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SOLUTIONS TO EXERCISES – SERIES B – CHAPTER 2
EXERCISE 2-1B
Smith Company
Effect of Events on the 2016 Accounting Equation
Assets
=
Liabilities
+
Stockholders’ Equity
Event
Cash
+
Accounts
Rec.
=
+
Common
Stock
+
Retained
Earnings
Earned Revenue
+
12,000
=
+
+
12,000
Coll. Acct. Rec.
9,800
+
(9,800)
=
+
+
Ending Balance
9,800
+
2,200
=
-0-
+
-0-
+
12,000
a. Accounts Receivable: $12,000 – $9,800 = $2,200
b. $12,000
c. $9,800 cash collected from accounts receivable.
d. $12,000
e. $12,000 of revenue was earned but only $9,800 of it was collected.
EXERCISE 2-2B
a.
Star Corporation Accounting Equation – 2016
Event
Assets
=
Liabilities
+
Stockholders’ Equity
Cash
=
Salaries
Payable
+
Common
Stock
+
Retained
Earnings
Earned Rev.
5,000
5,000
Accrued Sal.
3,000
(3,000)
Ending Bal.
5,000
=
3,000
+
-0-
+
2,000
$5,000
$2,000
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EXERCISE 2-2B (cont.)
c.
Cash Flow from Operating Activities
Cash from Revenue
$5,000
Net Cash Flow from Operating Act.
$5,000
d. The salary expense is deducted from revenue in computing net
income, but it has not been paid. This creates a difference of $3,000.
The revenue is the same because it has been earned and collected.
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EXERCISE 2-3B
a.
Talley, Inc.
General Ledger Accounts for the Year Ended December 31, 2016
Assets
=
Liabilities
+
Stockholders’
Equity
Event
Cash
Accts.
Rec.
=
Salaries
Pay.
+
Commo
n Stock
Retained
Earnings
Acct. Title
for RE
1.
20,000
20,000
2.
38,000
38,000
Revenue
3.
(2,500)
(2,500)
Util. Exp.
4.
21,000
(21,000)
5.
15,000
(15,000)
Sal. Exp.
6.
(2,000)
(2,000)
Dividends
Totals
36,500
17,000
=
15,000
+
20,000
18,500
b.
Talley, Inc.
Income Statement
For the Year Ended December 31, 2016
Revenue
$38,000
Expenses
Utilities Expense
$ 2,500
Salaries Expense
15,000
Total Expenses
(17,500)
Net Income
$20,500
EXERCISE 2-3B b. (cont.)
Talley, Inc.
Statement of Changes in Stockholders’ Equity
For the Year Ended December 31, 2016
Beginning Common Stock
$ -0-
Plus: Common Stock Issued
20,000
Ending Common Stock
$20,000
Beginning Retained Earnings
$ -0-
Plus: Net Income
20,500
Less: Dividends
(2,000)
Ending Retained Earnings
18,500
Total Stockholders’ Equity
$38,500
Assets
Cash
$36,500
Accounts Receivable
17,000
Total Assets
$53,500
Liabilities
Salaries Payable
$15,000
Stockholders’ Equity
Common Stock
18,500
Total Stockholders’ Equity
38,500
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EXERCISE 2-3B b. (cont.)
Talley, Inc.
Statement of Cash Flows
For the Year Ended December 31, 2016
Cash Flow From Operating Activities
Cash Receipts from Customers
$21,000
Cash Paid for Expenses
(2,500)
Net Cash Flow from Operating Act.
$18,500
Cash Flow From Investing Activities
-0-
Cash Flow From Financing Activities
Issue of Stock
$20,000
Paid Dividends
(2,000)
Net Cash Flow from Financing Act.
18,000
Net Change in Cash
36,500
Plus: Beginning Cash Balance
-0-
Ending Cash Balance
$36,500
paid.
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EXERCISE 2-4B
a.
Parker and Moates
Statements Model
For the 2016 Accounting Year
Balance Sheet
Income Statement
Statement of
Event
Assets
=
Liabilities
+
Stk. Equity
Rev.
–
Exp.
=
Net Inc.
Cash Flows
No.
Cash
+
Accts.
Rec.
=
Acct.
Payable
+
Sal.
Pay.
+
Retained
Earnings
1.
NA
96,000
NA
NA
96,000
96,000
NA
96,000
NA
2.
65,000
NA
NA
NA
65,000
65,000
NA
65,000
65,000 OA
3.
NA
NA
45,000
NA
(45,000)
NA
45,000
(45,000)
NA
4.
(26,000)
NA
NA
NA
(26,000)
NA
26,000
(26,000)
(26,000) OA
5.
70,000
(70,000)
NA
NA
NA
NA
NA
NA
70,000 OA
6.
(38,000)
NA
(38,000)
NA
NA
NA
NA
NA
(38,000) OA
7.
(10,000)
NA
NA
NA
(10,000)
NA
NA
NA
(10,000) FA
8.
NA
NA
NA
3,000
(3,000)
NA
3,000
(3,000)
NA
Totals
61,000
+
26,000
=
7,000
+
3,000
+
77,000
161,000
−
74,000
=
87,000
61,000 NC
b. Total assets: $87,000 ($61,000 + $26,000)
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EXERCISE 2-5B
a.
Computation of Net Income
Revenue recognized on account
$40,000
Less accrued salary expense
(35,000)
Net Income
$ 5,000
b.
