Chapter 2
Financial Statements and
Accounting Transactions
Questions
1. The four financial statements are: the income statement, the balance sheet, the
statement of owner’s equity, and the cash flow statement.
2. An income statement shows whether the business earned a net income (also called
profit). The statement does not simply report the amount of net income or loss but lists
the types and amounts of the revenues and expenses.
3. A revenue is an inflow of assets received in exchange for goods or services provided to
customers as part of the major or central operations of the business. A revenue also may
occur as a decrease in liabilities as when a service or product is delivered having been
paid for in advance.
4. An income statement user must know what time period is covered to judge whether the
company’s performance is satisfactory. For example, a statement user would not be able
to assess whether the amounts of revenue and net income are satisfactory without
knowing whether they were earned over a week, a month, or a year.
5. The dollar amounts in Leon Furniture’s financial statements are rounded to the nearest
$1,000. The consolidated statement of income (income statement) relates to the year
ended December 31, 2002, and also includes comparative statements for the previous
year.
6. Owner’s equity is increased by investments by the owner and by net income. It is
decreased by withdrawals made by the owner and by a net loss, which is the excess of
expenses over revenues.
7. The balance sheet provides information that helps users understand a company’s
financial status. It is often called the statement of financial position. The balance sheet
lists the types and dollar amounts of assets, liabilities, and equity of the business.
8. (a) Assets are probable future economic benefits obtained or controlled by a particular
entity as a result of past transactions or events. (b) Liabilities are probable future
sacrifices of economic benefits arising from present obligations of a particular entity to
transfer assets or provide services to other entities in the future as a result of past
transactions or events. (c) Equity is the residual interest in the assets of an entity that
remains after deducting its liabilities. (d) The term “net assets” means the same thing as
equity, which is also determined as assets less liabilities.
9. Total assets on December 31, 2002 were reported as $784,205,000. The total assets of
$784,205,000 equals the total for liabilities and shareholders’ equity of $784,205,000.
10. The equity section of the balance sheet reports a Carol Finlay, Capital account. The
presence of the owner’s capital account indicates that Finlay Interiors has been
organized as a sole proprietorship.
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Solutions Manual for Chapter 2
9
11. The objectivity principle requires financial statement information to be supported by
evidence other than someone’s opinion or imagination. This principle increases the
reliability of the financial statements.
12. This treatment is required by the cost and going-concern principles.
13. The revenue recognition principle provides guidance that managers and auditors need
for knowing when to recognize revenue. For example, if revenue is recognized too early,
the income statement reports income earlier than it should and the business looks more
profitable than it really is. On the other hand, if the revenue is not recognized on time, the
income statement shows lower amounts of revenue and net income than it should and
the business looks less profitable than it really is. Basically, this principle requires
revenue to be recognized when it is earned and can be measured reliably. The amount of
revenue should equal the value of the assets received from the customers.
*14. The CICA identifies generally accepted accounting principles in the CICA Handbook.
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10
Fundamental Accounting Principles, Eleventh Canadian Edition
QUICK STUDY
Quick Study 2-1
1.
2.
3.
4.
5.
6.
7.
SP
C
P
SP
C
C
P
Quick Study 2-2
a. Business entity principle
b. Revenue recognition principle
c. Cost principle
Quick Study 2-3
1.
2.
3.
4.
5.
Revenue Recognition
Objectivity and Cost
Business Entity
Going Concern
Monetary Unit
Quick Study 2-4
a. Owner’s equity = $ 75,000 – $ 40,500 = $ 34,500
b. Liabilities
= $300,000 – $ 85,500 = $214,500
c. Assets
= $187,500 + $ 95,400 = $282,900
Quick Study 2-5
a. Owner’s equity = $374,700 – $252,450 = $122,250
b. Liabilities
= $150,900 – $126,000 = $ 24,900
c. Assets
= $ 37,650 + $112,500 = $150,150
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Solutions Manual for Chapter 2
11
Quick Study 2-6
1.
2.
$20,000 = $15,000 = $5,000 beginning capital on January 1, 2004
$5,000 + $3,000 + $8,000 - $4,000 = $12,000 ending capital on December 31, 2004
Quick Study 2-7
The source documents include:
c. Telephone bill
d. Invoice from supplier
g. Bank statement
h. Sales invoice
Quick Study 2-8
Assets
a. Increase/Decrease
b. Increase
c. Decrease
d.
e. Decrease
=
Liabilities
+
Increase
Decrease
Increase
Equity
Decrease
Decrease
Quick Study 2-9
1.
2.
3.
4.
5.
6.
7.
8.
Office supplies – (c)
Office supplies expense – (a)
Accounts receivable – (c)
Accounts payable – (c)
Net loss – (a) and (b)
Office equipment – (c)
Owner, withdrawals – (b)
Notes payable – (c)
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12
9.
10.
11.
12.
13.
14.
15.
16.
Utilities expense – (a)
Furniture – (c)
Rent revenue –(a)
Consulting fees earned – (a)
Service fees earned – (a)
Salaries expense – (a)
Owner, investments – (b)
Net income – (a) and (b)
Fundamental Accounting Principles, Eleventh Canadian Edition
Quick Study 2-10
1. Net loss
2.
3.
4.
5.
Office supplies
Accounts payable
Accounts receivable
Owner’s investment
6. Furniture
7. Net income
8. Notes payable
9. Owner’s withdrawals
10. Truck
(d) A net loss would be presented on both the income
statement and the statement of owner’s equity.
(a) Asset
(b) Liability
(a) Asset
(d) Owner’s investments are presented on the statement of
owner’s equity.
(a) Asset
(d) Net income is presented on both the income statement
and the statement of owner’s equity.
(b) Liability
(d) Owner’s withdrawals are presented on the statement of
owner’s equity.
(a) Asset
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Solutions Manual for Chapter 2
13
EXERCISES
Exercise 2-1 (10 minutes)
a) $80,000 – $65,000 = $15,000 net income
b) $92,000 – $149,000 = $57,000 net loss
c) $10,000 + 0 – 0 + x = $86,000
x = $86,000 – $10,000
x = $76,000 net income
d) $25,000 + $40,000 – 0 + x = $52,000
x = 52,000 – 25,000 – 40,000
x = –$13,000 or a $13,000 Net loss
Exercise 2-2 (15 minutes)
Answers
Proofs:
Owner’s equity, January 1 ..........
Owner’s investments
during the year.........................
Owner’s withdrawals
during the year ........................
Net income (loss) for the year ....
Owner’s equity, December 31.....
(a)
$ (49,500)
$
(b)
$72,000
0
$
0
(c)
$24,000
$
0
(d)
$42,000
$
(e)
46,000
0
$46,000
120,000
72,000
63,000
75,000
75,000
(49,500)
31,500
$102,000
(54,000)
81,000
$99,000
(30,000)
(9,000)
$24,000
(31,500)
42,000
$85,500
(31,500)
(4,000)
$85,500
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14
Fundamental Accounting Principles, Eleventh Canadian Edition
Exercise 2-3 (15 minutes)
THE GRAYSON GROUP
Income Statement
For Month Ended November 30, 2005
Revenues:
Consulting fees earned ..................................
Operating expenses:
Salaries expense.............................................
Rent expense...................................................
Utilities expenses............................................
Telephone expense.........................................
Total operating expenses...........................
Net income ..............................................................
$15,000
$6,000
2,550
680
660
9,890
$ 5,110
Exercise 2-4 (15 minutes)
THE GRAYSON GROUP
Statement of Owner’s Equity
For Month Ended November 30, 2005
Joseph Grayson, capital, November 1 ............
Add: Investments by owner ..........................
Net income..............................................
Total .............................................................
Less: Withdrawals by owner ............................
Joseph Grayson, capital, November 30 ..........
84,000
5,110
$
0
89,110
$89,110
3,360
$85,750
Exercise 2-5 (15 minutes)
THE GRAYSON GROUP
Balance Sheet
November 30, 2005
Assets
Cash ...............................................
Accounts receivable .....................
Office supplies ..............................
Automobiles ..................................
Office equipment...........................
Total assets ...................................
Exercise 2-6 (15 minutes)
$12,000
15,000
2,250
36,000
28,000
$93,250
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Solutions Manual for Chapter 2
Liabilities
Accounts payable ...................
Owner’s Equity
Joseph Grayson, capital ........
Total liabilities and
owner’s equity.....................
$ 7,500
85,750
$93,250
15
TUTOR-RIGHT SERVICES
Income Statement
For Month Ended July 31, 2005
Revenues:
Tutoring fees earned ......................................
Textbook rental revenue ................................
Total revenues .............................................
$2,100
150
$ 2,250
Operating expenses:
Office rent expense.........................................
Tutors wages expense ...................................
Utilities expense..............................................
Total operating expenses ...........................
Net loss ...................................................................
$1,250
770
290
2,310
$
60
Exercise 2-7 (15 minutes)
TUTOR-RIGHT SERVICES
Statement of Owner’s Equity
For Month Ended July 31, 2005
Leena Mahan, capital, July 1 ............................
Add: Investments by owner ..........................
Total .............................................................
Less: Withdrawals by owner ............................
Net loss.....................................................
Leena Mahan, capital, July 31 ..........................
$ 500
60
$ 3,700
600
$ 4,300
560
$ 3,740
Exercise 2-8 (15 minutes)
TUTOR-RIGHT SERVICES
Balance Sheet
July 31, 2005
Assets
Cash ..............................................
Accounts receivable ....................
Supplies ........................................
Furniture .......................................
Computer equipment...................
Total assets ..................................
$ 800
1,340
300
900
1,100
$4,440
Liabilities
Accounts payable ...................
Owner’s Equity
Leena Mahan, capital..............
Total liabilities and
owner’s equity.....................
$ 700
3,740
$4,440
Exercise 2-9 (10 minutes)
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16
Fundamental Accounting Principles, Eleventh Canadian Edition
B
Description
1. Requires every business to be accounted for separately from its owner or owners.
D
2. Requires financial statement information to be supported by evidence other than
someone’s opinion or imagination.
A
3. Requires financial statement information to be based on costs incurred in
transactions.
E
4. Requires financial statements to reflect the assumption that the business will
continue operating instead of being closed or sold.
C
5. Requires revenue to be recorded only when the earnings process is complete.
Exercise 2-10 (20 minutes)
a.
Assets – Liabilities = Owner’s Equity
Beginning of the year....................... $ 75,000 –
$30,000 =
$45,000
End of the year.................................. $120,000 –
$46,000 =
74,000
Net increase in owner’s equity................................................................
$29,000
Net income ................................................................................................
$29,000
(Because there were no additional investments or withdrawals, the net income for
the year equals the net increase in owner’s equity.)
b. Net increase in owner’s equity....................................
Add: Withdrawals (12 months @ $1,750) ...................
Net income ....................................................................
$29,000
21,000
$50,000
An alternative calculation:
$45,000 + x - $21,000 = $74,000; x = $50,000
c.
Net increase in owner’s equity....................................
Less: Additional investment .......................................
Net loss..........................................................................
$29,000
32,500
$ 3,500
An alternative calculation:
$45,000 + $32,500 + x = $74,000; x = ($3,500) where the negative represents a loss.
d. Net increase in owner’s equity....................................
Add: Withdrawals (12 months @ $1,750) ...................
Gross increase in owner’s equity ...............................
Less: Additional investment .......................................
Net income ....................................................................
$29,000
21,000
$50,000
25,000
$25,000
An alternative calculation:
$45,000 + $25,000 - $21,000 + x = $74,000; x = $25,000
Exercise 2-11 (10 minutes)
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Solutions Manual for Chapter 2
17
If assets decreased by $5,000 during August, then
$20,000 + $5,000 = $25,000 Assets at August 1, 2005.
Therefore, Owner’s Equity at August 1, 2005 = $25,000 - $1,000 = $24,000
If liabilities increased by $3,000 during August, then
$1,000 + $3,000 = $4,000 Liabilities at August 31, 2005.
Therefore, Owner’s Equity at August 31, 2005 = $20,000 - $4,000 = $16,000
Exercise 2-12 (15 minutes)
a)
Totals
b)
Totals
c)
Totals
d)*
Totals
e)
Totals
f)
Totals
Cash
+ $5,000
$5,000
Assets
Accounts
+ Receivable +
$5,000
+ $1,200
$6,200
$6,200
– $3,000
$3,200
+ $2,500
$3,200
$2,500
Office
Supplies
=
Liabilities
Accounts
Payable
+ $400
$400
+ $400
$400
$400
$400
$400
$400
$400
$400
$400
$400
$6,100
=
+ Owner’s Equity
Bonnie Northrup,
+
Capital
+ $5,000
$5,000
$5,000
+ $1,200
$6,200
$6,200
– $3,000
$3,200
+ $2,500
$5,700
$6,100
*Note: For (d), since no transaction has occurred, no entry is required.
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18
Fundamental Accounting Principles, Eleventh Canadian Edition
Exercise 2-13 (20 minutes)
a)
b)
Totals
c)
Totals
d)
Totals
e)
Totals
f)*
Totals
g)
Totals
h)
Totals
i)
Totals
Cash
+ $7,000
- 2,500
$4,500
$4,500
$4,500
– $ 950
$3,550
$3,550
– $1,200
$2,350
+ $1,400
$3,750
– $2,700
$1,050
Assets
Liabilities + Owner’s Equity
Accounts
Parts
Accounts
Janine Commry,
+ Receivable + Supplies + Equipment = Payable +
Capital
+ $ 7,000
- 2,500
$ 4,500
+ $1,200
+ $1,200
$1,200
$1,200
$ 4,500
+ $3,400
+ $ 3,400
$3,400
$1,200
$1,200
$7,900
+ $950
$3,400
$1,200
$950
$1,200
$7,900
$3,400
$1,200
$950
$3,400
$1,200
$950
$1,200
– $1,200
$ 0
$3,400
$1,200
$950
$
0
$3,400
$1,200
$950
$
0
$6,600
=
$ 7,900
$7,900
+ $ 1,400
$9,300
– $ 2,700
$6,600
$6,600
*Note: For (f), since no transaction has occurred, no entry is required.
Exercise 2-14: (15 minutes)
b.
c.
d.
e.
Office Supplies were purchased paying cash of $1,000.
Office Furniture was purchased paying cash of $8,000.
Completed work for a client on credit; $2,000.
Purchased office supplies on credit; $800.
Exercise 2-15 (10 minutes)
a)
b)
c)
d)
e)
The business purchased land paying $3,000.
Office supplies were purchased on credit (or on account).
Revenue on account (or on credit) was earned.
A creditor (or liability) was paid.
A credit customer made a payment on their account (or the amount that was
owing).
Exercise 2-16 (30 minutes)
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Solutions Manual for Chapter 2
19
Cash
+ Accounts
Receivable
+
Equip- =
ment
Accounts + Linda Champion, Explanation
Payable
Capital
of Change
a.
$50,000
$10,000
$60,000
Investment
b.
– 2,600
$47,400
$10,000
–$2,600
$57,400
Rent Expense
$47,400
+12,000
$22,000
+12,000
$12,000
$57,400
+ 1,000
$48,400
$22,000
$12,000
+ 1,000
$58,400
Revenue
Revenue
c.
d.
e.
$48,400
+$2,000
$2,000
$22,000
$12,000
+ 2,000
$60,400
f.
– 8,000
$40,400
$2,000
+ 8,000
$30,000
$12,000
$60,400
g.
– 2,400
$38,000
$2,000
$30,000
$12,000
– 2,400
$58,000
h.
+ 500
$38,500
– 500
$1,500
$30,000
$12,000
$58,000
i.
–12,000
$26,500
$1,500
$30,000
– 12,000
$
0
$58,000
j.
– 500
$26,000
$1,500
$30,000
$57,500
Revenue
($1,000 + $2,000)
–
–
$
=
Expenses
($2,600 + $2,400)
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20
=
=
– 500
$57,500
0
Wages Expense
Withdrawal
$57,500
Net loss
$2,000
Fundamental Accounting Principles, Eleventh Canadian Edition
Exercise 2-17 (15 minutes) (Answers may vary.)
Possible examples include:
a.
