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Chapter 1 - A Framework for Financial Accounting

Answers to Review Questions (continued) Question 1-14 (LO 1-3) Basic revenues would include sale of products (such as toys, dolls, and games) and services (such as theme park tickets). Expenses include cost of merchandise sold, employee salaries, utilities, advertising, taxes, interest, and legal fees.

Question 1-15 (LO 1-3)

The accounting equation is: Assets = Liabilities + Stockholders’ Equity. The format of the balance sheet follows the accounting equation.

Question 1-16 (LO 1-3) Assets would include items such as merchandise inventory, office supplies, buildings, land, trucks, and equipment. Liabilities would include items such as amounts owed to employees, suppliers, taxing authorities, and lenders.

Question 1-17 (LO 1-3) Retained earnings represent the cumulative amount of net income earned over the life of the company that has not been distributed to stockholders as dividends. Net income is shown in the income statement and retained earnings are reported in the balance sheet. Thus, retained earnings represent a balance sheet account which reflects the cumulative result of income statements over the life of the company (less any dividends).

Question 1-18 (LO 1-3) The statement of cash flows reports operating, investing, and financing cash flows. Examples of each include: Operating – selling merchandise, paying employee salaries, and paying for advertisement. Investing – purchasing land and buildings to open new factories. Financing – Borrowing from lenders or issuing stock to owners to obtain funds necessary to expand operations.

Question 1-19 (LO 1-3) Two other important sources of information are the (1) management discussion and analysis of the company’s activities and (2) note disclosures to the financial statements.

Question 1-20 (LO 1-4) Successful companies use their resources efficiently to sell products and services for a profit. Unsuccessful companies either offer lower-quality products and services or do not efficiently keep their costs low. When a company is unprofitable, investors will neither invest in nor lend to the firm. Without these sources of financing, eventually the company will fail. When a company is able to make a profit, investors and creditors are willing to transfer their resources to it, and the company will expand its profitable operations even further. Investors and creditors rely heavily on financial accounting information in making investment and lending decisions.

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Chapter 1 - A Framework for Financial Accounting

Answers to Review Questions (continued) Question 1-21 (LO 1-5) GAAP refers to Generally Accepted Accounting Principles, or the rules of financial accounting. The fact that all companies use the same rules is critical to financial statement users, because it allows them to accurately compare financial information among companies when they are making decisions about where to lend or invest their resources.

Question 1-22 (LO 1-5)

The Financial Accounting Standards Board (FASB) is primarily responsible for the establishment of GAAP in the United States. The International Accounting Standards Board (IASB) serves this function on an international basis.

Question 1-23 (LO 1-5)

U.S. GAAP refers to the set of accounting standards being developed in the United States by the Financial Accounting Standards Board (FASB). IFRS (International Financial Reporting Standards) refers to the set of accounting standards being developed by the International Accounting Standards Board (IASB). The IASB promotes the use of IFRS around the world. Today, the IASB and FASB work closely in an effort to converge the two sets of accounting standards.

Question 1-24 (LO 1-5) The 1933 Securities Act and the 1934 Securities Exchange Act were designed to restore investor confidence in financial accounting following the stock market crash in 1929 and the ensuing Great Depression. The SEC has the power to require companies with publicly traded securities to prepare periodic financial statements for distribution to investors and creditors.

Question 1-25 (LO 1-5) The role of auditors is to help ensure that management has in fact appropriately applied GAAP in preparing the company’s financial statements. They are hired by a company as an independent party to express a professional opinion of the conformity of that company’s financial statements with GAAP. Auditors play a major role in investors’ and creditors’ decisions by adding credibility to the financial statements.

Question 1-26 (LO 1-5) The three objectives of financial reporting are providing information that: 1. is useful to investors and creditors in making decisions. 2. helps to predict cash flows. 3. tells about economic resources, claims to resources, and changes in resources and claims.

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Chapter 1 - A Framework for Financial Accounting

Answers to Review Questions (continued) Question 1-27 (LO 1-6) The benefits to obtaining a degree in accounting include a wide variety of job opportunities, high demand, and high salaries. Public accounting firms are professional service firms that traditionally have focused on three areas: auditing, tax preparation/planning, and business consulting. Private accounting means providing accounting services to the company that employs you. Traditional careers include auditor, tax preparer, consultant, and basic accounting services. Accountants are now expanding to work as financial analysts, forensic accountants, tax lawyers, FBI agents, and many others.

Question 1-28 (LO 1-7) Relevance and faithful representation are the two fundamental qualitative characteristics. Relevance implies that information is useful to the decision at hand. Faithful representation indicates that information accurately represents the underlying activity.

Question 1-29 (LO 1-7) The three components/aspects of relevance include: 1. Predictive value – Information is useful in helping to forecast future outcomes. 2. Confirmatory value – Information provides feedback on past activities. 3. Materiality – The nature or amount of an item has the ability to affect decisions. The three components/aspects of faithful representation include: 1. Completeness – All information necessary to describe an item is reported. 2. Verifiability – Measurements that independent parties would agree upon. 3. Free from error – Reported amounts reflect the best available information.

Question 1-30 (LO 1-7)

Cost effectiveness refers to practical boundaries (constraints) to achieving desired qualitative characteristics. Cost effectiveness suggests that financial accounting information is provided only when the benefits of doing so exceed the costs.

Question 1-31 (LO 1-7)

The four basic assumptions underlying GAAP include: 1. Economic entity assumption – All economic events can be identified with a particular economic entity. 2. Monetary unit assumption - A common denominator is needed to measure all elements. The dollar in the United States is the most appropriate common denominator to express information about financial statement elements and changes in those elements. 3. Periodicity assumption – The economic life of an enterprise (presumed to be indefinite) can be divided into artificial time periods for financial reporting. 4. Going concern assumption – In the absence of information to the contrary, it is anticipated that a business entity will continue to operate indefinitely.

Chapter 1 - A Framework for Financial Accounting

BRIEF EXERCISES Brief Exercise 1-1 (LO 1-1) 1. True 2. True 3. False

Brief Exercise 1-2 (LO 1-2) 1. b. 2. c. 3. a.

Brief Exercise 1-3 (LO 1-2) 1. c. 2. a. 3. b.

Brief Exercise 1-4 (LO 1-2) 1. e. 2. f. 3. b. 4. c. 5. a. 6. d.

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Chapter 1 - A Framework for Financial Accounting

Brief Exercise 1-5 (LO 1-2) 1. e. 2. d. 3. f. 4. a. 5. b.

Brief Exercise 1-6 (LO 1-2) 1. b. 2. a. 3. e. 4. c. 5. d.

Brief Exercise 1-7 (LO 1-3) 1. b. 2. a. 3. d. 4. c.

Brief Exercise 1-8 (LO 1-3) 1. c. 2. a. 3. d. 4. b.

Chapter 1 - A Framework for Financial Accounting

Brief Exercise 1-9 (LO 1-5) 1. b. 2. d. 3. a. 4. c.

