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Chapter 1
Accounting and the Business Environment
Review Questions
1. What is accounting?
Accounting is the information system that measures business activities, processes the information
business.
2. Briefly describe the two major fields of accounting.
Financial accounting provides information for external decision makers, such as outside investors,
3. Describe the various types of individuals who use accounting information and how they use that
information to make important decisions.
Individuals use accounting information to help them manage their money, evaluate a new job, and
better decide whether they can afford to make a new purchase. Business owners use accounting
4. What are two certifications available for accountants? Briefly explain each certification.
Certified Public Accountants (CPAs) are licensed professional accountants who serve the general
5. What is the role of the Financial Accounting Standards Board (FASB)?
6. Explain the purpose of Generally Accepted Accounting Principles (GAAP), including the
organization currently responsible for the creation and governance of these standards.
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The guidelines for accounting information are called GAAP. It is the main U.S. accounting rule
7. Describe the similarities and differences among the four different types of business entities discussed
in the chapter.
A sole proprietorship has a single owner, terminates upon the owner’s death or choice, the owner has
personal liability for the business’s debts, and it is not a separate tax entity. A partnership has two or
8. A business purchases an acre of land for $5,000. The current market value is $5,550, and the land
was assessed for property tax purposes at $5,250. What value should the land be recorded at, and
which accounting principle supports your answer?
9. What does the going concern assumption mean for a business?
10. Which concept states that accounting information should be complete, neutral, and free from
material error?
The faithful representation concept states that accounting information should be complete, neutral,
and free from material error.
11. Financial statements in the United States are reported in U.S. dollars. What assumption supports this
statement?
12. Explain the role of the International Accounting Standards Board (IASB) in relation to International
Financial Reporting Standards (IFRS).
13. What is the accounting equation? Briefly explain each of the three parts.
Assets = Liabilities + Equity. Assets are economic resources that are expected to benefit the
business in the future. They are things of value that a business owns or has control of. Liabilities
14. How does retained earnings increase? What are the two ways that retained earnings decreases?
15. How is net income calculated? Define revenues and expenses.
Revenues – Expenses = Net Income. Revenues are earnings resulting from delivering goods or
services to customers. Expenses are the cost of selling goods or service.
16. What are the steps used when analyzing a business transaction?
Step 1: Identify the accounts and the account type. Step 2: Decide if each account increases or
17. List the four financial statements. Briefly describe each statement.
Income Statement – Shows the difference between an entity’s revenues and expenses and reports the
net income or net loss for a specific period.
18. What is the calculation for ROA? Explain what ROA measures.
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Short Exercises
S1-1 Identifying users of accounting information
Learning Objective 1
For each user of accounting information, identify if the user would use financial accounting or
managerial accounting
a. investor
e. controller
b. banker
f. stockholder
c. IRS
g. human resources director
d. manager of the business
h. creditor
SOLUTION
a. FA
e. MA
S1-2 Determining organizations that govern accounting
Learning Objective 2
Suppose you are starting a business, Wholly Shirts, to imprint logos on T-shirts. In organizing the
business and setting up its accounting records, you take your information to a CPA to prepare financial
statements for the bank. Name the organization that governs the majority of the guidelines that the CPA
will use to prepare financial statements for Wholly Shirts. What are those guidelines called?
SOLUTION
b. FA
c. FA
g. MA
d. MA
h. FA
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S1-3 Identifying types of business organizations
Learning Objective 2
Chloe Michaels plans on opening Chloe Michaels Floral Designs. She is considering the various types of
business organizations and wishes to organize her business with unlimited life and wants owners of the
business to not be held personally liable for the business’s debts. Additionally, Chloe wants the business
to be a separate taxable entity. Which type of business organization will meet Chloe’s needs best?
SOLUTION
Chloe’s needs will best be met by organizing a corporation since a corporation has an unlimited life and
S1-4 Identifying types of business organizations
Learning Objective 2
You would like to start a cellular telephone equipment service business. You are considering organizing
the business as a sole proprietorship. Identify the advantages and disadvantages of owning a sole
proprietorship.
SOLUTION
S1-5 Applying accounting assumptions and principles
Learning Objective 2
Michael McNamee is the proprietor of a property management company, Apartment Exchange, near the
campus of Pensacola State College. The business has cash of $8,000 and furniture that cost $9,000 and
has a market value of $13,000. The business debts include accounts payable of $6,000. Michael’s
personal home is valued at $400,000, and his personal bank account has a balance of $1,200. Consider
the accounting principles and assumptions discussed in the chapter, and identify the principle or
assumption that best matches the situation:
a. Michael’s personal assets are not recorded on the Apartment Exchange’s balance sheet.
b. The Apartment Exchange records furniture at its cost of $9,000, not its market value of $13,000.
c. The Apartment Exchange reports its financial statements in U.S. dollars.
d. Michael expects the Apartment Exchange to remain in operation for the foreseeable future.
SOLUTION
a. The economic entity assumption
S1-6 Using the accounting equation
Learning Objective 3
Thompson Handyman Services has total assets for the year of $18,400 and total liabilities of $9,050.
Requirements
1. Use the accounting equation to solve for equity.
2. If next year assets increased by $4,300 and equity decreased by $3,850, what would be the amount
of total liabilities for Thompson Handyman Services?
SOLUTION
Requirement 1
Thompson Handyman Services has equity of $9,350.
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S1-7 Using the accounting equation
Learning Objective 3
Roland’s Overhead Doors reports the following financial information:
Assets
$ 45,800
Liabilities
17,220
Common Stock
27,460
Dividends
6,500
Revenues
8,850
Expenses
?
Requirements
1. Use the accounting equation to solve for the missing information.
2. Did Roland’s Overhead Doors report net income or net loss?
SOLUTION
Requirement 1
S1-8 Identifying accounts
Learning Objective 3
Consider the following accounts:
a. Accounts Payable
b. Cash
c. Common Stock
d. Accounts Receivable
e. Rent Expense
f. Service Revenue
g. Office Supplies
h. Dividends
i. Land
j. Salaries Expense
Identify each account as Asset, Liability, or Equity.
SOLUTION
a. L
f. E
b. A
g. A
c. E
h. E
d. A
i. A
e. E
j. E
S1-9 Using the accounting equation to analyze transactions
Learning Objective 4
Tiny Town Kennel earns service revenue by caring for the pets of customers. Tiny Town Kennel is
organized as a corporation. During the past month, Tiny Town Kennel has the following transactions:
a. Received $520 cash for service revenue earned.
b. Paid $325 cash for salaries expense.
c. Received a $1,000 contribution in exchange for common stock.
d. Earned $640 for service revenue, but the customer has not paid Tiny Town Kennel yet.
e. Received utility bill of $85, which will be paid next month.
f. Cash dividends of $100 were paid to stockholders.
Indicate the effects of the business transactions on the accounting equation for Tiny Town Kennel.
Transaction (a) is answered as a guide.
a. Increase asset (Cash); Increase equity (Service Revenue)
SOLUTION
a. Increase asset (Cash); Increase equity (Service Revenue)
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S1-10 Using the accounting equation to analyze transactions
Learning Objective 4
Elaine’s Inflatables earns service revenue by providing party planning services and inflatable
playscapes. Elaine’s Inflatables is organized as a corporation. During the past month, Elaine’s
Inflatables had the following transactions:
a. Received contributions of $10,000 in exchange for common stock.
b. Purchased equipment for $5,000 on account.
c. Paid $400 for office supplies.
d. Earned and received $2,500 cash for service revenue.
e. Paid $400 for wages to employees.
f. Cash dividends of $1,000 were paid to stockholders.
g. Earned $1,000 for services provided. Customer has not yet paid.
h. Paid $1,000 for rent.
i. Received a bill for $250 for the monthly utilities. The bill has not yet been paid.
Indicate the effects of the business transactions on the accounting equation for Elaine’s Inflatables.
Transaction (a) is answered as a guide.
a. Increase asset (Cash); Increase equity (Common Stock)
SOLUTION
a. Increase asset (Cash); Increase equity (Common Stock)
S1-11 Identifying accounts on the financial statements
Learning Objective 5
Consider the following accounts:
a. Accounts Payable
b. Cash
c. Common Stock
d. Accounts Receivable
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e. Rent Expense
f. Service Revenue
g. Office Supplies
h. Dividends
i. Land
j. Salaries Expense
Identify the financial statement (or statements) that each account would appear on. Use I for Income
Statement, RE for Statement of Retained Earnings, B for Balance Sheet, and C for Statement of Cash
Flows.
