1-61
PROBLEM 1-32A b. (cont.)
Mark’s Consulting Services
Balance Sheet
As of December 31, 2017
Assets
Cash
$57,500
Land
30,000
Total Assets
$87,500
Liabilities
Notes Payable
$10,000
Stockholders’ Equity
Common Stock
$44,000
Retained Earnings
33,500
Total Stockholders’ Equity
77,500
Total Liabilities and Stockholders’ Equity
$87,500
1-62
PROBLEM 1-32A b. (cont.)
Mark’s Consulting Services
Statement of Cash Flows
For the Year Ended December 31, 2017
Cash Flows From Operating Activities:
Cash Receipts from Customers
$95,000
Cash Payments for Expenses
(71,500)
Net Cash Flow from Operating Activities
$23,500
Cash Flows From Investing Activities
-0-
Cash Flows From Financing Activities:
Cash Receipts from Stock Issue
$24,000
Cash Payment on Debt
(15,000)
Cash Payment for Dividends
(3,000)
Net Cash Flow from Financing Activities
6,000
Net Increase in Cash
29,500
Plus: Beginning Cash Balance
28,000
Ending Cash Balance
$57,500
1-63
PROBLEM 1-32A (cont.)
e. Immediately after Event 2 in 2016 is recorded the balance in the
Retained Earnings account is zero. The revenue is recorded in a
Revenue account, not in the Retained Earnings account. The
1-64
PROBLEM 1-33A
a.
Pratt Corp.
Accounting Equation
Stockholders’ Equity
Common
Retained
Event
Assets
=
Liabilities
+
Stock
+
Earnings
Beginning Balances
30,000
=
12,000
+
13,0001
+
5,000
1. Paid Expense
(26,000)
(26,000)
3. Paid Dividend
(2,000)
(2,000)
4. Paid Liability
(3,000)
(3,000)
5. Issued Stock
4,000
4,000
6. Revenue*
35,550
35,5502
Ending Balance
38,550
=
9,000
+
17,000
+
12,550
1Assets − Liabilities − Retained Earnings = Common Stock:
$30,000 − $12,000 − $5,000 =
$13,000
2Increase in Retained Earnings: $ 7,550
Add: Expenses 26,000
Add: Dividends 2,000
Revenue $35,550
Pratt Corp.
Income Statement
For the Year Ended December 31, 2016
Revenue
$35,550
Expense
(26,000)
Net Income
$ 9,550
1-65
PROBLEM 1-33A (cont.)
Pratt Corp.
Statement of Changes in Stockholders’ Equity
For the Year Ended December 31, 2016
Beginning Common Stock
$13,000
Plus: Common Stock Issued
4,000
Ending Common Stock
$17,000
Beginning Retained Earnings
$5,000
Plus: Net Income
9,550
Less: Dividends
(2,000)
Ending Retained Earnings
12,550
Total Stockholders’ Equity
$29,550
Pratt Corp.
Balance Sheet
As of December 31, 2016
Assets
$38,550
Liabilities
$ 9,000
Stockholders’ Equity
Common Stock
$17,000
Retained Earnings
12,550
Total Stockholders’ Equity
29,550
Total Liabilities and Stockholders’ Equity
$38,550
1-66
PROBLEM 1-33A (cont.)
Pratt Corp.
Statement of Cash Flows
For the Year Ended December 31, 2016
Cash Flows From Operating Activities:
Cash Receipt from Revenue
$35,550
Cash Payment for Expense
(26,000)
Net Cash Flow from Operating Activities
$ 9,550
Cash Flows From Investing Activities
-0-
Cash Flows From Financing Activities:
Cash Receipts from Stock Issue
$ 4,000
Cash Payment to Creditors
(3,000)
Cash Dividend Paid to Stockholders
(2,000)
Net Cash Flow from Financing Activities
(1,000)
Net Increase in Cash
8,550
Plus: Beginning Cash Balance*
30,000
Ending Cash Balance
$38,550
*Assumes all assets are cash.
b. Percentage of assets provided by:
1-67
PROBLEM 1-34A
a.
Maben Company
Horizontal Statements Model for 2016
Balance Sheet
Income Statement
Statement of
Assets
=
Liab.
+
Stockholders’ Equity
Revenue
−
Expense
=
Net Inc.
Cash Flows
Event
No.
