Test Bank Latest Canadian 14th_Ed Fundamental Accounting Principles by Kermit Larson

$29.99

What Can You Expect From A tests bank 100

Multiple-choice.

True-false

Fill-in-the-blank

Matching

Short,questions

Essay,question

Sample,Chapter

Description

Test Bank Latest Canadian 14th_Ed Fundamental Accounting Principles by Kermit Larson

Sample Chapter No 1                          

 

SOLUTIONS MANUAL

to accompany

Fundamental Accounting Principles

14th Canadian Edition

by Larson/Jensen

 

 

 

Prepared by:

Tilly Jensen, Athabasca University

Wendy Popowich, Northern  Alberta Institute of Technology

Susan Hurley, Northern Alberta Institute of Technology

Ruby So Koumarelas, Northern Alberta Institute of Technology

 

Technical checks by:

Ross Meacher

Betty Young, Red River College,

ANSR Source

 

Chapter 1                        Accounting in Business

 

Chapter Opening Vignette Critical Thinking Challenge Questions*

 

1.    What questions might Jake need the answers to in order to get a loan from a bank? 

How many employees does he need to hire to provide services to clients? Does Jake pay his employees a salary or a wage? How much does he pay them? Does he have the cash in the bank to pay his employees? Does he have rental equipment? Does he have a vehicle? Does he have insurance? Is the building rented or purchased? If he rents a building, did he make rental payments in advance or does he pay monthly? If the building was purchased, did he pay cash or does he owe money on it? If he owes money, does he pay interest? If he owns a building, how much does he pay on property taxes and utilities? If he owns a building, how much does he pay for repairs and maintenance? What about buying and paying for supplies? Does he advertise? If so, how much does he pay? How much is the business actually earning? Do customers pay in advance or do they pay per session? Do customers pay cash or on account? What is the amount of income tax he has to pay? Are there any outstanding loans?  If so, what is the balance outstanding, the term, the payments, and the interest rate?  There are many other questions that could be asked.

2.    Who else might require accounting information from Jake’s business?

Other stakeholders that might require accounting information from Jake’s business include Canada Revenue Agency (CRA), employees, and potential investors.

*The Chapter 1 Critical Thinking Challenge questions are asked at the beginning of this chapter.  Students are reminded at the conclusion of the chapter to refer to the Critical Thinking Challenge questions at the beginning of the chapter.  The solutions to the Critical Thinking Challenge questions are available here in the Solutions Manual and accessible to students at Connect.
Concept Review Questions

 

  1. Jake identifies accounting knowledge as the key to success in business.
  2. Businesses offering products include Danier Leather, Bauer, NIKE, and Reebok which produce apparel; Dell, Hewlett-Packard, and Apple which produce computer equipment; and Tilley, Levis, and GAP which produce clothing.  Service business examples include: WestJet Airlines which provides airline services; Sympatico, AOL Canada, and CompuServe provide information communication services; and Tilden, Hertz, and Budget which provide vehicle rental services.
  3. Business organizations can be organized in one of three forms: sole proprietorship, partnership, or corporation. These forms have implications for legal liability, taxation, continuity, number of owners, and legal status as follows:

Sole Proprietorship  Partnership                Corporation

Legal entity                             no                          no                                 yes

Limited liability                       no                          no                                 yes

Unlimited life                          no                          no                                 yes

Business income taxed         no                          no                                 yes

One owner allowed              yes                         no                                 yes

  1. The equity section of the balance sheet reports a Virgil Klimb, Capital account. The presence of the owner’s capital account indicates that Vertically Inclined has been organized as a sole proprietorship.
  2. The two organizations for which accounting information is available in Appendix 1 at the end of the book are WestJet Airlines and Danier Leather.
  3. Hospitals, colleges, prisons, and bus lines are examples of organizations that can be formed as profit-oriented businesses, government units, or nonprofit establishments.
  4. Individuals responsible for marketing activities are likely interested in information such as sales volume, advertising costs, promotion costs, salaries of sales personnel, and sales commissions.
  5. External users and their uses of accounting information include: (a) lenders for measuring the return of loans; (b) shareholders for assessing the acquisition of shares; (c) members of the board of directors for overseeing management; and (d) potential employees for judging employment opportunities. Other users are auditors, consultants, regulators, unions, suppliers, and appraisers.  Internal users and their uses of accounting information include:  (a)  management for overseeing performance, financial position, and cash flow; and (b) current employees for generating special purpose reports to assist management.
  6. The internal role of accounting is to serve the organization’s internal operating functions by providing useful information in completing their tasks more effectively and efficiently. By providing this information, accounting helps the organization reach its overall goals.
  7. Managerial accounting tasks performed by both private and government accountants include general accounting, cost accounting, budgeting, auditing, and management consulting.
  8. Management consulting services offered by public accounting professionals include designing and installing accounting systems, establishing internal controls, advice on budgeting, guidance in information technology, and constructing employee benefit plans.
  9. In addition to preparing tax returns, tax accountants help companies plan future transactions to minimize the amount of tax to be paid.
  10. The independent auditor for Danier Leather is PricewaterhouseCoopers LLP.
  11. The purpose of accounting is to provide decision makers with information helping them make better decisions. Examples include information for people making investments, loans and similar decisions.
  12. Accounting professionals deal with a variety of information about their employers and clients that is not generally available to the public. Ethical issues arise concerning the possibility that accounting professionals might personally benefit by using confidential information. There is also the possibility that their employers and clients might be harmed if certain information is not kept confidential.
  13. 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.
  14. 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.
  15. The four financial statements are: the income statement, the balance sheet, the statement of changes in equity, and the statement of cash flows.
  16. An income statement reports on the business’s performance during the period. It shows whether the business earned a net income (or net loss). The statement does not simply report the amount of net income or loss but lists the types and amounts of the revenues and expenses.
  17. 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.
  18. A business’s equity is increased by investments into the business made 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.
  19. The balance sheet reports on the financial position of a business at a specific point in time. It is often called the statement of financial position. It provides information that helps users understand a company’s financial status. The balance sheet lists the types and dollar amounts of assets, liabilities, and equity of the business.
  1. (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.

 

 

QUICK STUDY

Quick Study 1-1

There are a variety of questions and this list is certainly not exhaustive:

  1. How much was spent on advertising last year? And/or how much is projected to be spent this year?
  2. What is the effect of advertising on sales? And/or what is the projected effect of advertising on this year’s sales?
  3. How much was spent on delivering flowers last year? And/or how much is projected to be spent this year?
  4. How much will it cost to create a webpage and sell flowers online?
  5. Can sales be increased by selling online? And/or what is the experience of our competitors in this regard?
  6. When pricing flowers, how much is being charged for delivery?
  7. Are there enough sales staff to answer phones/emails and/or are sales being lost because of insufficient staffing and/or staffing issues?

Quick Study 1-2

a. Accounting Meeting with the mechanical staff to determine new machine requirements for next year.
b. Recordkeeping Data entry of sales orders received via the telephone.
c. Accounting Analyzing a sales report to determine if the discount policy is effective in getting customers to buy in multiple quantities.
d. Recordkeeping Listing cheques received in the mail.

Quick Study 1-3

a. Highlands United Church Non-business d. CDI College Business
b. Royal Alexandra Hospital Non-business e. Loblaw Business
c. RBC Business f. World Vision Non-business

 

Quick Study 1-4

Accounting professionals practice in four broad fields including: Accounting-related opportunities within each field are numerous and include:
Financial accounting –  Statement preparation

–  Statement analysis

–  Auditing

–  Regulatory

–  Consulting

–  Planning

–  Criminal investigation

Managerial accounting –  General accounting

–  Cost accounting

–  Budgeting

–  Internal auditing

–  Management advisory services

Taxation –  Preparation

–  Planning

–  Regulatory

–  Investigations

–  Consulting

Accounting-related –  Lenders

–  Consultants

–  Analysts

–  Traders

–  Managers

–  Directors

–  Underwriters

–  Planners

–  Appraisers

 

 

Quick Study 1-5

Accounting information could be used to determine if a product should be sold or if an investment should be made.

Quick Study 1-6

The four elements need to be addressed as follows:

  1. Is it the Truth? No, personal dinners with a spouse are not business expenses so you are not being truthful in submitting these as part of the expense report.
  2. Is it Fair to all concerned? No, it is not fair to the owner(s) of the business, to the other employees, or to your spouse (since they are likely not aware of the deceit).
  3. Will it build goodwill and better friendships? It may build a good relationship with the restaurant owners where you take your spouse but it will damage goodwill between the employer and you as well as strain friendships with other employees.
  4. Will it be beneficial to all concerned? It will benefit you, your spouse, and the restaurant owner but it will not benefit the business owner(s) and the other employees.

Conclusion:  The behaviour in the situation described appears to be unethical based on the application of the Rotary 4-Way Test.

Quick Study 1-7

  1. Business entity principle
  2. Revenue recognition principle
  3. Cost principle

Quick Study 1-8

  1. Revenue Recognition
  2. Cost
  3. Business Entity
  4. Going Concern
  5. Monetary Unit

Quick Study 1-9

Monetary Unit a. Delco performed work for a client located in China and collected 8,450,000 RMB (Chinese currency), the equivalent of about $1,320,000 Canadian. Delco recorded it as 8,450,000.
Revenue Recognition b. Delco collected $180,000 from a customer on December 20, 2014 for work to be done in February 2015.  The $180,000 was recorded as revenue during 2014.  Delco’s year end is December 31.
Going Concern c. Delco’s December 31, 2014 balance sheet showed total assets of $840,000 and liabilities of $1,120,000.  The income statement for the past 6 years has shown a trend of increasing losses.
Cost d. Included in Delco’s assets was land and building purchased for $310,000 and reported on the balance sheet at $470,000.
Business Entity e. Delco’s owner, Tom Del, consistently buys personal supplies and charges them to the company.