Computation of Cash Collected from Accounts Receivable
Beginning balance of Accounts Receivable
$ 2,000
Add revenue recognized on account
40,000
Less ending balance of Accounts Receivable
(2,400)
Cash collected from accounts receivable
$39,600
Computation of Cash Paid for Salaries Expense
Beginning balance of Salaries Payable
$ 1,300
Add accrued salary expense recognized
35,000
Less ending balance of Salaries Payable
(900)
Cash paid for salary expense
$35,400
Cash Flow from Operating Activities
Cash from accounts receivable
$39,600
Cash paid for salary expense
(35,400)
Net Cash Flow from Operating Act.
$ 4,200
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EXERCISE 2-6B
a. & c.
Event
Revenue
Expense
Statement of
Cash Flows
1.
NA
NA
$50,000 FA
2.
$67,000
NA
NA
3.
NA
NA
(5,000) FA
4.
NA
NA
45,000 OA
5.
NA
$49,000
(49,000) OA
6.
10,000
NA
10,000 OA
7.
NA
2,000
NA
b.
Computation of Net Income
Revenue
$77,000
Less: Expenses
(51,000)
Net Income
$26,000
d.
Cash Flow from Operating Activities
Cash from Revenue
$55,000
Cash paid for expenses
(49,000)
Net Cash Flow from Operating Act.
$ 6,000
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EXERCISE 2-7B
Hall, Inc.
Effect of Events on the General Ledger Accounts
Assets
=
Liabilities
+
Stockholders’ Equity
Event
Cash
Accounts
Receivable
Land
=
Accounts
Payable
+
Com.
Stock
+
Retained
Earnings
1. Sales
on Account
62,000
62,000
2. Coll.
Accts. Rec.
51,000
(51,000)
3. Incurred
Expense
39,000
(39,000)
4. Pd. Acc.
Pay.
(31,000)
(31,000)
5. Issue of
Stock
40,000
40,000
6. Purchase
Land
(21,000)
21,000
Totals
39,000
11,000
21,000
=
8,000
+
40,000
+
23,000
a. Revenue recognized, $62,000.
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2-80
EXERCISE 2-8B
a. Retained Earnings is a permanent account, meaning that one period’s
ending balance becomes the next period’s beginning balance. Since
the December 31, 2016 after-closing balance is $19,400, this will also be
the balance on January 1, 2017.
EXERCISE 2-9B
a.
Permanent Accounts
Cash
Notes Payable
Land
Common Stock
Retained Earnings
Accounts
Revenue
Expenses
Dividends
Beginning Retained Earnings
Add: Revenue
Less: Expenses
Less: Dividends
Ending Retained Earnings
Computation of Net Income
Revenue
Less: Expenses
Net Income
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EXERCISE 2-10B
a.
Account
Classification
1. Service Revenue
T
2. Dividends
T
3. Common Stock
P
4. Notes Payable
P
5. Cash
P
6. Rent Expense
T
7. Accounts Receivable
P
8. Utilities Expense
T
9. Prepaid Insurance
P
10. Retained Earnings
P
b. The accounting cycle is divided into one-year accounting periods. Using the accounting cycle
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EXERCISE 2-11B
a. Directly matched
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EXERCISE 2-12B
a.
Handy Andy
Effect of Events on Financial Statements for 2016
Assets
=
Liab.
+
Stockholders’ Equity
Income Statement
Statement of
Event
No.
Cash
+
Supplies
=
Accts.
Pay.
+
Com.
Stock
+
Retained
Earnings
Rev.
−
Exp.
=
Net
Income
Cash
Flows
Beg.
Bal.
9,000
+
-0-
=
-0-
+
5,000
+
4,000
-0-
−
-0-
=
-0-
-0-
1.
NA
+
9,500
=
9,500
+
NA
+
NA
NA
−
NA
=
NA
NA
2.
32,500
+
NA
=
NA
+
NA
+
32,500
32,500
−
NA
=
32,500
32,500 OA
3.
(7,200)
+
NA
=
(7,200)
+
NA
+
NA
NA
−
NA
=
NA
(7,200) OA
4.
NA
+
(7,800)
=
NA
+
NA
+
(7,800)
NA
−
7,800
=
(7,800)
NA
Totals
34,300
+
1,700
=
2,300
+
5,000
+
28,700
32,500
−
7,800
=
24,700
25,300 NC
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EXERCISE 2-13B
a.
Janitorial Professionals, Inc.
Effect of Events on the Accounting Equation
Assets
=
Liab.
+
Stk. Equity
Event
Cash
Supplies
=
Accounts
Payable
Retained
Earnings
1. Provided Service
20,000
20,000
2. Purchased Supplies
4,000
4,000
3. Used Supplies
(3,000)
(3,000)
Totals
20,000
1,000
=
4,000
17,000
b.
Janitorial Professionals, Inc.
Income Statement
For the Year Ended December 31, 2016
Revenue
$20,000
Expense
(3,000)
Net Income
$17,000
Janitorial Professionals, Inc.
Balance Sheet
As of December 31, 2016
Assets
Cash
$20,000
Supplies
1,000
Total Assets
$21,000
Liabilities
Accounts Payable
$ 4,000
Total Liabilities
$ 4,000
Stockholders’ Equity
Retained Earnings
$17,000
Total Stockholders’ Equity
17,000
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Total Liab. and Stockholders’ Equity
$21,000