2–1
SOLUTIONS TO PROBLEMS – CHAPTER 2
PROBLEM 2-32
James Cleaning Company
Effect of Events on the Financial Statements
Balance Sheet
Income Statement
Stmt. of
Assets
=
Liabilities
+
Stock. Equity
Rev.
−
Exp.
=
Net Inc.
Cash Flows
Even
t
Cash
+
Accts
Rec.
+
Supp.
=
Accts.
Pay.
+
Unearn
Rev.
+
Com.
Stock
+
Ret.
Earn.
1.
15,000
+
NA
+
NA
=
NA
+
NA
+
15,000
+
NA
NA
−
NA
=
NA
15,000 FA
2.
6,000
+
NA
+
NA
=
NA
+
NA
+
NA
+
6,000
6,000
−
NA
=
6,000
6,000 OA
3.
NA
+
18,000
+
NA
=
NA
+
NA
+
NA
+
18,000
18,000
−
NA
=
18,000
NA
4.
11,000
+
(11,000)
+
NA
=
NA
+
NA
+
NA
+
NA
NA
−
NA
=
NA
11,000 OA
5.
(1,400)
+
NA
+
1,400
=
NA
+
NA
+
NA
+
NA
NA
−
NA
=
NA
(1,400) OA
6.
NA
+
NA
+
(1,300)
=
NA
+
NA
+
NA
+
(1,300)
NA
−
1,300
=
(1,300)
NA
7.
3,600
+
NA
+
NA
=
NA
+
3,600
+
NA
+
NA
NA
−
NA
=
NA
3,600 OA
8.
NA
+
NA
+
NA
=
NA
+
(1,800)
+
NA
+
1,800
1,800
−
NA
=
1,800
NA
9.
(6,500)
+
NA
+
NA
=
NA
+
NA
+
NA
+
(6,500)
NA
−
6,500
=
(6,500)
(6,500) OA
10.
NA
+
NA
+
NA
=
2,800
+
NA
+
NA
+
(2,800)
NA
−
2,800
=
(2,800)
NA
11.
(2,100)
+
NA
+
NA
=
(2,100)
+
NA
+
NA
+
NA
NA
−
NA
=
NA
(2,100) OA
12.
(1,000)
+
NA
+
NA
=
NA
+
NA
+
NA
+
(1,000)
NA
−
NA
=
NA
(1,000) FA
Bal.
24,600
+
7,000
+
100
=
700
+
1,800
+
15,000
+
14,200
25,800
−
10,600
=
15,200
24,600 NC
2–2
PROBLEM 2-33
The Accounting Equation
Total Assets
=
Liabilities
+
Stockholders’ Equity
Event/
Adjust.
Cash
+
Other
Assets
=
+
Common
Stock
+
Retained
Earnings
a.
(6,000)
+6,000
NA
NA
NA
a. Adj.1
NA
(4,500)
NA
NA
(4,500)
b.
NA
+2,400
+2,400
NA
NA
b. Adj.2
NA
(2,200)
NA
NA
(2,200)
c.
(7,200)
+7,200
NA
NA
NA
c. Adj.3
NA
(6,000)
NA
NA
(6,000)
d.
+18,000
NA
+18,000
NA
NA
d. Adj.4
NA
NA
(6,000)
NA
6,000
4$18,000 x 4/12 = $6,000
PROBLEM 2-34
a.
Bates Company
Income Statement
For the Year Ended December 31, 2014
Revenue
$18,000
Expenses
Salary Expense
$13,000
Utility Expense
1,800
Rent Expense
1,600
Total Expense
(16,400)
Net Income
$ 1,600
b.
Accounts to be Closed:
1. Revenue
2–3
2. Salary Expense
3. Utility Expense
4. Rent Expense
5. Dividends
c.
Computation of Retained Earnings:
Beginning Retained Earnings
$19,700
Add: Net Income
1,600
Less: Dividends
(1,000)
Ending Retained Earnings
$20,300
Net income only includes revenues and expenses for the current year. Retained
earnings not only includes current year net income, but also the balance from
previous years and reductions for dividends.
d. The balances are zero; they were closed to Retained Earnings on December 31,
2014. The December 31 closing balance of one year is the opening balance on
January 1 of the next year.