 

Quick Study 1-10

  1. SP
  2. C
  3. P
  4. SP
  5. C
  6. C
  7. P

Quick Study 1-11

  1. Equity = $  75,000  – $ 40,500   = $  34,500
  2. Liabilities = $300,000  – $ 85,500   = $214,500
  3. Assets = $187,500  + $ 95,400   = $282,900

Quick Study 1-12

  1. Equity = $374,700  – $252,450  = $122,250
  2. Liabilities = $150,900  – $126,000  = $  24,900
  3. Assets = $  37,650  + $112,500  = $150,150

 


Quick Study 1-13

 

b.

Allin Servicing
Income Statement
For Month Ended May 31, 2014
Revenues $135
Expenses 85
Net income (loss) $  50
Allin Servicing
Statement of Changes in Equity
For Month Ended May 31, 2014
Tim Allin, capital, May 1 $240
Add:  Investments by owner $  60
        Net income 50 $110
Total 350
Less:  Withdrawals by owner 75
Tim Allin, capital, May 31 $275

 

Allin Servicing
Balance Sheet
May 31, 2014
Assets Liabilities
  Cash $120   Accounts payable $  45
  Equipment 200 Equity
  Tim Allin, capital 275
Total liabilities and
Total assets $320      equity $320

 

a.

Allin Servicing
Income Statement
For Month Ended April 30, 2014
Revenues $300
Expenses 125
Net income (loss) 175
Allin Servicing
Statement of Changes in Equity
For Month Ended April 30, 2014
Tim Allin, capital, April 1 $  50
Add:  Investments by owner $  30
        Net income   175   205
Total $255
Less:  Withdrawals by owner    15
Tim Allin, capital, April 30 $240
Allin Servicing
Balance Sheet
April 30, 2014
Assets Liabilities
  Cash $  60   Accounts payable $  25
  Equipment 205 Equity
  Tim Allin, capital 240
Total liabilities and
Total assets $265      equity $265

 

 

 

Quick Study 1-14

  1. $20,000 – $15,000 = $5,000 beginning capital on January 1, 2014
  2. $5,000 + $3,000 + $8,000 – $4,000 = $12,000 ending capital on December 31, 2014

Quick Study 1-15

The source documents include:

  1. Telephone bill
  2. Invoice from supplier
  3. Bank statement
  4. Sales invoice

Quick Study 1-16

           Assets = Liabilities +              Equity
a.     Increase/Decrease
b.    Increase Increase
c.    Decrease Decrease
d. Increase                Decrease
e.    Decrease                Decrease

Quick Study 1-17

c 1. Supplies…………………………………………… $10
a 2. Supplies expense…………………………….. 22
c 3. Accounts receivable………………………… 25
c 4. Accounts payable…………………………….. 12
c 5. Equipment……………………………………….. 40
b 6. Tim Roadster’s withdrawals in April… 35
c 7. Notes payable………………………………….. 30
a 8. Utilities expense………………………………. 10
c 9. Furniture………………………………………….. 20
a 10. Fees earned……………………………………… 70
a 11. Rent revenue……………………………………. 35
a 12. Salaries expense……………………………… 45
b 13. Tim Roadster’s investments in April… 60
a+b 14. Net income*……………………………………… 28

*Calculated as:  70 + 35 – 22 – 10 – 45 = 28

Quick Study 1-18

1. Total revenues……………………………………….. 70 + 35 = 105
2. Total operating expenses………………………. 22 + 10 + 45 = 77
3. Net income…………………………………………….. 105 – 77 = 28
4. Total assets…………………………………………… 10 + 25 + 40 + 20 = 95
5. Total liabilities……………………………………….. 12 + 30 = 42
6. Tim Roadster, capital (April 30, 2014)…….. 60 – 35 + 28 = 53
7. Total liabilities and equity………………………. 42 + 53 = 95

 

Quick Study 1-19

d 1. Net loss…………………………………………….. 2 Income statement &

Statement of changes in equity

d 2. Rent expense……………………………………. 22 Income statement
b 3. Rent payable…………………………………….. 6
a 4. Accounts receivable…………………………. 14
d 5. Joan Bennish’s investments in May….. 30 Statement of changes in equity
d 6. Interest revenue………………………………… 2 Income statement
d 7. Joan Bennish, capital, May 1, 2014……. 0 Statement of changes in equity
a 8. Repair supplies………………………………….  5
b 9. Notes payable……………………………………. 25
d 10. Joan Bennish’s withdrawals in May…… 5 Statement of changes in equity
a 11. Truck………………………………………………… 15
d 12. Consulting fees earned……………………… 18 Income statement
c 13. Joan Bennish, capital, May 31, 2014…… 23*
a 14. Cash…………………………………………………. 20
 

*

 

See QS1-20 for details on how this amount was calculated; this calculation was not a requirement of QS1-19.

 

Quick Study 1-20

BENNISH CONSULTING
Income Statement
For Month Ended May 31, 2014

Revenues:

Consulting fees earned…………………………………                   $18

Interest revenue……………………………………………                       2

Total revenues…………………………………………………….                               $20

Operating expenses:

Rent expense……………………………………………….                                 22

Net loss  ……………………………………………………………..                               $   2

 

BENNISH CONSULTING
Statement of Changes in Equity
For Month Ended May 31, 2014

Joan Bennish, capital, May 1………………………….                                      $  0

Add:    Investments by owner …………………………                                        30

Total ………………………………………………………..                                      $30

Less: Withdrawals by owner…………………………..                    $ 5

Net loss…………………………………………………                       2                 7

Joan Bennish, capital, May 31………………………..                                      $23

 

BENNISH CONSULTING
Balance Sheet
May 31, 2014

                                  Assets                                                                        Liabilities

Cash…………………………………………..               $20        Rent payable…………………………        $  6

Accounts receivable……………………                 14        Notes payable……………………….          25

Repair supplies…………………………..                   5        Total liabilities……………………….                 $31     

Truck………………………………………….                 15                                 Equity

                                                                                        Joan Bennish, capital…………….                   23

                                                                                        Total liabilities and

Total assets………………………………..               $54            equity………………………………..                 $54

 

 

EXERCISES

Exercise 1-1 (10 minutes)

  1. Corporation
  2. Sole proprietorship
  3. Corporation
  4. Partnership
  5. Sole proprietorship
  6. Sole proprietorship
  7. Corporation

Exercise 1-2 (5 minutes)

I or E I or E
Bank manager E Parent E
Owner I Canada Revenue Agency E
Toy Supplier E Cleaner contracted by TLC E

Exercise 1-3 (10 minutes)

  1. A
  2. C
  3. B
  4. A
  5. A
  6. B
  7. B
  8. C

 

Exercise 1-4 (20 minutes) (Answers will vary.)

a.

  1. Is it the Truth?  No, making personal long distance calls on the company phone without paying for the charges is deceitful.
  2. Is it Fair to all concerned?  No, it is not fair to the owner(s) of the business or to the other employees.
  3. Will it build goodwill and better friendships?  It will damage goodwill and friendships between the caller and their employer and colleagues as well as with the people they are calling (since they are likely not aware of the deceit).
  4. Will it be beneficial to all concerned?  It will benefit the caller in the short run in terms of cost savings but these costs will reduce the profits of the business owner(s).

 

Conclusion:  The behaviour in the situation described appears to be unethical based on the application of the Rotary 4-Way Test.

Exercise 1-4 (concluded)

 

b.

  1. Is it the Truth?  It appears that the three people ahead of you entered without tickets which is deceitful.  They may have fabricated a story to enter and/or the ticket-taker is part of the deceit.
  2. Is it Fair to all concerned?  It is unfair to the paying patrons of the theatre and unfair to the owner of the theatre.
  3. Will it build goodwill and better friendships?  In the long run, these types of relationships (between the ticket-taker and the three individuals admitted without tickets) are not what goodwill and true friendships are based upon.    Having observed the event, your respect for the ticket-taker and the three individuals admitted without tickets will be negatively affected.
  4. Will it be beneficial to all concerned?  In the short run, it will benefit the three people who were admitted without paying and the ticket-taker, if an acquaintance, may have accrued future benefits from the three people admitted.  If this transgression is discovered by the ticket-taker’s supervisor, the ticket-taker will likely lose their job which is certainly not beneficial.  The owner(s) of the theatre do not benefit from this event, nor do other patrons because if it is known that such things occur, ticket prices will be priced to include the cost of this kind of lost sale.

 

Conclusion:  The behaviour in the situation described appears to be unethical based on the application of the Rotary 4-Way Test.

 

c.

  1. Is it the Truth?  The cashier is not being truthful by providing receipts only upon request because the cash register would be showing fewer drop-in customers than actually occur.
  2. Is it Fair to all concerned?  No, it is not fair to the paying customers (prices may go up if drop-in revenues are not what is expected) or the owner of the facility.
  3. Will it build goodwill and better friendships?  No, deceitful acts never build goodwill and do not build good friendships.  Eventually, the supervisor and/or owner of the facility will recognize that drop-in revenues are lower than the actual number of drop-in customers attending the facility and the cashier will lose his/her job and perhaps face criminal charges.
  4. Will it be beneficial to all concerned?  No, it is not beneficial to the cashier (as they may lose his/her job), to the owner, or to the paying patrons.