SOLUTION
a. B
f. I
Use the following information to answer Short Exercises S1-12 through S1-14.
Centerpiece Arrangements has just completed operations for the year ended December 31, 2018. This is
the third year of operations for the company. The following data have been assembled for the business:
Insurance Expense
$ 4,500
Salaries Expense
$ 46,000
Service Revenue
70,000
Accounts Payable
17,600
Utilities Expense
1,400
Office Supplies
1,700
Rent Expense
16,000
Dividends
4,800
Common Stock
9,000
Accounts
Receivable
8,000
Cash
7,200
Equipment
12,100
Retained Earnings, January 1,
2018
5,100
b. B, C
g. B
c. B
h. RE
d. B
i. B
e. I
j. I
S1-12 Preparing the income statement
Learning Objective 5
Prepare the income statement of Centerpiece Arrangements for the year ended December 31, 2018.
SOLUTION
CENTERPIECE ARRANGEMENTS
Revenue:
Service Revenue
Expenses:
Salaries Expense
Rent Expense
Insurance Expense
Utilities Expense
Total Expenses
Net Income
S1-13 Preparing the statement of retained earnings
Learning Objective 5
Prepare the statement of retained earnings of Centerpiece Arrangements for the year ended December
31, 2018.
SOLUTION
CENTERPIECE ARRANGEMENTS
Statement of Retained Earnings
Year Ended December 31, 2018
Retained Earnings, January 1, 2018
$ 5,100
Net income for the year
Dividends
Retained Earnings, December 31, 2018
$ 2,400
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S1-14 Preparing the balance sheet
Learning Objective 5
Prepare the balance sheet of Centerpiece Arrangements as of December 31, 2018.
SOLUTION
CENTERPIECE ARRANGEMENTS
Balance Sheet
December 31, 2018
Assets
Liabilities
Cash
$ 7,200
Accounts Payable
$ 17,600
S1-15 Preparing the statement of cash flows
Learning Objective 5
Polk Street Homes had the following cash transactions for the month ended July 31, 2018.
Cash receipts:
Collections from customers
$
25,000
Issued common stock
13,000
Cash payments:
Rent
500
Utilities
2,000
Salaries
1,500
Purchase of equipment
25,000
Payment of cash dividends
4,000
Cash balance, July 1, 2018
14,000
Cash balance, July 31, 2018
19,000
Accounts Receivable
Office Supplies
Equipment
Common Stock
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Prepare the statement of cash flows for Polk Street Homes for the month ended July 31, 2018.
SOLUTION
POLK STREET HOMES
Statement of Cash Flows
Month Ended July 31, 2018
Cash flows from operating activities:
Receipts:
S1-16 Calculating ROA
Learning Objective 6
Matured Water Services had net income for the month of October of $50,880. Assets as of the beginning
and end of the month totaled $362,000, and $486,000, respectively. Calculate Matured Water Services’
ROA for the month of October.
SOLUTION
Return on assets
=
Net income / Average total assets
=
$50,880 / (($362,000 + $486,000) / 2)
=
$50,880 / $424,000
=
12%
Payments:
To employees
To suppliers
Net cash provided by operating activities
Cash flows from investing activities:
Net cash used by investing activities
Cash flows from financing activities:
Net cash provided by financing activities
Net increase in cash
Cash balance, July 1, 2018
Cash balance, July 31, 2018
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Exercises
E1-17 Identifying users of accounting information
Learning Objective 1
For each of the users of accounting information, identify whether the user is an external decision maker (E) or an
internal decision maker (I):
a. customer
b. company manager
c. Internal Revenue Service
d. lender
e. investor
f. controller
g. cost accountant
h. SEC
SOLUTION
a. E
e. E
E1-18 Using accounting vocabulary
Learning Objective 2
Consider the following accounting terms and definitions, and match each term to the definition:
1. Sole proprietorship
2. Faithful
representation
3. Partnership
4. IFRS
5. Corporation
6. Audit
a. Set of global accounting guidelines, formulated by the IASB
b. Holds that fair market value should not be used over actual costs
c. Stands for Financial Accounting Standards Board
d. Owner is referred to as a proprietor
e. Asserts that accounting information should be complete, neutral, and free from material
error
7. Cost principle
8. FASB
9. Creditors
10. SEC
f. An examination of a company’s financial statements and records
g. Has two or more owners (called partners )
h. U.S. governmental agency that oversees the U.S. financial markets
i. Type of entity that is designed to limit personal liability exposure of owners to the
entity’s debts
j. Person or business lending money
SOLUTION
1. d
6. f
2. e
7. b
3. g
8. c
4. a
9. j
5. i
10. h
E1-19 Using accounting vocabulary
Learning Objective 3, 5
Consider the following accounting terms and definitions, and match each term to the definition:
1. Accounting equation
2. Asset
3. Balance sheet
4. Expense
5. Income statement
6. Liability
7. Net income
8. Net loss
9. Revenue
10. Statement of cash flows
11. Statement of retained
earnings
a. An economic resource that is expected to be of benefit in the future
b. Debts that are owed to creditors
c. Excess of total expenses over total revenues
d. Excess of total revenues over total expenses
e. The basic tool of accounting, stated as
Assets Liabilities Equity=+
f. Decreases in equity that occur in the course of selling goods or services
g. Increases in equity that occur in the course of selling goods or services
h. Reports on a business’s cash receipts and cash payments during a period
i. Reports on an entity’s assets, liabilities, and stockholders’ equity as of a
specific date
j. Reports on an entity’s revenues, expenses, and net income or loss for the
period
k. Reports how the company’s retained earnings balance changed from the
beginning to the end of the period
SOLUTION
1. e
7. d
3. i
9. g
4. f
10. h
5. j
11. k
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E1-20 Using the accounting equation
Learning Objective 3
Compute the missing amount in the accounting equation for each entity from the financial information presented:
Assets
Liabilities
Equity
Hair Styles
$ ?
$ 36,000
$ 36,000
Style Cuts
90,000
?
48,000
Your Basket
101,000
68,000
?
SOLUTION
Assets
Liabilities
Equity
E1-21 Using the accounting equation
Learning Objective 3
Wizco Advertising’s balance sheet data at May 31, 2018, and June 30, 2018, follow:
May 31, 2018
June 30, 2018
Total Assets
$ 122,000
$ 287,000
Total Liabilities
66,000
144,000
For each of the following situations that occurred in June, 2018 with regard to common stock and dividends of a
corporation, compute the amount of net income or net loss during June 2018.
a. The company issued $10,000 of common stock and paid no dividends.
b. The company issued no common stock. It paid cash dividends of $3,000.
c. The company issued $12,500 of common stock and paid cash dividends of $30,000.
SOLUTION
a.
b.
c.
Stockholders’ equity, May 31, 2018
$ 56,000
$ 56,000
$ 56,000
90,000
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E1-22 Using the accounting equation
Learning Objective 3
Mountain Drycleaners started 2018 with total assets of $19,000 and total liabilities of $14,000. At the
end of 2018, Mountain’s total assets stood at $12,000 and total liabilities were $9,000.
Requirements
1. Did the stockholders’ equity of Mountain Drycleaners increase or decrease during 2018? By how
much?
2. Identify the four possible reasons that stockholders’ equity can change.
SOLUTION
Requirement 1
Assets
=
Liabilities
+
Equity
Beginning of 2018
$19,000
=
$14,000
+
?
Requirement 2
a. Increase through issuance of common stock.
E1-23 Using the accounting equation
Learning Objective 3
During 2018, Flowing Rivers Spa reported revenue of $30,000. Total expenses for the year were
$15,000. Flowing Rivers Spa ended the year with total assets of $43,000, and it owed debts totaling
$14,000. At year-end 2017, the business reported total assets of $28,000 and total liabilities of $14,000.
Requirements
1. Compute Flowing Rivers Spa’s net income for 2018.
2. Did Flowing Rivers Spa’s stockholders’ equity increase or decrease during 2018? By how much?
$19,000
=
$14,000
+
End of 2018
$12,000
=
+
?
$12,000
=
+
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SOLUTION
Requirement 1
E1-24 Using the accounting equation
Learning Objective 3
The records of Felix Company show the following at December 31, 2018:
Assets & Liabilities:
Equity:
Beginning:
Common Stock
$ 11,000
Assets
$ 67,000
Dividends
8,000
Liabilities
11,000
Revenues
205,000
Ending:
Expenses
?
Assets
$ 46,000
Retained Earnings, January 1, 2018
45,000
Liabilities
34,000
Requirements
1. Compute the missing amount for Felix Company. You will need to determine Retained Earnings,
December 31, 2018, and total stockholders’ equity, December 31, 2018.
