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EXERCISE 1-12
a. Investors put assets into the company with the expectation of sharing profits. Creditors
lend assets to the company with the expectation of repayment of the principal plus
interest on the loan.
b.
Clinton Company
Accounting Equation
Event
Assets
=
Liabilities
+
Stockholders’ Equity
Acquired assets
$2,900
$1,200
$1,700
Earned income
800
800
Balance
$3,700
$1,200
$2,500
Since creditors are owed $1,200 and there are sufficient funds to pay them; the
c.
Clinton Company
Accounting Equation
Event
Assets
=
Liabilities
+
Stockholders’ Equity
Acquired assets
$2,900
$1,200
$1,700
Incurred loss
(800)
(800)
Balance
$2,100
$1,200
$ 900
Since creditors are owed $1,200 and there are sufficient funds to pay them; the
EXERCISE 1-12 (cont.)
d.
Clinton Company
Accounting Equation
Event
Assets
=
Liabilities
+
Stockholders’ Equity
Acquired assets
$2,900
$1,200
$1,700
Incurred loss
(1,900)
(200)
(1,700)
Balance
$1,000
$1,000
($ 0)
While creditors get first priority to receive assets in a business liquidation, this does not
mean they cannot lose all or a portion of the assets they loan a business. In this case
EXERCISE 1-13
Event
Classification
1.
Asset Source
2.
Asset Source
3.
Asset Exchange
4.
Asset Source
5.
Asset Source
6.
Asset Exchange
7.
Asset Use
8.
NA
9.
Asset Use
10.
Asset Use
11.
NA
EXERCISE 1-14
Steps:
1.
2.
Change in Stk. Equity = Change in Com. Stock + Change in Ret. Earn.
$65,000 (given) = $20,000 (1) + $45,000
3.
Alternate Solution:
From the Statement of Changes in Stockholders’ Equity we know (with minor
modifications):
Beginning Total Stk. Equity, 1/1/2014
$156,000
(Common Stock + Retained Earnings)
Plus: Common Stock Issued
$20,000
Plus: Net Income
?
Less: Dividends
(5,000)
Change in Stockholders’ Equity
65,000
Ending Total Stk. Equity, 12/31/2014
$221,000
Working backwards from the change in equity we can solve for net income:
Change in Stockholders’ Equity, 2014
$65,000
Plus: Dividends
5,000
Less: Common Stock Issued
(20,000)
Net Income, 2014
$50,000
EXERCISE 1-15
a.
Topez Company
Accounting Equation for 2014
Assets
=
Liabilities
+
Stockholders’ Equity
Common
Retained
Event
Cash
=
+
Stock
+
Earnings
1. Cash revenues
14,500
NA
NA
14,500
2. Paid expenses
(9,200)
NA
NA
(9,200)
3. Paid dividend
(500)
NA
NA
(500)
Ending Balance
4,800
=
-0-
+
-0-
+
4,800
b.
Topez Company
Income Statement
For the Year Ended December 31, 2014
Revenue
$14,500
Expense
(9,200)
Net Income
$ 5,300
Topez Company
Statement of Changes in Stockholders’ Equity
For the Year Ended December 31, 2014
Beginning Common Stock
$ -0-
Plus: Common Stock Issued
0
Ending Common Stock
$ -0-
Beginning Retained Earnings
$ -0-
Plus: Net Income
5,300
Less: Dividends
(500)
Ending Retained Earnings
4,800
Total Stockholders’ Equity
$4,800
EXERCISE 1-15 (cont.)
Topez Company
Balance Sheet
As of December 31, 2014
Assets
Cash
$ 4,800
Liabilities
$ -0-
Stockholders’ Equity
Common Stock
$ -0-
Retained Earnings
4,800
Total Stockholders’ Equity
4,800
Total Liabilities and Stockholders’ Equity
$ 4,800
c. The income statement is dated with the term “for the year ended” because it covers a
EXERCISE 1-16
a. Land will be shown on the 2013 balance sheet.
EXERCISE 1-17
a.
Palmetto Company
Statement of Cash Flows
For the Year Ended December 31, 2014
Cash Flows From Operating Activities:
Net Cash Inflow from Operating Activities
$ 15,600
Cash Flows From Investing Activities:
Net Cash Outflow from Investing Activities
(23,000)
Cash Flows From Financing Activities:
Net Cash Outflow from Financing Activities
(4,500)
Net Decrease in Cash
(11,900)
Plus: Beginning Cash Balance
32,000
Ending Cash Balance
$20,100
expenses.
c. The company paid cash to purchase long-term assets.
EXERCISE 1-18
a.
Event
Statement of Cash Flow Classification
1.
OA
2.
FA
3.
FA
4.
IA
5.
OA
6.
OA
7.
IA
8.
FA
9.
NA
10.
FA
EXERCISE 1-18 (cont.)
b.
American General Company
Statement of Cash Flows
For the Year Ended December 31, 2014
Cash Flows From Operating Activities:
Cash Receipts from Customers
$14,000
Cash Payments for Salaries
(4,000)
Cash Payments for Utilities
(4,200)
Net Cash Inflow from Operating Activities
$ 5,800
Cash Flows From Investing Activities:
Cash Paid to Purchase Land
$(8,000)
Cash Collected from the Sale of Land
7,000
Net Cash Outflow from Investing Activities
(1,000)
Cash Flows From Financing Activities:
Cash Receipts from Loan
$ 8,000
Cash Paid to Loan Obligation
(3,000)
Cash Receipts from Stock Issue
30,000
Cash Payments for Dividends
(1,000)
Net Cash Inflow from Financing Activities
34,000
Net Increase in Cash
38,800
Plus: Beginning Cash Balance
9,000
Ending Cash Balance
$47,800
EXERCISE 1-19
a.