 

Conclusion:  The behaviour in the situation described appears to be unethical based on the application of the Rotary 4-Way Test.

Exercise 1-5 (10 minutes)

Description

B     1.   Requires every business to be accounted for separately from its owner or owners.

A     2.   Requires financial statement information to be based on costs incurred in transactions.

D     3.   Requires financial statements to reflect the assumption that the business will continue operating instead of being closed or sold.

C     4.   Requires revenue to be recorded only when the earnings process is complete

 

Exercise 1-6 (10 minutes)

  1. $516,000 – $492,000 = $24,000 net income

 

  1. $165,000 – $240,000 = $75,000 net loss

 

  1. $32,000 + 0 – 0 + x = $86,000

x = $86,000 – $32,000

x = $54,000 net income

 

  1. $48,000 + $40,000 – 0 + x = $52,000

x = $52,000 – $48,000 – $40,000

x = –$36,000 or a $36,000 net loss

 

Exercise 1-7 (15 minutes)

  (a)   (b)   (c) (d)   (e)
Answers $ (19,750

 

) $46,000 $7,000 $10,250 $102,000

Proofs:

    Equity, January 1…………………….. $           0 $         0 $            0 $         0 $102,000
    Owner’s investments
        during the year……………………..  60,000  46,000 31,500 37,500 140,000
    Net income (loss) for the year…..     15,750   30,500    (4,500 ) 10,250 (8,000 )
    Owner’s withdrawals
        during the year ……………………. (19,750 ) (27,000 ) (20,000 ) (15,750 ) (63,000 )
    Equity, December 31………………… $56,000 $49,500 $7,000 $32,000 $171,000

 

Exercise 1-8 (15 minutes)

THE HIGGINS GROUP
Income Statement
For Month Ended November 30, 2014

Revenues:

Consulting fees earned…………………………………                               $22,000

Operating expenses:

Salaries expense…………………………………………..            $6,000

Rent expense……………………………………………….            2,550

Telephone expense………………………………………             1,680

Utilities expenses…………………………………………                 660

Total operating expenses…………………………..                                  10,890

Net income………………………………………………………….                               $ 11,110

 

Exercise 1-9 (15 minutes)

THE HIGGINS GROUP
Statement of Changes in Equity
For Month Ended November 30, 2014

Jean Higgins, capital, November 1………………….                               $         0

Add:    Investments by owner …………………………              84,000

Net income………………………………………….              11,110        95,110

Total ………………………………………………………..                               $95,110

Less: Withdrawals by owner…………………………..                                   3,360

Jean Higgins, capital, November 30………………..                               $91,750

 

Analysis component:

The owner, Jean Higgins, invested $84,000 of assets during the month, which caused equity to increase.  Also, net income earned during the month was $11,110 also causing equity to increase during November.  The total increases in equity during the month were a total of $95,110 ($84,000 + $11,110).

NOTE:  Students might point out that equity decreased by a total of $3,360 in withdrawals which in combination with the total increase of $95,110 caused a net increase in equity of $91,750.

 

Exercise 1-10 (15 minutes)

THE HIGGINS GROUP
Balance Sheet
November 30, 2014

                                  Assets                                                                        Liabilities

Cash…………………………………………..        $16,000        Accounts payable………………….          $  7,500

Accounts receivable……………………          17,000

Office supplies……………………………            5,000                                           Equity

Automobiles……………………………….          36,000        Jean Higgins, capital……………..            91,750

Office equipment………………………..          25,250        Total liabilities and

Total assets………………………………..        $99,250            equity………………………………..          $99,250

 

Analysis component:

$91,750 (or 92.44% calculated as $91,750/$99,250 × 100) of the total $99,250 assets are financed by Jean Higgins, the owner of The Higgins Group.

 

Exercise 1-11 (15 minutes)

WINDSOR LEARNING SERVICES
Income Statement
For Month Ended July 31, 2014

Revenues:

Tutoring fees earned…………………………………….                               $4,200

Textbook rental revenue……………………………….                                     300

Total revenues…………………………………………..                               $ 4,500

 

Operating expenses:

Office rent expense………………………………………            $2,500

Tutors wages expense………………………………….            1,540

Utilities expense…………………………………………..                 680

Total operating expenses…………………………..                                    4,720

Net loss  ……………………………………………………………..                               $      220

 

Exercise 1-12 (15 minutes)

WINDSOR LEARNING SERVICES
Statement of Changes in Equity
For Month Ended July 31, 2014

Milton Windsor, capital, July 1………………………..                               $  7,400

Add:    Investments by owner …………………………                                   1,200

Total ………………………………………………………..                               $  8,600

Less: Withdrawals by owner…………………………..             $ 1,000

Net loss…………………………………………………                   220          1,220

Milton Windsor, capital, July 31………………………                               $  7,380

 

Analysis component:

Withdrawals of $1,000 by the owner, Milton Windsor, caused equity to decrease during July, 2014.  Also, the net loss of $220 caused equity to decrease in July.  The total decrease in equity during the month of July was $1,220 (calculated as $1,000 + $220).

 

NOTE:  Students might point out that equity increased by $1,200 of owner investments which, in combination with the total decrease of $1,220, caused a net decrease in equity of $20.

Exercise 1-13 (15 minutes)

WINDSOR LEARNING SERVICES
Balance Sheet
July 31, 2014

                                  Assets                                                                        Liabilities

Cash…………………………………………..        $  1,600        Accounts payable………………….         $   1,500

Accounts receivable……………………            2,000

Supplies……………………………………..            1,280                                           Equity

Furniture…………………………………….            1,800        Milton Windsor, capital………….              7,380

Computer equipment………………….            2,200        Total liabilities and

Total assets………………………………..          $8,880            equity………………………………..            $8,880

 

Analysis component:

$1,500 or 16.89% (calculated as $1,500/$8,880 × 100) of the total $8,880 assets held by Windsor Learning Services are financed by debt.

 

Exercise 1-14 (20 minutes)

Assets       –       Liabilities     =             Equity

Beginning of the year……………………..       $ 75,000     –        $30,000       =          $  45,000

End of the year……………………………….      $120,000     –        $46,000       =              74,000

 

  (a)   (b)   (c) (d)
Answers $ 29,000

 

$86,000 $(51,000 ) $(4,000)

Proofs:

    Equity, January 1…………………….. $    45,000 $    45,000 $    45,000 $  45,000
    Owner’s investments
        during the year…………………….. 0  0 80,000 75,000
    Net income (loss) for the year…..     29,000   86,000    (51,000 ) (4,000)
    Owner’s withdrawals
        during the year ……………………. (0 ) (57,000 ) (0 ) (42,000 )
    Equity, December 31………………… $74,000 $74,000 $74,000 $74,000
  1. An alternative calculation:

$45,000 + 0 + x – 0 = $74,000; x = $29,000

  1. An alternative calculation:

$45,000 + 0 + x – $57,000 = $74,000; x = $86,000

 

  1. An alternative calculation:

  $45,000 + $80,000 + x – 0 = $74,000; x = ($51,000) where the negative represents a loss.

  1. An alternative calculation:

$45,000 + $75,000 + x – $42,000 = $74,000; x = ($4,000) where the negative represents a loss.

Exercise 1-15 (10 minutes)

a.

If assets decreased by $15,000 during August, then

$25,000 + $15,000 = $40,000 Assets at August 1, 2014.

Therefore, Equity at August 1, 2014 = $40,000 – $10,000 = $30,000

 

b.

If liabilities increased by $9,000 during August, then

$10,000 + $9,000 = $19,000 Liabilities at August 31, 2014.

Therefore, Equity at August 31, 2014 = $25,000 – $19,000 = $6,000

Exercise 1-16 (15 minutes)

Assets Liabilities + Equity
Cash + Accounts Receivable + Office Supplies = Accounts Payable + Marnie Wesson, Capital
a)  + $25,000 + $25,000
b) + $600 + $600
c) +     7,000 +     7,000
d)*
e) – 4,500 – 4,500
f) + $1,250 + 1,250
Totals $27,500 + $1,250 + $600 = $600 + $28,750
$29,350 = $29,350

*Note:  For (d), since no exchange has occurred, no entry is required.

 

Exercise 1-17 (20 minutes)

Assets Liabilities + Equity
Cash + Accounts Receivable + Parts Supplies + Equipment = Accounts Payable + Stacey Crowe, Capital
a) +   $14,000 +  $    14,000
b) – 2,500 – 2,500
c) + $800 + $800
d) + $3,400 + $  3,400
e) – $  1,950 + $1,950
f)*
g) – $800 – $800
h) + $3,400 + $  3,400
i) – $2,700 – $  2,700
Totals $9,450 + $3,400 + $800 + $1,950   = $      0 + $15,600
$15,600 = $15,600

*Note:  For (f), since no exchange has occurred, no entry is required.

Exercise 1-18: (15 minutes)

  1. Office Supplies were purchased paying cash of $500.
  2. Office Furniture was purchased paying cash of $8,000.
  3. Completed work for a client on credit; $1,000.
  4. Purchased office supplies on credit; $400.
  5. Paid $250 to a creditor.
  6. Collected $750 cash from a credit customer.