2. Did Felix earn a net income or suffer a net loss for the year? Compute the amount.
SOLUTION
Requirement 1
Assets
−
Liabilities
=
Equity
Beginning of 2018
$67,000
−
$11,000
=
$56,000
Ending of 2018
$46,000
−
$34,000
=
$12,000
=
Liabilities
+
Beginning of 2018
$28,000
=
+
$28,000
=
+
$14,000
Ending of 2018
$43,000
=
+
$43,000
=
+
$29,000
Retained Earnings, Jan. 1, 2018
Plus: Revenues
Less: Expenses
Less: Dividends
(8,000)
Retained Earnings, Dec. 31, 2018
Common Stock
Retained Earnings
Requirement 2
Felix Company suffered (or reported) a net loss of ($36,000).
Revenue
−
Expenses
=
Net Income (Loss)
$205,000
−
$241,000
=
($36,000)
E1-25 Using the accounting equation to analyze transactions
Learning Objective 4
As the manager of a Papa Sean’s restaurant, you must deal with a variety of business transactions. Give
an example of a transaction that has each of the following effects on the accounting equation:
a. Increase one asset and decrease another asset.
b. Decrease an asset and decrease equity.
c. Decrease an asset and decrease a liability.
d. Increase an asset and increase equity.
e. Increase an asset and increase a liability.
SOLUTION
Student responses will vary. Examples include:
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E1-26 Using the accounting equation to analyze business transactions
Learning Objective 4
Indicate the effects of the following business transactions on the accounting equation of Vivian’s Online
Video store. Transaction (a) is answered as a guide.
a. Received cash of $10,000 from issuance of common stock.
Answer: Increase asset (Cash); Increase equity (Common Stock)
b. Earned video rental revenue on account, $2,800.
c. Purchased office furniture on account, $300.
d. Received cash on account, $400.
e. Paid cash on account, $100.
f. Rented videos and received cash of $200.
g. Paid monthly office rent of $1,000.
h. Paid $100 cash to purchase office supplies.
SOLUTION
a. Increase asset (Cash); Increase equity (Common Stock)
b. Increase asset (Accounts Receivable); Increase equity (Rental Revenue)
E1-27 Using the accounting equation to analyze business transactions
Learning Objective 4
Indicate the effects of the following business transactions on the accounting equation for Sam’s Snack
Foods, a supplier of snack foods. Transaction (a) is answered as a guide.
a. Sam’s Snack Foods received cash from issuance of common stock to stockholders.
Answer: Increase asset (Cash); Increase equity (Common Stock)
b. Cash purchase of land for a building site.
c. Paid cash on accounts payable.
d. Purchased equipment; signed a note payable.
e. Performed service for a customer on account.
f. Employees worked for the week but will be paid next Tuesday.
g. Received cash from a customer on accounts receivable.
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h. Borrowed money from the bank.
i. Cash dividends paid to stockholders.
j. Incurred utilities expense on account.
SOLUTION
a. Increase asset (Cash); Increase equity (Common Stock)
b. Increase asset (Land); Decrease asset (Cash)
E1-28 Using the accounting equation to analyze business transactions
Learning Objective 4
The analysis of the first eight transactions of Advanced Accounting Service follows. Describe each
transaction.
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SOLUTION
Transaction Descriptions:
1. Issuance of common stock to stockholders
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E1-29 Using the accounting equation to analyze business transactions
Learning Objective 4
Ashley Stamper opened a medical practice. During July, the first month of operation, the business, titled Ashley Stamper, MD, experienced
the following events:
Jul. 6
Received a contribution of $68,000 from Stamper and opened a bank account in the name of A.
Stamper, MD. The corporation issued common stock to Stamper.
9
Paid $56,000 cash for land.
12
Purchased medical supplies for $1,500 on account.
15
Officially opened for business.
20
Paid cash expenses: employees’ salaries, $1,300; office rent, $1,500; utilities, $100.
31
Earned service revenue for the month, $13,000, receiving cash.
31
Paid $1,050 on account.
Analyze the effects of these events on the accounting equation of the medical practice of Ashley Stamper, MD, using the following format:
SOLUTION
ASSETS
=
LIABILITIES
+
EQUITY
Contributed
Capital
+
Retained Earnings
Date
Cash
+
Medical
Supplies
+
Land
=
Accounts
Payable
+
Common
Stock
–
Dividends
+
Service
Revenue
–
Salaries
Expense
–
Rent
Expense
–
Utilities
Expense
July 6
+68,000
+68,000
Bal.
$68,000
=
+
$68,000
9
–56,000
+56,000
=
Bal.
$12,000
+
=
+
$68,000
+
=
Bal.
$12,000
+
+
=
+
$68,000
Bal.
$12,000
+
+
=
+
$68,000
=
Bal.
+
+
=
+
$68,000
$1,500
=
+13,000
Bal.
$22,100
+
+
=
+
$68,000
$1,500
=
Bal.
$21,050
+
+
=
+
$68,000
$1,500
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E1-30 Preparing the financial statements
Learning Objective 5
Estella Osage publishes an online travel magazine. In need of cash, the business applies for a loan with
National Bank. The bank requires borrowers to submit financial statements. With little knowledge of
accounting, Estella Osage, a stockholder, does not know how to proceed.
Requirements
1. What are the four financial statements that the business will need to prepare?
2. Is there a specific order in which the financial statements must be prepared?
3. Explain how to prepare each statement.
Use the following information to answer Exercises E1-31 through E1-33.
The account balances of Wilson Towing Service at June 30, 2018, follow:
Equipment
$ 25,850
Service Revenue
$ 15,000
Office Supplies
1,000
Accounts Receivable
9,000
Notes Payable
6,800
Accounts Payable
8,000
Rent Expense
900
Retained Earnings, June 1, 2018
3,250
Cash
1,400
Salaries Expense
2,400
Dividends
3,500
Common Stock
11,000
SOLUTION
Requirement 1
a. Income statement
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E1-31 Preparing the income statement
Learning Objective 5
Net Income $11,700
Requirements
1. Prepare the income statement for Wilson Towing Service for the month ending June 30, 2018.
2. What does the income statement report?
SOLUTION
Requirement 1
WILSON TOWING SERVICE
Income Statement
Month Ended June 30, 2018
Revenue:
E1-32 Preparing the statement of retained earnings
Learning Objective 5
Ending Retained Earnings $11,450
Requirements
1. Prepare the statement of retained earnings for Wilson Towing Service for the month ending June 30,
2018.
2. What does the statement of retained earnings report?
Service Revenue
Expenses:
Salaries Expense
Rent Expense
Net Income
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SOLUTION
Requirement 1
WILSON TOWING SERVICE
Statement of Retained Earnings
Month Ended June 30, 2018
E1-33 Preparing the balance sheet
Learning Objective 5
Total Assets $37,250
Requirements
1. Prepare the balance sheet for Wilson Towing Service as of June 30, 2018.
2. What does the balance sheet report?
SOLUTION
Requirement 1
WILSON TOWING SERVICE
Balance Sheet
June 30, 2018
Use the following information to answer Exercises E1-34 through E1-36.
The assets, liabilities, and equities of Damon Design Studio have the following balances at December
31, 2018. The retained earnings was $39,000 at the beginning of the year. At year end, common stock
was $13,000 and dividends were $57,000.
Notes Payable
$ 14,000
Office Furniture
$ 48,400
Rent Expense
23,000
Utilities Expense
7,200
Cash
3,200
Accounts Payable
3,600
Office Supplies
5,100
Service Revenue
154,600
Salaries Expense
65,000
Accounts Receivable
9,300
Property Tax Expense
2,200
Miscellaneous Expense
3,800
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E1-34 Preparing the income statement
Learning Objective 5
Net Income $53,400
Prepare the income statement for Damon Design Studio for the year ending December 31, 2018.
SOLUTION
DAMON DESIGN STUDIO
Income Statement
Year Ended December 31, 2018
Revenue:
Service Revenue
$ 154,600
Expenses:
Salaries Expense
Rent Expense
Utilities Expense
Miscellaneous Expense
Property Tax Expense
Total Expenses
Net Income
E1-35 Preparing the statement of retained earnings
Learning Objective 5
Ending Retained Earnings $35,400
Prepare the statement of retained earnings for Damon Design Studio for the year ending December 31,
2018.