Carolina Company
Accounting Equation for 2014
Assets
=
Liabilities
+
Stockholders’ Equity
Event
Cash
+
Land
=
Notes
Payable
+
Com.
Stock
+
Retained
Earnings
Acct.
Title/RE
Bal. 1/1/14
15,000
10,000
-0-
20,000
5,000
1. Issued stk.
50,000
NA
NA
50,000
NA
NA
2. Pur. Land
(15,000)
15,000
NA
NA
NA
NA
3. Loan
25,000
NA
25,000
NA
NA
NA
4. Provide Svc.
60,000
NA
NA
NA
60,000
Svc. Rev.
5. Paid Rent
(12,000)
NA
NA
NA
(12,000)
Rent Exp.
6. Pd. Op. Exp.
(22,000)
NA
NA
NA
(22,000)
Op. Exp.
7. Paid Div.
(5,000)
NA
NA
NA
(5,000)
Dividends
8. Land Value
NA
NA
NA
NA
NA
Totals
96,000
+
25,000
=
25,000
+
70,000
+
26,000
b.
Carolina Company
Income Statement
For the Year Ended December 31, 2014
Service Revenue
$60,000
Rent Expense
(12,000)
Operating Expense
(22,000)
Net Income
$26,000
EXERCISE 1-19 b. (cont.)
Carolina Company
Statement of Changes in Stockholders’ Equity
For the Year Ended December 31, 2014
Beginning Common Stock
$20,000
Plus: Common Stock Issued
50,000
Ending Common Stock
$70,000
Beginning Retained Earnings
$ 5,000
Plus: Net Income
26,000
Less: Dividends
(5,000)
Ending Retained Earnings
26,000
Total Stockholders’ Equity
$96,000
Carolina Company
Balance Sheet
As of December 31, 2014
Assets
Cash
$96,000
Land
25,000
Total Assets
$121,000
Liabilities
Notes Payable
$25,000
Total Liabilities
$25,000
Stockholders’ Equity
Common Stock
$70,000
Retained Earnings
26,000
Total Stockholders’ Equity
96,000
Total Liabilities and Stockholders’ Equity
$121,000
EXERCISE 1-19 b. (cont.)
Carolina Company
Statement of Cash Flows
For the Year Ended December 31, 2014
Cash Flows From Operating Activities:
Cash Receipts from Customers
$60,000
Cash Payment for Rent Expense
(12,000)
Cash Payments for Other Operating Exp.
(22,000)
Net Cash Flow from Operating Activities
$26,000
Cash Flows From Investing Activities:
Cash Paid to Purchase Land
$(15,000)
Net Cash Flow from Investing Activities
(15,000)
Cash Flows From Financing Activities:
Cash Receipts from Stock Issue
$50,000
Cash Receipts from Loan
25,000
Cash Payments for Dividends
(5,000)
Net Cash Flow from Financing Activities
70,000
Net Increase in Cash
81,000
Plus: Beginning Cash Balance
15,000
Ending Cash Balance
$96,000
c. Percentage of assets provided by retained earnings:
EXERCISE 1-20
a.
Pandora Company: Asset Exchange
b.
Donnelley Company: Asset Exchange
c.
Pandora Company: Investing Activity
d.
Donnelley Company: Investing Activity
EXERCISE 1-21
a.
Wilson Company
Accounting Equation as of January 1, 2014
Assets
=
Liabilities
+
Stockholders’ Equity
Notes
Common
Retained
Cash
+
Land
=
Payable
+
Stock
+
Earnings
$200
$1,800
$600
$1,000
?
b. The company cannot pay a $300 dividend because it only has $200 of cash. The
c. Total Assets = $200 + $1,800 = $2,000
d. Investor’s Contributions ÷ Total Assets
$1,000 ÷ $2,000 = 50%
f.
Wilson Company
Accounting Equation as of January 1, 2014
Assets
=
Liabilities
+
Stockholders’ Equity
Notes
Common
Retained
Cash
+
Land
=
Payable
+
Stock
+
Earnings
$200
$1,800
30%
$50%
20%
EXERCISE 1-21 (cont.)
g.
Wilson Company
Accounting Equation as of December 31, 2014
Assets
=
Liabilities
+
Stockholders’ Equity
Notes
Common
Retained
Cash
+
Land
=
Payable
+
Stock
+
Earnings
$200
$1,800
$600
$1,000
400
500
NA
NA
NA
500
Rev.
(300)
NA
NA
NA
(300)
Exp.
(50)
NA
NA
NA
(50)
Div
350
$1,800
$600
$1,000
$550
Wilson Company
Income Statement
For the Year Ended December 31, 2014
Revenue
$500
Expenses
(300)
Net Income
$200
EXERCISE 1-21 g. (cont,)
Wilson Company
Statement of Changes in Stockholders’ Equity
For the Year Ended December 31, 2014
Beginning Common Stock
$1,000
Plus: Common Stock Issued
0
Ending Common Stock
$1,000
Beginning Retained Earnings
$ 400
Plus: Net Income
200
Less: Dividends
(50)
Ending Retained Earnings
550
Total Stockholders’ Equity
$1,550
Wilson Company
Balance Sheet
As of December 31, 2014
Assets
Cash
$ 350
Land
1,800
Total Assets
$2,150
Liabilities
Notes Payable
$600
Total Liabilities
$ 600
Stockholders’ Equity
Common Stock
$1,000
Retained Earnings
550
Total Stockholders’ Equity
1,550
Total Liabilities and Stockholders’ Equity
$2,150