 

Exercise 1-19 (20 minutes)

Assets = Liabilities + Equity Explanation of Equity Transaction
Cash + Accounts Receivable + Supplies + Equipment = Accounts Payable + Mailin Moon, Capital
a) + $3,000 + $2,500 +$5,500 Owner Investment
b) + $6,500 +$6,500 Revenue
c) + $600 + $600
d) – $   1,450 – $   1,450 Sal. Expense
e)*
f) – $  1,400 – $  1,400 Rent Expense
g) + $4,500 +$4,500 Revenue
Totals $6,650 + $4,500 + $600 + $2,500 = $600 + $13,650

 

$14,250 =      $14,250

 

*Note:  For (e), since no exchange has occurred, no entry is required.

Exercise 1-20 (25 minutes)

 

Mailin Moon– Freelance Writing

Income Statement

For Month Ended March 31, 2014

 

Revenues:
     Freelance writing revenue $11,000
Operating expenses:
     Salaries expense $    1,450
     Rent expense 1,400
         Total operating expenses 2,850
Net income $8,150

 

Mailin Moon– Freelance Writing

Statement of Changes in Equity

For Month Ended March 31, 2014

 

Mailin Moon, capital, March 1 $       0
Add:  Investment by owner $5,500
          Net income 8,150 13,650
Mailin Moon, capital, March 31 $13,650

 

Mailin Moon– Freelance Writing

Balance Sheet

March 31, 2014

Assets

Liabilities

  Cash $6,650  Accounts payable $   600
  Accounts receivable 4,500
  Supplies 600
  Equipment 2,500

                        Equity

Mailin Moon, capital 13,650
Total assets $14,250 Total liabilities and equity $14,250

 

Analysis component:

  1. Supplies of $600 were financed by accounts payable, a liability.
  2. Equipment of $2,500 was financed by owner investment, an equity transaction.
  3. Cash of $6,650 and Accounts receivable of $4,500 were financed by an investment by owner of $3,000 and net income of $8,150.  Net income includes the equity transactions of revenues and expenses (revenues of $11,000 less expenses of $2,850).

Exercise 1-21 (20 minutes)

Assets = Liabilities + Equity Explanation of Equity Transaction
 

 

Cash

 

 

+

 

Accounts Receivable

 

 

+

 

 

Supplies

 

 

+

 

 

Equipment

 

 

=

 

Accounts Payable

 

 

+

Pete Kequahtooway, Capital
a) +      $4,300 +$15,000 +$19,300 Owner Investment
b) +$1,600 +$1,600
c) +$950 +$950
d)*
e) +$550 +$550 Revenue
f) +$600 +$600 Revenue
g) -$200 -$200
h) -$250 -$250 Adv. Expense
i) +$600 -$600
Totals $4,450 + $550 + $2,550 + $15,000 = $2,350 + $20,200

 

$22,550 = $22,550

 

*Note:  For (d), since no exchange has occurred, no entry is required.

 

Exercise 1-22 (25 minutes)

Pete’s Yard Care

Income Statement

For Month Ended March 31, 2014

Revenues:
     Yard care revenue $1,150
Operating expenses:
     Advertising expense 250
Net income $  900

 

Pete’s Yard Care

Statement of Changes in Equity

For Month Ended March 31, 2014

Pete Kequahtooway, capital, March 1 $       0
Add:  Investment by owner $19,300
          Net income 900 20,200
Pete Kequahtooway, capital, March 31 $20,200

 

Pete’s Yard Care

Balance Sheet

March 31, 2014

Assets

Liabilities

  Cash $    4,450  Accounts payable $   2,350
  Accounts receivable 550
  Supplies 2,550
  Equipment 15,000

                        Equity

Pete Kequahtooway, capital 20,200
Total assets $22,550 Total liabilities and equity $22,550

 

Analysis component:

The $900 of net income does not represent cash because all of the revenues ($550 + $600 = $1,150) were on account. The $250 of advertising expense was paid in cash. The net income (loss) on an income statement represents the net income (loss) that was actually earned which is not necessarily going to agree to the net income (loss) actually received in cash. This is in accordance with the revenue recognition principle which says that revenues (and also expenses) are recorded at the time earned (or expensed in the case of expenses) regardless of whether cash has been exchanged.

Exercise 1-23 (20 minutes)

Assets = Liabilities + Equity Explanation of Equity Transaction
Cash + Accounts Receivable + Supplies + Equipment = Accounts Payable + Otto Ingles, Capital
Bal. $6,000 $1,200 $1,900 $6,500 $4,000 $11,600
a) +$800 -$800
b) -$2,500 -$2,500
c) +$1,100 +$1,100 Revenue
d) -$950 -$950 Wage Exp.
e) -$1,200 -$1,200 Rent Exp.
f) -$600 -$600 Utilities Exp.
g) +$1,600 +$1,600 Revenue
h)*
Totals $2,650 + $2,000 + $1,900 + $6,500 = $1,500 + $11,550

 

$13,050 = $13,050

 

*Note:  For (h), since no exchange has occurred, no entry is required.

Exercise 1-24 (25 minutes)

Otto’s Wrecking Service

Income Statement

For Month Ended July 31, 2014

Revenues:
     Wrecking revenue $2,700
Operating expenses:
     Rent expense $ 1,200
     Utilities expense 600
     Wage expense 950
         Total operating expenses 2,750
Net loss $     50

 

Otto’s Wrecking Service

Statement of Changes in Equity

For Month Ended July 31, 2014

Otto Ingles, capital, July 1 $  11,600
Less:  Net loss        50
Otto Ingles, capital, July 31 $  11,550

 

Otto’s Wrecking Service

Balance Sheet

July 31, 2014

Assets

Liabilities

  Cash $2,650  Accounts payable $ 1,500
  Accounts receivable 2,000
  Supplies 1,900
  Equipment 6,500

                        Equity

Otto Ingles, capital 11,550
Total assets $13,050 Total liabilities and equity $13,050

 

Analysis component: 

$11,550 or 88.54% (calculated as $11,550/$13,050 × 100) of the assets are financed by Otto Ingles, the owner.  $1,500 or 11.49% (calculated as $1,500/$13,050 × 100) of the assets are financed by debt.

PROBLEM SET “A”

Problem 1-1A (10 minutes)

 

Characteristic

Type of Business Organization
Sole
Proprietorship
 

Partnership

 

Corporation

Limited liability     Ö
Unlimited liability Ö Ö  
Owners are shareholders     Ö
Owners are partners   Ö  
Taxed as a separate legal entity     Ö

 

Problem 1-2A (20 minutes)

Year

2015 2014 2013
Beginning capital 125,0001 28,0003 0 
+ Owner investment 0   0 10,000 
+ Net income (loss) (5,000) 175,000 60,0005
– Owner withdrawals 0   78,000 42,000 
= Ending capital 120,000   125,0002 28,0004

 

Note: The superscripts show the order in which the answers were calculated.

 

Calculations:

  1. $120,000 + 5,000 = $125,000 
  2. $125,000 (The beginning capital balance for one period is the ending capital balance of the previous period)
  3. $125,000 + $78,000 – $175,000 = $28,000
  4. $28,000 (The beginning capital balance for one period is the ending capital balance of the previous period)
  5. $28,000 + $42,000 – $10,000 = $60,000

 

 

 

Problem 1-3A (30 minutes)

BEE-CLEAN
Income Statement
For Year Ended July 31, 2014

Revenues:

Service revenue……………………………………………                               $131,000

Repair revenue……………………………………………..                                     2,500

Total revenues…………………………………………..                               $133,500

Operating expenses:

Wages expense…………………………………………….          $68,000

Rent expense……………………………………………….           14,000

Supplies expense…………………………………………            15,900

Utilities expense…………………………………………..              9,800

Interest expense…………………………………………..              2,100             

Total operating expenses…………………………..                               109,800

Net income………………………………………………………….                               $ 23,700

 

BEE-CLEAN
Statement of Changes in Equity
For Year Ended July 31, 2014

Bee Cummins, capital, August 1, 2013……………                               $   79,300

Add:    Investments by owner …………………………             $      -0-

Net income………………………………………….              23,700           23,700

Total ………………………………………………………..                               $ 103,000

Less: Withdrawals by owner…………………………..                                    46,000

Bee Cummins, capital, July 31, 2014……………….                               $   57,000

BEE-CLEAN
Balance Sheet
July 31, 2014

Assets

Liabilities

Cash………………………………………

$  5,600

 

Accounts payable………………..

$   9,400

Accounts receivable……………….

42,000

 

Notes payable………………………

      20,000

Supplies…………………………………

2,400

  Total liabilities ………………. $ 29,400

Prepaid rent……………………………

4,000

Office equipment…………………… 19,200

 

Equity

Furniture………………………………..

   13,200

 

Bee Cummins, capital………….

   57,000

 

 

Total assets……………………………

$86,400

 

Total liabilities and equity…….

$ 86,400

 

Problem 1-3A (concluded)

 

Analysis component: 

$29,400 or 34.03% (calculated as $29,400/$86,400 × 100) of the assets are financed by debt. $57,000 or 65.97% (calculated as $57,000/$86,400 × 100) of the assets are financed by Bee Cummins, the owner.