Brief Exercise 1-10 (LO 1-5) 1. Yes. 2. No. 3. Yes. 4. No. 5. Yes. 6. No.

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Chapter 1 - A Framework for Financial Accounting

Brief Exercise 1-11 (LO 1-6) 1.

True

10. True 11. True 12. True

Brief Exercise 1-12 (LO 1-7) 1. b. 2. a. 3. c.

Brief Exercise 1-13 (LO 1-7) 1. c. 2. b. 3. a.

Chapter 1 - A Framework for Financial Accounting

EXERCISES Exercise 1-1 (LO 1-2) 1. a. 2. c. 3. a. 4. b. 5. c. 6. a. 7. b.

Exercise 1-2 (LO 1-2) Transaction 1. Falcon purchases common stock of Wildcat. 2. Falcon borrows from Wildcat by signing a note. 3. Falcon provides services to Wildcat. 4. Falcon pays interest to Wildcat on borrowing.

Financial Statement Balance sheet

Account

Activity

Asset

Investing

Balance sheet

Liability

Financing

Income statement Income statement

Revenue Expense

Operating Operating

Financial Statement Balance sheet

Account

Activity

Equity

Financing

Balance sheet

Asset

Investing

Income statement

Expense

Operating

Income statement

Revenue

Operating

Exercise 1-3 (LO 1-2) Transaction 1. Wildcat issues common stock to Falcon. 2. Wildcat lends to Falcon by accepting a note. 3. Wildcat receives services from Falcon. 4. Wildcat receives interest from Falcon on lending.

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Chapter 1 - A Framework for Financial Accounting

Exercise 1-4 (LO 1-2) Requirement 1 Revenues $14,000

− −

Expenses $9,000

= Net Income = $5,000

Liabilities $27,000 $27,000

Stockholders’ + equity + $X = $23,000

Requirement 2 Assets $50,000 $50,000

= = −

Exercise 1-5 (LO 1-2) Requirement 1 Revenues $28,000

− −

Expenses $33,000

= =

Net Loss ($5,000)

Liabilities $15,000 $15,000

Stockholders’ + equity + $X = $4,000

Requirement 2 Assets $19,000 $19,000

= = −

Chapter 1 - A Framework for Financial Accounting

Exercise 1-6 (LO 1-3) Cowboy Law Firm Income Statement For the period ended December 31 Service revenue Expenses: Salaries Utilities Total expenses Net income

$9,300 2,200 1,200 3,400 $5,900

Exercise 1-7 (LO 1-3) Buffalo Drilling Statement of Stockholders’ Equity For the year ended December 31

Beginning balance, Jan. 1 Issuance of common stock Add: Net income Less: Dividends Ending balance, Dec. 31

Common Stock

Retained Earnings

$11,000 8,000

$ 8,200

$19,000

8,500 (3,200) $13,500

Total Stockholders’ Equity $19,200 8,000 8,500 (3,200) $32,500

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Chapter 1 - A Framework for Financial Accounting

Exercise 1-8 (LO 1-3) Wolfpack Construction Balance Sheet December 31 Assets Cash Land Equipment

Total assets *

Assets $50,000 $50,000

= = −

$ 6,000 18,000 26,000

Liabilities Accounts payable Notes payable Total liabilities

$50,000

Stockholders’ Equity Common stock 11,000 Retained earnings 16,000 * Total stockholders’ equity 27,000 Total liabilities and stockholders’ equity $50,000

Liabilities $23,000 $23,000

+ + −

$ 3,000 20,000 23,000

Stockholders’ equity ($11,000 + Retained earnings) $11,000 = Retained earnings $16,000 = Retained earnings

Chapter 1 - A Framework for Financial Accounting

Exercise 1-9 (LO 1-3) Requirement 1 Beginning balance

$ 5,000

Cash received from sale of products to customers Cash received from the bank for long-term loan Cash paid to purchase factory equipment Cash paid to merchandise suppliers Cash received from the sale of an unused warehouse Cash paid to workers Cash paid for advertisement Cash received for sale of services to customers Cash paid for dividends to stockholders

40,000 45,000 (50,000) (12,000) 13,000 (24,000) (4,000) 30,000 (6,000)

Ending balance

$37,000

Requirement 2

Tiger Trade Statement of Cash Flows Cash Flows from Operating Activities Cash inflows: From sale of products to customers From sale of services to customers Cash outflows: For merchandise suppliers For workers For advertisement Net cash flows from operating activities Cash Flows from Investing Activities Purchase factory equipment Sale of warehouse Net cash flows from investing activities Cash Flows from Financing Activities Borrow from bank Pay dividends Net cash flows from financing activities Net increase in cash Cash at the beginning of the year Cash at the end of the year

$40,000 30,000 (12,000) (24,000) (4,000) $30,000 (50,000) 13,000 (37,000) 45,000 (6,000) 39,000 32,000 5,000 $37,000

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Chapter 1 - A Framework for Financial Accounting

Exercise 1-10 (LO 1-3) Requirement 1

Fighting Okra Cooking Services Income Statement For the year ended December 31, 2021 Service revenue Expenses: Salaries Supplies Rent Legal fees Postage Total expenses Net income

$75,000 $24,000 14,500 10,600 2,400 1,500 53,000 $22,000

Requirement 2

Fighting Okra Cooking Services Statement of Stockholders’ Equity For the year ended December 31, 2021

Beginning balance Issuance of common stock Add: Net income Less: Dividends Ending balance

Common Stock

Retained Earnings

$200,000 25,000

$32,000

$225,000

22,000 (10,000) $44,000

Total Stockholders’ Equity $232,000 25,000 22,000 (10,000) $269,000

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Chapter 1 - A Framework for Financial Accounting

Exercise 1-11 (LO 1-3) Requirement 1

Artichoke Academy Statement of Stockholders’ Equity For the year ended December 31, 2021

Beginning balance Issuance of common stock Add: Net income Less: Dividends Ending balance

Common Stock

Retained Earnings

$150,000 40,000

$50,000

$190,000

30,000 (10,000) $70,000

Total Stockholders’ Equity $200,000 40,000 30,000 (10,000) $260,000

Requirement 2

Artichoke Academy Balance Sheet December 31, 2021 Assets Cash Supplies Prepaid rent Land

Total assets

$52,600 13,400 24,000 200,000

$290,000

Liabilities Accounts payable Utilities payable Salaries payable Notes payable Total liabilities

$ 9,100 2,400 3,500 15,000 30,000

Stockholders’ Equity Common stock 190,000 Retained earnings 70,000 Total stockholders’ equity 260,000 Total liabilities and stockholders’ equity $290,000

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Chapter 1 - A Framework for Financial Accounting

Exercise 1-12 (LO 1-3) Requirement 1

Squirrel Tree Services Balance Sheet December 31, 2021 Assets Cash $ 7,700 Supplies 1,800 Prepaid insurance 3,500 Building 72,000

Total assets

$85,000

Liabilities Accounts payable Salaries payable Notes payable Total liabilities

$ 9,700 3,500 20,000 33,200

Stockholders’ Equity Common stock 40,000 Retained earnings 11,800 Total stockholders’ equity 51,800 Total liabilities and stockholders’ equity $85,000

Chapter 1 - A Framework for Financial Accounting

Requirement 2

Squirrel Tree Services Statement of Cash Flows For the year ended December 31, 2021 Cash Flows from Operating Activities Cash inflows from customers Cash outflows for salaries Cash outflows for supplies Net cash flows from operating activities Cash Flows from Investing Activities Sale investments Purchase building Net cash flows from investing activities Cash Flows from Financing Activities Borrow from bank Pay dividends Net cash flows from financing activities Net decrease in cash Cash at the beginning of the year* Cash at the end of the year

$ 60,000 (22,000) (4,000) $34,000 10,000 (62,000) (52,000) 20,000 (6,500) 13,500 (4,500) 12,200 $ 7,700

* Plug number in order to calculate correct ending balance

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Chapter 1 - A Framework for Financial Accounting

Exercise 1-13 (LO 1-3) 1.

Revenues − $27,000 −

Expenses $18,000

Change in stockholders’ equity $17,000 $17,000

= =

Net Income $9,000

Issue common stock

Net Income

−

Dividends

= −

$11,000 $11,000

+ −

$12,000 − $12,000 =

$X $6,000

Assets

Liabilities

$24,000 $24,000

= =

$X $9,000

Total change = in cash $26,000 = $26,000 −

Stockholders’ equity + $15,000 + $15,000 +

Operating cash flows $34,000 $34,000

+ + −

Investing cash flows ($17,000) ($17,000)

+ + =

Financing cash flows $X $9,000

Exercise 1-14 (LO 1-3) Year

Net Income

Dividends

Retained Earnings*

$1,700

$ 600

$ 1,100

2,200

600

2,700

3,100

1,500

4,300

4,200

1,500

7,000

5,400

1,500

10,900

* Retained earnings = Beginning retained earnings + Net income − Dividends

Chapter 1 - A Framework for Financial Accounting

Exercise 1-15 (LO 1-3) ($ in billions) Change in retained earnings

Change in retained earnings $3.2 $3.2 Change in retained earnings $3.4 $3.4 Change in retained earnings $1.6 $1.6

Net income

− Dividends

Net income

− Dividends

= =

$6.9 $6.9

Net income

= =

$X $6.0

Net income

= =

$1.6 $1.6

− −

$X $3.7

− Dividends − −

$2.6 $2.6

− Dividends − −

$X $0

Change in retained earnings [$X − (−$1.6)] $X = ($2.6)

Net − Dividends income

($1.0)

Change in retained earnings [$1.56 − $X] $X = $1.19

Net − Dividends income

$0.43

−

$0.06

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Chapter 1 - A Framework for Financial Accounting

Exercise 1-16 (LO 1-3) ($ in billions)

Assets

Liabilities

Stockholders ’ equity

Assets

Liabilities

Stockholders’ equity

$228

$107

$228

$107

$121

Assets

Liabilities

Stockholders’ equity

$1,500

$110

$1,610

$1,500

$110

Assets

Liabilities

Stockholders’ equity

$4.7

$0.3

$4.7

$4.4

$0.3

Change in assets

Change in liabilities

$1.2

$0.3

$1.2

$0.3

$0.9

Change in assets

Change in liabilities

Change in + stockholders’ equity

($0.34)

$0.02

($0.32)

($0.34)

$0.02

Change in + stockholders’ equity

Chapter 1 - A Framework for Financial Accounting

Exercise 1-17 (LO 1-3) ($ in billions)

Total change = in cash

Operating cash flows

Total change = in cash $0 =

Operating cash flows $3.6

Total change = in cash ($X − $0.7) = $X = $0.4

Operating cash flows $1.4

Total change = in cash $0.04 =

Operating cash flows $0.07

Total change = in cash $0.02 =

Operating cash flows $0.60

Total change = in cash $0.02 =

Operating cash flows $0.41

+ +

Investing cash flows Investing cash flows $0.6 Investing cash flows ($0.3)

Investing cash flows $0.63 Investing cash flows ($1.00) Investing cash flows ($1.42)

+ +

Financing cash flows Financing cash flows ($4.2) Financing cash flows ($1.4)

Financing cash flows ($0.66) Financing cash flows $0.42 Financing cash flows $1.03

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Chapter 1 - A Framework for Financial Accounting

Exercise 1-18 (LO 1-5) 1. d. 2. e. 3. a. 4. c. 5. f. 6. b. 7. g.

Exercise 1-19 (LO 1-7) 1. g. Comparability 2. f. Free from error 3. b. Predictive value 4. i. Timeliness 5. a. Confirmatory value 6. e. Neutrality 7. d. Completeness 8. h. Verifiability 9. j. Understandability 10. c. Materiality

Exercise 1-20 (LO 1-7) 1. b. 2. c. 3. d. 4. a.

Chapter 1 - A Framework for Financial Accounting

PROBLEMS: SET A Problem 1-1A (LO 1-2) Type of business activity

Transactions

Financing

Pay amount owed to the bank for previous borrowing

Operating

Pay utility costs

Investing

Purchase equipment to be used in operations

Operating

Provide services to customers

Operating

Purchase office supplies

Investing

Purchase a building

Operating

Pay workers’ salaries

Operating

Pay for research and development costs

Operating

Pay taxes to the IRS

10.

Financing

Sell common stock to investors

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Chapter 1 - A Framework for Financial Accounting

Problem 1-2A (LO 1-2) Account classifications Account Names 1.

Stockholders’ equity

Common stock

Asset

Equipment

Liability

Salaries payable

Revenue

Service revenue

Expense

Utilities expense

Asset

Supplies

Expense

Research and development expense

Asset

Land

Liability

Income tax payable

10.

Liability

Interest payable

Chapter 1 - A Framework for Financial Accounting

Problem 1-3A (LO 1-3) Longhorn Corporation Income Statement For the year ended Dec. 31, 2021 Service revenue Expenses: Cost of goods sold Salaries Delivery Total expenses Net income

$67,700 53,400 5,500 2,600 61,500 $ 6,200

Longhorn Corporation Statement of Stockholders’ Equity For the year ended Dec. 31, 2021

Beginning balance Issuance of common stock Add: Net income Less: Dividends Ending balance

Common Stock

Retained Earnings

$40,000 4,000

$18,200

$44,000

6,200 (0) $24,400

Total Stockholders’ Equity $58,200 4,000 6,200 (0) $68,400

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Chapter 1 - A Framework for Financial Accounting

Problem 1-3A (concluded)

Longhorn Corporation Balance Sheet Dec. 31, 2021 Assets Cash Supplies Equipment Buildings

$ 1,200 3,400 29,000 40,000

Total assets

$73,600

Liabilities Accounts payable Salaries payable Total liabilities

$ 4,400 800 5,200

Stockholders’ Equity Common stock 44,000 Retained earnings 24,400 Total stockholders’ equity 68,400 Total liabilities and stockholders’ equity $73,600

Chapter 1 - A Framework for Financial Accounting

Problem 1-4A (LO 1-3) (Suggested order of calculation) On the statement of stockholders’ equity, $7,000 + (c) − $3,000 = $10,000 (c) = $6,000 From (c), (b) = $6,000 From (b), $39,000 − (a) − $6,000 − $4,000 = $6,000 (b) (a) = $23,000 From the statement of stockholders’ equity, (e) = $11,100 (f) = $10,000 From total assets, (g) = $26,000 From (e), (f), and (g), (d) + $11,100 (e) + $10,000 (f) = $26,000 (g) (d) = $4,900

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Chapter 1 - A Framework for Financial Accounting

Problem 1-5A (LO 1-3) Cornhusker Company Income Statement For the year ended December 31, 2021 Service revenues Expenses: Rent Utilities Salaries Insurance Total expenses Net income

$37,000 7,000 4,900 13,300 3,500 28,700 $ 8,300

Cornhusker Company Statement of Stockholders’ Equity For the year ended December 31, 2021

Beginning balance (Jan. 1) Issuance of common stock Add: Net income Less: Dividends Ending balance (Dec. 31)

Common Stock

Retained Earnings

$16,000 0

$7,300

$16,000

8,300 (3,200) $12,400

Total Stockholders’ Equity $23,300 0 8,300 (3,200) $28,400

Chapter 1 - A Framework for Financial Accounting

Problem 1-5A (concluded)

Cornhusker Company Balance Sheet December 31, 2021 Assets Cash $ 4,800 Accounts receivable 7,200 Land 21,000

Total assets

$33,000

Liabilities Accounts payable Salaries payable Total liabilities

$ 2,200 2,400 4,600

Stockholders’ Equity Common stock 16,000 Retained earnings 12,400 Total stockholders’ equity 28,400 Total liabilities and stockholders’ equity $33,000

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Chapter 1 - A Framework for Financial Accounting

Problem 1-6A (LO 1-7) Assumption violated 1.

Going concern

Economic entity

Monetary unit

Periodicity

Problem 1-7A (LO 1-7) 1. d. 2. b. 3. i. 4. c. 5. a. 6. g. 7. h. 8. f. 9. e.

Chapter 1 - A Framework for Financial Accounting

PROBLEMS: SET B Problem 1-1B (LO 1-2) Type of business activity

Transactions

Operating

Pay for advertising

Financing

Pay dividends to stockholders

Operating

Collect cash from customer for previous sale

Investing

Purchase a building to be used for operations

Investing

Purchase equipment

Investing

Sell land

Financing

Receive a loan from the bank by signing a note

Operating

Pay suppliers for purchase of supplies

Operating

Provide services to customers

10.

Investing

Invest in securities of another company

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Chapter 1 - A Framework for Financial Accounting

Problem 1-2B (LO 1-2) Account classifications Account Names 1.

Asset

Cash

Revenue

Service Revenue

Asset

Supplies

Asset

Buildings

Expense

Advertising Expense

Asset

Equipment

Expense

Interest Expense

Liability

Accounts Payable

Dividends

10.

Liability

Notes Payable

Chapter 1 - A Framework for Financial Accounting

Problem 1-3B (LO 1-3) Gator Investments Income Statement For the year ended Dec. 31, 2021 Service revenue Expenses: Advertising Salaries Utilities Interest Total expenses Net income

$127,600 33,500 65,100 15,500 3,500 117,600 $ 10,000

Gator Investments Statement of Stockholders’ Equity For the year ended Dec. 31, 2021

Beginning balance Issuance of common stock Add: Net income Less: Dividends Ending balance

Common Stock

Retained Earnings

$100,000 11,000

$30,300

$111,000

10,000 (5,200) $35,100

Total Stockholders’ Equity $130,300 11,000 10,000 (5,200) $146,100

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Chapter 1 - A Framework for Financial Accounting

Problem 1-3B (concluded)

Gator Investments Balance Sheet Dec. 31, 2021 Assets Cash Equipment Buildings

Total assets

$ 5,500 27,000 150,000

Liabilities Accounts payable Notes payable Total liabilities

$182,500

Stockholders’ Equity Common stock 111,000 Retained earnings 35,100 Total stockholders’ equity 146,100 Total liabilities and stockholders’ equity $182,500

$ 6,400 30,000 36,400

Chapter 1 - A Framework for Financial Accounting

Problem 1-4B (LO 1-3) (Suggested order of calculation) On the statement of stockholders’ equity, $14,000 + (c) = $17,000 (c) = $3,000 $7,000 + $5,000 − (d) = $8,000 (d) = $4,000 (b) = $5,000 From (b), (a) − $13,000 − $7,000 − $5,000 = $5,000 (b) (a) = $30,000 From the statement of stockholders’ equity, (g) = $17,000 (h) = $8,000 From (g) and (h), $4,000 + $17,000 (g) + $8,000 (h) = (i) (i) = $29,000 From total liabilities and stockholders’ equity, (f) = $29,000 From (f), $1,100 + (e) + $6,000 + $16,000 = $29,000 (f) (e) = $5,900

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Chapter 1 - A Framework for Financial Accounting

Problem 1-5B (LO 1-3) Tar Heel Corporation Income Statement For the year ended December 31, 2021 Service revenues Expenses: Advertising Utilities Salaries Interest Total expenses Net income

$69,400 10,400 6,000 26,700 2,100 45,200 $24,200

Tar Heel Corporation Statement of Stockholders’ Equity For the year ended December 31, 2021 Common Stock

Retained Earnings

Beginning balance Issuance of common stock Add: Net income Less: Dividends Ending balance

$21,000 6,000

$26,800

* Beginning retained earnings + Net income − Dividends = Ending retained earnings

$26,800 24,200 ? $40,000

$27,000

24,200 (11,000) * $40,000

Total Stockholders’ Equity $47,800 6,000 24,200 (11,000) $67,000

Chapter 1 - A Framework for Financial Accounting

Problem 1-5B (concluded)

Tar Heel Corporation Balance Sheet December 31, 2021 Assets Cash $ 5,200 Accounts receivable 13,200 Supplies 4,600 Building 80,000

Total assets

$103,000

Liabilities Accounts payable Salaries payable Note payable Total liabilities

$ 7,700 3,300 25,000 36,000

Stockholders’ Equity Common stock 27,000 Retained earnings 40,000 Total stockholders’ equity 67,000 Total liabilities and stockholders’ equity $103,000

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Chapter 1 - A Framework for Financial Accounting

Problem 1-6B (LO 1-7) Assumption violated 1.

Periodicity

Monetary unit

Going concern

Economic entity

Problem 1-7B (LO 1-7) 1. h. 2. g. 3. f. 4. a. 5. d. 6. e. 7. i. 8. b. 9. c.

Chapter 1 - A Framework for Financial Accounting

ADDITIONAL PERSPECTIVES Additional Perspective 1-1 Requirement 1

The three primary forms of business organizations include sole proprietorship, partnership, and corporation. The major advantage of a corporation is limited liability. Stockholders of a corporation are not held personally responsible for the financial obligations of the corporation. Owners of sole proprietorships or partnerships remain personally liable for activities of the business. Corporations have the disadvantages of double taxation compared to sole proprietorships and partnerships. Because of the higher risk of personal injury due to outdoor adventure activities, it is recommended that Great Adventures be organized as a corporation.

Requirement 2

Typical financing activities include issuing common stock, borrowing, and repayment of borrowing. Typical investing activities include the purchase of long-term assets such as land, buildings, equipment, vehicles, and machinery. Typical operating activities include providing services and products to customers and the associated costs of running the business such as advertising, rent, insurance, wages, and taxes.

Requirement 3

Assets – cash, accounts receivable, supplies, and equipment. Liabilities – accounts payable, salaries payable, and notes payable. Stockholders’ equity – common stock and retained earnings. Revenues – service revenue. Expenses – advertising, salaries, insurance, and supplies.

Requirement 4

Income statement – revenues less expenses equal net income during an interval of time. Statement of stockholders’ equity – changes in common stock and retained earnings during an interval of time. Balance sheet – assets equal liabilities plus stockholders’ equity at a point in time. Statement of cash flows – cash inflows and outflows related to operating, investing, and financing activities during an interval of time.

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Chapter 1 - A Framework for Financial Accounting

Additional Perspective 1-2

AMERICAN EAGLE OUTFITTERS ($ in thousands) Requirement 1 Total assets Total liabilities Stockholders’ equity Assets $1,816,313

= $1,816,313 = $569,522 = $1,246,791 = =

Liabilities $569,522

+ +

Stockholders’ Equity $1,246,791

Requirement 2 Consolidated Statements of Operations Requirement 3 Net sales Net income Requirement 4 Investing activities Financing activities

= $3,795,549 = $204,163 Inflows There are none Net proceeds from stock options exercised

Outflows Capital expenditures for property and equipment Cash dividends paid

Requirement 5 The company’s auditor is Ernst & Young LLP. The auditor states, “We have audited the accompanying consolidated balance sheets of American Eagle Outfitters, Inc. (the Company) as of February 3, 2018 and January 28, 2017, and the related consolidated statements of operations, comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended February 3, 2018, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at February 3, 2018 and January 28, 2017, and the results of its operations and its cash flows for each of the three years in the period ended February 3, 2018, in conformity with U.S. generally accepted accounting principles.”

Chapter 1 - A Framework for Financial Accounting

Additional Perspective 1-3 BUCKLE ($ in thousands)

Requirement 1 Total assets Total liabilities Stockholders’ equity Assets $538,116

= $538,116 = $146,868 = $391,248 = =

Liabilities $146,868

+ +

Stockholders’ Equity $391,248

Requirement 2 Consolidated Statements of Income Requirement 3 Net sales Net income Requirement 4 Investing activities Financing activities

= $913,380 = $89,707 Inflows Proceeds from sales/maturities of investments There are none

Outflows Purchases of investments Payment of dividends

Requirement 5 The company’s auditor is Deloitte & Touche LLP. The auditor states, “We have audited the accompanying consolidated balance sheets of The Buckle, Inc. and subsidiary (the “Company”) as of February 3, 2018 and January 28, 2017, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the three fiscal years in the period ended February 3, 2018, and the related notes and the schedule listed in the Index at Item 15 (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of February 3, 2018 and January 28, 2017, and the results of its operations and its cash flows for each of the three fiscal years in the period ended February 3, 2018, in conformity with accounting principles generally accepted in the United States of America.” ©2019 McGraw-Hill Education. All rights reserved .Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education 1-42 Financial Accounting, 5e

Chapter 1 - A Framework for Financial Accounting

Additional Perspective 1-4 Requirement 1 The total assets of American Eagle are higher than the total assets of Buckle. Requirement 2 The total liabilities of American Eagle are higher than the total liabilities of Buckle. A higher amount of liabilities does not necessarily mean a higher chance of bankruptcy. The probability of bankruptcy relates to the ability of a company to repay its liabilities as they become due. If sufficient resources are available, then high levels of debt can be paid. Requirement 3 Ability to repay debt. The ratio of total liabilities to total assets can be used as one measure of a company’s ability to repay its liabilities. The higher the ratio, the more difficult it will be for a company to pay its liabilities. Requirement 4 The net income of American Eagle is higher than the net income of Buckle. When one company has a higher net income than another company does, this does not always mean the company’s operations are more successful. One company may be larger than another company so it has higher net income in absolute dollar amounts because operations are larger, but it may be making less profit per dollar of invested assets. Requirement 5 Ability to generate profits. Net income provides a measure of a company’s ability to generate profit for its owners. In the case of American Eagle and Buckle, the owners are the stockholders of the company. An increase in net income is a desirable characteristic of a company that, along with other factors, increases the value (or stock price) of the company to its owners.

Chapter 1 - A Framework for Financial Accounting

Additional Perspective 1-5 1. Yes. The role of an auditor is to express an independent, professional opinion of the extent to which financial statements are prepared in compliance with Generally Accepted Accounting Principles. An auditor’s ethics might be challenged because of the need to retain the client as a source of revenue. In this case, the auditor might fear losing the audit fee if it upsets its largest client by requiring a correction to the financial statements because of questionable accounting practices. The company may fire the auditor and retain the services of someone else. This problem is further worsened by the company offering an additional $200,000 in audit fees this year and the promise of continued services for the next five years. Management may be using these monetary incentives as a way to entice the auditor to allow certain reporting practices. If the auditor upsets the client, the auditor faces the possibility of losing revenue each year from audit services. 2. No. Auditors are not employees of the company. They are hired by a company as an independent party. To the extent they feel management’s reporting practices violate Generally Accepted Accounting Principles, they can issue an opinion stating so. 3. Yes. Although ultimate responsibility for fair presentation of financial statements lies with management, the auditor’s opinion lends additional credibility to those financial statements. These statements are useful to investors, creditors and others for making decisions. In addition, if the auditor detects that financial statements are misstated and does not disclose this opinion, then the auditor likely faces monetary penalties and other sanctions that could limit its ability to perform any audits in the future.

4. No. Even though the auditor faces this ethical dilemma, they serve an important role in the reporting of financial information to help investors and creditors make decisions. Auditors follow a strict set of guidelines in providing auditing services. In addition, they typically face severe legal and monetary penalties in the case of negligence or willful allowance of materially misstated financial statements by management. The auditor should issue an opinion stating its belief that financial statements are materially misstated. ©2019 McGraw-Hill Education. All rights reserved .Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education 1-44 Financial Accounting, 5e

Chapter 1 - A Framework for Financial Accounting

Additional Perspective 1-6 Requirement 1 The mission of the U.S. Securities and Exchange Commission is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. The SEC was created to restore investor confidence in our capital markets by providing investors and the markets with more reliable information and clear rules of honest dealing. The Securities Act of 1933 has two basic objectives: •

require that investors receive financial and other significant information concerning securities being offered for public sale; and

•

prohibit deceit, misrepresentations, and other fraud in the sale of securities.