Cash
+
Land
=
Notes
Payable
+
Common
Stock
+
Retained
Earnings
1
30,000
+
NA
=
NA
+
30,000
+
NA
NA
−
NA
=
NA
30,000FA
2
40,000
+
NA
=
40,000
+
NA
+
NA
NA
−
NA
=
NA
40,000 FA
3
48,000
+
NA
=
NA
+
NA
+
48,000
48,000
−
NA
=
48,000
48,000 OA
4
(25,000)
+
NA
=
NA
+
NA
+
(25,000)
NA
−
25,000
=
(25,000)
(25,000) OA
5.
(1,000)
+
NA
=
NA
+
NA
+
(1,000)
NA
−
NA
=
NA
(1,000) FA
6.
20,000
+
NA
=
NA
+
20,000
+
NA
NA
−
NA
=
NA
20,000 FA
7.
(10,000)
+
NA
=
(10,000)
+
NA
+
NA
NA
−
NA
=
NA
(10,000) FA
8.
(53,000)
+
53,000
=
NA
+
NA
+
NA
NA
−
NA
=
NA
(53,000) IA
9.
NA
+
NA
=
NA
+
NA
+
NA
NA
−
NA
=
NA
NA
Total
49,000
+
53,000
=
30,000
+
50,000
+
22,000
48,000
−
25,000
23,000
49,000 NC
b. Total Assets = $49,000 + $53,000 = $102,000
c.
Sources of Assets
1. Issue of stock
$ 30,000
2. Cash from loan
40,000
3. Cash from revenue
48,000
6. Issue of stock
20,000
Total Sources of Assets
$138,000
1-62
PROBLEM 1-34A (cont.)
d. Net income amounts to $23,000 (see part a.) Dividends are not
expenses and do not appear on the income statement.
e.
Operating Activities:
Cash from revenue
$48,000
Cash paid for expenses
(25,000)
Net Cash Flow from Operating Activities
$23,000
Investing Activities:
Cash paid to purchase land
$(53,000)
Net Cash Flow from Investing Activities
$(53,000)
Financing Activities:
Cash from stock issue ($30,000 + $20,000)
$50,000
Cash from loan
40,000
Paid cash dividend
(1,000)
Cash paid on loan principal
(10,000)
Net Cash Flow from Financing Activities
$79,000
f. Percentage of assets is provided as follows:
Investors ($50,000 ÷ $102,000) 49.0%
Creditors ($30,000 ÷ $102,000) 29.4%
Earnings ($22,000 ÷ $102,000) 21.6%
g. Zero. The revenue is recorded in a Revenue account not in the
Retained Earnings account. The balance in the Revenue account is
transferred to Retained Earnings at the end of the accounting period
through the closing process.
1-63
SOLUTIONS TO EXERCISES – SERIES B – CHAPTER 1
EXERCISE 1-1B
The three types of resources available to conversion agents are:
Note to instructor:
The memo should discuss the fact that the resource owners are those
who own resources that are desired by others, either in the original form
1-64
EXERCISE 1-2B
a. The three areas of service provided by public accountants are
auditing, tax and consulting.
EXERCISE 1-3B
Entities
Distribution of Cash
Ray Steen (personal
account)
Personal account was decreased by the $100,000
cash deposited in the Steen Enterprises’
business account.
Steen Enterprises
Cash account increased by the $100,000 cash
deposited by Mr. Steen.
Cash account increased by $60,000 cash
borrowed from First Bank.
Cash account increased by $75,000 cash invested
by Stan Rhoades.
Cash account decreased by $150,000 cash used to
purchase building.
Cash account increased by $56,000 cash revenue
earned.
Cash account decreased by $31,000 cash payment
to employees for salaries.
First Bank
Cash account decreased by $60,000 cash loaned
to Steen Enterprises.
Stan Rhoades, father-
in-law, personal
account
Cash decreased by $75,000 cash invested in Steen
Enterprises.
Zoro Realty Company
Cash increased by $150,000 received from Steen
Enterprises to purchase building.
Steen Enterprises’
customers
Cash decreased by $56,000 when customers paid
for services performed.
Steen Enterprises’
employees
Cash increased by $31,000 when employees
received payment for salaries.
1-66
EXERCISE 1-4B
Accounting Equation
Stockholders’ Equity
Common
Retained
Company
Assets
=
Liabilities
+
Stock
+
Earnings
A
142,000
=
30,000
+
50,000
+
62,000
B
50,000
=
15,000
+
10,000
+
25,000
C
85,000
=
20,000
+
25,000
+
40,000
D
215,000
=
60,000
+
100,000
+
55,000
1-67
EXERCISE 1-5B
Morrison Co.
Accounting Equation
Stockholders’
Equity
Event
Number
Assets
=
Liabilities
+
Common
Stock
Retained
Earnings
1.
I
NA
I
NA
2.
I
I
NA
NA
3.
