CHAPTER 1 INTRODUCTION TO ACCOUNTINGAND BUSINESS
DISCUSSION QUESTIONS
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1. Some users of accounting information include managers, employees, investors, creditors, customers, and the government.
2. The role of accounting is to provide information for managers to use in operating the business. In addition, accounting provides information to others to use in assessing the economic performance and condition of the business.
3. The corporate form allows the company to obtain large amounts of resources by issuing stock. For this reason, most companies that require large investments in property, plant, and equipment are organized as corporations.
4. No. The business entity concept limits the recording of economic data to transactions directly affecting the activities of the business. The payment of the interest of $3,200 is a personal transaction of Murray Stoltz and should not be recorded by Ontime
Delivery Service.
5. The land should be recorded at its cost of $82,000 to A2Z Repair Service. This is consistent with the cost concept.
6. a. No. The offer of $1,000,000 and the
increase in the assessed value should not be recognized in the accounting records.
b. Cash would increase by $1,000,000, land would decrease by $525,000, and owner’s equity would increase by $475,000.
7. An account receivable is a claim against a customer for goods or services sold. An
account payable is an amount owed to a creditor for goods or services purchased. Therefore, an account receivable in the records of the seller is an account payable in the records of the purchaser.
8. (a) The business incurred a net loss of $185,000 ($615,000 – $430,000).
9. (b) The business realized net income of $117,000 ($825,000 – $708,000).
10. Net income or net loss
Owner’s equity at the end of the period
Cash at the end of the period
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practice exercises
PE 1–1A
$105,000. Under the cost concept, the land should be recorded at the cost to Easy Repair Service.
PE 1–1B
$57,500. Under the cost concept, the land should be recorded at the cost to AAA Repair Service.
PE 1–2A
a. A = L + OE b. A = L + OE
$800,000 = $450,000 + OE + $175,000 = – $60,000 + OE
OE = $350,000 OE = + $235,000
OE on December 31, 2012 =
$585,000 = $350,000 + $235,000
PE 1–2B
a. A = L + OE b. A = L + OE
$575,000 = $125,000 + OE + $85,000 = + $30,000 + OE
OE = $450,000 OE = + $55,000
OE on December 31, 2012 =
$505,000 = $450,000 + $55,000
PE 1–3A
(2) Asset (Cash) decreases by $1,800; Liability (Accounts Payable) decreases by $1,800.
(3) Asset (Accounts Receivable) increases by $12,500; Revenue (Delivery Service Fees) increases by $12,500.
(4) Asset (Cash) increases by $6,900; Asset (Accounts Receivable) decreases by $6,900.
(5) Asset (Cash) decreases by $4,000; Drawing (Lisa Dewar, Drawing) increases by $4,000.
PE 1–3B
(2) Expense (Advertising Expense) increases by $1,200; Asset (Cash) decreases by $1,200.
(3) Asset (Supplies) increases by $450; Liability (Accounts Payable) increases by $450.
(4) Asset (Accounts Receivable) increases by $7,500; Revenue (Delivery Service Fees) increases by $7,500.
(5) Asset (Cash) increases by $4,900; Asset (Accounts Receivable) decreases by $4,900.
PE 1–4A
DYNASTY TRAVEL SERVICE
Income Statement
For the Year Ended June 30, 2012
Fees earned $950,000
Expenses:
Wages expense $478,000
Office expense 222,000
Miscellaneous expense 16,000
Total expenses 716,000
Net income $234,000
PE 1–4B
ESCAPE TRAVEL SERVICE
Income Statement
For the Year Ended November 30, 2012
Fees earned $942,500
Expenses:
Wages expense $562,500
Office expense 391,625
Miscellaneous expense 15,875
Total expenses 970,000
Net loss $ 27,500
PE 1–5A
DYNASTY TRAVEL SERVICE
Statement of Owner’s Equity
For the Year Ended June 30, 2012
Nancy Coleman, capital, July 1, 2011 $250,000
Additional investment by owner during year $ 60,000
Net income for the year 234,000
$294,000
Less withdrawals 36,000
Increase in owner’s equity 258,000
Nancy Coleman, capital, June 30, 2012 $508,000
PE 1–5B
ESCAPE TRAVEL SERVICE
Statement of Owner’s Equity
For the Year Ended November 30, 2012
Brett Daniels, capital, December 1, 2011 $475,000
Additional investment by owner during year $ 45,000
Net loss for the year (27,500)
$ 17,500
Less withdrawals (25,000)
Decrease in owner’s equity (7,500)
Brett Daniels, capital, November 30, 2012 $467,500
PE 1–6A
DYNASTY TRAVEL SERVICE
Balance Sheet
June 30, 2012
Assets Liabilities
Cash $ 156,000 Accounts payable $ 24,000
Accounts receivable 64,000
Supplies 12,000 Owner’s Equity
Land 300,000 Nancy Coleman, capital 508,000
Total liabilities and
Total assets $532,000 owner’s equity $532,000
PE 1–6B
ESCAPE TRAVEL SERVICE
Balance Sheet
November 30, 2012
Assets Liabilities
Cash $ 56,750 Accounts payable $ 52,500
Accounts receivable 94,375
Supplies 6,375 Owner’s Equity
Land 362,500 Brett Daniels, capital 467,500
Total liabilities and
Total assets $520,000 owner’s equity $520,000
PE 1–7A
DYNASTY TRAVEL SERVICE
Statement of Cash Flows
For the Year Ended June 30, 2012
Cash flows from operating activities:
Cash received from customers $920,000
Deduct cash payments for operating expenses 710,000
Net cash flows from operating activities $ 210,000
Cash flows from investing activities:
Cash payments for purchase of land (208,000)
Cash flows from financing activities:
Cash received from owner as investment $ 60,000
Deduct cash withdrawals by owner 36,000
Net cash flows from financing activities 24,000
Net increase in cash during year $ 26,000
Cash as of July 1, 2011 130,000
Cash as of June 30, 2012 $ 156,000
PE 1–7B
ESCAPE TRAVEL SERVICE
Statement of Cash Flows
For the Year Ended November 30, 2012
Cash flows from operating activities:
Cash received from customers $875,000
Deduct cash payments for operating expenses 912,500
Net cash flows from operating activities $ (37,500)
Cash flows from investing activities:
Cash payments for purchase of land (67,500)
Cash flows from financing activities:
Cash received from owner as investment $ 45,000
Deduct cash withdrawals by owner 25,000
Net cash flows from financing activities 20,000
Net decrease in cash during year $ (85,000)
Cash as of December 1, 2011 141,750
Cash as of November 30, 2012 $ 56,750
PE 1–8A
a. Dec. 31, Dec. 31,
2012 2011
Total liabilities $375,000 $287,500
Total owner’s equity 300,000 250,000
Ratio of liabilities to owner’s equity 1.25 1.15
($375,000/$300,000) ($287,500/$250,000)
b. Increased
PE 1–8B
a. Dec. 31, Dec. 31,
2012 2011
Total liabilities $340,000 $300,000
Total owner’s equity 500,000 400,000
Ratio of liabilities to owner’s equity 0.68 0.75
($340,000/$500,000) ($300,000/$400,000)
b. Decreased
exercises
Ex. 1–1
a.
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1. service
2. service
3. merchandise
4. manufacturing
5. service
6. manufacturing
7. service
8. manufacturing
9. manufacturing
10. service
11. merchandise
12. service
13. merchandise
14. manufacturing
15. manufacturing
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b. The accounting equation is relevant to all companies. It serves as the basis of the accounting information system.
Ex. 1–2
As in many ethics issues, there is no one right answer. Often times, disclosing only what is legally required may not be enough. In this case, it would be best for the company’s chief executive officer to disclose both reports to the county representatives. In doing so, the chief executive officer could point out any flaws or deficiencies in the fired researcher’s report.
Ex. 1–3
a.
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1. B
2. M
3. R
4. B
5. R
6. R
7. X
8. M
9. X
10. R
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b. A business transaction is an economic event or condition that directly changes an entity’s financial condition or results of operations.
Ex. 1–4
Peat’s Coffee & Tea’s owners’ equity: $176 – $32 = $144
Starbucks’ owners’ equity: $5,577 – $2,531 = $3,046
Ex. 1–5
Dollar Tree’s owners’ equity: $2,036 – $783 = $1,253
Target’s owners’ equity: $44,106 – $30,394 = $13,712
Ex. 1–6
a. $600,000 ($150,000 + $450,000)
b. $225,000 ($275,000 – $50,000)
c. $425,000 ($615,000 – $190,000)
Ex. 1–7
a. $450,000 ($800,000 – $350,000)
b. $530,000 ($450,000 + $150,000 – $70,000)
c. $370,000 ($450,000 – $60,000 – $20,000)
d. $590,000 ($450,000 + $100,000 + $40,000)
e. Net income: $125,000 ($975,000 – $400,000 – $450,000)
Ex. 1–8
a. (1) asset
b. (3) owner’s equity
c. (2) liability
d. (3) owner’s equity
e. (1) asset
f. (1) asset
Ex. 1–9
a. Increases assets and increases owner’s equity.
b. Increases assets and decreases assets.
c. Increases assets and increases liabilities.
d. Increases assets and increases owner’s equity.
e. Decreases assets and decreases owner’s equity.
Ex. 1–10
a. (1) Total assets increased $250,000 ($350,000 – $100,000).
(2) No change in liabilities.
