Under a double-entry system, show how the entry in each statement is entered in the
ledger by using debit or credit to indicate the increase or decrease in the affected
account.
Answer:
If the unit price of inventory is increasing during a period, a company using the LIFO
inventory method will show less gross profit for the period, than if it had used the FIFO
inventory method.
Answer:
Neko Case decides to open a cleaning and laundry service near the local college
campus that will operate as a corporation. Analyze the following transactions for the
month of June in terms of their effect on the basic accounting equation. Record each
transaction by increasing (+) or decreasing (‘“) the dollar amount of each item affected.
Indicate the new balance of each item after a transaction is recorded. It is not necessary
to identify the cause of changes in stockholders’ equity.
Transactions
(1) Issued stock in exchange for $20,000 cash on June 1.
(2) Purchased equipment for $5,000 paying $3,000 in cash and the remainder due in 30
days.
(3) Purchased supplies for $1,200 cash.
(4) Received a bill from College News for $300 for advertising in the campus
newspaper.
(5) Cash receipts from customers for cleaning and laundry amounted to $2,400.
(6) Paid salaries of $600 to student workers.
(7) Billed the Lion Soccer Team $450 for cleaning and laundry services.
(8) Paid $300 to College News for advertising that was previously billed in Transaction
4.
(9) Paid dividends of $1,200.
(10) Incurred utility expenses for month on account, $500.
Answer:
The Restor-It is a company specializing in the restoration of old homes. To
showcase its work, the company purchased an old Victorian home in
downtown Pittsburg, Kansas. The original home was purchased for
$125,000. A new heating and air-conditioning system was added for
$30,000. The house was completely rewired and re-plumbed at a cost of
$50,000. Custom cabinets were added, and the floors and trim were
refurbished to their original condition, at a cost of $75,000.
The project was such a success, that Restor-It decided to purchase another
very large home, this time in nearby Joplin, Missouri. A realtor offered to
purchase the home in Pittsburg for $175,000. He plans to lease it as luxury
short-term apartments for visiting dignitaries. Restor-It decided that a
modest return was all that was required, and so they agreed to sell. Only
afterward did they learn that they had a $10,000 loss on the sale. The
president of the company, Dan Easler, does not believe that a loss is
possible. “We sold that house for more than we paid for it,” he said. “I
know we put some money in it, but we had depreciated it for three years.
How in the world can we have a loss?”
Write a short memo to Mr. Easler explaining how it would be possible to
have a loss. Do not try to use specific numbers for cost or depreciation.
Answer:
Sue Garner is the daughter of Fred Garner, the founder and president of
Big Sky Enterprises. She has been working in various departments during
school vacations throughout high school. She burst into the accounting
department excitedly one morning. She said that the stock prices of several
of the firm’s available-for-sale securities are up, and that her father said that
the company had made over $10,000 because of this jump in stock prices.
She asks to see how the increase is recorded. It is a very busy time in the
accounting department, and so her question is deferred.
Prepare a brief note to answer Sue’s question.
Answer:
On January 1, 2014, Mink Company purchased 5,000 shares of Kusher Company stock for
$360,000. Mink’s investment represents 30 percent of the total outstanding shares of Kusher.
During 2014, Kusher paid total dividends of $100,000 and reported net income of $300,000.
What revenue does Mink report related to this investment and what is the amount to be
reported as an investment in Kusher stock at December 31?
Answer: