102. Complete the shareholders’ equity section for each of the following independent situations.
CASE A
CASE B
CASE C
Common stock, 10,000 shares
A
C
E
Additional paid-in capital
25,000
D
30,000
Retained earnings
45,000
25,000
20,000
Total shareholders’ equity
80,000
100,000
F
Par value per share
B
1.50
2.50
103. Indicate the effects of the following transactions on the balance sheet equation, using the format:
Transaction letter
Assets
=
Liabilities
+
Shareholders’ equity
a.
Issued 20,000 shares of $0.10 par value common stock for $100,000.
b.
Issued 5,000 shares of $0.10 par value common stock in full payment for land worth $25,000 to be used
as a future building site.
c.
Acquired equipment costing $7,500 for a cash payment of $700 with the balance payable over the next
five years.
d.
Paid $1,000 for rent for the next two months.
e.
Completed a consulting job and invoiced the client for $5,000, payable in 30 days.
f.
Ordered office supplies for the office, totaling $225.
g.
Purchased a three-year fire insurance policy and pays in advance $3,000.
h.
Received payment from the client for services rendered in (e) above.
i.
Received the office supplies. The invoice indicates payment is due within 10 days.
j.
Issued a check for the office supplies purchased in (i) above.
Transaction letter Assets = Liabilities + Shareholders’ Equity
a. +100,000 +100,000
104. A friend of yours has prepared the following balance sheet for his bicycle shop but it has a problem. He
thought his total assets did not reflect the assets available to the firm. He has asked you to take a look at this
balance sheet and help him out.
Eric’s Bike Shop, Inc.
Balance Sheet
As of December 31, Year 1
Assets
Current Assets:
Cash
$15,000
Merchandise Inventory
30,000
Merchandise Sold, at cost
37,500
Prepaid Insurance
1,000
Advance from Customer
(1,000)
Total Current Assets
$82,500
Property, Plant, and Equipment:
Equipment
8,000
Less Note Payable
(5,000)
Total Assets
$85,500
Liabilities and Shareholders’ Equity
Current Liabilities:
Bike Sales
$55,000
Accounts Payable
2,000
Accumulated Depreciation
700
Rent Payable
1,000
Total Current Liabilities
$58,700
Shareholders’ Equity:
Common Stock 1,000 shares at $10 par value
$10,000
Additional Paid-in Capital
7,500
Retained Earnings
9,300
Total Shareholders’ Equity
$26,800
Total Liabilities and Shareholders’ Equity
$85,500
Required:
a.
Prepare a corrected balance sheet for Eric’s Bike Shop, Inc.
b.
Draft a memo to Eric explaining the errors you corrected. Include your reasons.
a.
Eric’s Bike Shop, Inc.
Balance Sheet
As of December 31, Year 1
Assets
Current Assets:
Cash
$15,000
Merchandise Inventory
30,000
Prepaid Insurance
1,000
Total Current Assets
$46,000
Property, Plant, and Equipment:
Equipment
8,000
Less Accumulated Depreciation
(700)
Total Assets
$53,300
Liabilities and Shareholders’ Equity
Current Liabilities:
Accounts Payable
$2,000
Rent Payable
1,000
Advance from customer
1,000
Note Payable
5,000
Total Current Liabilities
$ 9,000
Shareholders’ Equity:
Common Stock 1,000 shares at $10 par value
$10,000
Additional Paid-in Capital
7,500
Retained Earnings
26,800
Total Shareholders’ Equity
$44,300
Total Liabilities and Shareholders’ Equity
$53,300
b. Date: March 31, Year 2
To: Eric
From: Me
RE: Corrections to Balance Sheet dated December 31, Year 1
Enclosed please find the corrected version of your Balance Sheet as of December 31, Year 1. The following
adjustments have to be made:
·
Merchandise Sold and Bike Sales are not balance sheet accounts. Rather, they are the total sales and
cost of sales for the accounting period. These accounts need to be closed to Retained Earnings at the end
of the period.
·
The Advance from Customer is not an asset; it is a liability and represents the amount of goods or
service you need to provide the customer in order to earn this revenue.
·
The Note Payable should not be shown as a deduction from equipment. Rather, it is an amount the bike
shop owes, a liability.
·
Accumulated Depreciation is not shown as a liability, it is a contra account to equipment. It shows the
amount of the equipment charged to expense from the date the equipment was placed in service.
If you have further questions concerning this financial statement, please do not hesitate to contact me.
105. In European countries, terminology on financial statements sometimes differs from terminology commonly
used in the United States. Match the European terms to commonly used United States counterparts.
Common European Term
Common U.S. Term
a.
Tangible Fixed Asset
1.
Property, Plant, and Equipment
b.
Financial Assets
2.
Common Stock
c.
Trade Receivables
3.
Additional Paid-in Capital
d.
Liquid Funds
4.
Investment in Securities
e.
Subscribed Capital
5.
Retained Earnings
f.
Capital Reserve
6.
Accounts Payable
g.
Profit Reserves, Net Income
7.
Accounts Receivable
Available for Distributions
8.
Notes Payable to Banks
h.
Bonds
9.
Bonds Payable
i.
Due to Banks
10.
Cash
j.
Trade Payables
106. The transactions listed below relate to the JB Corporation. Indicate whether or not each transaction
immediately gives rise to an asset or liability of JB Corporation under generally accepted accounting principles.
If accounting recognizes an asset or a liability, give the account title and amount.
a.
JB Corporation issues $1 par value common stock for $10,000,000, its market value.
b.
JB Corporation purchases a machine for $20,000, freight of $675, and installation costs of $1,500.
c.