SOLUTION
DAMON DESIGN STUDIO
Statement of Retained Earnings
Year Ended December 31, 2018
Retained Earnings, January 1, 2018
$ 39,000
Net income for the year
Dividends
Retained Earnings, December 31, 2018
$ 35,400
E1-36 Preparing the balance sheet
Learning Objective 5
Total Assets $66,000
Prepare the balance sheet for Damon Design Studio as of December 31, 2018.
SOLUTION
DAMON DESIGN STUDIO
Balance Sheet
December 31, 2018
Cash
Accounts Payable
Accounts Receivable
Notes Payable
Office Supplies
Total Liabilities
Office Furniture
Common Stock
Retained Earnings
Total Stockholders’ Equity
Total Assets
Equity
1-32
E1-37 Preparing the statement of cash flows
Learning Objective 5
For each transaction, identify the appropriate section on the statement of cash flows to report the transaction.
Choose from: Cash flows from operating activities (O), Cash flows from investing activities (I), Cash flows from
financing activities (F), or Is not reported on the statement of cash flows (X). If reported on the statement, decide
whether the transaction should be shown as a positive cash flow (+) or a negative cash flow (–):
a. The business received cash from the issuance of common stock.
b. Paid cash on accounts payable for office supplies purchased.
c. Performed services for a customer on account.
d. Cash dividends were paid to stockholders.
e. Received cash from a customer for services performed.
f. Purchased equipment with cash.
g. Paid rent for the month.
h. Purchased land; signed a note payable.
i. Paid employees wages for the week.
j. Incurred utility expense on account.
SOLUTION
a. F +
f. I –
b. O –
g. O –
c. X
h. X
d. F –
i. O –
e. O +
j. X
E1–38 Preparing the statement of cash flows
Learning Objective 5
Decrease in cash $9,350
Morning Bean Food Equipment Company had the following transactions for the month ending January
31, 2018. Morning Bean’s cash balance on January 1, 2018, was $11,800.
Jan. 1
Common stock was issued to stockholders for $5,000 cash.
7
Purchased equipment for $2,400 on account.
14
Paid $19,000 cash for land.
17
Paid cash expenses: employees’ salaries, $1,300; office rent, $1,600; utilities, $450.
23
Paid cash dividends of $500.
26
Earned service revenue for the month, $8,500, receiving cash.
Prepare the statement of cash flows of Morning Bean Food Equipment Company for the month ended
January 31, 2018.
SOLUTION
MORNING BEAN FOOD EQUIPMENT COMPANY
Statement of Cash Flows
Month Ended January 31, 2018
Cash flows from operating activities:
Receipts:
Collections from customers
Payments:
To employees
To suppliers
Net cash provided by operating activities
Cash flows from investing activities:
Purchase of land
Net cash used by investing activities
Cash flows from financing activities:
Issuance of common stock
Payment of cash dividends
Net cash provided by financing activities
Net decrease in cash
Cash balance, January 1, 2018
Cash balance, January 31, 2018
1-34
E1-39 Calculating Return on Assets
Learning Objective 6
Alice Appliance Service had net income for the year of $58,500. In addition, the balance sheet reports
the following balances:
Jan 1, 2018
Dec 31, 2018
Notes Payable
$ 32,000
$ 58,000
Cash
34,000
134,200
Office Furniture
23,000
44,000
Building
160,000
160,000
Accounts Payable
11,500
11,000
Total Stockholders’ Equity
204,500
333,000
Accounts Receivable
2,200
19,800
Equipment
24,000
42,000
Office Supplies
4,800
2,000
Calculate the return on assets for Alice Appliance Service for the year ending December 31, 2018.
SOLUTION
Average total assets = (Beginning total assets + ending total assets) / 2
Beginning total assets = $34,000 + $23,000 + $160,000 + $2,200 + $24,000 + $4,800 = $248,000
1-35
Problems (Group A)
P1-40A Using the accounting equation for transaction analysis
Learning Objective 4
Cash $13,600
Meg McKinney opened a public relations firm called Solid Gold on August 1, 2018. The following amounts summarize her business on
August 31, 2018:
During September 2018, the business completed the following transactions:
a. Received contribution of $17,000 cash from Meg McKinney in exchange for common stock.
b. Performed service for a client and received cash of $800.
c. Paid off the beginning balance of accounts payable.
d. Purchased office supplies from OfficeMax on account, $1,200.
e. Collected cash from a customer on account, $2,000.
f. Cash dividends of $1,600 were paid to stockholders.
g. Consulted for a new band and billed the client for services rendered, $4,500.
h. Recorded the following business expenses for the month:
Paid office rent: $1,000.
Paid advertising: $500.
Analyze the effects of the transactions on the accounting equation of Solid Gold using the format presented in Exhibit 1-6.
1-36
SOLUTION
ASSETS
=
LIABILITIES
+
EQUITY
Contributed
Capital
+
Retained Earnings
Cash
+
Accounts
Receivable
+
Office
Supplies
+
Land
=
Accounts
Payable
+
Common
Stock
–
Dividends
+
Service
Revenue
–
Rent
Expense
–
Advertising
Expense
Bal.
$1,900
+
$3,200
+
$15,000
=
$5,000
+
$11,900
+ $3,200
(a)
+17,000
+17,000
Bal.
+
$3,200
+
$15,000
=
$5,000
+
$28,900
(b)
Bal.
+
+
$15,000
=
$5,000
+
(c)
Bal.
+
$3,200
+
$15,000
=
+
+
(d)
+1,200
Bal.
+
$3,200
+
+
$15,000
=
$1,200
+
+
(e)
Bal.
+
+
+
$15,000
=
$1,200
+
+
Bal.
+
+
+
$15,000
=
$1,200
+
+
(g)
Bal.
+
$5,700
+
+
$15,000
=
$1,200
+
+
(h)
Bal.
+
+
+
$15,000
=
+
+
1-37
P1-41A Using the accounting equation for transaction analysis
Learning Objective 4
Cash $21,500
Conner Thomas started a new business, Thomas Gymnastics, and completed the following transactions during December:
Dec. 1
Received $19,000 cash from Conner in exchange for common stock.
2
Received $3,800 cash from customers for services performed.
5
Paid $200 cash for office supplies.
9
Performed services for a customer and billed the customer for services
rendered, $4,500.
10
Received $200 invoice for utilities due in two weeks.
15
Paid for advertising in the local paper, $250.
20
Paid utility invoice received on December 10.
25
Collected cash in full from customer billed on December 9.
28
Paid rent for the month, $1,600.
28
Paid $1,450 to assistant for wages.
30
Received $1,400 cash from customers for services performed.
31
Cash dividends of $3,500 were paid to stockholders.
Analyze the effects of the transactions on the accounting equation of Thomas Gymnastics using a format similar to Exhibit 1-6.
SOLUTION
ASSETS
=
LIABILITIES
+
EQUITY
Contributed
Capital
+
Retained Earnings
Cash
+
Accounts
Receivable
+
Office
Supplies
=
Accounts
Payable
+
Common
Stock
–
Dividends
+
Service
Revenue
–
Rent
Expense
–
Utilities
Expense
–
Wages
Expense
–
Advertising
Expense
1
+19,000
+19,000
2
+3,800
+3,800
Bal.
$22,800
=
+
$19,000
+
$3,800
5
–200
+200
Bal.
$22,600
+
$200
=
+
$19,000
+
$3,800
9
Bal.
$22,600
+
+
=
+
$19,000
+
$8,300
Bal.
+
+
=
+
$19,000
+
$8,300
Bal.
+
+
=
+
$19,000
+
$8,300
Bal.
+
+
=
+
$19,000
+
$8,300
Bal.
$26,650
+
+
=
+
$19,000
+
$8,300
Bal.
+
=
+
$19,000
+
$8,300
Bal.
$23,600
+
=
+
$19,000
+
$8,300
+1,400
+1,400
Bal.
+
=
+
$19,000
+
Bal.
$21,500
+
+
=
+
$19,000
+
1-39
P1-42A Preparing financial statements
Learning Objective 5
1. Net Income $115,700
Presented here are the accounts of Hometown Décor Company for the year ended December 31, 2018.