 

Problem 1-4A (60 minutes) Part 1

LeCLAIRE DELIVERY SERVICES
Balance Sheet
December 31, 2013

                                        Assets                                                                            Liabilities

Cash………………………………..        $  26,250              Accounts payable……………………         $    3,750 

Accounts receivable…………            14,250

Office supplies…………………              2,250

Trucks……………………………..            27,000                                                       Equity

Office equipment……………..            69,000              Jess LeClaire, capital………………           135,0001

                                                                                   

Total assets                                  $138,750              Total liabilities and equity……….         $138,750 

________________________

Calculations:

  1. $138,750 – $3,750 = $135,000 (calculation of unknown amount)

 

Problem 1-4A (concluded) Part 1

LeCLAIRE DELIVERY SERVICES
Balance Sheet
December 31, 2014

                                        Assets                                                                            Liabilities

Cash………………………………..            $  9,375            Accounts payable……………………         $  18,750 

Accounts receivable…………              11,175            Notes payable…………………………             52,500 

Office supplies…………………                1,650                  Total liabilities……………………         $  71,250 

Trucks……………………………..              27,000

Office equipment……………..              73,500

Land………………………………..              22,500                                                         Equity

Building…………………………..              90,000            Jess LeClaire, capital………………           163,9502

                                                                                   

Total assets……………………..          $235,200            Total liabilities and equity……….         $235,200 

 

Calculations:

  1. $235,200 – $71,250 = $163,950

Part 2

Calculation of net income for 2014:
Jess LeClaire, Capital December 31, 2013 $135,000
+ Owner investment 17,500
+ Net income (loss) ?
– Owner withdrawals 18,000
= Jess LeClaire, capital December 31, 2014 $163,950

 

OR

$135,000 + $17,500 + ? – $18,000 = $163,950; ? = $29,450

 

Analysis component:

Assets increased by $96,450 ($235,200 – $138,750).  $67,500 of the increase in assets were financed by an increase in debt (total liabilities went from $3,750 at December 31, 2013 to $71,250 at December 31, 2014).  The remaining $28,950 increase in assets ($96,450 – $67,500) resulted from equity financing (equity increased to $163,950 at December 31, 2014 from $135,000 at December 31, 2013 because of $17,500 owner investment plus $29,450 net income less $18,000 of withdrawals during 2014).

 

Problem 1-5A (40 minutes) Part 1

Company A:

(a)… Equity on December 31, 2013:

Assets……………………………………………………………                              $90,000

Liabilities……………………………………………………….                              –38,000

Equity…………………………………………………………….                              $52,000

(b).. Equity on December 31, 2014:

Equity, December 31, 2013……………………………..                              $52,000

Add: Owner investments………………………………..                                10,000

Less: Owner’s withdrawals…………………………….                                  5,000

Net loss…………………………………………………                                16,000

Equity, December 31, 2014……………………………..                              $41,000

(c)    Amount of liabilities on December 31, 2014:

Assets    ………………………………………………………..                              $96,000

Equity     ………………………………………………………..                              –41,000

Liabilities……………………………………………………….                              $55,000

 

Part 2

Company B:

(a) and (b)

Equity:                                                                              Dec. 31, 2013       Dec. 31, 2014

Assets……………………………………………………………            $105,000               $82,000

Liabilities……………………………………………………….              –45,000               –55,000

Equity…………………………………………………………….              $60,000               $27,000

(c)    Net income (loss) for 2014:

Equity, December 31, 2013……………………………..                                          $60,000

Add: Owner investments………………………………..                                            19,000

Net income(loss)……………………………………                                                     ?

Less: Owner withdrawals……………………………….                                              6,000

Equity, December 31, 2014……………………………..                                          $27,000

Therefore, the net loss must have been $(46,000).

 

 

Problem 1-5A (continued)

Part 3

Company C:

First, calculate the beginning balance of equity:

                                                                                         Dec. 31, 2013

Assets………………………………………………………….                $58,000

Liabilities……………………………………………………..                –28,000

Equity…………………………………………………………..                $30,000

Next, find the ending balance of equity by completing this table:

Equity, December 31, 2013……………………………                $30,000

Add:  Owner investments……………………………..                  15,500

Net income………………………………………….                  18,000

Less: Owner withdrawals……………………………..                    7,750

Equity, December 31, 2014……………………………                $55,750

Finally, find the ending amount of assets by adding the ending balance of equity to the ending balance of the liabilities:

                                                                                         Dec. 31, 2014

Liabilities……………………………………………………..                $38,000

Equity…………………………………………………………..                  55,750

Assets………………………………………………………….                $93,750

Part 4

Company D:

First, calculate the beginning and ending equity balances:

                                                                                                 Dec. 31, 2013               Dec. 31, 2014

Assets………………………………………………………….              $160,000                       $250,000

Liabilities……………………………………………………..                –76,000                       –128,000

Equity…………………………………………………………..                $84,000                      $ 122,000

Then, find the amount of owner investments during 2014 by completing this table:

Equity, December 31, 2013……………………………                                                      $84,000

Add: Owner investments………………………………                                                                 ?

Net income………………………………………….                                                        24,000

Less: Owner withdrawals……………………………..                                                                 0

Equity, December 31, 2014……………………………                                                    $122,000

Therefore, the owner investments must have been $14,000.

 

 

Problem 1-5A (concluded)

Part 5

Company E:

First, calculate the balance of equity as of December 31, 2014:

Assets………………………………………………………….                            $225,000

Liabilities……………………………………………………..                            –150,000

Equity…………………………………………………………..                            $  75,000

Next, find the beginning balance of equity by completing this table:

Equity, December 31, 2013……………………………                              $         ?

Add: Owner investments……………………………..                                  9,000

Net income………………………………………….                                36,000

Less: Owner withdrawals……………………………..                                18,000

Equity, December 31, 2014……………………………                              $75,000

Therefore, the beginning balance of equity was $48,000.

Finally, find the beginning amount of liabilities by subtracting the beginning balance of equity from the beginning balance of the assets:

Dec. 31, 2013

Assets………………………………………………………….                            $246,000

Equity…………………………………………………………..                             –48,000

Liabilities……………………………………………………..                            $198,000

 

 


Problem 1-6A (45 minutes) Parts 1 and 2

                                              Assets                                             =               Liabilities            +              Equity

                                                                                                                                                                    George

                           +   Accounts   +    Office    +    Office    +                      =   Accounts +      Notes    +  Littlechild,  Explanation of

          Cash          Receivable     Supplies   Equipment     Building          Payable        Payable         Capital Equity Transaction

(a)     + $160,000                                              + $20,000                                                                           + $180,000 Investment by owner

 

(b)      100,000                                                                   + $600,000                            + $500,000                    

 

(c)           3,000                         + $3,000                                                                                                               

 

(d)                                                                   + 72,000                                + $72,000                                           

 

(e)*                                                                                                                                                                              

 

(f)                          + $5,200                                                                                                                       +   5,200 Service Revenue

 

(g)          3,500                                                                                                                                           3,500 Advertising Expense

 

(h)    +       4,000                                                                                                                                        +   4,000 Service Revenue

 

(i)            4,000                                                                                              4,000                                            

 

(j)      +       2,500      2,500                                                                                                                                     

 

(k)           7,000                                                                                                                                           7,000 Wages Expense

 

(l)            3,600                                                                                                                                            3,600 Withdrawal by owner

 

Bal.   $   45,400  +  $2,700      +  $3,000     + $92,000    +   $600,000    =   $68,000    +  $500,000   +  $175,100

 

$743,100                                              =                         $743,100

*NOTE:  For (e), since no exchange has occurred, no entry is required.


Problem 1-6A (continued)

Part 3

Littlechild Enterprises

Income Statement

For Month Ended March 31, 2014

 

Revenues:
     Service revenue $9,200
Operating expenses:
     Wages expense $7,000
     Advertising expense 3,500
         Total operating expenses 10,500
Net loss $1,300

 

Littlechild Enterprises

Statement of Changes in Equity

For Month Ended March 31, 2014

 

George Littlechild, capital, March 1 $           0
Add:  Investment by owner     180,000
     Total $180,000
Less:  Withdrawal by owner $  3,600
            Net loss 1,300 4,900
George Littlechild, capital, March 31 $175,100

 

Littlechild Enterprises

Balance Sheet

March 31, 2014

Assets

Liabilities

  Cash $  45,400  Accounts payable $  68,000
  Accounts receivable 2,700  Notes payable 500,000
  Office supplies 3,000      Total liabilities $568,000
  Office equipment 92,000
  Building 600,000

Equity

George Littlechild, capital $175,100
Total assets $743,100 Total liabilities and equity $743,100

Analysis component:

Assets result from a combination of debt and equity financing (A = L + E).  Littlechild Enterprises’ total assets of $743,100 resulted from incurring $568,000 in liabilities ($68,000 in accounts payable plus $500,000 of notes payable).  $568,000/$743,100 x 100 = 76.44% or 76%.  The remaining 24% of the assets were financed by equity transactions (owner investment and net income or loss less withdrawals made by the owner).

 


 

Problem 1-7A (60 minutes)

    Cash Accounts Receivable Office Supplies Office
Equip.
Electrical Equip. Accounts Payable Larry Power, Capital Explanation of Equity Transaction
 

Bal.

Oct. 31 $30,000 $7,000 $1,900 $28,000 $14,000 $18,000 $62,900
 

Nov. 1

-7,200 -7,200 Rent expense
3 +10,000 +10,000 Investment by owner
3 -10,000 +$18,000 + $8,000
5 -1,800 +1,800
6 +2,000 +2,000 Electrical fees earned
8 +5,200 +5,200
15 +6,000 +6,000 Electrical fees earned
*16
18 +1,000 +1,000
20 -5,200 -5,200
24 +4,800 +4,800 Electrical fees earned
28  + 6,000 -6,000
30 -4,400 -4,400 Salaries expense
30 -3,600 -3,600 Utilities expense
30 -1,400 -1,400 Withdrawal by owner
$14,400 $11,800 $4,700 $33,200 $32,000 $27,000 $69,100
$96,100 =              $96,100
 

*Note:  For November 16, since no exchange has occurred, no entry is required.