The business purchases office supplies (or some other asset) for cash.
b. The owner withdraws cash (or some other asset) from the business; also, the
business incurs an expense paid with cash.
c.
The business incurs an expense on credit.
d. The business purchases equipment (or some other asset) on credit.
e.
The owner invests cash (or some other asset); or, the business earns a revenue and
accepts cash or an account receivable.
f.
The business pays an account payable (or some other liability) with cash.
Exercise 2-18 (20 minutes)
Assets
Liabilities +
Owner’s Equity
+ Accounts + Supplies + Equipment = Accounts + Bert Zimm, Explanation
Receivable
Payable
Capital
Owner
+ $5,000
+$5,000 Investment
+ $2,500
+$2,500 Revenue
$
0
$ 0
$5,000
$ 0
$7,500
$2,500
+ $300
+ $300
$
0
$300
$5,000
$300
$7,500
$2,500
– $ 900
– $ 900 Sal. Expense
$1,600
$
0
$300
$5,000
$300
$6,600
Cash
a)
b)
Totals
c)
Totals
d)
Totals
e)*
Totals
f)
Totals
g)
Totals
$1,600
– $ 600
$1,000
$1,000
$
0
$300
$5,000
$300
$
0
+ $1,000
$1,000
$300
$5,000
$300
$300
$5,000
$300
$7,300
=
$6,600
– $ 600 Rent Expense
$6,000
+$1,000 Revenue
$7,000
$7,300
*Note: For (e), since no transaction has occurred, no entry is required.
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Solutions Manual for Chapter 2
21
Exercise 2-19 (25 minutes)
Bert Zimm – Freelance Writing
Income Statement
For Month Ended March 31, 2005
Revenues:
Freelance service revenue
Operating expenses:
Salaries expense
Rent expense
Total operating expenses
Net income
$3,500
$900
600
1,500
$2,000
Bert Zimm – Freelance Writing
Statement of Owner’s Equity
For Month Ended March 31, 2005
Bert Zimm, capital, March 1
Add: Investment by owner
Net income
Bert Zimm, capital, March 31
Assets
Cash
Accounts receivable
Supplies
Equipment
Total assets
$
0
$5,000
2,000
$7,000
Bert Zimm – Freelance Writing
Balance Sheet
March 31, 2005
Liabilities
$1,000
Accounts payable
$ 300
1,000
300
5,000
Owner’s Equity
Bert Zimm, capital
7,000
$7,300
Total liabilities and owner’s equity $7,300
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22
Fundamental Accounting Principles, Eleventh Canadian Edition
PROBLEMS
Problem 2-1A (20 minutes)
Year
Beginning capital
+ Owner investment
+ Net income (loss)
– Owner withdrawals
= Ending capital
2007
288,0001
0
(28,000)
0
260,000
2006
152,0003
0
214,000
78,000
288,0002
2005
0
100,000
69,0005
17,000
152,0004
Note: The superscripts show the order in which the answers were calculated.
Calculations:
1. $260,000 + 28,000 = $288,000
2. $288,000 (The beginning capital balance for one period is the ending capital
balance of the previous period)
3. $288,000 + $78,000 - $214,000 = $152,000
4. $152,000 (The beginning capital balance for one period is the ending capital
balance of the previous period)
5. $152,000 + $17,000 - $100,000 = $69,000
Problem 2-2A (30 minutes)
LITE-KARE
Income Statement
For Year Ended July 31, 2006
Revenues:
Service revenue ..............................................
Repair revenue ................................................
Total revenues .............................................
Operating expenses:
Wages expense ...............................................
Rent expense...................................................
Supplies expense............................................
Utilities expense..............................................
Interest expense..............................................
Total operating expenses...........................
Net income ..............................................................
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Solutions Manual for Chapter 2
$71,000
3,000
$74,000
$26,000
12,000
5,700
4,900
250
48,850
$ 25,150
23
Problem 2-2A (continued)
LITE-KARE
Statement of Owner’s Equity
For Year Ended July 31, 2006
Murray Clance, capital, August 1, 2005 ...........
Add: Investments by owner ..........................
Net income..............................................
Total .............................................................
Less: Withdrawals by owner ............................
Murray Clance, capital, July 31, 2006 ..............
$ -025,150
$39,650
25,150
$64,800
17,000
$47,800
LITE-KARE
Balance Sheet
July 31, 2006
Assets
Cash ...........................................
Accounts receivable .................
Supplies .....................................
Prepaid rent ...............................
Office equipment.......................
Furniture ....................................
Total assets ...............................
$ 5,900
28,000
1,200
6,000
14,600
9,500
$65,200
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24
Liabilities
Accounts payable..................
Notes payable........................
Total liabilities ...............
$ 7,400
10,000
$17,400
Owner’s Equity
Murray Clance, capital ..........
47,800
Total liabilities and
owner’s equity ...................
$65,200
Fundamental Accounting Principles, Eleventh Canadian Edition
Problem 2-3A (60 minutes) Part 1
GOODALL DELIVERY SERVICES
Balance Sheet
December 31, 2005
Assets
Cash ...................................
Accounts receivable .........
Office supplies ..................
Trucks ................................
Office equipment...............
$ 52,500
28,500
4,500
54,000
138,000
Total assets
$277,500
Liabilities
Accounts payable .....................
$ 7,500
Owner’s Equity
Travis Goodall, capital .............
270,0001
Total liabilities and
owner’s equity.......................
$277,500
_____________________
Calculations:
1. $277,500 – $7,500 = $270,000
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Solutions Manual for Chapter 2
25
Problem 2-3A (continued) Part 1
GOODALL DELIVERY SERVICES
Balance Sheet
December 31, 2006
Assets
Cash ...................................
Accounts receivable .........
Office supplies ..................
Trucks ................................
Office equipment...............
Land....................................
Building..............................
$ 18,750
22,350
3,300
54,000
147,000
45,000
180,000
Total assets .......................
$470,400
Liabilities
Accounts payable .....................
Notes payable............................
Total liabilities .....................
$ 37,500
105,000
$142,500
Owner’s Equity
Travis Goodall, capital .............
327,9002
Total liabilities and
owner’s equity.......................
$470,400
Part 2
Calculation of net income for 2006:
Owner’s equity, December 31, 2006 ....................................
Owner’s equity, December 31, 2005 ....................................
Increase in owner’s equity during 2006 ..............................
Less: Additional investment.................................................
Net increase in owner’s equity during 2006,
apart from new investment...............................................
Add: Withdrawals ($3,000 × 12) ...........................................
Net income earned in 2006 ...................................................
______________________
$327,900
270,000
$ 57,900
35,000
$ 22,900
36,000
$ 58,900
Calculations:
3. $470,400 – $142,500 = $327,900
OR
$270,000 + $35,000 + x - $36,000 = $327,900; x = $58,900
Copyright © 2005 by McGraw-Hill Ryerson Limited. All rights reserved.
26
Fundamental Accounting Principles, Eleventh Canadian Edition
Problem 2-4A (40 minutes) Part 1
Company A:
(a) Owner’s equity on December 31, 2005:
Assets.................................................................
Liabilities............................................................
Owner’s equity...................................................
$45,000
–23,500
$21,500
(b) Owner’s equity on December 31, 2006:
Owner’s equity, December 31, 2005 ................
Add: Owner investments ..................................
Net income................................................
Less: Owner’s withdrawals ..............................
Owner’s equity, December 31, 2006 ................
$21,500
5,000
7,500
2,500
$31,500
(c) Amount of liabilities on December 31, 2006:
Assets .............................................................
Owner’s equity...................................................
Liabilities............................................................
$48,000
–31,500
$16,500
Part 2
Company B:
(a) and (b)
Owner’s equity:
Assets.................................................................
Liabilities............................................................
Owner’s equity...................................................
Dec. 31, 2005
$35,000
–22,500
$12,500
(c) Net income for 2006:
Owner’s equity, December 31, 2005 ................
Add: Owner investments ..................................
Net income................................................
Less: Owner withdrawals .................................
Owner’s equity, December 31, 2006 ................
Dec. 31, 2006
$41,000
–27,500
$13,500
$12,500
1,500
?
3,000
$13,500
Therefore, the net income must have been $2,500.