Land
$ 13,000
Common Stock
$ 28,000
Notes Payable
33,000
Accounts Payable
14,000
Property Tax Expense
2,800
Accounts Receivable
800
Dividends
36,000
Advertising Expense
17,000
Rent Expense
14,000
Building
170,400
Salaries Expense
67,000
Cash
2,800
Salaries Payable
1,300
Equipment
17,000
Service Revenue
225,000
Insurance Expense
1,700
Office Supplies
8,000
Interest Expense
6,800
Retained Earnings, Dec. 31, 2017
56,000
Requirements
1. Prepare Hometown Décor Company’s income statement.
2. Prepare the statement of retained earnings.
3. Prepare the balance sheet.
SOLUTION
Requirement 1
HOMETOWN DÉCOR COMPANY
Income Statement
Year Ended December 31, 2018
Revenue:
Service Revenue
$ 225,000
Expenses:
Salaries Expense
Rent Expense
14,000
Interest Expense
Property Tax Expense
2,800
Insurance Expense
1,700
Total Expenses
Net Income
1-41
P1-43A Preparing financial statements
Learning Objective 5
b. Ending Retained Earnings $48,000
Picture Perfect Photography works weddings and prom-type parties. The balance of retained earnings
was $16,000 at December 31, 2017. At December 31, 2018, the business’s accounting records show
these balances:
Insurance Expense
$ 6,000
Accounts Receivable
$ 13,000
Cash
42,000
Notes Payable
14,000
Accounts Payable
11,000
Retained Earnings, Dec. 31, 2018
?
Advertising Expense
4,000
Salaries Expense
25,000
Service Revenue
75,000
Equipment
46,000
Dividends
8,000
Common Stock
28,000
Prepare the following financial statements for Picture Perfect Photography for the year ended December
31, 2018:
a. Income statement.
b. Statement of retained earnings.
c. Balance sheet.
SOLUTION
Part a.
PICTURE PERFECT PHOTOGRAPHY
Income Statement
Year Ended December 31, 2018
Revenue:
Service Revenue
$ 75,000
Expenses:
Salaries Expense
Insurance Expense
Advertising Expense
Total Expenses
Net Income
1-42
P1-44A Preparing financial statements
Learning Objective 5
Total Assets $47,100
The bookkeeper of Outdoor Life Landscaping prepared the company’s balance sheet while the
accountant was ill. The balance sheet, shown on the next page, contains numerous errors. In particular,
the bookkeeper knew that the balance sheet should balance, so he plugged in the retained earnings
amount needed to achieve this balance. The retained earnings is incorrect. All other amounts are correct,
but some are out of place or should not be included in this statement. Prepare a corrected balance sheet.
SOLUTION
OUTDOOR LIFE LANDSCAPING
Balance Sheet
November 30, 2018
Assets
Liabilities
Cash
$ 4,600
Accounts Payable
$ 2,700
1-44
P1-45A Using the accounting equation for transaction analysis and preparing financial statements
Learning Objective 4, 5
2b. Ending Retained Earnings $19,560
Allen Shonton recently opened his own accounting firm on April 1, which he operates as a corporation. The name of the new entity is Allen
Shonton, CPA. Shonton experienced the following events during the organizing phase of the new business and its first month of operations in
2018:
Apr. 5
Shonton deposited $75,000 in a new business bank account titled Allen Shonton, CPA. The
business issued common stock to Shonton.
6
Paid $300 cash for letterhead stationery for new office.
7
Purchased office furniture for the office on account, $9,500.
10
Consulted with tax client and received $4,000 for services rendered.
11
Paid utilities, $190.
12
Finished tax hearings on behalf of a client and submitted a bill for accounting services, $20,000.
18
Paid office rent, $750.
25
Received amount due from client that was billed on April 12.
27
Paid full amount of accounts payable created on April 7.
30
Cash dividends of $3,500 were paid to stockholders.
Requirements
1. Analyze the effects of the events on the accounting equation of Allen Shonton, CPA. Use a format similar to Exhibit 1-6.
2. Prepare the following financial statements:
a. Income statement.
b. Statement of retained earnings.
c. Balance sheet.
SOLUTION
Requirement 1
ASSETS
=
LIABILITIES
+
EQUITY
Contributed
Capital
+
Retained Earnings
Cash
+
Accounts
Receivable
+
Office
Supplies
+
Furniture
=
Accounts
Payable
+
Common
Stock
–
Dividends
+
Service
Revenue
–
Rent
Expense
–
Utilities
Expense
5
+75,000
+75,000
6
–300
+300
Bal.
$74,700
+
$300
=
+
$75,000
7
+9,500
+9,500
Bal.
$74,700
+
$300
+
$9,500
=
$9,500
+
$75,000
Bal.
$78,700
+
$300
+
=
$9,500
+
$75,000
+
–190
Bal.
$78,510
+
$300
+
=
$9,500
+
$75,000
+
$190
+20,000
Bal.
$78,510
+
+
$300
+
=
$9,500
+
$75,000
+
$24,000
$190
–750
Bal.
$77,760
+
+
$300
+
=
$9,500
+
$75,000
+
$24,000
+20,000
Bal.
$97,760
+
$300
+
=
$9,500
+
$75,000
+
$24,000
$190
Bal.
$88,260
+
$300
+
=
+
$75,000
+
$24,000
$190
Bal.
+
+
+
=
+
$75,000
+
$24,000
$190
1-46
P1-45A, cont.
Requirement 2a
ALLEN SHONTON, CPA
Income Statement
Month Ended April 30, 2018
Revenue:
Service Revenue
$ 24,000
Requirement 2b
ALLEN SHONTON, CPA
Statement of Retained Earnings
Month Ended April 30, 2018
Retained Earnings, April 1, 2018
$ 0
Net income for the month
23,060
Dividends
Requirement 2c
ALLEN SHONTON, CPA
Balance Sheet
April 30, 2018
Cash
Office Supplies
Furniture
Common Stock
Retained Earnings
Total Assets
Equity
Expenses:
Rent Expense
Utilities Expense
Total Expenses
Net Income
1-47
P1–46A Using the accounting equation for transaction analysis and preparing financial statements
Learning Objective 4, 5
2c. Total Assets $83,700
Annette Pachelo recently opened her own law office on March 1, which she operates as a corporation. The name of the new entity is Annette
Pachelo, Attorney. Pachelo experienced the following events during the organizing phase of the new business and its first month of operation,
March 2018. Some of the events were personal and did not affect the law practice. Others were business transactions and should be accounted
for by the business.
Mar. 1
Sold personal investment in Amazon stock, which she had owned for several years, receiving
$35,000 cash.
2
Deposited the $35,000 cash from the sale of the Amazon stock in her personal bank account.
3
Deposited $73,000 cash in a new business bank account titled Annette Pachelo, Attorney. The
business issued common stock to Pachelo.
5
Paid $700 cash for ink cartridges for the printer.
7
Purchased computer for the law office, agreeing to pay the account, $5,000, within three months.
9
Received $2,800 cash from customers for services rendered.
15
Received bill from The Lawyer for magazine subscription, $400. (Use Miscellaneous Expense
account.)
23
Finished court hearings on behalf of a client and submitted a bill for legal services, $10,000, on
account.
28
Paid bill from The Lawyer.
30
Paid utilities, $1,200.
31
Received $3,300 cash from clients billed on March 23.
31
Cash dividends of $5,500 were paid to stockholders.
Requirements
1. Analyze the effects of the preceding events on the accounting equation of Annette Pachelo, Attorney. Use a format similar to Exhibit 1-6.
2. Prepare the following financial statements:
a. Income statement.
b. Statement of retained earnings.
c. Balance sheet.
d. Statement of cash flows.
SOLUTION
Requirement 1
ASSETS
=
LIABILITIES
+
EQUITY
Contributed
Capital
+
Retained Earnings
Cash
+
Accounts
Receivable
+
Office
Supplies
+
Computer
=
Accounts
Payable
+
Common
Stock
−
Dividends
+
Service
Revenue
–
Utilities
Expense
–
Miscellaneous
Expense
3
+73,000
+73,000
5
–700
+700
Bal.
$72,300
+
$700
=
+
$73,000
7
+5,000
+5,000
Bal.
$72,300
+
$700
+
=
+
$73,000
9
+2,800
Bal.
$75,100
+
$700
+
=
+
$73,000
+
Bal.
$75,100
+
$700
+
=
+
$73,000
+
+10,000
Bal.
+
+
$700
+
=
+
$73,000
+
–400
Bal.
$74,700
+
+
$700
+
=
+
$73,000
+
Bal.
$73,500
+
+
$700
+
=
+
$73,000
+
+3,300
Bal.
$76,800
+
+
$700
+
=
+
$73,000
+
–5,500
Bal.
$71,300
+
+
$700
+
=
+
$73,000
+
1-49
P1-46A, cont.