 

 

 


Problem 1-7A (concluded)

Analysis component:

Revenue is not recorded on November 28 because the revenue was actually earned on November 15.  The revenue recognition principle requires that revenue be recorded when it was incurred (when the economic exchange occurred), on November 15.  Cash is being collected on November 28 and is recorded as a reduction of the asset, accounts receivable, that was realized on November 15.

 

Problem 1-8A

POWER ELECTRICAL
Income Statement
For Month Ended November 30, 2014

Revenues:

Electrical fees earned…………………………………………..                                $12,800

Operating expenses:

Rent expense………………………………………………………              $7,200

Salaries expense………………………………………………….                4,400

Utilities expense …………………………………………………                3,600

Total operating expenses………………………………….                                  15,200

Net loss  …………………………………………………………………….                                  $2,400

POWER ELECTRICAL
Statement of Changes in Equity
For Month Ended November 30, 2014

Larry Power, capital, November 1……………………………….                                $62,900

Add: Investments by owner………………………………………..                                  10,000

Total    …………………………………………………………………….                                $72,900

Less: Withdrawals by owner……………………………………….             $1,400

Net loss……………………………………………………………..               2,400            3,800

Larry Power, capital, November 30……………………………..                                $69,100

 

Problem 1-8A (concluded)

POWER ELECTRICAL
Balance Sheet
November 30, 2014

                                        Assets                                                      Liabilities

Cash………………………………..        $14,400        Accounts payable…………..              $27,000

Accounts receivable…………          11,800

Office supplies…………………            4,700       

Office equipment……………..          33,200              Equity

Electrical equipment………..          32,000        Larry Power, capital……….                69,100

                                                                            Total liabilities and

Total assets……………………..        $96,100            equity…………………………              $96,100

 

Analysis component:

Power Electrical incurred a net loss of $2,400 for the month ended November 30, 2014.  Therefore, instead of helping to finance assets, the November operating activities had a negative impact on equity.  Equity did increase during November but because of an additional investment by the owner.  As a sole proprietor, a goal is to increase equity because of positive earnings; not through owner investment.

 

Problem 1-9A (25 minutes)

Balance Sheet Income Statement
Total
Assets
Total
Liab.
Equity Net
Income
  1 Owner invests cash…………………….. + +
  2 Sell services for cash………………….. + + +
  3 Acquire services on credit…………… +
  4 Pay wages with cash……………………
  5 Owner withdraws cash………………..
  6 Borrow cash with note payable…… + +
  7 Sell services on credit…………………. + + +
  8 Buy office equipment for cash…….. +/–
  9 Collect receivable from (7)…………… +/–
10 Buy asset with note payable………… + +

PROBLEM SET “B”

Problem 1-1B (5 minutes)

  1. a) WestJet Airlines Ltd. is a corporation because it has shareholders.
  2. b) Danier Leather is a corporation because it has shareholders.

 

 

Problem 1-2B (20 minutes)

2015 2014 2013
Beginning capital 457,0001 369,0003 0
+ Owner investment 0 0 400,000
+ Net income (loss) 366,000 192,000 (31,000)5
– Owner withdrawals 218,000 104,000 0
= Ending capital 605,000 457,0002 369,000 4

 

Note: The superscripts show the order in which the answers were calculated.

 

Calculations:

  1. 605,000 + 218,000 – 366,000  = 457,000
  2. The beginning capital of 457,000 for 2015 is the ending capital from 2014.
  3. 457,000 + 104,000 – 192,000 = 369,000
  4. The beginning capital of 369,000 for 2014 is the ending capital from 2013.
  5. 369,000 – 400,000 = -31,000

Problem 1-3B (30 minutes)

FIREWORKS FANTASIA
Income Statement
For Year Ended December 31, 2014

Revenues:

Fees earned………………………………………………….                               $140,000

Rent revenue………………………………………………..                                   66,000

Total revenues…………………………………………..                               $206,000

 

Operating expenses:

Wages expense…………………………………………….          $92,000

Fireworks supplies expense…………………………           77,500

Utilities expense…………………………………………..           25,100

Advertising expense…………………………………….              9,000

Office supplies expense……………………………….             3,600

Total operating expenses…………………………..                               207,200

Net loss  ……………………………………………………………..                               $   1,200

Problem 1-3B (concluded)

FIREWORKS FANTASIA
Statement of Changes in Equity
For Year Ended December 31, 2014

Wes Gandalf, capital, January 1……………………..                                      $175,200

Add:    Investments by owner …………………………                                          30,000

Total ………………………………………………………..                                      $205,200

Less: Withdrawals by owner…………………………..            $12,000

Net loss ………………………………………………..                1,200                 13,200

Wes Gandalf, capital, December 31…………………                                      $192,000

FIREWORKS FANTASIA
Balance Sheet
December 31, 2014

                          Assets                                                            Liabilities

Cash………………………………….       $   8,000      Accounts payable…………….      $  58,000

Accounts receivable…………..          14,000

Fireworks supplies…………….          49,000

Office supplies…………………..            3,000

Tools…………………………………          18,000

Building…………………………….          81,000                                 Equity

Land………………………………….          63,000      Wes Gandalf, capital………..       192,000

Office equipment……………….         14,000      Total liabilities and

Total assets……………………….      $250,000          equity…………………………..      $250,000

 

 

 

Analysis component: 

$58,000 or 23.20% (calculated as $58,000/$250,000 × 100) of the assets are financed by debt. $192,000 or 76.80% (calculated as $192,000/$250,000 × 100) of the assets are financed by Wes Gandalf, the owner.

 

 

Problem 1-4B (60 minutes) Part 1

CARMEN CREEK GOURMET MEATS
Balance Sheet
December 31, 2013

Assets                                                                            Liabilities

Cash………………………………..          $  28,000        Accounts payable……………………….       $  10,000  

Accounts receivable…………              50,000

Office supplies…………………              20,000

Office equipment……………..            120,000                                                       Equity

Machinery………………………..             61,000        Carmen Munch, capital……………….         269,0001

 

Total assets……………………..          $279,000        Total liabilities and equity…………..       $279,000  

 

CARMEN CREEK GOURMET MEATS
Balance Sheet
December 31, 2014

Assets                                                                            Liabilities

Cash………………………………..             $   20,000            Accounts payable………………..      $   30,000  

Accounts receivable…………                  60,000            Notes payable……………………..         520,000  

Office supplies…………………                  25,000             Total liabilities…………………..         550,000  

Office equipment……………..                120,000

Machinery………………………..                  61,000

Building…………………………..                520,000                                                 Equity

Land………………………………..               130,000            Carmen Munch, capital………..         386,0002

 

Total assets……………………..              $936,000            Total liabilities and equity……       $936,000  

 

Calculations:

  1. $279,000 – $10,000 = $269,000 (calculation of unknown capital amount)
  2. $936,000 – $550,000 = $386,000 (calculation of unknown capital amount)

 

…. continued on next page

Problem 1-4B (concluded) Part 2

Calculation of net income for 2014:
Carmen Munch, Capital December 31, 2013 $269,000
+ Owner investment 50,000
+ Net income (loss) ?
– Owner withdrawals (12 months X $2,000) 24,000
= Carmen Munch, Capital December 31, 2014 $386,000

 

OR

$269,000 + $50,000 + ? – $24,000 = $386,000; ? = $91,000

 

Analysis component:

Assets increased by $657,000 ($936,000 – $279,000).  $540,000 of the increase in assets were financed by an increase in debt (total liabilities went from $10,000 at December 31, 2013 to $550,000 at December 31, 2014).  The remaining $117,000 increase in assets ($657,000 – $540,000) resulted from equity financing (equity increased to $386,000 at December 31, 2014 from $269,000 at December 31, 2013 because of $50,000 owner investment plus $91,000 net income less $24,000 of withdrawals during 2014).

 

Problem 1-5B (40 minutes) Part 1

Company V:

(a) and (b)

Calculation of equity:

                                                                                         12/31/13                    12/31/14

Assets…………………………………………………          $165,000                   $192,000

Liabilities…………………………………………….            –30,000                     –26,000

Equity………………………………………………….          $135,000                   $166,000

(c)    Calculation of net income (loss) for 2014:

Equity, December 31, 2013…………………..                                            $135,000

Add: Owner investments……………………..                                               60,000

Net income (loss)………………………..                                                         ?

Less: Owner withdrawals…………………….                                                  4,500

Equity, December 31, 2014…………………..                                           $166,000

Therefore, the net loss must have been $(24,500).

Problem 1-5B (continued)

Part 2

Company W:

(a)    Calculation of equity at December 31, 2013:

Assets…………………………………………………..                                            $70,000

Liabilities………………………………………………                                           –50,000

Equity……………………………………………………                                            $20,000

(b)   Calculation of equity at December 31, 2014:

Equity, December 31, 2013…………………….                                            $20,000

Add: Owner investments……………………….                                              10,000

Net income…………………………………..                                              30,000

Less: Owner withdrawals………………………                                                2,000

Equity, December 31, 2014…………………….                                            $58,000

(c)    Calculation of the amount of liabilities at December 31, 2013:

Assets…………………………………………………..                                            $90,000

Equity……………………………………………………                                            –58,000

Liabilities………………………………………………                                            $32,000

Part 3

Company X:

First, calculate the beginning and ending equity balances:

                                                                                       12/31/13                    12/31/14

Assets…………………………………………………..        $121,500                   $136,500

Liabilities………………………………………………          –58,500                     –55,500

Equity……………………………………………………        $  63,000                   $  81,000

Then, find the amount of owner investments during 2014 by completing this table:

Equity, December 31, 2013 ……………………          $63,000

Add: Owner investments……………………….                  ?