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Solutions Manual for Chapter 2
27
Problem 2-4A (continued) Part 3
Company C:
First, calculate the beginning balance of equity:
Assets...............................................................
Liabilities ..........................................................
Owner’s equity.................................................
Dec. 31, 2005
$29,000
–14,000
$15,000
Next, find the ending balance of equity by completing this table:
Owner’s equity, December 31, 2005 ..............
Add: Owner investments................................
Net income..............................................
Less: Owner withdrawals ...............................
Owner’s equity, December 31, 2006 ..............
$15,000
7,750
9,000
3,875
$27,875
Finally, find the ending amount of assets by adding the ending balance of equity to the
ending balance of the liabilities:
Liabilities ..........................................................
Owner’s equity.................................................
Assets...............................................................
Dec. 31, 2006
$19,000
27,875
$46,875
Part 4
Company D:
First, calculate the beginning and ending equity balances:
Assets...............................................................
Liabilities ..........................................................
Owner’s equity.................................................
Dec. 31, 2005
$80,000
–38,000
$42,000
Dec. 31, 2006
$125,000
–64,000
$ 61,000
Then, find the amount of owner investments during 2006 by completing this table:
Owner’s equity, December 31, 2005 ..............
Add: Owner investments ................................
Net income..............................................
Less: Owner withdrawals ...............................
Owner’s equity, December 31, 2006 ..............
$42,000
?
12,000
0
$61,000
Therefore, the owner investments must have been $7,000.
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28
Fundamental Accounting Principles, Eleventh Canadian Edition
Problem 2-4A (concluded) Part 5
Company E:
First, calculate the balance of equity as of December 31, 2006:
Assets...............................................................
Liabilities..........................................................
Owner’s equity.................................................
$112,500
–75,000
$ 37,500
Next, find the beginning balance of equity by completing this table:
Owner’s equity, December 31, 2005 ..............
Add: Owner investments................................
Net income..............................................
Less: Owner withdrawals ...............................
Owner’s equity, December 31, 2006 ..............
$
?
4,500
18,000
9,000
$37,500
Therefore, the beginning balance of equity was $24,000.
Finally, find the beginning amount of liabilities by subtracting the beginning balance of
equity from the beginning balance of the assets:
Assets...............................................................
Owner’s equity.................................................
Liabilities..........................................................
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Solutions Manual for Chapter 2
Dec. 31, 2005
$123,000
–24,000
$ 99,000
29
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30
Problem 2-5A (45 minutes) Parts 1 and 2
Assets
Cash
Fundamental Accounting Principles, Eleventh Canadian Edition
(a)
(b)
Bal.
(c)
Bal.
(d)
Bal.
(e)*
Bal.
(f)
Bal.
(g)
Bal.
(h)
Bal.
(i)
Bal.
(j)
Bal.
(k)
Bal.
(l)
Bal.
+ Accounts + Office + Office +
Receivable
Supplies Equipment
+ $80,000
− 50,000
$30,000
− 4,000
$26,000
+ $4,000
$4,000
$26,000
$26,000
+ $1,500
$26,000
$1,500
− 1,000
$25,000
$1,500
+ 2,000
$27,000
$1,500
− 2,000
$25,000
$1,500
+
500 − 500
$25,500
$1,000
− 3,500
$22,000
$1,000
− 1,800
$20,200 + $1,000
=
Liabilities
Building
= Accounts +
Payable
+
Owner’s Equity
George
Notes + Hemphill, Explanation
Payable
Capital
of Changes
+$30,000
+$110,000 Investment
+ $300,000
$300,000
+ $250,000
$250,000
$ 110,000
$300,000
$110,000
$300,000
+ $36,000
$36,000
$250,000
$4,000
$30,000
+ 36,000
$66,000
$250,000
$ 110,000
$4,000
$66,000
$300,000
$36,000
$250,000
$4,000
$66,000
$300,000
$36,000
$250,000
$4,000
$66,000
$300,000
$36,000
$250,000
$4,000
$66,000
$300,000
$250,000
$4,000
$66,000
$300,000
$36,000
− 2,000
$34,000
$110,000
+ 1,500
$111,500
− 1,000
$110,500
+ 2,000
$112,500
$250,000
$112,500
$4,000
$66,000
$300,000
$34,000
$250,000
$30,000
$4,000
+ $4,000
$66,000
+ $66,000 +
$391,200
*NOTE: For (e), since no transaction has occurred, no entry is required.
$300,000
$300,000 =
=
$112,500
− 3,500
$34,000
$250,000
$109,000
− 1,800
$34,000 + $250,000 + $107,200
$391,200
Service Revenue
Advertising Expense
Service Revenue
Wages Expense
Withdrawal
Problem 2-5A (continued)
Part 3
Hemphill Enterprises
Income Statement
For Month Ended March 31, 2005
Revenues:
Service revenue
Operating expenses:
Wages expense
Advertising expense
Total operating expenses
Net loss
$3,500
$3,500
1,000
4,500
$1,000
Hemphill Enterprises
Statement of Owner’s Equity
For Month Ended March 31, 2005
George Hemphill, capital, March 1
Add: Investment by owner
Total
Less: Withdrawal by owner
Net loss
George Hemphill, capital, March 31
Assets
Cash
Accounts receivable
Office supplies
Office equipment
Building
Total assets
$
0
110,000
$110,000
$ 1,800
1,000
Hemphill Enterprises
Balance Sheet
March 31, 2005
Liabilities
$ 20,200
Accounts payable
1,000
Notes payable
4,000
Total liabilities
66,000
300,000
Owner’s Equity
George Hemphill, capital
$391,200
Total liabilities and owner’s equity
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Solutions Manual for Chapter 2
2,800
$107,200
$ 34,000
250,000
$284,000
$107,200
$391,200
31
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32
Problem 2-6A (60 minutes) Parts 1 and 2
Assets
Cash
Fundamental Accounting Principles, Eleventh Canadian Edition
Apr. 1
1
3
5
8
12
15
20
22
23
28
29
30
30
30
30
30
+ Accounts
Receivable
+
+ $60,000
− 3,200
− 1,680
−
800
+ 4,600
Office
Supplies
= Liabilities +
= Accounts +
Owner’s Equity
Kelly Young,
Capital
Explanation
of Change
+ $60,000
− 3,200
Investment
Rent Expense
−
+
+
−
800
4,600
3,000
850
Cleaning Expense
Consulting Revenue
Consulting Revenue
Salaries Expense
+
2,800
Consulting Revenue
−
−
−
−
−
$62,760
60
200
480
850
1,200
Advertising Expense
Telephone Expense
Utilities Expense
Salaries Expense
Withdrawal
Payable
+ $1,680
+ $3,000
−
+
850
3,000
− 3,000
+ 2,800
+ 1,000
+
−
−
−
−
−
− 2,800
2,800
1,000
200
480
850
1,200
$60,140
+ $1,000
− 1,000
+
60
+
$
0
$62,820
+
$2,680=$
60
=
+
$62,820
Problem 2-6A (concluded) Part 3
ALERT CONSULTING
Income Statement
For Month Ended April 30, 2005
Revenues:
Consulting services revenue.............................
Operating expenses:
Rent expense.......................................................
Salaries expense.................................................
Cleaning expense ...............................................
Utilities expense..................................................
Telephone expense.............................................
Advertising expense...........................................
Total operating expenses ...........................
Net income ..................................................................
$10,400
$3,200
1,700
800
480
200
60
6,440
$ 3,960
ALERT CONSULTING
Statement of Owner’s Equity
For Month Ended April 30, 2005
Kelly Young, capital, April 1 .....................................
Add: Investments by owner ....................................
Net income.......................................................
Total .......................................................................
Less: Withdrawals by owner .....................................
Kelly Young, capital, April 30 ....................................
$60,000
3,960
$
0
63,960
$63,960
1,200
$62,760
ALERT CONSULTING
Balance Sheet
April 30, 2005
Assets
Cash ...................................
Office supplies ..................
Total assets .....................
$60,140
2,680
$62,820
Liabilities
Accounts payable............................. $
Owner’s Equity
Kelly Young, capital .......................
Total liabilities and
owner’s equity.............................
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Solutions Manual for Chapter 2
60
62,760
$62,820
33
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34
Problem 2-7A (60 minutes) Parts 1 and 2
Bal.