I
NA
NA
I
4.
I/D
NA
NA
NA
5.
D
NA
NA
D
6.
D
NA
NA
D
1-68
EXERCISE 1-6B
a.
Master Corp.
Accounting Equation for 2016
Assets
=
Liabilities
+
Stockholders’ Equity
Event
Cash
+
Land
=
Notes
Payable
+
Com.
Stock
+
Retained
Earnings
Acct.
Title/RE
Bal. 1/1/16
20,000
50,000
35,000
25,000
10,000
1. Pur. Land
(12,000)
12,000
NA
NA
NA
NA
2. Issued stk.
20,000
NA
NA
20,000
NA
NA
3. Service
50,000
NA
NA
NA
50,000
Revenue
4. Paid Exp.
(42,000)
NA
NA
NA
(42,000)
Oper. Exp.
5. Loan
20,000
NA
20,000
NA
NA
NA
6. Paid Div.
(2,000)
NA
NA
NA
(2,000)
Dividend
7. Land Value
NA
NA
NA
NA
NA
NA
Totals
54,000
+
62,000
=
55,000
+
45,000
+
16,000
b.
Assets
=
Liabilities
+
Stockholders’ Equity
$116,000
=
$55,000
+
$61,000
c. The balances of total assets, liabilities and stockholders’ equity will
be the same on January 1, 2017 as the balances on December 31,
2016. (See b. above)
1-69
EXERCISE 1-7B
a.
Assets
=
Liabilities
+
Stockholders’ Equity
Cash
=
Note Payable
+
Common Stock
+
Retained Earnings
156,000
=
85,600
+
52,400
+
?
Retained Earnings = $156,000 – $85,600 – $52,400 = $18,000
b. & c.
Dunn Company
Effect of 2017 Transactions on the Accounting Equation
Assets
=
Liabilities
+
Stockholders’ Equity
Notes
Common
Retained
Event
Cash
=
Payable
+
Stock
+
Earnings
Beginning Balances
156,000
85,600
52,400
18,000
1. Earned Revenue
36,000
NA
NA
36,000
2. Paid expenses
(20,000)
NA
NA
(20,000)
3. Paid dividend
(3,000)
NA
NA
(3,000)
Ending Balance
169,000
=
85,600
+
52,400
+
31,000
d.
Cash
=
Note Payable
+
Common Stock
+
Retained Earnings
169,000
=
85,600
+
52,400
+
31,000
1-70
EXERCISE 1-8B
a.
Assets
=
Liabilities
+
Stockholders’ Equity
Cash
Notes Payable
Salaries Expense
Land
Accounts Payable
Common Stock
Office Furniture
Utilities Payable
Service Revenue
Trucks
Interest Expense
Supplies
Utilities Expense
Computers
Operating Expenses
Building
Rent Revenue
Dividends
Supplies Expense
Gasoline Expense
Retained Earnings
Dividends
b. No. The number of accounts will vary depending on the level of detail
the reporting entity chooses to provide, as well as the type of company
and industry in which it operates. More accounts provide financial
statement users with more information about the reporting entity.
1-71
1-72
EXERCISE 1-9B
a.
Cash
+
Land
=
Creditors
+
Stockholders’
Equity
$10,000
$ -0-
$4,000
$6,000
(9,000)
9,000
NA
NA
Bal.
$ 1,000
+
$9,000
=
$4,000
+
$6,000
b. Creditor’s Claim ÷ Total Assets = Percent of Total
$4,000 ÷ $10,000 = 40%
c. Stakeholder’s Claim ÷ Total Assets = Percent of Total
$6,000 ÷ $10,000 = 60%
d. The company cannot repay the debt. The company owes the creditors
$4,000 but has only $1,000 cash. Note there is no actual money in the
stockholders’ equity account. Indeed, there is no cash in any account
that appears on the right side of the accounting equation. The right
side of the accounting equation represents obligations and
commitments of a company to its creditors and stockholders. Indeed,
the accounting equation could be written as:
Cash
+
Land
=
Creditors
+
Stockholders’
Equity
Bal.
$ 1,000
+
$9,000
=
40%
+
60%
equation.
1-73
EXERCISE 1-10B
a. Dividends are paid to investors. The investor has an ownership
interest in the business that allows the investor (owner) to share in
the profits of the business. This pay out of a share of profits of a
of $800. Since creditors have first claim on the assets, all of the $800
1-74
EXERCISE 1-11B
$400) to be paid as dividends to the investors.
b. Creditors receive their $400 interest payment, leaving $100 ($500 –
c. Creditors receive their $400 interest payment. No dividend is paid to
above.