The Securities Exchange Act of 1934 created the Securities and Exchange Commission. The Act empowers the SEC to require periodic reporting of information by companies with publicly traded securities.

Chapter 1 - A Framework for Financial Accounting

Additional Perspective 1-6 (continued) Requirement 2 The four main financial statements discussed by the SEC are: (1) balance sheets; (2) income statements; (3) cash flow statements; and (4) statements of shareholders’ equity. A balance sheet provides detailed information about a company’s assets, liabilities and shareholders’ equity. An income statement is a report that shows how much revenue a company earned over a specific time period (usually for a year or some portion of a year). An income statement also shows the costs and expenses associated with earning that revenue. The literal “bottom line” of the statement usually shows the company’s net earnings or losses. This tells you how much the company earned or lost over the period. Cash flow statements report a company’s inflows and outflows of cash from three types of activities: (1) operating activities; (2) investing activities; and (3) financing activities. The statement of shareholders’ equity shows changes in the interests of the company’s shareholders over time. The disclosure notes provide additional information beyond that reported in the financial statements. This information includes items such as significant accounting policies and practices, income taxes, pension and other retirement plans, stock options, and much more. MD&A is management’s opportunity to provide investors with its view of the financial performance and condition of the company. It’s management’s opportunity to tell investors what the financial statements show and do not show, as well as important trends and risks that have shaped the past or are reasonably likely to shape the company’s future.

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Chapter 1 - A Framework for Financial Accounting

Additional Perspective 1-6 (concluded) Requirement 3 The mission of the FASB is to establish and improve standards of financial accounting and reporting for the guidance and education of the public, including issuers, auditors, and users of financial information. The Securities and Exchange Commission (SEC) has statutory authority to establish financial accounting and reporting standards for publicly held companies under the Securities Exchange Act of 1934. Throughout its history, however, the Commission’s policy has been to rely on the private sector (like the FASB) for this function to the extent that the private sector demonstrates ability to fulfill the responsibility in the public interest. Requirement 4 (a) Yes; Nike properly prepared the four financial statements. (b) NIKE designs, develops, markets, and sells athletic footwear, apparel, equipment, accessories, and services worldwide. (c) In the segment disclosure note, the company reports amounts for items such as revenue, depreciation, net income, accounts receivable, inventories and capital expenditures for each segment.

Chapter 1 - A Framework for Financial Accounting

Additional Perspective 1-7 The functions of financial accounting are to measure business activities of a company and to communicate information about those activities to investors and creditors and other outside users for decision-making purposes. The four financial statements include: 1. Income statement, which shows revenues and expenses during the reporting period. 2. Statement of stockholders’ equity, which shows the change in stockholders’ equity during the reporting period. 3. Balance sheet, which shows a company’s resources (assets), creditors’ claims to those assets (liabilities), and the remaining claims of stockholders’ to those assets (stockholders’ equity) at the end of the period. 4. Statement of cash flows, which shows a company’s inflows and outflows of cash arising from operating, investing, and financing activities during the reporting period. The role of auditors is to help ensure that management has in fact appropriately applied Generally Accepted Accounting Principles in preparing the company’s financial statements. Auditors are trained individuals hired by a company as an independent party to express a professional opinion of that company’s financial statements.

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Chapter 2 - The Accounting Cycle: During the Period

Chapter 2 The Accounting Cycle: During the Period REVIEW QUESTIONS Question 2-1 (LO 2-1)

External transactions are transactions between the company and a separate economic entity. Internal transactions do not include an exchange with a separate economic entity. Purchasing supplies from a local vendor is classified as an external transaction.

Question 2-2 (LO 2-1) 1. Use source documents to identify accounts affected by external transactions. 2. Analyze the impact of the transaction on the accounting equation. 3. Assess whether the transaction results in a debit or a credit to the account balance. 4. Record the transaction in the journal using debits and credits. 5. Post the transaction to the T-accounts in the general ledger. 6. Prepare a trial balance.

Question 2-3 (LO 2-2) Dual effect refers to each transaction having an effect on at least two accounts of the accounting equation such that the accounting equation will always be in balance. If an economic event increases (decreases) one side of the equation, then it also increases (decreases) the other side of the equation by the same amount, or, it increases one account and decreases another account on the same side of the equation.

Question 2-4 (LO 2-2) Assets

Liabilities

Stockholders’ equity

(a)

Increase

No change

(b)

Decrease

No change

Decrease

(c)

Increase

No change

Increase

(d) No change* =

No change

* One asset (equipment) increases while another asset (cash) decreases.

Question 2-5 (LO 2-2) Jerry is not correct. While it is possible for a transaction to increase one account and decrease another, dual effect simply indicates that at least two accounts will always be affected. However, the accounting equation must always remain in balance. It is not possible for one side of the equation to increase while the other side decreases. ©2019 McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education. Solutions Manual, Chapter 2 2-1

Chapter 2 - The Accounting Cycle: During the Period

Answers to Review Questions (continued) Question 2-6 (LO 2-3) Accounts

Normal balance

Assets

Debit

Liabilities

Credit

Stockholders’ equity

Credit

Revenues

Credit

Expenses

Debit

Question 2-7 (LO 2-3) Jenny is not correct. Any account can be debited or credited. Since an asset has a normal debit balance, it would be debited when it increases and credited when it decreases. Similarly, since a liability has a normal credit balance, it would be credited when it increases and debited when it decreases.

Question 2-8 (LO 2-3) Accounts

Increase

(a) Cash

Debit

(b) Salaries payable

Credit

Debit

(d) Service revenue

Credit

Question 2-9 (LO 2-3) Accounts

Decrease*

(a) Cash

Credit

(b) Salaries payable

Debit

Credit

(d) Service revenue

Debit

* Answers are opposite of those in Question 2-8

Chapter 2 - The Accounting Cycle: During the Period

Answers to Review Questions (continued) Question 2-10 (LO 2-3)

These statements are consistent. Retained earnings has three components – revenues, expenses, and dividends. Changing the balance of any of these components changes the balance of retained earnings. Retained earnings increases with a credit and decreases with a debit. Since expenses reduce retained earnings, an increase to an expense decreases retained earnings.

Question 2-11 (LO 2-4) A journal provides a chronological record of all transactions affecting a firm. A journal entry is used to describe the format for recording a transaction.

Question 2-12 (LO 2-4) Date

Debit

Credit

Account Name . . . . . . . . . . . . . . . . . . . . . . Amount Account Name . . . . . . . . . . . . . . . (Description of transaction)

Amount

Question 2-13 (LO 2-4) In each journal entry, the sum of all amounts debited equals the sum of all amounts credited.