Oct. 31
Nov. 1
Bal.
3
3
Bal.
5
Bal.
6
Bal.
Cash
$40,000
-2,800
$37,200
+10,800
-10,800
$37,200
-900
$36,300
+1,000
$37,300
Accounts
Receivable
$3,500
$3,500
$3,500
$3,500
Office
Supplies
$950
$950
$950
+900
$1,850
Accounts
Payable
$9,000
$14,000
$7,000
$9,000
$14,000
+$14,000
$21,000
+ $3,200
$12,200
$14,000
$21,000
$12,200
$1,850
$1,850
$37,300
$3,500
+3,000
$6,500
$1,850
$17,800
$21,000
$16,000
$37,300
$6,500
$17,800
$21,000
$37,300
-3,800
$33,500
$6,500
$1,850
+500
$2,350
$17,800
$21,000
$2,350
$17,800
$21,000
$16,000
+500
$16,500
-3,800
$12,700
$37,300
15
Bal.
Electrical
Equip.
$7,000
$3,500
8
Bal.
Office
Equip.
$14,000
$14,000
+3,800
$17,800
$21,000
Stan Frey,
Capital
$56,450
-2,800
$53,650
+10,800
Rent expense
Owner investment
$64,450
$12,200
+3,800
$16,000
$21,000
Explanation
of Change
$64,450
+1,000
$65,450
Electrical fees earned
$65,450
+3,000
$68,450
Electrical fees earned
*16
Bal.
18
Fundamental Accounting Principles, Eleventh Canadian Edition
Bal.
20
Bal.
24
Bal.
28
Bal.
30
Bal.
30
Bal.
30
$33,500
+ 3,000
$36,500
-2,200
$34,300
-700
$33,600
-700
$32,900
$6,500
+600
$7,100
-3,000
$4,100
$2,350
$17,800
$21,000
$12,700
$2,350
$17,800
$21,000
$12,700
$4,100
$2,350
$17,800
$21,000
$12,700
$4,100
$2,350
$17,800
$21,000
$12,700
$4,100
$2,350
$17,800
$78,150
*Note: For November 16, since no transaction has occurred, no entry is required.
$21,000
$68,450
$68,450
$68,450
+600
$69,050
$69,050
-2,200
$66,850
-700
$66,150
-700
$65,450
$12,700
=
$78,150
Electrical fees earned
Salaries expense
Utilities expense
Owner withdrawals
Problem 2-7A (continued) Part 3
FREY ELECTRICAL CO.
Income Statement
For Month Ended November 30, 2005
Revenues:
Electrical fees earned .............................................
Operating expenses:
Rent expense...........................................................
Salaries expense.....................................................
Utilities expense .....................................................
Total operating expenses...................................
Net loss ..........................................................................
$4,600
$2,800
2,200
700
5,700
$1,100
FREY ELECTRICAL CO.
Statement of Owner’s Equity
For Month Ended November 30, 2005
Stan Frey, capital, November 1 .....................................
Add: Investments by owner ..........................................
Total ..........................................................................
Less: Withdrawals by owner .........................................
Net loss ..................................................................
Stan Frey, capital, November 30 ...................................
$
700
1,100
$56,450
10,800
$67,250
1,800
$65,450
FREY ELECTRICAL CO.
Balance Sheet
November 30, 2005
Assets
Cash ...................................
Accounts receivable .........
Office supplies ..................
Office equipment...............
Electrical equipment.........
$32,900
4,100
2,350
17,800
21,000
Total assets .......................
$78,150
Liabilities
Accounts payable............
Owner’s Equity
Stan Frey, capital.............
Total liabilities and
owner’s equity .............
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Solutions Manual for Chapter 2
$12,700
65,450
$78,150
35
Problem 2-8A (25 minutes)
1
2
3
4
5
6
7
8
9
10
Income
Balance Sheet
Stmnt
Total Total
Net
Assets Liab. Equity Income
Owner invests cash .......................
+
+
Sell services for cash ....................
+
+
+
Acquire services on credit ............
+
–
–
Pay wages with cash .....................
–
–
–
Owner withdraws cash ..................
–
–
Borrow cash with note payable ....
+
+
Sell services on credit ...................
+
+
+
Buy office equipment for cash ..... +/–
Collect receivable from (7) ............ +/–
Buy asset with note payable.........
+
+
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36
Fundamental Accounting Principles, Eleventh Canadian Edition
Problem 2-1B (20 minutes)
Beginning capital
+ Owner investment
+ Net income (loss)
– Owner withdrawals
= Ending capital
2007
146,0001
0
183,000
69,000
260,000
2006
35,0003
0
163,000
52,000
146,0002
2005
0
50,000
(15,000)5
0
35,000 4
Note: The superscripts show the order in which the answers were calculated.
Calculations:
1. 260,000 + 69,000 – 183,000 = 146,000
2. The beginning capital of 146,000 for 2007 is the ending capital from 2006.
3. 146,000 + 52,000 – 163,000 = 35,000
4. The beginning capital of 35,000 for 2006 is the ending capital from 2005.
5. 35,000 – 50,000 = -15,000
Problem 2-2B (30 minutes)
FIREWORKS FANTASIA
Income Statement
For Year Ended December 31, 2005
Revenues:
Fees earned .....................................................
Rent revenue ...................................................
Total revenues .............................................
Operating expenses:
Wages expense ...............................................
Fireworks supplies expense..........................
Utilities expense..............................................
Advertising expense.......................................
Office supplies expense.................................
Total operating expenses...........................
Net loss ..................................................................
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Solutions Manual for Chapter 2
$ 70,000
33,000
$ 103,000
$46,000
41,000
17,800
4,500
1,800
111,100
$ 8,100
37
Problem 2-2B (continued)
FIREWORKS FANTASIA
Statement of Owner’s Equity
For Year Ended December 31, 2005
Wes Gandalf, capital, January 1.......................
Add: Investments by owner ..........................
Total .............................................................
Less: Withdrawals by owner ............................
Net loss ....................................................
Wes Gandalf, capital, December 31 .................
Assets
Cash .....................................
Accounts receivable ...........
Fireworks supplies..............
Office supplies ....................
Tools.....................................
Building................................
Land......................................
Office equipment.................
Total assets .........................
$26,000
8,100
$187,600
15,000
$202,600
34,100
$168,500
FIREWORKS FANTASIA
Balance Sheet
December 31, 2005
Liabilities
$ 14,000 Accounts payable.............. $ 9,000
7,000
16,000
1,500
9,000
62,000
Owner’s Equity
56,000 Wes Gandalf, capital ......... 168,500
12,000 Total liabilities and
owner’s equity ............... $177,500
$177,500
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38
Fundamental Accounting Principles, Eleventh Canadian Edition
Problem 2-3B (60 minutes) Part 1
STILLER CO.
Balance Sheet
December 31, 2006
Assets
Cash ...................................
Accounts receivable .........
Office supplies ..................
Office equipment...............
Machinery ..........................
$ 14,000
25,000
10,000
60,000
30,500
Total assets .......................
$139,500
Liabilities
Accounts payable......................... $
5,000
Owner’s Equity
Joseph Stiller, capital...................
134,5001
Total liabilities and
owner’s equity ........................... $139,500
STILLER CO.
Balance Sheet
December 31, 2007
Assets
Cash ...................................
Accounts receivable .........
Office supplies ..................
Office equipment...............
Machinery ..........................
Building..............................
Land ...................................
$ 10,000
30,000
12,500
60,000
30,500
260,000
65,000
Total assets .......................
$468,000
_____________________
Calculations:
1. $139,500 – $5,000 = $134,500
2. $468,000 – $275,000 = $193,000
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Solutions Manual for Chapter 2
Liabilities
Accounts payable ................. $ 15,000
Notes payable........................
260,000
Total liabilities ...................
275,000
Owner’s Equity
Joseph Stiller, capital ...........
193,0002
Total liabilities and
owner’s equity................... $468,000
39
Problem 2-3B (concluded) Part 2
Calculation of net income for 2007:
Owner’s equity, December 31, 2007 ....................................
Owner’s equity, December 31, 2006 ....................................
Increase in owner’s equity during 2007 ..............................
Less: Additional investment.................................................
Net increase in owner’s equity during 2007,
apart from new investment................................................
Add: Withdrawals ($1,000 × 12) ...........................................
Net income earned in 2007 ...................................................
$193,000
134,500
$ 58,500
25,000
$ 33,500
12,000
$ 45,500
Problem 2-4B (40 minutes) Part 1
Company V:
(a) and (b)
Calculation of owner’s equity:
Assets.....................................................
Liabilities ................................................
Owner’s equity.......................................
12/31/05
$45,000
–30,000
$15,000
12/31/06
$49,000
–26,000
$23,000
(c) Calculation of net income for 2006:
Owner’s equity, December 31, 2005 ....
Add: Owner investments ......................
Net income....................................
Less: Owner withdrawals .....................
Owner’s equity, December 31, 2006 ....
$15,000
6,000
?
4,500
$23,000
Therefore, the net income must have been $6,500.
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40
Fundamental Accounting Principles, Eleventh Canadian Edition
Problem 2-4B (continued)
Part 2
Company W:
(a) Calculation of equity at December 31, 2005:
Assets.......................................................
Liabilities..................................................
Owner’s equity.........................................
$70,000
–50,000
$20,000
(b) Calculation of equity at December 31, 2006:
Owner’s equity, December 31, 2005 ......
Add: Owner investments ........................
Net income......................................
Less: Owner withdrawals .......................
Owner’s equity, December 31, 2006 ......
$20,000
10,000
30,000
2,000
$58,000
(c) Calculation of the amount of liabilities at December 31, 2006:
Assets.......................................................
Owner’s equity.........................................
Liabilities..................................................
$90,000
–58,000
$32,000
Part 3
Company X:
First, calculate the beginning and ending equity balances:
12/31/05
Assets.......................................................
$121,500
Liabilities..................................................
–58,500
Owner’s equity.........................................
$ 63,000
12/31/06
$136,500
–55,500
$ 81,000
Then, find the amount of owner investments during 2006 by completing this table:
Owner’s equity, December 31, 2005 .....
Add: Owner investments ........................
Net income......................................
Less: Owner withdrawals .......................
Owner’s equity, December 31, 2006 ......
$63,000
?
16,500
0
$81,000
Therefore, the owner investments must have been $1,500.
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Solutions Manual for Chapter 2
41
Problem 2-4B (continued)
Part 4
Company Y:
First, calculate the beginning balance of equity:
Assets.......................................................
Liabilities ..................................................
Owner’s equity.........................................
Dec. 31, 2005
$82,500
–61,500
$21,000
Next, find the ending balance of equity by completing this table:
Owner’s equity, December 31, 2005 ......
Add: Owner investments........................
Net income......................................
Less: Owner withdrawals .......................
Owner’s equity, December 31, 2006 ......
$21,000
38,100
24,000
18,000
$65,100
Finally, find the ending amount of assets by adding the ending balance of equity to the
ending balance of the liabilities:
Liabilities ..................................................
Owner’s equity.........................................
Assets.......................................................
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42
Dec. 31, 2006
$ 72,000
65,100
$137,100
Fundamental Accounting Principles, Eleventh Canadian Edition
Problem 2-4B (concluded) Part 5
Company Z:
First, calculate the balance of equity as of December 31, 2006:
Assets.......................................................
Liabilities..................................................
Owner’s equity.........................................
$160,000
–52,000
$108,000
Next, find the beginning balance of equity by completing this table:
Owner’s equity, December 31, 2005 ......
Add: Owner investments........................
Net income......................................
Less: Owner withdrawals .......................
Owner’s equity, December 31, 2006 ......
$
?
40,000
32,000
6,000
$108,000
Therefore, the beginning balance of equity was $42,000.
Finally, find the beginning amount of liabilities by subtracting the beginning balance of
equity from the beginning balance of the assets:
Assets.......................................................
Owner’s equity.........................................
Liabilities..................................................
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Solutions Manual for Chapter 2
Dec. 31, 2005
$124,000
–42,000
$ 82,000
43
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44
Problem 2-5B (45 minutes) Parts 1 and 2
Assets
Cash
=
+ Accounts + Office +
Office
+
Receivable
Supplies
Equipment
Fundamental Accounting Principles, Eleventh Canadian Edition
(a)
+$50,000
(b) – 10,000
Bal. $40,000
(c)
– 9,000
Bal. $31,000
(d)
_______
Bal. $31,000
(e)
– 1,500
Bal. $29,500
(f)
_______
Bal. $29,500
(g) + 5,400
Bal. $34,900
(h) – 2,750
Bal. $32,150
(i)*
______
Bal. $32,150
(j)
+ 1,200
Bal. $33,350
(k)
–
900
Bal. $32,450
(l)
– 1,900
Bal. $30,550 +
+ $5,000
+$3,000
$3,000
______
$3,000
______
$3,000
______
$3,000
− 1,200
$1,800
______
$1,800
______
$1,800
+$2,000
$2,000
______
$2,000
______
$2,000
______
$2,000
______
$2,000
______
$2,000
______
$2,000
______
$2,000
______
+ $2,000
$5,000
+ 9,000
$14,000
+ 3,200
$17,200
_______
$17,200
_______
$17,200
_______
$17,200
_______
$17,200
_______
$17,200
_______
$17,200
_______
$17,200
_______
+ $17,200 +
Building
+$120,000
$120,000
________
$120,000
________
$120,000
________
$120,000
________
$120,000
________
$120,000
________
$120,000
________
$120,000
________
$120,000
________
$120,000
________
$120,000 =
$171,550
Note: For (i), since no transaction has occurred, no entry is required.
Liabilities
= Accounts +
Payable
=
+$5,200
$5,200
______
$5,200
______
$5,200
______
$5,200
______
$5,200
______
$5,200
______
$5,200
− 900
$4,300
______
$4,300
Notes
Payable
+
+$110,000
$110,000
________
$110,000
________
$110,000
________
$110,000
________
$110,000
________
$110,000
________
$110,000
________
$110,000
________
$110,000
________
$110,000
________
+ $110,000 +
$171,550
Owner’s Equity
+ Judith Grimm,
Capital
+$55,000
_______
$55,000
_______
$55,000
_______
$55,000
− 1,500
$53,500
+ 3,000
$56,500
+ 5,400
$61,900
− 2,750
$59,150
_______
$59,150
_______
$59,150
_______
$59,150
− 1,900
$57,250
Explanation of Changes
Investment
Advertising Expense
Consulting Services Revenue
Consulting Services Revenue
Withdrawal
Wages Expense
Problem 2-5B (continued)
Part 3
Southwest Consulting
Income Statement
For Year Ended December 31, 2005
Revenues:
Consulting services revenue
Operating expenses:
Wages expense
Advertising expense
Total operating expenses
Net income
$8,400
$1,900
1,500
Southwest Consulting
Statement of Owner’s Equity
For Year Ended December 31, 2005
Judith Grimm, capital, January 1
Add: Investment by owner
$55,000
Net income
5,000
Total
Less: Withdrawal by owner
Judith Grimm, capital, December 31
Assets
Cash
Accounts receivable
Office supplies
Office equipment
Building
Total assets
Southwest Consulting
Balance Sheet
December 31, 2005
Liabilities
$ 30,550
Accounts payable
1,800
Notes payable
2,000
Total liabilities
17,200
120,000
Owner’s Equity
Judith Grimm, capital
Total liabilities and owner’s equity
$171,550
Copyright © 2005 by McGraw-Hill Ryerson Limited. All rights reserved.