2–4
PROBLEM 2-35
(Prepared for Instructor’s Use)
Accounting Equation
Assets
Liabilities
Stk. Equity
Date
Cash
Acc.
Rec.
Pp. Rent
Supp.
Int.
Rec.
Land
Acc. Pay.
Sal. Pay.
Unear.
Rev.
Com.
Stock
Ret. Earn.
Bal.
60,000
45,000
35,000
32,000
60,000
48,000
1/1
30,000
30,000
4/1
(7,200)
7,200
6/1
(5,000)
(5,000)
7/1
(40,000)
40,000
8/1
(21,000)
(21,000)
9/1
9,600
9,600
9/30
20,000
(20,000)
10/1
1,200
1,200
12/31
75,000
75,000
12/31
62,000
(62,000)
12/31
27,000
(27,000)
12/31
18,000
(18,000)
12/31
(1,100)
(1,100)
12/311
12/31a
(5,400)1
(5,400)
12/31a
(4,800)2
4,800
12/312
120
120
Bal.
108,400
58,000
1,800
100
120
55,000
39,200
18,000
4,800
90,000
71,420
1No entry for the change in value of the land.
2This assumes that some of the cash was invested in an interest bearing account.
(1) 12/31a Expired Rent ($7,200 x 9/12 = $5,400)
(2) 12/31a Unearned Revenue Earned ($9,600 x 4/8 = $4,800)
2–5
PROBLEM 2-35 (cont.)
a. The two transactions that need adjusting entries are as follows:
1. April 1, prepaid rent.
2. Sept. 1, unearned revenue; cash was received in advance.
b. $35,000 + $40,000 − $20,000 = $55,000
g. $9,600 − $4,800 ($9,600 x 4/8) = $4,800
h. $20,000 − $40,000 = ($20,000)
m. Beg. RE $48,000 + NI $28,420 − Div. $5,000 = Ending retained earnings $71,420
2-6
PROBLEM 2–36
Dawkins Company
Financial Statements
For the Year Ended December 31, 2014
Income Statement
Revenue
Service Revenue
$86,000
Total Revenue
$86,000
Expenses
Other Operating Expenses
$59,000
Supplies Expense
1,000
Rent Expense
3,500
Insurance Expense
2,500
Total Expenses
(66,000)
Net Income
$20,000
Statement of Changes in Stockholders’ Equity
Beginning Common Stock
$ 5,500
Plus: Stock Issued
9,000*
Ending Common Stock
$14,500
Beginning Retained Earnings
$47,200
Plus: Net Income
20,000
Less: Dividends
(5,000)
Ending Retained Earnings
62,200
Total Stockholders’ Equity
$76,700
*Not given in the problem.
Ending Common Stock − Beginning Common Stock = Stock Issued
$14,500 − $5,500 = $9,00PROBLEM 2-36
(cont.)
Dawkins Company
Balance Sheet
As of December 31, 2014
Assets
Cash
$22,100
Accounts Receivable
21,000
Supplies
2,100
Prepaid Insurance
3,500
Land
43,000
Total Assets
$91,700
Liabilities
Accounts Payable
$15,000
Total Liabilities
$15,000
Stockholders’ Equity
Common Stock
$14,500
Retained Earnings
62,200
Total Stockholders’ Equity
76,700
Total Liab. and Stockholders’ Equity
$91,700
PROBLEM 2-36 (cont.)