Net income…………………………………..            16,500

Less: Owner withdrawals………………………                     0

Equity, December 31, 2014…………………….          $81,000

Therefore, the owner investments must have been $1,500.

Problem 1-5B (continued)

Part 4

Company Y:

First, calculate the beginning balance of equity:

Dec. 31, 2013

Assets…………………………………………………..                            $82,500

Liabilities………………………………………………                            –50,000

Equity……………………………………………………                            $32,500

Next, find the ending balance of equity by completing this table:

Equity, December 31, 2013…………………….                            $32,500

Add:  Owner investments………………………                             38,100

Less: Owner withdrawals………………………                              18,000

Net loss………………………………………..                             46,000

Equity, December 31, 2014…………………….                              $6,600

Finally, find the ending amount of assets by adding the ending balance of equity to the ending balance of the liabilities:

Dec. 31, 2014

Liabilities………………………………………………                          $  72,000

Equity……………………………………………………                                6,600

Assets…………………………………………………..                            $78,600

Problem 1-5B (concluded) Part 5

Company Z:

First, calculate the balance of equity as of December 31, 2014:

Assets…………………………………………………..                          $160,000

Liabilities………………………………………………                            –52,000

Equity……………………………………………………                          $108,000

Next, find the beginning balance of equity by completing this table:

Equity, December 31, 2013…………………….                          $          ?

Add:  Owner investments………………………                              40,000

Net income…………………………………..                              32,000

Less: Owner withdrawals………………………                                6,000

Equity, December 31, 2014…………………….                          $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:

Dec. 31, 2014

Assets…………………………………………………..                          $124,000

Equity……………………………………………………                            –42,000

Liabilities………………………………………………                          $  82,000

 


Problem 1-6B (45 minutes) Parts 1 and 2

                                             Assets                                              =             Liabilities         +        Equity

+ Accounts + Office + Office + Building = Accounts + Notes + Lily Coe, Explanation of
Cash Receivable Supplies Equipment Payable Payable Capital Equity Transaction

 

(a) +$120,000 + $10,000 +$130,000 Investment by owner
 

(b)

 

–  50,000

 

+$240,000

 

+$190,000

   
(c)   –    18,000 +   18,000
(d)   +$4,000 +    6,400 +$10,400
(e)   –    4,500     4,500 Advertising Expense
(f)   +$6,000 +    6,000 Consulting Services Revenue
(g)   +    8,000 +    8,000 Consulting Services Revenue
(h)   –    5,500     5,500 Withdrawal by owner
(i)*  
(j)   +    4,000   4,000
(k)   –   6,400   6,400
(l)       3,800   ______   ______   _______   ________   ______   ________       3,800 Wages Expense
Bal.   $43,800 + $2,000 + $4,000 + $34,400 + $240,000 = $4,000 + $190,000 + $130,200  

$324,200                                               =                        $324,200

 

Note:  For (i), since no exchange has occurred, no entry is required.


Problem 1-6B (continued)

Part 3

Coe Consulting

Income Statement

For Year Ended December 31, 2014

Revenues:
     Consulting services revenue $14,000
Operating expenses:
     Wages expense $3,800
     Advertising expense 4,500
         Total operating expenses 8,300
Net income $5,700

 

Coe Consulting

Statement of Changes in Equity

For Year Ended December 31, 2014

Lily Coe, capital, January 1 $        0
Add:  Investment by owner $130,000
          Net income 5,700 135,700
     Total $135,700
Less:  Withdrawal by owner 5,500
Lily Coe, capital, December 31 $130,200

 

Coe Consulting

Balance Sheet

December 31, 2014

Assets     Liabilities  
  Cash $ 43,800  Accounts payable $    4,000
  Accounts receivable 2,000  Notes payable 190,000
  Office supplies 4,000      Total liabilities $194,000
  Office equipment 34,400
  Building 240,000 Equity
Lily Coe, capital 130,200
Total assets $324,200 Total liabilities and equity $324,200

 

Analysis component:

Assets result from a combination of debt and equity financing (A = L + E).  Coe’s total assets of $324,200 resulted from incurring $194,000 in liabilities ($4,000 in accounts payable plus $190,000 of notes payable).  $194,000/$324,200 x 100 = 59.84% or 60%.  The remaining 40% of the assets were financed by equity transactions (owner investment and net income less withdrawals made by the owner).

 

 

Problem 1-7B (50 minutes)

Assets = Liabilities + Equity
+ Accounts + Office + Office + Excavat = Accounts + Robert Cantu, Explanation of
Cash Receivable Supplies Equip. Equip. Payable Capital Equity Transaction
June 30 $  12,000 + $4,600 + $1,560 + $9,600 + $24,000 = $6,200 + $45,560  
July 1 + 20,000 + 20,000 Investment by owner
1   –    1,000   –      1,000 Rent Expense
1   –     3,000 + 8,000 + 5,000
6   –     1,000 +  1,000
8   +      4,400 +    4,400 Excavating Fees Earned
10   + 7,600 +  7,600
15   + 4,800 +    4,800 Excavating Fees Earned
17   +  3,840 +  3,840
23   –    7,600   –  7,600             
25   + 10,000 +  10,000 Excavating Fees Earned
28   +      4,800   –  4,800
31     –   4,500   –    4,500 Salaries Expense
31   –      1,700   –        1,700 Utilities Expense
31       2,400   ______   ______   ______   ______                    2,400 Withdrawal by owner
Bal. $20,000 + $14,600 + $6,400 + $17,200 + $32,000 = $15,040 + $75,160  

$90,200                                                           =               $90,200


Problem 1-7B (concluded)

 

Analysis component:

The revenue recognition principle requires that revenue be recorded when it is incurred (when the economic exchange occurred), on July 15, even though cash is not received.  The payment for this transaction is collected on July 28 and is recorded as a reduction of the asset, accounts receivable, that was realized on July 15.

 

Problem 1-8B

 

CANTU EXCAVATING
Income Statement
For Month Ended July 31, 2014

Revenues:

Excavating fees earned ………………………………..                                                $19,200

Operating expenses:

Salaries expense…………………………………………..                      $4,500

Rent expense……………………………………………….                        1,000

Utilities expense ………………………………………….                        1,700

Total operating expenses…………………………..                                                    7,200

Net income………………………………………………………….                                                $12,000

 

CANTU EXCAVATING
Statement of Changes in Equity
For Month Ended July 31, 2014

Robert Cantu, capital, June 30……………………………..                                                $45,560

Add: Investments by owner…………………………………                    $20,000

Net income…………………………………………………                      12,000                 32,000

Total…………………………………………………………………                                                $77,560

Less: Withdrawals by owner………………………………..                                                    2,400

Robert Cantu, capital, July 31………………………………                                                $75,160

 

CANTU EXCAVATING
Balance Sheet
July 31, 2014

Assets                                                                            Liabilities

Cash………………………………..                $20,000            Accounts payable………………..            $15,040

Accounts receivable…………                  14,600

Office supplies…………………                    6,400

Office equipment……………..                  17,200                                                 Equity

Excavating equipment……..                  32,000            Robert Cantu, capital…………..             75,160

 

Total assets……………………..                $90,200            Total liabilities and equity……            $90,200

 

 

Problem 1-8B (concluded)

 

Analysis component:

The owner of Cantu Excavating invested $120,000 during the month ended July 31, 2014 therefore having a positive impact on equity.  Equity increased during July largely because of this additional investment by the owner.  As a sole proprietor, a goal is to increase equity because of positive earnings; not through owner investment.

 

Problem 1-9B (25 minutes)

Income
Balance Sheet Statement
Total
Assets
Total
Liab.
Equity Net
Income
  1 Owner invests cash………………………..

+

+

  2 Pay wages with cash………………………

  3 Acquire services on credit……………..

+

  4 Buy store equipment for cash………..

+/–

  5 Borrow cash with note payable………

+

+

  6 Sell services for cash……………………..

+

+

+

  7

Sell services on credit…………………….

+

+

+

  8

Pay rent with cash………………………….

  9

Owner withdraws cash…………………..

10

Collect receivable from (7)……………..

+/–

 

ANALYTICAL AND REVIEW PROBLEMS

A&R Problem 1-1

TASKER AUTO REPAIR SHOP
Balance Sheet
November 30, 2014

 

            Assets   Liabilities
Cash……………………………… $  6,300 Accounts payable……………….. $34,650
Accounts receivable………. 47,250 Mortgage payable………………..   28,350
Parts and supplies…………. 14,175  Total liabilities…………………. $63,000
Equipment…………………….. 22,050  
Equity
Jack Tasker, capital…………….   26,775
Total assets…………………… $89,775 Total liabilities and equity…… $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.