Requirement 2a
ANNETTE PACHELO, ATTORNEY
Income Statement
Month Ended March 31, 2018
Revenue:
Service Revenue
$ 12,800
Requirement 2b
ANNETTE PACHELO, ATTORNEY
Statement of Retained Earnings
Month Ended March 31, 2018
Retained Earnings, March 1, 2018
$ 0
Net income for the month
11,200
11,200
Retained Earnings, March 31, 2018
$ 5,700
Requirement 2c
ANNETTE PACHELO, ATTORNEY
Balance Sheet
March 31, 2018
Cash
Accounts Payable
$ 5,000
Office Supplies
Retained Earnings
Total Stockholders’ Equity
78,700
Total Assets
Equity
$ 83,700
Expenses:
Utilities Expense
Miscellaneous Expense
Total Expenses
Net Income
P1-46A, cont.
Requirement 2d
ANNETTE PACHELO, ATTORNEY
Statement of Cash Flows
Month Ended March 31, 2018
Cash flows from operating activities:
Receipts:
Payments:
To suppliers
Net cash provided by operating activities
Cash flows from investing activities:
1-51
Problems Group B
P1-47B Using the accounting equation for transaction analysis
Learning Objective 4
Cash $12,650
Meg McIntyre opened a public relations firm called Pop Chart on August 1, 2018. The following amounts summarize her business on August
31, 2018:
During September 2018, the business completed the following transactions:
a. Received contribution of $14,000 cash from Meg McIntyre in exchange for common stock.
b. Performed service for a client and received cash of $1,600.
c. Paid off the beginning balance of accounts payable.
d. Purchased office supplies from OfficeMax on account, $1,200.
e. Collected cash from a customer on account, $2,300.
f. Cash dividends of $1,500 were paid to stockholders.
g. Consulted for a new band and billed the client for services rendered, $4,000.
h. Recorded the following business expenses for the month:
Paid office rent: $900.
Paid advertising: $450.
Analyze the effects of the transactions on the accounting equation of Pop Chart using the format presented above.
SOLUTION
ASSETS
=
LIABILITIES
+
EQUITY
Contributed
Capital
+
Retained Earnings
Cash
+
Accounts
Receivable
+
Office
Supplies
+
Land
=
Accounts
Payable
+
Common
Stock
–
Dividends
+
Service
Revenue
–
Rent
Expense
–
Advertising
Expense
Bal.
$2,600
+
$2,500
+
+
$16,000
=
$5,000
+
$13,600
+
2,500
(a)
+14,000
+14,000
Bal.
+
$2,500
+
$16,000
=
$5,000
+
+
(b)
Bal.
+
$2,500
+
$16,000
=
$5,000
+
+
(c)
Bal.
+
$2,500
+
$16,000
=
+
+
(d)
Bal.
+
$2,500
+
$1,200
+
$16,000
=
+
+
(e)
Bal.
+
+
$1,200
+
$16,000
=
+
+
Bal.
+
+
$1,200
+
$16,000
=
+
+
(g)
Bal.
+
+
$1,200
+
$16,000
=
+
+
(h)
Bal.
$12,650
+
+
$1,200
+
$16,000
=
+
+
1-53
P1-48B Using the accounting equation for transaction analysis
Learning Objective 4
Cash $21,300
Cosmo Thomas started a new business, Thomas Gymnastics, and completed the following transactions during December:
Dec. 1
Received $19,000 cash from Thomas in exchange for common stock.
2
Received $3,800 cash from customers for services performed.
5
Paid $300 cash for office supplies.
9
Performed services for a customer and billed the customer for services rendered, $4,500.
10
Received $150 invoice for utilities due in two weeks.
15
Paid for advertising in the local paper, $350.
20
Paid utility invoice received on Dec. 10.
25
Collected cash in full from customer billed on Dec. 9.
28
Paid rent for the month, $2,600.
28
Paid $1,200 to assistant for wages.
30
Received $1,600 cash from customers for services performed.
31
Cash dividends of $3,000 were paid to stockholders.
Analyze the effects of the transactions on the accounting equation of Thomas Gymnastics using a format similar to Exhibit 1-6.
1-54
SOLUTION
ASSETS
=
LIABILITIES
+
EQUITY
Contributed
Capital
+
Retained Earnings
Cash
+
Accounts
Receivable
+
Office
Supplies
=
Accounts
Payable
+
Common
Stock
–
Dividends
+
Service
Revenue
–
Rent
Expense
–
Utilities
Expense
–
Wages
Expense
–
Advertising
Expense
1
+19,000
+19,000
2
+3,800
+3,800
Bal.
$22,800
=
+
$19,000
+
$3,800
5
–300
+300
Bal.
$22,500
+
$300
=
+
$19,000
+
$3,800
9
+4,500
+4,500
Bal.
$22,500
+
+
$300
=
+
$19,000
+
$8,300
Bal.
$22,500
+
+
$300
=
+
$19,000
+
$8,300
–350
Bal.
$22,150
+
+
$300
=
+
$19,000
+
$8,300
Bal.
$22,000
+
+
$300
=
+
$19,000
+
$8,300
Bal.
$26,500
+
+
$300
=
+
$19,000
+
$8,300
–2,600
Bal.
$23,900
+
$300
=
+
$19,000
+
$8,300
$2,600
–1,200
Bal.
$22,700
+
$300
=
+
$19,000
+
$8,300
$2,600
+1,600
Bal.
$24,300
+
$300
=
+
$19,000
+
$9,900
$2,600
–3,000
Bal.
$21,300
+
+
$300
=
+
$19,000
+
$9,900
$2,600
1-55
P1-49B Preparing financial statements
Learning Objective 5
1. Net Income $97,600
Presented here are the accounts of Pembroke Bookkeeping Company for the year ended December 31,
2018:
Land
$ 10,000
Common Stock
$ 29,000
Notes Payable
31,000
Accounts Payable
7,000
Property Tax Expense
3,100
Accounts Receivable
1,200
Dividends
28,000
Advertising Expense
12,000
Rent Expense
7,000
Building
147,400
Salaries Expense
64,000
Cash
2,800
Salaries Payable
800
Equipment
15,000
Service Revenue
192,000
Insurance Expense
1,700
Office Supplies
12,000
Interest Expense
6,600
Retained Earnings, Dec. 31, 2017
51,000
Requirements
1. Prepare Pembroke Bookkeeping Company’s income statement.
2. Prepare the statement of retained earnings.
3. Prepare the balance sheet.
SOLUTION
Requirement 1
PEMBROKE BOOKKEEPING COMPANY
Income Statement
Year Ended December 31, 2018
Revenues:
Service Revenue
$ 192,000
Expenses:
Salaries Expense
Advertising Expense
Rent Expense
Interest Expense
Property Tax Expense
Insurance Expense
Total Expenses
Net Income
$ 97,600
1-56
1-57
P1-50B Preparing financial statements
Learning Objective 5
b. Ending Retained Earnings $81,500
Pretty Pictures works weddings and prom-type parties. The balance of Retained Earnings was $20,000 at
December 31, 2017. At December 31, 2018, the business’s accounting records show these balances:
Insurance Expense
$ 6,000
Accounts Receivable
$ 5,000
Cash
42,000
Notes Payable
10,000
Accounts Payable
13,000
Retained Earnings, Dec. 31, 2018
?
Advertising Expense
4,500
Salaries Expense
30,000
Service Revenue
115,000
Equipment
85,500
Dividends
13,000
Common Stock
28,000
Prepare the following financial statements for Pretty Pictures for the year ended December 31, 2018:
a. Income statement.
b. Statement of retained earnings.
c. Balance sheet.
SOLUTION
Requirement a
PRETTY PICTURES
Income Statement
Year Ended December 31, 2018
Revenues:
Service Revenue
$ 115,000
Expenses:
Insurance Expense
Advertising Expense
Total Expenses
Net Income
1-59
P1-51B Preparing financial statements
Learning Objective 5
Total Assets $48,700
The bookkeeper of Juniper Landscaping prepared the company’s balance sheet while the accountant was
ill. The balance sheet, shown on the next page, contains numerous errors. In particular, the bookkeeper
knew that the balance sheet should balance, so he plugged in the retained earnings amount needed to
achieve this balance. The retained earnings is incorrect. All other amounts are correct, but some are out
of place or should not be included on this statement. Prepare a corrected balance sheet.
SOLUTION
JUNIPER LANDSCAPING
Balance Sheet
July 31, 2018
Assets
Liabilities
Cash
$ 5,300
Accounts Payable
$ 2,700
Accounts Receivable
1,800
Notes Payable
24,700
Office Supplies
Total Liabilities
Land
Office Furniture
Common Stock
Retained Earnings
Total Stockholders’ Equity
$ 48,700
Equity
1-60
P1-52B Using the accounting equation for transaction analysis and preparing financial statements
Learning Objective 5
2c. Total Assets $58,360
Amos Sharp recently opened his own accounting firm on October 1, which he operates as a corporation. The name of the new entity is Amos
Sharp, CPA. Sharp experienced the following events during the organizing phase of the new business and its first month of operations in
2018.
