
(18) Stockholders’ equity
E2–2.
Req. 1
Received
Given
(a)
Cash (A)
Common stock and Additional
paid-in capital (SE)
(b)
Equipment (A)
(c)
No exchange transaction
—
(d)
Equipment (A)
Notes payable (current) (L)
(e)
Building (A)
(f)
Intangibles (A)
(g)
Retained earnings (SE) [Received a reduction
in the owners’ claims to the company’s assets]
Dividends payable (L) [a
promise to pay]
(h)
Land (A)
Cash (A)
(i)
Intangibles (A)
(j)
No exchange transaction
—
(k)
Investments (A)
Cash (A)
(l)
Cash (A)
Notes payable (current) (L)
(m)
Notes payable (L)
promise to pay]
[or Delivery truck]
[or Computer equipment]
[or Construction in progress]
[or Copyright]
[or Patents]
Cash (A)
Cash (A)
Cash (A)
Cash (A) and Notes payable
(current) (L)
[Received a reduction in its Cash (A)
Req. 2
The truck in (b) would be recorded as an asset of $18,000. The land in (h) would be
recorded as an asset of $50,000. These are applications of the historical cost principle.
Req. 3
The agreement in (c) involves no exchange or receipt of cash, goods, or services and
thus is not a transaction. Since transaction (j) occurs between the owner and others,
there is no effect on the business because of the separate entity assumption.
E2–3.
Balance Sheet
Classification
Debit or Credit
Balance
(1) Accounts Receivable
CA
Debit
(2) Retained Earnings
SE
Credit
(3) Accrued Expenses Payable
CL
Credit
(4) Prepaid Expenses
CA
Debit
(5) Common Stock
SE
Credit
(6) Long-Term Investments
NCA
Debit
(7) Plant, Property, and Equipment
NCA
Debit
(8) Accounts Payable
CL
Credit
(9) Short-Term Investments
CA
Debit
(10) Long-Term Debt
NCL
Credit
(11) Inventories
CA
Debit
(12) Additional Paid-in Capital
SE
Credit
(13) Current Lease Obligations
CL
Credit
(14) Operating Lease Right-of-Use Assets
NCA
Debit
(15) Treasury Stock
SE
Debit
Account
E2–4.
Event
a.
b.
Assets
Cash
Operating
lease rightof-use
assets
=
c.
Cash
+10,000
d.
Note
receivable
Land
Cash
Long-term
lease
liabilities
+12,000
Notes payable
+10,000
Notes payable
+9,000
+15,000
–
3,000
e.
+ Stockholders’ Equity
+40,000
Cash
Cash
Liabilities
+800
–
800
+13,000
–
4,000
Common
stock
+1,000
Additional
paid-in
capital
+39,000
E2–5.
Req. 1 (dollars in millions)
Event
Assets
a.
Buildings
Equipment
Cash
b.
Cash
=
+303
+1,202
–
432
+885
c.
d.
Short-term
investments
Cash
f.
Cash
Short-term
investments
+2,379
Cash
+6,134
Cash
+1,491
Notes payable
(long-term)
+6,134
Common stock
+10
Additional paid-in
capital
+875
Retained
earnings
–1,491
Treasury stock
–3,067
-2,426
No effects
h.
Dividends
payable
Stockholders’ Equity
+2,426
e.
g.
Liabilities
+
Notes payable
(long-term)
+1,073
–2,379
–3,067
Req. 2
The separate entity assumption states that transactions of the business are separate
from transactions of the owners. Since transaction (e) occurs between the owners and
others in the stock market, there is no effect on the business.
E2–6.
a.
b.
c.
d.
e.
Cash (+A) ............................................................................
Common stock (+SE)*..................................................
Additional paid-in capital (+SE)
…………………………
Operating lease right-of-use assets (+A) .............................
Cash ( A) .....................................................................
Long-term lease liabilities (+L) ....................................
40,000
1,000
39,000
15,000
3,000
12,000
Cash (+A) ............................................................................
Notes payable (+L).......................................................
10,000
Notes receivable (+A) .........................................................
Cash ( A) ....................................................................
800
Land
(+A).............................................................................
Cash ( A) .....................................................................
Notes payable (+L) ......................................................
10,000
800
13,000
4,000
9,000
*Common stock at par value: 1,000 shares x $1 par value = $1,000
Additional paid-in capital is the excess over market: 1,000 shares x $39 excess =
$39,000
E2–7.
Req. 1 (dollars in millions)
a.
b.
c.
d.
Buildings (+A) ......................................................................
Equipment (+A) ..................................................................
Cash ( A) .....................................................................
Notes payable (+L) ......................................................
303
1,202
Cash (+A) ............................................................................
Common stock (+SE) ...................................................
Additional paid-in capital (+SE)
885
Retained earnings ( SE) .....................................................
Dividends payable (+L) ................................................
1,491
Short-term investments (+A)................................................
Cash ( A) .....................................................................
2,426
432
1,073
10
875
1,491
2,426
e.
No journal entry required.
f.
Cash (+A) ............................................................................
Short-term investments ( A) ........................................
2,379
Cash (+A) ...........................................................................
Notes payable (+L) .....................................................
6,134
Treasury stock ( SE) ..........................................................
Cash ( A) ...................................................................
3,067
g.
h.
2,379
6,134
3,067
Req. 2
The separate entity assumption states that transactions of the business are separate
from transactions of the owners. Since transaction (e) occurs between the owners and
others in the stock market, there is no effect on the business.
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SOLUTION MANUAL EMAIL ME
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CHAPTERS IN PDF FORMAT