(3) Owner’s equity increased $250,000.
b. (1) Total assets decreased $75,000.
(2) Total liabilities decreased $75,000.
(3) No change in owner’s equity.
c. No, it is false that a transaction always affects at least two elements (Assets, Liabilities, or Owner's Equity) of the accounting equation. Some transactions affect only one element of the accounting equation. For example, purchasing supplies for cash only affects assets.
Ex. 1–11
1. (a) increase
2. (a) increase
3. (b) decrease
4. (b) decrease
Ex. 1–12
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1. c
2. a
3. e
4. e
5. c
6. c
7. d
8. a
9. e
10. e
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Ex. 1–13
a. (1) Provided catering services for cash, $29,000.
(2) Purchase of land for cash, $20,000.
(3) Payment of expenses, $14,000.
(4) Purchase of supplies on account, $1,000.
(5) Withdrawal of cash by owner, $2,000.
(6) Payment of cash to creditors, $7,000.
(7) Recognition of cost of supplies used, $1,800.
b. $14,000 ($25,000 – $11,000)
c. $11,200 (–$2,000 + $29,000 – $15,800)
d. $13,200 ($29,000 – $15,800)
e. $11,200 ($13,200 – $2,000)
Ex. 1–14
No. It would be incorrect to say that the business had incurred a net loss of $10,000. The excess of the withdrawals over the net income for the period is a decrease in the amount of owner’s equity in the business.
Ex. 1–15
Aries
Owner’s equity at end of year
($750,000 – $300,000) $450,000
Deduct owner’s equity at beginning of year
($400,000 – $100,000) 300,000
Net income (increase in owner’s equity) $ 150,000
Gemini
Increase in owner’s equity (as determined for Aries) $150,000
Add withdrawals 40,000
Net income $190,000
Leo
Increase in owner’s equity (as determined for Aries) $150,000
Deduct additional investment 90,000
Net income $ 60,000
Pisces
Increase in owner’s equity (as determined for Aries) $150,000
Deduct additional investment 90,000
$ 60,000
Add withdrawals 40,000
Net income $100,000
Ex. 1–16
Balance sheet items: 1, 2, 4, 5, 6, 10
Ex. 1–17
Income statement items: 3, 7, 8, 9
Ex. 1–18
a.
LOST TRAIL COMPANY
Statement of Owner’s Equity
For the Month Ended June 30, 2012
Penny Beall, capital, June 1, 2012 $375,000
Net income for June $125,000
Less withdrawals 18,000
Increase in owner’s equity 107,000
Penny Beall, capital, June 30, 2012 $482,000
b. The statement of owner’s equity is prepared before the June 30, 2012, balance sheet because Penny Beall, Capital as of June 30, 2012, is needed for the balance sheet.
Ex. 1–19
UNIVERSAL SERVICES
Income Statement
For the Month Ended October 31, 2012
Fees earned $800,000
Expenses:
Wages expense $270,000
Rent expense 60,000
Supplies expense 9,000
Miscellaneous expense 12,000
Total expenses 351,000
Net income $449,000
Ex. 1–20
In each case, solve for a single unknown, using the following equation:
Owner’s equity (beginning) + Investments – Withdrawals + Revenues – Expenses = Owner’s equity (ending)
Aquarius Owner’s equity at end of year ($420,000 – $110,000) $310,000
Owner’s equity at beginning of year ($300,000 – $120,000) 180,000
Increase in owner’s equity $130,000
Deduct increase due to net income ($190,000 – $80,000) 110,000
$ 20,000
Add withdrawals 25,000
Additional investment in the business (a) $ 45,000
Libra Owner’s equity at end of year ($700,000 – $220,000) $480,000
Owner’s equity at beginning of year ($500,000 – $260,000) 240,000
Increase in owner’s equity $240,000
Add withdrawals 32,000
$272,000
Deduct additional investment 100,000
Increase due to net income $172,000
Add expenses 128,000
Revenue (b) $300,000
Scorpio Owner’s equity at end of year ($90,000 – $80,000) $ 10,000
Owner’s equity at beginning of year ($100,000 – $76,000) 24,000
Decrease in owner’s equity $ (14,000)
Deduct decrease due to net loss ($115,000 – $122,500) (7,500)
$ (6,500)
Deduct additional investment 10,000
Withdrawals from the business (c) $ (16,500)
Taurus Owner’s equity at end of year ($248,000 – $136,000) $112,000
Add decrease due to net loss ($112,000 – $128,000) 16,000
$128,000
Add withdrawals 60,000
Owner’s equity at beginning of year $188,000
Deduct additional investment 40,000
$148,000
Add liabilities at beginning of year 120,000
Assets at beginning of year (d) $268,000
Ex. 1–21
a.
LADY INTERIORS
Balance Sheet