JB Corporation owes $5,000 for utilities at the end of the year. The firm has 10 days before payment is
due without paying a late fee.
d.
JB Corporation receives a 30-day, 10% loan of $10,000 from a local bank.
e.
JB Corporation acquires property with an appraised value of $2,000,000 for its stock.
f.
JB Corporation receives an order for merchandise totaling $5,000 from a customer. The merchandise
will be shipped next week.
107. Prepare journal entries for each of the following unrelated transactions. You may omit explanations for the
journal entries.
a.
A firm issues 5,000 shares of $2 par value common stock in exchange for $20,000 cash.
b.
A firm acquires a building with an appraised value of $100,000 for $30,000 cash and the assumption
of a 25-year, 10% mortgage with a balance of $60,000.
c.
Acquires $1,000 (list price) of inventory for $980 cash. The firm treats cash discounts as a reduction
in acquisition cost.
d.
A firm pays $1,000 to its landlord. The $1,000 represents the current month’s rent plus the next
month’s rent payment in advance.
e.
A publisher sells $2,000 in magazine subscriptions that will be filled over the next 12 months.
a. Cash 20,000
Common Stock 10,000
108. You’ve been asked to review the following balance sheet which has been prepared by a new staff member.
Mountain Camping Supplies
Balance Sheet
As of December 31, Year 1
Assets
Current Assets:
Cash
$ 7,500
Accounts Receivable
14,000
Merchandise Inventory
25,000
Land
9,000
Total Current Assets
$ 46,500
Property, Plant, and Equipment:
Building
$125,000
Total Assets
$180,500
Liabilities and Shareholders’ Equity
Current Liabilities:
Advance from Customer
$ 500
Accounts Payable
21,000
Rent Payable
3,600
Utilities Payable
1,200
Salaries Payable
1,800
Total Current Liabilities
$ 28,100
Shareholders’ Equity:
Common Stock 2,000 shares at $2.50 par value
$ 5,000
Additional Paid-in Capital
85,000
Retained Earnings
62,400
Total Shareholders’ Equity
$152,400
Total Liabilities and Shareholders’ Equity
$180,500
a. Prepare the journal entries for the following transactions:
1.
Merchandise purchased on account and costing $5,000 was received but not recorded.
2.
Payments by clients for previously billed invoices were found in the receptionist’s desk drawer.
The checks totaled $2,100.
3.
Written checks totaling $2,700 for payment of accounts payable, were found in the treasurer’s
desk drawer. He was going to mail them out next Monday.
4.
It was discovered that the company president had signed a contract totaling $18,250 for the
purchase of new office furniture.
5.
Upon further investigation, you found that the company had paid but incorrectly recorded next
year’s fire insurance policy, totaling $3,600. The payment was recorded as an expense.
b. Prepare a corrected balance sheet.
a. 1. Inventory 5,000
Accounts Payable 5,000
b.
Mountain Camping Supplies
Balance Sheet
As of December 31, Year 1
Assets
Current Assets:
Cash
$ 12,300
Accounts Receivable
11,900
Merchandise Inventory
30,000
Prepaid insurance
3,600
Total Current Assets
$ 57,800
Property, Plant, and Equipment:
Land
9,000
Building
125,000
Total Assets
$191,800
Liabilities and Shareholders’ Equity
Current Liabilities:
Advance from Customer
$ 500
Accounts Payable
28,700
Rent Payable
3,600
Utilities Payable
1,200
Salaries Payable
1,800
Total Current Liabilities
$ 35,800
Shareholders’ Equity:
Common Stock 2,000 shares at $2.50 par value
$ 5,000
Additional Paid-in Capital
85,000
Retained Earnings
66,000
Total Shareholders’ Equity
$156,000
Total Liabilities and Shareholders’ Equity
$191,800
109. Many firms, especially in their first years of operation and growth, face a variety of challenges obtaining
funds to finance their growth.
Required:
Discuss how a small, young manufacturing firm that has a relatively unpredictable revenue stream might
approach financing a new manufacturing line.
A manufacturing firm would have significant investments in property, plant, and equipment (PPE). It will
require funds to make such investments, with potential sources including short-term liabilities, long-term
110. Several actions that an organization may take are not recognized or entered in the accounting records.
While not entered into the formal accounting system, several such actions are exceedingly important to the
organization.
Required:
Comment on the current and future implications that the hiring of a new president may have on the
organization’s accounting records.
The hiring of a new president would not be recorded in the accounting records, as it does not immediately affect
111. Describe a typical balance sheet.
A TYPICAL BALANCE SHEET
112. Describe the balance sheet equation and the dual effects of transactions.
THE BALANCE SHEET EQUATION AND DUAL EFFECTS OF TRANSACTIONS
1. It increases an asset and increases either a liability or shareholders’ equity.
2. It decreases an asset and decreases either a liability or shareholders’ equity.
3. It increases one asset and decreases another asset.
4. It increases one liability or shareholders’ equity and decreases another liability or shareholders’ equity.
113. Describe T-accounts and how they are used.
T-ACCOUNTS
A T-account is a device or convention for organizing and accumulating the accounting entries of transactions
Long-standing custom follows three rules:
114. Describe the relationship between the balance sheet and the income statement.
RELATIONSHIP BETWEEN THE BALANCE SHEET AND THE INCOME STATEMENT
115. Describe the closing entries process at the end of the accounting period..
CLOSING ENTRIES
At the end of the accounting period, the revenue and expense accounts have served their purpose in
116. Describe the steps used for the accounting record-keeping process.
OVERVIEW OF THE ACCOUNTING RECORD-KEEPING PROCESS
The accounting record-keeping process generally involves the following steps:
1. Recording each transaction in a file or other record in the form of a journal entry.