Oct. 5
Sharp deposited $45,000 in a new business bank account titled Amos Sharp, CPA. The business
issued common stock to Sharp.
6
Paid $300 cash for letterhead stationery for new office.
7
Purchased office furniture for the office on account, $6,500.
10
Consulted with tax client and received $3,300 for services rendered.
11
Paid utilities, $340.
12
Finished tax hearings on behalf of a client and submitted a bill for accounting services, $16,000.
18
Paid office rent, $1,800.
25
Received amount due from client that was billed on October 12.
27
Paid full amount of Accounts Payable created on October 7.
31
Cash dividends of $3,800 were paid to stockholders.
Requirements
1. Analyze the effects of the events on the accounting equation of Amos Sharp, CPA. Use a format similar to Exhibit 1-6.
2. Prepare the following financial statements:
a. Income statement.
b. Statement of retained earnings.
c. Balance sheet.
1-61
SOLUTION
Requirement 1
ASSETS
=
LIABILITIES
+
EQUITY
Contributed
Capital
+
Retained Earnings
Cash
+
Accounts
Receivable
+
Office
Supplies
+
Office
Furniture
=
Accounts
Payable
+
Common
Stock
–
Dividends
+
Service
Revenue
–
Rent
Expense
–
Utilities
Expense
5
+45,000
+45,000
Bal.
$45,000
=
+
$45,000
6
Bal.
$44,700
+
=
+
$45,000
7
Bal.
$44,700
+
+
=
+
$45,000
Bal.
$48,000
+
+
=
+
$45,000
$3,300
Bal.
$47,660
+
+
=
+
$45,000
$3,300
Bal.
$47,660
+
+
+
=
+
$45,000
Bal.
$45,860
+
+
+
=
+
$45,000
Bal.
$61,860
+
+
=
+
$45,000
Bal.
$55,360
+
+
=
+
$45,000
Bal.
$51,560
+
+
+
=
+
$45,000
+
P1-52B, cont.
Requirement 2a
AMOS SHARP, CPA
Income Statement
Month Ended October 31, 2018
Revenues:
Service Revenue
$ 19,300
Expenses:
Rent Expense
Utilities Expense
Total Expenses
Net Income
Requirement 2b
Requirement 2c
AMOS SHARP, CPA
Balance Sheet
October 31, 2018
Cash
Office Supplies
Office Furniture
Common Stock
Retained Earnings
Total Assets
Equity
AMOS SHARP, CPA
Statement of Retained Earnings
Month Ended October 31, 2018
Retained Earnings, October 1, 2018
Net income for the month
Dividends
Retained Earnings, October 31, 2018
1-63
P1-53B Using the accounting equation for transaction analysis and preparing financial statements
Learning Objectives 4, 5
2c. Total Assets $103,700
Abby Perry recently opened her own law office on December 1, which she operates as a corporation. The name of the new entity is Abby
Perry, Attorney. Perry experienced the following events during the organizing phase of the new business and its first month of operation,
December 2018. Some of the events were personal and did not affect the law practice. Others were business transactions and should be
accounted for by the business.
Dec. 1
Sold personal investment in Nike stock, which she had owned for several years, receiving $30,000
cash.
2
Deposited the $30,000 cash from the sale of the Nike stock in her personal bank account.
3
Deposited $89,000 cash in a new business bank account titled Abby Perry, Attorney. The business
issued common stock to Perry.
5
Paid $600 cash for ink cartridges for the printer.
7
Purchased computer for the law office, agreeing to pay the account, $8,000, within three months.
9
Received $2,900 cash from customers for services rendered.
15
Received bill from The Lawyer for magazine subscription, $300. (Use Miscellaneous Expense
account.)
23
Finished court hearings on behalf of a client and submitted a bill for legal services, $8,000, on
account.
28
Paid bill from The Lawyer.
30
Paid utilities, $900.
31
Received $2,800 cash from clients billed on Dec. 23.
31
Cash dividends of $3,000 were paid to stockholders.
Requirements
1. Analyze the effects of the preceding events on the accounting equation of Abby Perry, Attorney. Use a format similar to Exhibit 1-6.
2. Prepare the following financial statements:
a. Income statement.
b. Statement of retained earnings.
c. Balance sheet.
d. Statement of cash flows.
SOLUTION
Requirement 1
ASSETS
=
LIABILITIES
+
EQUITY
Contributed
Capital
+
Retained Earnings
Cash
+
Accounts
Receivable
+
Office
Supplies
+
Computer
=
Accounts
Payable
+
Common
Stock
–
Dividends
+
Service
Revenue
–
Utility
Expense
–
Misc.
Expense
3
+89,000
+89,000
5
–600
+600
Bal.
$88,400
$600
+
=
+
$89,000
7
+8,000
+8,000
Bal.
$88,400
+
$600
+
=
+
$89,000
9
+2,900
Bal.
$91,300
+
$600
+
=
+
$89,000
+
$2,900
Bal.
$91,300
+
$600
+
=
+
$89,000
+
$2,900
$300
+8,000
Bal.
$91,300
+
+
$600
+
=
+
$89,000
+
–300
Bal.
$91,000
+
+
$600
+
=
+
$89,000
+
$300
–900
Bal.
+
+
$600
+
=
+
$89,000
+
$900
$300
Bal.
+
+
$600
+
=
+
$89,000
+
$900
$300
Bal.
+
+
$600
+
=
+
$89,000
+
$900
$300
1-65
P1-53B, cont.
Requirement 2a
ABBY PERRY, ATTORNEY
Income Statement
Month Ended December 31, 2018
Requirement 2b
ABBY PERRY, ATTORNEY
Statement of Retained Earnings
Month Ended December 31, 2018
Requirement 2c
ABBY PERRY, ATTORNEY
Balance Sheet
December 31, 2018
1-66
P1-53B, cont.
Requirement 2d
ABBY PERRY, ATTORNEY
Statement of Cash Flows
Month Ended December 31, 2018
Cash flows from operating activities:
Receipts:
Collections from customers
$ 5,700
Payments:
To suppliers
(1,800)
Net cash provided by operating activities
3,900
Cash flows from investing activities:
0
Cash flows from financing activities
Issued common stock
$ 89,000
Payment of cash dividends
(3,000)
Net cash provided by financing activities
86,000
Net increase in cash
89,900
Cash balance, December 1, 2018
0
Cash balance, December 31, 2018
$ 89,900
Using Excel
P1-54 Using Excel to prepare transaction analysis
Download an Excel template for this problem online in MyAccountingLab or at
http://www.pearsonhighered.com/Horngren.
Echo Lake Corporation started operations on November 1, 2018. Nine transactions occur during
November. Financial statements are prepared at the end of the month.
Requirements
1. Use Excel to prepare a transaction analysis of the nine transactions. Use the blue shaded areas for
inputs.
a. For each transaction, record the amount (either an increase or decrease) under the correct account.
Enter only non-zero amounts. If an account is not affected by the transaction, leave the amount
blank. Be sure to use a minus sign (−) if the amount is a decrease.
b. The row totals will be calculated automatically.
c. The accounting equation
( )
Assets Liabilities Equity=+
should remain in balance after each
transaction. The accounting equation is calculated automatically to the right of the transaction
table.
2. Prepare the income statement, statement of retained earnings, balance sheet, and statement of cash
flows for the company. Each financial statement appears on a separate worksheet tab. Fill in the blue
shaded areas using a formula that references the account balances at the end of the month in the
Transaction Analysis tab.
SOLUTION
1-68
Continuing Problem
P1-55 is the first problem in a continuing problem that will be used throughout the chapters to reinforce the concepts learned.
P1-55 Using the accounting equation for transaction analysis, preparing financial statements, and calculating return on assets (ROA)
Canyon Canoe Company is a service-based company that rents canoes for use on local lakes and rivers. Amber and Zack Wilson graduated
from college about 10 years ago. They both worked for one of the “Big Four” accounting firms and became CPAs. Because they both love the
outdoors, they decided to begin a new business that will combine their love of outdoor activities with their business knowledge. Amber and
Zack decide that they will create a new corporation, Canyon Canoe Company, or CCC for short. The business began operations on November
1, 2018.