A&R Problem 1-2

Susan Huang, Lawyer
Income Statement
For Month Ended October 31, 2014

Revenues

Legal fees………………………………………………………..                                $11,550

Operating expenses

Salaries expense………………………………………………          $2,940

Rent expense…………………………………………………..            2,100

Supplies expense…………………………………………….               420

Telephone expense………………………………………….               210

Total operating expenses………………………………                                   5,670

Net income……………………………………………………………..                                 $ 5,880

Susan Huang, Lawyer
Statement of Changes in Equity
For Month Ended October 31, 2014

Susan Huang, capital, October 1……………………………..                                $         0

Add:  Investment by owner………………………………………        $10,500

Net income…………………………………………………….            5,880

Total…………………………………………………………………….                                  16,380

Susan Huang capital, October 31…………………………….                                $16,380

Susan Huang, LAWYER
Balance Sheet
October 31, 2014

                            Assets                                                                            Liabilities

Cash………………………………..            $  3,780                Accounts payable…………..      $  1,050

Accounts receivable…………                2,100

Supplies…………………………..                1,050

Law library……………………….                8,400                                               Equity

Furniture………………………….                2,100                Susan Huang, capital……..        16,380

Total liabilities and

Total assets……………………..            $17,430                   equity………………………….      $17,430

 

 

 

A&R Problem 1-3

 

Income Statement Balance Sheet
Revenues Expenses Assets Liabilities Equity
 

1.

         $14,000  

$14,000

        $14,000
 

2.

           $5,000  

 

 

 

 

3.

 

$25,000

        $25,000
 

4.

          $500               500              500
 

5.

 

 

               500                500  

 

 

6.

         10,000         10,000
 

7.

          5,000           5,000
 

8.

             200              200
 

9.

           2,000
 

10.

 

12,000

 

11.

                45                  45  

45

 

12.

                 900                900                 900

 

ETHICS CHALLENGE 1-1

  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.

 

  1. 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.

 

  1. Students should support their decision with appropriate reasons likely echoing the discussion in 2) above.

 

  1. 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.

 


FOCUS ON FINANCIAL STATEMENTS

 

FFS 1-1

Parts 1 and 2

 

June 2014

  Assets = Liabilities + Equity    
    + Accounts + Office = Accounts + Diane Towbell,   Explanation of
  Cash   Receivable   Equip.   Payable   Capital    Equity Transaction
June  1 +20,000       +6,000       +26,000   Owner investment
5     +3,000           +3,000   Service revenue
7 -1,500               -1,500   Rent expense
9 +1,000   -1,000                
15 -5,000               -5,000   Wages expense
17 +2,000               +2,000   Service revenue
29             +300   -300   Utilities expense
30 -1,500               -1,500   Wages expense
Totals 15,000 + 2,000 + 6,000 = 300 + 22,700    
23,000
23,000

 

 

 


FFS 1-1 (continued) Parts 1 and 2

 

July 2014

  Assets = Liabilities + Equity  
    + Accounts + Office = Accounts + Diane Towbell,   Explanation of
  Cash   Receivable   Equip.   Payable   Capital    Equity Transaction
Balance June 30 15,000   2,000   6,000   300   22,700    
July  5     +3,500           +3,500   Service revenue
8 +2,000   -2,000                
9 -1,500               -1,500   Rent expense
12         +1,800   +1,800        
14 -1,000           -1,000        
15 -2,500               -2,500   Wages expense
17 +4,800               +4,800   Service revenue
25 -600           -300   -300   Utilities expense
31 -1,700               -1,700   Wages expense
31 -2,000               -2,000   Owner withdrawals
Totals 12,500 + 3,500 + 7,800 = 800 + 23,000    
23,800
23,800

 

 

 

 

 

FFS 1-1 (continued)

Part 3

GLENROSE SERVICING
Income Statement
For Month Ended June 30, 2014

Revenues:

Service revenue……………………………………………                                      $5,000

 

Operating expenses:

Wages expense…………………………………………….            $6,500

Rent expense……………………………………………….             1,500

Utilities expense…………………………………………..                 300

Total operating expenses…………………………..                                        8,300

Net loss  ……………………………………………………………..                                      $3,300

 

GLENROSE SERVICING
Statement of Changes in Equity
For Month Ended June 30, 2014

Diane Towbell, capital, June 1………………………..                                          $       -0-

Add:    Investments by owner …………………………                                            26,000

Total ………………………………………………………..                                          $26,000

Less: Withdrawals by owner…………………………..               $    -0-

Net loss ………………………………………………..                3,300                     3,300

Diane Towbell, capital, June 30………………………                                          $22,700

 

GLENROSE SERVICING
Balance Sheet
June 30, 2014

                                  Assets                                                                         Liabilities

Cash…………………………………………..        $15,000        Accounts payable………………….          $     300

Accounts receivable……………………            2,000       

Office equipment………………………..            6,000                                           Equity

                                                                                        Diane Towbell, capital……………            22,700

                                                                                       

Total assets………………………………..        $23,000        Total liabilities and equity……..          $23,000

 

 

FFS 1-1 (continued) Part 3

GLENROSE SERVICING
Income Statement
For Month Ended July 31, 2014

Revenues:

Service revenue……………………………………………                                  $8,300

 

Operating expenses:

Wages expense…………………………………………….            $4,200

Rent expense……………………………………………….             1,500

Utilities expense…………………………………………..                 300

Total operating expenses…………………………..                                    6,000

Net income………………………………………………………….                                  $2,300

 

 

GLENROSE SERVICING
Statement of Changes in Equity
For Month Ended July 31, 2014

Diane Towbell, capital, July 1…………………………                               $22,700

Add:    Investments by owner …………………………             $      -0-

Net income………………………………………….                2,300          2,300

Total ………………………………………………………..                               $25,000

Less: Withdrawals by owner…………………………..                                   2,000

Diane Towbell, capital, July 31……………………….                               $23,000

 

GLENROSE SERVICING
Balance Sheet
July 31, 2014

                                  Assets                                                                         Liabilities

Cash…………………………………………..        $12,500        Accounts payable………………….          $     800

Accounts receivable……………………            3,500       

Office equipment………………………..            7,800                                           Equity

                                                                                        Diane Towbell, capital……………            23,000

                                                                                       

Total assets………………………………..        $23,800        Total liabilities and equity……..          $23,800


 

FFS 1-1 (concluded)

Analysis component:

1.    The increase in assets of $800 from June 30, 2014 to July 31, 2014 was financed by a $500 increase in liabilities and a $300 increase in equity.  The $300 increase in equity resulted from a net income of $2,300 less withdrawals of $2,000.

2.    a.  The income statement reports a company’s financial performance.  A company’s financial performance is how a company performs or operates on a day-by-day basis:  the generation of revenues and incurring of expenses that help create the revenues.

b.  The balance sheet reports a company’s financial position at a specific point in time.  Financial position describes what assets, liabilities, and equity a company has on a given date.  For example, Glenrose Servicing’s cash balance on July 31, 2014 is $12,500 — this describes how much cash Glenrose had on July 31.

  1. Glenrose’s July 31, 2014 income statement reports a net income of $2,300 which is reported on the July statement of changes in equity as one of the activities that caused equity to change during the month.  The ending capital balance reported on the July statement of changes in equity is reported on the July balance sheet as the equity position on July 31, 2014.

 

FFS 1-2

Part A

  1. WestJet’s assets are classified into four groups on the December 31, 2011 balance sheet: current assets, property and equipment, intangible assets, and other assets.
  2. WestJet rounds to thousands of Canadian dollars on its financial statements.
  3. The December 31, 2011 balance sheet shows Assets of $3,473,678 thousand = Liabilities of $2,103,461 thousand + Equity of $1,370,217 thousand.
  4. No, the personal assets belonging to the owners of WestJet are not included on WestJet’s financial statements in accordance with the Business Entity Principle.
  5. (variety of answers possible, for example, the accounts receivable manager would want to know if receivables are being collected efficiently)

Part B

  1. Total assets = $76,477 thousand;
  2. Total net assets = $76,477 thousand – $13,813 thousand = $62,664 thousand;
  3. Assets of $76,477 thousand = Liabilities of $13,813 thousand + Equity of $62,664 thousand.
  4. Data is provided on a comparative basis so decision makers can see the change from the previous year(s).
  5. (variety of answers possible, for example, a potential creditor would be interested in knowing if Danier will have sufficient assets to cover any credit they grant)

 

 

CRITICAL THINKING

 

 

CT 1-1

Note to instructor:  Student responses will vary therefore the answer here is only suggested and not inclusive of all possibilities; it is presented in point form for brevity.

Goal(s)*:

—  Correctly state sales reports*

 

Problem(s):

—  Misclassification of items under GAAP

 

Assumption(s)/Principle(s):

—  The report should be prepared in accordance with GAAP to protect users of the information … so that users know on what basis amounts have been recorded/reported.

 

Facts:

—  as shown in the September sales report prepared by the sales person

 

Conclusion(s)/Consequence(s):

— August 28 sale should be in August and not in September; consequence of current reporting is that August revenue, net income, and equity was understated and September revenue, net income, and equity are overstated

— September 10 purchase of desk is to be recorded as an asset and not expensed; consequence of current reporting is that September expenses will be overstated causing net income, assets, and equity to be understated.

— September 2–30 lunch costs should have been expensed; consequence of current reporting is that statements won’t balance (it appears there are two credit entries with no debit) and that expenses are understated with net income and equity overstated.

— October 5 appears to be recorded correctly.

 

*This should be the goal since it is assumed that the owner(s) of the business want accurate reports.  However, the salesperson might want to overstate the sales to make himself/herself look good; the marketing manager might want to overstate sales for the same reason.  The goal is highly dependent on ‘perspective’.

Test Bank Latest Canadian 14th_Ed Fundamental Accounting Principles by Kermit Larson

Test Bank Latest Canadian 14th_Ed Fundamental Accounting Principles by Kermit Larson