Question 2-14 (LO 2-4) (a)

Debit

Cash

Credit

1,200 Service Revenue (Receive cash from providing services)

1,200

(b)

Debit

Credit

Rent Expense Cash (Pay rent for the current month)

500

(c)

Debit

Credit

Building 10,000 Notes Payable (Purchase building with note payable)

10,000

500

Chapter 2 - The Accounting Cycle: During the Period

Answers to Review Questions (continued) Question 2-15 (LO 2-4) (a) Purchase supplies by paying cash of $20,000. (b) Provide services to customer on account for $30,000. (c) Pay cash on accounts payable of $10,000.

Question 2-16 (LO 2-5) A T-account is an informal means to show the balance in an account. The left side is referred to as a debit and the right side is referred to as a credit.

Question 2-17 (LO 2-5)

Posting is the process of transferring the debit and credit information from the journal to individual accounts in the general ledger. (a)

Supplies 20,000

(b)

Accounts Receivable 30,000

Cash 20,000

Service Revenue 30,000 Cash 10,000

Question 2-18 (LO 2-6)

The general ledger is the collection of all accounts used to record the company’s transactions. A chart of accounts is a listing of all account names.

Question 2-19 (LO 2-6) A trial balance is a list of all accounts and their balances at a particular date. Balance refers to the fact that the sum of the accounts with debit balances should equal the sum of the accounts with credit balances.

Question 2-20 (LO 2-6)

Not necessarily. While total debits equaling total credits is a good indication that all accounts have been appropriately accounted for, the accounts could contain offsetting errors. For example, if one account with a debit (credit) balance is understated by the same amount that another account with a debit (credit) balance is overstated, the trial balance will show equal debit and credit totals.

Chapter 2 - The Accounting Cycle: During the Period

BRIEF EXERCISES Brief Exercise 2-1 (LO 2-1) Proper order: (c) Use source documents to identify accounts affected by external transactions. (d) Analyze the impact of the transaction on the accounting equation. (b) Assess whether the impact of the transaction results in a debit or credit to the account balance. (f) Record transactions using debits and credits. (a) Post the transaction to the T-accounts in the general ledger. (e) Prepare a trial balance.

Brief Exercise 2-2 (LO 2-2) Liabilities

Possible + Stockholders’ Equity (Yes/No)

Assets

(a)

Increase (Cash ↑)

= Decrease + (Accounts Payable ↓)

(b)

No change

(c)

Decrease (Cash ↓)

No change

Increase + Increase (Salaries Payable ↑) (Service Revenues ↑) No Change

+ Decrease (Advertising Expense ↑)

Yes

Brief Exercise 2-3 (LO 2-2) Cash Supplies Prepaid Rent Land Equipment

Total Assets $ 7,200 2,100 3,200 9,000 16,000 $37,500

Total Liabilities and Stockholders’ Equity Accounts Payable $ 1,700 Salaries Payable 4,300 Notes Payable 18,000 Stockholders’ Equity 13,500 $37,500

Chapter 2 - The Accounting Cycle: During the Period

Brief Exercise 2-4 (LO 2-2) Assets

Liabilities

+ Stockholders’ Equity

(a)

+$50,000

(b)

+$42,000 −$42,000

(c)

+$35,000

(d)

−$5,000

Brief Exercise 2-5 (LO 2-3) Account

Debit

Credit

Asset

−

Liability

−

Common Stock

−

Retained Earnings

−

Dividends

−

Revenue

−

Expense

−

Chapter 2 - The Accounting Cycle: During the Period

Brief Exercise 2-6 (LO 2-3) (a) The balance of an asset account increases with a debit and decreases with a credit. (b) The balance of a liability account increases with a credit and decreases with a debit. (c) The balance of a stockholders’ equity account increases with a credit and decreases with a debit. (d) The balance of a revenue account increases with a credit and decreases with a debit. (e) The balance of an expense account increases with a debit and decreases with a credit.

Brief Exercise 2-7 (LO 2-4) (1)

Debit

Credit

Equipment 15,000 Notes Payable 15,000 (Purchase equipment with note payable) (2) Supplies Cash (Purchase office supplies for cash)

600 600

(3) Rent Expense Cash (Pay rent for the current month)

800 800

Chapter 2 - The Accounting Cycle: During the Period

Brief Exercise 2-8 (LO 2-4) (1)

Debit

Cash

17,000 Service Revenue (Provide services for cash)

Credit 17,000

(2) Prepaid Insurance 4,200 Cash (Purchase one year of prepaid insurance with cash)

4,200

(3) Equipment Cash (Purchase equipment with cash)

20,000 20,000

(4) Cash

30,000 Notes Payable (Obtain bank loan)

30,000

Brief Exercise 2-9 (LO 2-5) 1.

Cash 13,000 8,200 4,400 1,900 3,500 5,500 5,300

2. Postings on the left side (or debit side) of the cash T-account represent increases to cash, such as receiving cash from customers, selling assets, borrowing money, and issuing stock. 3. Postings on the right side (or credit side) of the cash T-account represent decreases to cash, such as paying cash for rent, supplies, equipment, employee salaries, utilities, repayment of debt, and dividends. ©2019 McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education. 2-8 Financial Accounting, 5e

Chapter 2 - The Accounting Cycle: During the Period

Brief Exercise 2-10 (LO 2-2, 2-3, 2-4, 2-5) Assets

Liabilities

Stockholders’ Equity

(a)

+$30,000

(b)

+$20,000

(c)

−$7,000

(a)

Debit

Credit

Cash

30,000 Service Revenue (Provide services for cash)

30,000

(b) Supplies 20,000 Accounts Payable 20,000 (Purchase office supplies on account) (c) Salaries Expense 7,000 Cash (Pay salaries for the current month) Cash 0 (a) 30,000 7,000 (c) 23,000

Supplies 0 (b) 20,000 20,000

7,000

Service Revenue 0 30,000 (a) 30,000 Accounts Payable 0 20,000 (b) 20,000

Salaries Expense 0 (c) 7,000 7,000

Chapter 2 - The Accounting Cycle: During the Period

Brief Exercise 2-11 (LO 2-6) Trial Balance Accounts Cash Accounts Receivable Prepaid Rent Accounts Payable Salaries Payable Common Stock Retained Earnings Dividends Service Revenue Salaries Expense Rent Expense Advertising Expense Totals

Debit $ 6,100 4,400 900

Credit

$ 2,000 700 6,200 2,000 500 7,100 3,000 2,000 1,100 $18,000

$18,000

Brief Exercise 2-12 (LO 2-6) Trial Balance Accounts Cash Accounts Receivable Equipment Accounts Payable Deferred Revenue Common Stock Retained Earnings Dividends Service Revenue Salaries Expense Utilities Expense Totals

Debit $ 7,300 2,100 10,400

Credit

$ 3,900 1,100 11,000 3,900 600 4,500 3,200 800 $24,400

$24,400

Chapter 2 - The Accounting Cycle: During the Period

EXERCISES Exercise 2-1 (LO 2-1) 1. d. 2. b. 3. a. 4. e. 5. c.