Nov. 1
Received $16,000 cash to begin the company and issued common stock to Amber and Zack.
2
Signed a lease for a building and paid $1,200 for the first month’s rent.
3
Purchased canoes for $4,800 on account.
4
Purchased office supplies on account, $750.
7
Earned $1,400 cash for rental of canoes.
13
Paid $1,500 cash for wages.
15
Paid $50 dividends to stockholders.
16
Received a bill for $150 for utilities. (Use separate payable account.)
20
Received a bill for $175 for cell phone expenses. (Use separate payable account.)
22
Rented canoes to Early Start Daycare on account, $3,000.
26
Paid $1,000 on account related to the November 3, 2018, purchase.
28
Received $750 from Early Start Daycare for canoe rental on November 22, 2018.
30
Paid $100 dividends to stockholders.
Requirements
1. Analyze the effects of Canyon Canoe Company’s transactions on the accounting equation. Use the format of Exhibit 1-6, and include
these headings: Cash; Accounts Receivable; Office Supplies; Canoes; Accounts Payable; Utilities Payable; Telephone Payable; Common
Stock; Dividends; Canoe Rental Revenue; Rent Expense; Utilities Expense; Wages Expense; and Telephone Expense.
2. Prepare the income statement of Canyon Canoe Company for the month ended November 30, 2018.
3. Prepare the statement of retained earnings for the month ended November 30, 2018.
4. Prepare the balance sheet as of November 30, 2018.
5. Calculate the return on assets for Canyon Canoe Company for November 2018.
SOLUTION
Requirement 1
ASSETS
=
LIABILITIES
+
EQUITY
Contributed
Capital
+
Retained Earnings
Cash
+
Accounts
Receivable
+
Office
Supplies
+
Canoes
=
Accounts
Payable
+
Utilities
Payable
+
Telephone
Payable
+
Common
Stock
–
Dividends
+
Canoe
Rental
Revenue
–
Rent
Expense
–
Utilities
Expense
–
Wages
Expense
–
Telephone
Expense
1
+16,000
+16,000
2
–1,200
–1,200
Bal.
$14,800
=
+
$1,200
3
Bal.
$14,800
+
=
+
$1,200
4
Bal.
$14,800
+
=
+
$1,200
7
+1,400
Bal.
$16,200
+
+
=
+
+
$1,200
–1,500
Bal.
$14,700
+
+
=
+
+
–50
Bal.
$14,650
+
+
=
+
+
Bal.
$14,650
+
+
=
+
+
+
+175
Bal.
$14,650
+
+
=
+
+
$175
+
+
$175
Bal.
$14,650
+
+
+
=
+
+
$175
+
+
$175
–1,000
Bal.
$13,650
+
+
+
=
+
+
$175
+
+
$175
Bal.
$14,400
+
+
+
=
+
+
$175
+
+
$175
–100
$14,300
+
+
+
+
+
$175
$150
+
$175
1-70
1-72
Critical Thinking
Tying It All Together Case 1-1
Before you begin this assignment, review the Tying It All Together feature in the chapter.
Starbucks Corporation is the premier roaster, marketer, and retailer of specialty coffee in the world,
operating in 68 countries. Starbucks generates revenues through company-operated stores, licensed
stores, and consumer packaged goods. In 2015, revenues from company-operated stores accounted for
79% of total revenues. Starbucks states that its retail objective is to be the leading retailer and brand of
coffee and tea by selling the finest quality coffee, tea, and related products. In addition, the company
strives to provide the Starbucks Experience by exemplifying superior customer service and providing
clean and well-maintained stores. Part of this experience involves providing free internet service to
customers while they are enjoying their food and beverages.
Requirements
1. How would the cost of internet service be reported by Starbucks and on which financial statement?
2. Suppose Starbucks receives a bill from its internet service provider but has not yet paid the bill.
What would be the effect on assets, liabilities, and equity when Starbucks receives this bill?
3. What would be the effect on assets, liabilities, and equity when Starbucks pays its internet service
bill?
4. Suppose Starbucks expects that the cost of internet service will increase by 4% in the coming year.
What would be the impact on Starbucks’ net income? How might Starbucks overcome this impact?
SOLUTION
Requirement 1
Starbucks Corporation would report the cost of internet service as an expense on its income statement.
Most likely, the expense would be included in Store Operating Expenses.
1-73
1-74
Decision Case 1-1
Let’s examine a case using Greg’s Tunes and Sal’s Silly Songs. It is now the end of the first year of
operations, and the stockholders want to know how well each business came out at the end of the year.
Neither business kept complete accounting records, and no dividends were paid. The businesses throw
together the data shown on the next page at year-end:
To gain information for evaluating the businesses, the stockholders ask you several questions. For each
answer, you must show your work to convince the stockholders that you know what you are talking
about.
Requirements
1. Which business has more assets?
2. Which business owes more to creditors?
3. Which business has more stockholders’ equity at the end of the year?
4. Which business brought in more revenue?
5. Which business is more profitable?
6. Which of the foregoing questions do you think is most important for evaluating these two
businesses? Why?
7. Which business looks better from a financial standpoint?
SOLUTION
Requirement 1
Greg’s Tunes has more assets.
Sal’s $23,000, Greg’s $25,000 ($10,000 + $6,000 + $9,000)
1-75
Requirement 3
Requirement 4
Requirement 5
Requirement 6
Requirement 7
Ethical Issues 1-1
The tobacco companies have paid billions because of smoking-related illnesses. In particular, Philip
Morris, a leading cigarette manufacturer, paid more than $3,000,000,000 in settlement payments in one
year.
Requirements
1. Suppose you are the chief financial officer (CFO) responsible for the financial statements of Philip
Morris. What ethical issue would you face as you consider what to report in your company’s annual
report about the cash payments? What is the ethical course of action for you to take in this situation?
2. What are some of the negative consequences to Philip Morris for not telling the truth? What are some
of the negative consequences to Philip Morris for telling the truth?
SOLUTION
Requirement 1
The chief financial officer (CFO) of Philip Morris would be torn between addressing the fact that the
Requirement 2
Negative consequences of not telling the truth are as follows: If users of the financial statements feel they
1-77
Fraud Case 1-1
Exeter is a building contractor on the Gulf Coast. After losing a number of big lawsuits, it was facing its
first annual net loss as the end of the year approached. The owner, Hank Snow, was under intense
pressure from the company’s creditors to report positive net income for the year. However, he knew that
the controller, Alice Li, had arranged a short-term bank loan of $10,000 to cover a temporary shortfall of
cash. He told Li to record the incoming cash as “construction revenue” instead of a loan. That would
nudge the company’s income into positive territory for the year, and then, he said, the entry could be
corrected in January when the loan was repaid.
Requirements
1. How would this action affect the year-end income statement? How would it affect the year-end
balance sheet?
2. If you were one of the company’s creditors, how would this fraudulent action affect you?
SOLUTION
Requirement 1
Requirement 2
Financial Statement Case 1-1
This and similar cases in later chapters focus on the financial statements of a real company—Target
Corporation, a discount merchandiser that sells a wide assortment of general merchandise and food.
Target sells both national and private and exclusive brands, with approximately one-third of its 2015
sales related to private and exclusive brands. As you work each case, you will gain confidence in your
ability to use the financial statements of real companies.
Visit http://www.pearsonhighered.com/Horngren to view a link to Target Corporation’s Fiscal 2015
Annual Report.
Requirements
1. How much in cash (including cash equivalents) did Target Corporation have on January 30, 2016?
2. What were the company’s total assets at January 30, 2016? At January 31, 2015?
3. Write the company’s accounting equation at January 30, 2016, by filling in the dollar amounts:
Assets Liabilities Equity=+
4. Identify total sales (revenues) for the year ended January 30, 2016. How much did total revenue
increase or decrease from fiscal year 2014 to fiscal year 2015? (Because Target’s fiscal year end of
January 30, 2016 ends at the beginning of 2016, the majority of Target’s financial results were obtained
1-78
in the calendar year of 2015. As a result, Target calls the fiscal year 2015 even though the year reported
on the annual report ends on January 30, 2016.)
5. How much net income (net earnings) or net loss did Target earn for 2015 and for 2014? Based on net
income, was 2015 better or worse than 2014?
6. Calculate Target Corporation’s return on assets for the year ending January 30, 2015.
7. How did Target Corporation’s return on assets compare to Kohl’s Corporation return on assets?
SOLUTION
Requirement 1
Requirement 2
Requirement 3
Requirement 4
Requirement 5
$3,363 (in millions) in 2015
Requirement 6
All amounts in millions.
Requirement 7