Solutions Manual for Chapter 2
3,400
$5,000
$
0
60,000
$60,000
2,750
$57,250
$ 4,300
110,000
$114,300
57,250
$171,550
45
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46
Problem 2-6B (60 minutes) Parts 1 and 2
Assets
Cash
June
Fundamental Accounting Principles, Eleventh Canadian Edition
1
1
4
6
8
14
16
20
21
22
24
29
29
30
30
30
30
+
+$120,000
– 4,500
– 2,400
– 2,250
+
750
–
+
1,900
5,300
+ 3,500
–
375
–
120
–
525
– 1,900
– 2,000
$113,580 +
= Liabilities +
Accounts + Cleaning = Accounts +
Receivable
Supplies
Payable
+$2,400
+$5,300
– 5,300
+ 3,500
+ 825
– 3,500
$ 825 +
$117,555
+
750
+$750
– 375
$3,150 =
=
$375 +
Owner’s
Equity
Andrew
Martin,
Capital
Explanation of Change
+$120,000
– 4,500
Investment
Rent Expense
–
+
+
–
2,250
750
5,300
1,900
Advertising Expense
Service Revenue
Service Revenue
Salaries Expense
+
3,500
Service Revenue
+825
Service Revenue
–
120
–
525
– 1,900
– 2,000
$117,180
$117,555
Telephone Expense
Utilities Expense
Salaries Expense
Withdrawal
Problem 2-6B (concluded) Part 3
UNIVERSAL MAINTENANCE CO.
Income Statement
For Month Ended June 30, 2005
Revenues:
Maintenance services revenue .........................
Operating expenses:
Rent expense.......................................................
Salaries expense.................................................
Advertising expense...........................................
Utilities expense..................................................
Telephone expense.............................................
Total operating expenses...............................
Net loss ......................................................................
$10,375
$4,500
3,800
2,250
525
120
11,195
$ 820
UNIVERSAL MAINTENANCE CO.
Statement of Owner’s Equity
For Month Ended June 30, 2005
Andrew Martin, capital, June 1..................................
Add: Investments by owner ......................................
Total ........................................................................
Less: Withdrawals by owner ....................................
Net loss.............................................................
Total ........................................................................
Andrew Martin, capital, June 30................................
$2,000
820
$
0
120,000
$120,000
2,820
$117,180
UNIVERSAL MAINTENANCE CO.
Balance Sheet
June 30, 2005
Assets
Cash ...................................
Accounts receivable .........
Cleaning supplies .............
$113,580
825
3,150
Total assets .......................
$117,555
Liabilities
Accounts payable.........................
$
375
Owner’s Equity
Andrew Martin, capital .................
117,180
Total liabilities and
owner’s equity ........................... $117,555
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Solutions Manual for Chapter 2
47
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48
Problem 2-7B (50 minutes) Parts 1 and 2
Fundamental Accounting Principles, Eleventh Canadian Edition
June 30
July 1
Bal.
1
Bal.
1
Bal.
6
Bal.
8
Bal.
10
Bal.
15
Bal.
17
Bal.
23
Bal.
25
Bal.
28
Bal.
31
Bal.
Bal.
Bal.
31
31
Assets
= Liabilities + Owner’s Equity
+ Accounts + Office + Office + Excavat. = Accounts + Robert Cantu,
Cash
Receivable
Supplies
Equip.
Equip.
Payable
Capital
$ 6,000 +
$2,300 +
$780 + $4,800 + $17,000 =
$3,100 +
$27,780
60,000
60,000
$66,000
$87,780
–
500
–
500
$65,500
$87,280
–
800
+ 4,000
+ 3,200
_______
$64,700
$21,000
$6,300
$87,280
–
500
+ 500
______
______
_______
$64,200
$1,280
$21,000
$6,300
$87,280
+ 2,200
_____
______
______
+ 2,200
$66,400
$1,280
$21,000
$6,300
$89,480
______
_____
+ 3,800
______
+ 3,800
_______
$66,400
$1,280
$8,600
$21,000
$10,100
$89,480
______
+ 2,400
_____
______
______
______
+ 2,400
$66,400
$4,700
$1,280
$8,600
$21,000
$10,100
$91,880
______
______
+ 1,920
______
______
+ 1,920
_______
$66,400
$4,700
$3,200
$8,600
$21,000
$12,020
$91,880
– 3,800
______
______
______
______
– 3,800
$62,600
$4,700
$3,200
$8,600
$21,000
$8,220
$91,880
______
+ 5,000
______
______
______
______
+ 5,000
$62,600
$9,700
$3,200
$8,600
$21,000
$8,220
$96,880
– 2,400
______
______
______
______
_______
+ 2,400
$65,000
$7,300
$3,200
$8,600
$21,000
$8,220
$96,880
–
______
______
______
______
______
– 1,260
1,260
$63,740
$7,300
$3,200
$8,600
$21,000
$8,220
$95,620
–
260
______
______
______
______
______
–
260
$63,480
$7,300
$3,200
$8,600
$21,000
$8,220
$95,360
– 1,200
______
______
______
______
– 1,200
$62,280 +
$7,300 + $3,200 + $8,600 + $21,000 =
$8,220 +
$94,160
$102,380
=
$102,380
Explanation
of Change
Investment
Rent Expense
Excavating Fees Earned
Excavating Fees Earned
Excavating Fees Earned
Salaries Expense
Utilities Expense
Withdrawal
Problem 2-7B (concluded) Part 3
CANTU EXCAVATING CO.
Income Statement
For Month Ended July 31, 2005
Revenues:
Excavating fees earned .................................
Operating expenses:
Salaries expense.............................................
Rent expense...................................................
Utilities expense .............................................
Total operating expenses...........................
Net income ..............................................................
$9,600
$1,260
500
260
2,020
$7,580
CANTU EXCAVATING CO.
Statement of Owner’s Equity
For Month Ended July 31, 2005
Robert Cantu, capital, June 30..............................
Add: Investments by owner ..................................
Net income.....................................................
Total .....................................................................
Less: Withdrawals by owner .................................
Robert Cantu, capital, July 31 ...............................
$60,000
7,580
$ 27,780
67,580
$95,360
1,200
$94,160
CANTU EXCAVATING CO.
Balance Sheet
July 31, 2005
Assets
Cash ...................................
Accounts receivable .........
Office supplies ..................
Office equipment...............
Excavating equipment......
$62,280
7,300
3,200
8,600
21,000
Total assets .......................
$102,380
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Solutions Manual for Chapter 2
Liabilities
Accounts payable .................
$ 8,220
Owner’s Equity
Robert Cantu, capital............
94,160
Total liabilities and
owner’s equity...................
$102,380
49
Problem 2-8B (25 minutes)
1
2
3
4
5
6
7
8
9
10
Owner invests cash..........................
Pay wages with cash........................
Acquire services on credit...............
Buy store equipment for cash.........
Borrow cash with note payable.......
Sell services for cash.......................
Sell services on credit......................
Pay rent with cash ............................
Owner withdraws cash.....................
Collect receivable from (7)...............
Income
Balance Sheet
Stmnt
Total
Total
Net
Assets Liab. Equity Income
+
+
–
–
–
+
–
–
+/–
+
+
+
+
+
+
+
+
–
–
–
–
–
+/–
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50
Fundamental Accounting Principles, Eleventh Canadian Edition
ANALYTICAL AND REVIEW PROBLEMS
A&R Problem 2-1
TASKER AUTO REPAIR SHOP
Balance Sheet
November 30, 2005
Assets
Cash.................................... $ 6,300
Accounts receivable.......... 47,250
Parts and supplies............. 14,175
Equipment.......................... 22,050
Total assets........................ $89,775
Liabilities
Accounts payable ............
Mortgage payable ............
Total liabilities ..............
Owner’s Equity
Jack Tasker, capital.........
Total liabilities and
owner’s equity ..............
$34,650
28,350
$63,000
26,775
$89,775
Note to Instructors:
To reinforce students’ understanding of the nature of double-entry bookkeeping and the
accounting equation, it may be advantageous to use this problem to demonstrate the
importance of recording transactions correctly because neither double-entry bookkeeping
nor the accounting equation guarantee the correctness of information; they only prove
arithmetic accuracy.
Accordingly, the best way to explain this seemingly impossible situation to beginning
students in accounting is to summarize both incorrect and the correct balance sheets in
detail.
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Solutions Manual for Chapter 2
51
A&R Problem 2-2
SUSAN HUANG, LAWYER
Income Statement
For Month Ended October 31, 2005
Revenues
Legal fees ............................................................
Operating expenses
Salaries expense.................................................
Rent expense.......................................................
Supplies expense................................................
Telephone expense.............................................
Total operating expenses ...............................
Net income ..................................................................