Dawkins Company
Statement of Cash Flows
For the Year Ended December 31, 2014
Cash Flow From Operating Activities
$ 8,600
Cash Flow From Investing Activities
(6,000)
Cash Flow From Financing Activities
9,000
Net Change in Cash
11,600
Plus: Beginning Cash Balance
10,500*
Ending Cash Balance
$22,100
Ending Cash Bal. − Increase in Cash = Beg. Cash Balance
$22,100 − $11,600 = $10,500
2-8
PROBLEM 2–37
FOR THE YEARS
2014
2015
2016
Income Statements
Revenue (cash)
$ 400
$ 500
$ 800
Expense (cash)
(250)
(l) (400)
(425)
Net income
(a) $ 150
$ 100
$ 375
Statements of Changes in Stockholders’ Equity
Beginning common stock
$ -0-
(m) $8,000
$9,100
Plus: Common stock issued
(b) 8,000
1,100
310
Ending common stock
8,000
9,100
(s) 9,410
Beginning retained earnings
-0-
25
75
Plus: Net income
(c) 150
100
375
Less: Dividends
(d) (125)
(50)
(150)
Ending retained earnings
25
(n) 75
300
Total stockholders’ equity
(e) $8,025
$9,175
(t) $9,710
Balance Sheets
Assets
Cash
(f) $11,000
(o) $ 6,650
(u)$ 8,050
Land
-0-
(p) 5,000
2,500
Total assets
$11,000
$11,650
$10,550
Liabilities
(g) $ 2,975
(q) $ 2,475
$ 840
Stockholders’ equity
Common stock
(h) 8,000
(r) 9,100
9,410
Retained earnings
(i) 25
75
300
Total stockholders’ equity
8,025
9,175
9,710
Total liabilities and stk. equity
$11,000
$11,650
$10,550
PROBLEM 2-37 (cont.)
FOR THE YEARS
2014
2015
2016
Statements of Cash Flows
Cash flows from oper. activities:
Cash receipts from revenue
(j)$ 400
$ 500
(v) $ 800
Cash payments for expenses
(k) (250)
(400)
(w) (425)
Net cash flows from oper. Act.
150
100
375
Cash flows from invest. activities:
Cash payments for land
-0-
(5,000)
-0-
Cash receipt from sale of land
-0-
-0-
2,500
Net cash flows from invest. act.
-0-
(5,000)
2,500
Cash flows from fin. activities:
Cash rec. from borrowed funds
2,975
-0-
-0-
Cash payments to reduce debt
-0-
(500)
(x) (1,635)
Cash receipts from stock issue
8,000
1,100
(y) 310
Cash payments for dividends
(125)
(50)
(z) (150)
Net cash flows from fin. activities
10,850
550
(1,475)
Net change in cash
11,000
(4,350)
1,400
Plus: beginning cash balance
-0-
11,000
6,650
Ending cash balance
$11,000
$ 6,650
$ 8,050
PROBLEM 2-37 (cont.)
Computations of amounts:
a. $150 Net Income = $400 Revenue − $250 Expenses.
b. $8,000 Common Stock Issued = $8,000 Ending Common Stock − $-0- Beginning Common
i. $25 Retained Earnings = $25 Ending Retained Earnings from Statement of Changes in
Stockholders’ Equity.
j. $400 Cash Receipts from Revenue = $400 Revenue from Income Statement.
k. $250 Cash Payments for Expenses = $250 Expenses from Income Statement.
l. $400 Expenses = $500 Revenue − $100 Net Income.
m. $8,000 Beginning Common Stock = $8,000 Ending Common Stock for 2014.
n. $75 Ending Retained Earnings = $25 Beginning Retained Earnings + $100 Net Income − $50
Dividends.
o. $6,650 Cash = $6,650 Ending Cash Balance from the Statement of Cash Flows.
2-11
PROBLEM 2-38
a.
Alabama Service Company
Accounting Equation for 2014
Assets
=
Liabilities
+
Stk. Equity
Event
Type of
Event
Cash
Accts.
Rec.
Supp.
Prepd.
Rent
Land
=
Accts.
Pay.
Salaries
Payable
Unearn.
Rev.
+
Com.
Stock
Earnings
1.
AS
60,000
60,000
2.
AS
1,200
1,200
3.
AE
(18,000)
18,000
4.
AU
(800)
(800)
5.
AS
42,000
6.
AU
(21,000)
7.
AE
38,000
(38,000)
8.
CE
3,200
9.
AU
(1,000)
Totals
58,200
4,000
200
-0–
18,000
=
400
3,200
-0–
+
60,000