$11,550
$2,940
2,100
420
210
5,670
$ 5,880
SUSAN HUANG, LAWYER
Statement of Owner’s Equity
For Month Ended October 31, 2005
Susan Huang, capital, October 1 ..............................
Add: Investment by owner ........................................
Net income.........................................................
Total .........................................................................
Susan Huang capital, October 31 .............................
$10,500
5,880
$
0
16,380
$16,380
SUSAN HUANG, LAWYER
Balance Sheet
October 31, 2005
Assets
Cash....................................
Accounts receivable..........
Supplies..............................
Law library..........................
Furniture.............................
$ 3,780
2,100
1,050
8,400
2,100
Total assets........................
$17,430
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52
Liabilities
Accounts payable............ $ 1,050
Owner’s Equity
Susan Huang, capital ...... 16,380
Total liabilities and
owner’s equity .............. $17,430
Fundamental Accounting Principles, Eleventh Canadian Edition
A&R Problem 2-3
Dec 31/2006 Dec 31/2005 Dec 31/2004
414,0006
294,000
248,0001
68,0005
94,0004
164,0008
346,000
200,0003
84,0007
Assets
Liabilities
Owner's equity
Additional Information:
Net income (loss)
Owner investment
Owner withdrawals
Assets increased
Liabilities increased (decreased)
During 2006
197,0002
0
51,000
120,000
(26,000)
During 2005
84,000
32,000
0
46,000
(70,000)9
Calculations:
Dec. 31/2004
Assets
=
1
$248,000
+46,000
Liabilities
+
8
$164,000
–70,0009
Dec. 31/2005
$294,000
+120,000
$94,0004
–26,000
Dec. 31/2006
$414,0006
$68,0005
1.
2.
3.
4.
5.
6.
7.
8.
9.
Equity
$84,0007
+84,000
+32,000
0
$200,0003
197,0002
0
–51,000
$346,000
Net income
Owner investment
Withdrawals
Net income
Owner investment
Withdrawals
$294,000 – $46,000 = $248,000
$120,000 + $26,000 + $51,000 = $197,000
$346,000 + $51,000 – $197,000 = $200,000
$294,000 – $200,000 = $94,000
$94,000 – $26,000 = $68,000
$346,000 + $68,000 = $414,000
$200,000 – $32,000 – $84,000 = $84,000
$248,000 – $84,000 = $164,000
$164,000 – $94,000 = $70,000
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Solutions Manual for Chapter 2
53
A&R Problem 2-4
Income Statement
Revenues
Expenses
1.
$14,000
Balance Sheet
Liabilities
Assets
$14,000
2.
$5,000
3.
$25,000
4.
$500
Owner’s
Equity
$14,000
$25,000
500
500
5.
500
6.
10,000
10,000
7.
5,000
5,000
8.
200
200
9.
2,000
10.
12,000
11.
12.
45
900
500
45
45
900
900
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54
Fundamental Accounting Principles, Eleventh Canadian Edition
Ethics Challenge
1.
The accounting principle most relevant to this situation is the revenue
recognition principle. The revenue recognition principle provides guidance on
when revenue should be recognized on the income statement. The principle
states that revenue should be recognized when earned. In this case, the earliest
the revenue could be considered earned is when the product is shipped to
customers.
2.
If Sue is aware of the revenue recognition principle she faces a dilemma of
applying GAAP, which will result in different revenue recognition than her
supervisor is advocating. Sue faces a dilemma of following the guidance of her
profession or following her supervisor. If Sue does not conform to her
supervisor’s wishes she may face the consequence of losing her job. If Sue
does what her supervisor requests she may face internal anguish of doing
something that she knows is not professionally correct and which may
negatively affect any users of the financial statements that she is helping
produce.
3.
Students should support their decision with appropriate reasons likely echoing
the discussion in 2) above.
4.
Sue may be able to discuss the situation she is facing with someone else in the
firm and find support for not following the supervisor’s directive. If the intent to
violate accounting principles is a commonplace occurrence in the skateboard
company Sue may wish to seek employment elsewhere as the problem will likely
reoccur in the future.
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Solutions Manual for Chapter 2
55
Copyright © 2005 by McGraw-Hill Ryerson Limited. All rights reserved.
56
Focus on Financial Statements
Parts 1 and 2
June 2005
Assets
+ Accounts +
Receivable
Cash
June 1 +20,000
5
7
-1,500
9 +1,000
15
-5,000
17 +2,000
29
30
-1,500
Totals 15,000 +
+3,000
-1,000
=
Liabilities + Owner’s Equity
Office
= Accounts + Diane Towbell,
Equip.
Payable
Capital
+6,000
+26,000
+3,000
-1,500
+300
2,000 +
Fundamental Accounting Principles, Eleventh Canadian Edition
23,000
6,000 =
300
+
23,000
-5,000
+2,000
-300
-1,500
22,700
Explanation of Change
in Owner’s Equity
Owner investment
Service revenue
Rent expense
Wages expense
Service revenue
Utilities expense
Wages expense
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Solutions Manual for Chapter 2
Focus on Financial Statements
Parts 1 and 2 (continued)
July 2005
Assets
+ Accounts +
Cash
Receivable
Balance 15,000
2,000
June 30
July 5
+3,500
8 +2,000
-2,000
9 -1,500
12
14 -1,000
15 -2,500
17 +4,800
25
-600
31 -1,700
31 -2,000
Totals 12,500 +
3,500 +
23,800
=
Liabilities + Owner’s Equity
Office
= Accounts + Diane Towbell,
Equip.
Payable
Capital
6,000
300
22,700
+1,800
+1,800
-1,000
-300
7,800 =
800
+
23,800
Explanation of Change
in Owner’s Equity
+3,500
Service revenue
-1,500
Rent expense
-2,500
+4,800
-300
-1,700
-2,000
23,000
Wages expense
Service revenue
Utilities expense
Wages expense
Owner withdrawals
57
Focus on Financial Statements (continued)
Part 3
GLENROSE SERVICING
Income Statement
For Month Ended June 30, 2005
Revenues:
Service revenue ..............................................
$5,000
Operating expenses:
Wages expense ...............................................
Rent expense...................................................
Utilities expense..............................................
Total operating expenses ...........................
Net loss ...................................................................
$6,500
1,500
300
8,300
$3,300
GLENROSE SERVICING
Statement of Owner’s Equity
For Month Ended June 30, 2005
Diane Towbell, capital, June 1..........................
Add: Investments by owner ..........................
Total .............................................................
Less: Withdrawals by owner ............................
Net loss ....................................................
Diane Towbell, capital, June 30........................
$
$ -03,300
-026,000
$26,000
3,300
$22,700
GLENROSE SERVICING
Balance Sheet
June 30, 2005
Assets
Cash ..............................................
Accounts receivable ....................
Office equipment..........................
$15,000
2,000
6,000
Total assets ..................................
$23,000
Liabilities
Accounts payable ...................
Owner’s Equity
Diane Towbell, capital.............
Total liabilities and
owner’s equity.....................
$
300
22,700
$23,000
Focus on Financial Statements (continued)
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58
Fundamental Accounting Principles, Eleventh Canadian Edition
Part 3
GLENROSE SERVICING
Income Statement
For Month Ended July 31, 2005
Revenues:
Service revenue ..............................................
$8,300
Operating expenses:
Wages expense ...............................................
Rent expense...................................................
Utilities expense..............................................
Total operating expenses...........................
Net income ..............................................................
$4,200
1,500
300
6,000
$2,300
GLENROSE SERVICING
Statement of Owner’s Equity
For Month Ended July 31, 2005
Diane Towbell, capital, June 30 .......................
Add: Investments by owner ..........................
Net income..............................................
Total .............................................................
Less: Withdrawals by owner ............................
Diane Towbell, capital, July 31.........................
$
-02,300
$22,700
2,300
$25,000
2,000
$23,000
GLENROSE SERVICING
Balance Sheet
July 31, 2005
Assets
Cash ...............................................
Accounts receivable .....................
Office equipment...........................
$12,500
3,500
7,800
Total assets ...................................
$23,800
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Solutions Manual for Chapter 2
Liabilities
Accounts payable ...................
Owner’s Equity
Diane Towbell, capital ............
Total liabilities and
owner’s equity.....................
$
800
23,000
$23,800
59