Exercise 2-2 (LO 2-2) Assets

Liabilities

Stockholders’ Equity

Increase

No effect

Increase

No effect

Increase

No effect

Increase

Decrease

No effect

Decrease

No effect

Decrease

No effect* =

No effect

* One asset (cash) increases while another asset (accounts receivable) decreases.

Chapter 2 - The Accounting Cycle: During the Period

Exercise 2-3 (LO 2-2) Dual Effect 1. Issue 10,000 shares of common stock in exchange for $32,000 in cash.

Assets increase

Stockholders’ equity increases

2. Purchase land for $19,000. A note payable is signed for the full amount.

Assets increase

Liabilities increase

3. Purchase storage containers for $8,000.

One asset (containers) increases and another asset (cash) decreases

4. Hire three employees for $2,000 per month.

No effect on the accounting equation

5. Receive cash of $12,000 in rental fees for the current month.

Assets increase

Stockholders’ equity increases

6. Purchase office supplies for $2,000 on account.

Assets increase

Liabilities increase

7. Pay employees $6,000 for the first month’s salaries.

Assets decrease

Stockholders’ equity decreases

Chapter 2 - The Accounting Cycle: During the Period

Exercise 2-4 (LO 2-2) Dual Effect 1. Paint houses in the current month for $15,000 on account. 2. Purchase painting equipment for $16,000 cash.

Assets increase

Stockholders’ equity increases

One asset (equipment) increases and another asset (cash) decreases

3. Purchase office supplies on account for $2,500.

Assets increase

Liabilities increase

4. Pay employee salaries of $3,200 for the current month.

Assets decrease

Stockholders’ equity decreases

5. Purchase advertising to appear in the current month, $1,200.

Assets decrease

Stockholders’ equity decreases

6. Pay office rent of $4,400 for the current month.

Assets decrease

Stockholders’ equity decreases

7. Receive $10,000 from customers in (1) above.

One asset (cash) increases and another asset (accounts receivable) decreases

8. Receive cash of $5,000 in advance from a customer that plans to have his house painted in the following month.

Assets increase

Liabilities increase

Chapter 2 - The Accounting Cycle: During the Period

Exercise 2-5 (LO 2-2) Transaction

Balance

Retained earnings, April 1

$13,000

1. Issue common stock for cash, $11,000

2. Provide services to customers on account, $8,500.

+8,500

3. Provide services to customers in exchange for cash, $3,200.

+3,200

4. Purchase equipment and pay cash, $7,600.

5. Pay rent for April, $1,100.

−1,100

6. Pay employee salaries for April, $3,500.

−3,500

7. Pay dividends to stockholders, $2,000.

−2,000

Retained earnings, April 30

$18,100

Exercise 2-6 (LO 2-3) Debit or Credit

Account

Debit

Cash

Credit

Service Revenue

Debit

Salaries Expense

Credit

Accounts Payable

Debit

Equipment

Credit

Retained Earnings

Debit

Utilities Expense

Debit

Accounts Receivable

Debit

Dividends

10.

Credit

Common Stock

Chapter 2 - The Accounting Cycle: During the Period

Exercise 2-7 (LO 2-3) Account Debited

Account Credited

Example: Purchase equipment in exchange for cash.

Equipment

Cash

1. Pay a cash dividend.

Dividends

Cash

2. Pay rent in advance for the next three months.

Prepaid Rent

Cash

3. Provide services to customers on account.

Accounts Receivable

Service Revenue

4. Purchase office supplies on account.

Supplies

Accounts Payable

5. Pay salaries for the current month.

Salaries Expense

Cash

6. Issue common stock in exchange for cash.

Cash

Common Stock

7. Collect cash from customers for services provided in (3) above.

Cash

Accounts Receivable

8. Borrow cash from the bank and sign a note.

Cash

Notes Payable

9. Pay for the current month’s utilities.

Utilities Expense

Cash

10. Pay for office supplies purchased in (4) above.

Accounts Payable

Cash

Chapter 2 - The Accounting Cycle: During the Period

Exercise 2-8 (LO 2-4) (1)

Debit

Equipment Cash (Purchase equipment with cash)

23,400

Credit 23,400

(2) Cash

6,800 Service Revenue (Provide services for cash)

6,800

(3) Rent Expense Cash (Pay current month’s rent)

1,300 1,300

(4) Supplies 1,000 Accounts Payable (Purchase office supplies on account)

1,000

(5) Salaries Expense Cash (Pay current month’s salaries)

2,100 2,100

Chapter 2 - The Accounting Cycle: During the Period

Exercise 2-9 (LO 2-4) 1. Purchase equipment with cash, $8,800. 2. Provide services to customers on account, $3,200. 3. Pay current month’s salaries, $1,900. 4. Receive cash from customers in advance of services, $1,500. 5. Pay dividends to stockholders, $900.

Chapter 2 - The Accounting Cycle: During the Period

Exercise 2-10 (LO 2-4) February 2

Debit

Advertising Expense Cash (Pay advertising for current month)

700

Credit 700

February 7 Supplies 1,300 Accounts Payable (Purchase beauty supplies on account)

1,300

February 14 Cash

2,900 Service Revenue (Provide beauty services for cash)

2,900

February 15 Salaries Expense Cash (Pay salaries for current month)

900 900

February 25 Accounts Receivable 1,000 Service Revenue (Provide beauty services on account)

1,000

February 28 Utilities Expense Cash (Pay utilities for current month)

300 300

Chapter 2 - The Accounting Cycle: During the Period

Exercise 2-11 (LO 2-4) March 1

Debit

Cash

21,000 Common Stock (Issue common stock)

Credit 21,000

March 5 Cash

9,000 Notes Payable (Obtain bank loan)

9,000

March 10 Equipment 25,000 Cash (Purchase construction equipment for cash)

25,000

March 15 Advertising Expense 1,100 Cash (Purchase advertising for current month)

1,100

March 22 Accounts Receivable 18,000 Service Revenue (Provide construction services on account)

18,000

March 27 Cash

13,000 Accounts Receivable (Receive cash on account)

13,000

March 28 Salaries Expense Cash (Pay salaries for current month)

6,000 6,000

Chapter 2 - The Accounting Cycle: During the Period

Exercise 2-12 (LO 2-4) Corrections 1.

2. 3.

4. 5.

External Transaction Owners invest $15,000 in the company and receive common stock.

Accounts Cash Common Stock

Debit 15,000

Receive cash of $4,000 for services provided in the current period.

Cash Service Revenue

4,000

Purchase office supplies on account, $300.

Supplies Accounts Payable

300

Pay $600 for next month’s rent.

Prepaid Rent Cash

600

Equipment Cash

2,200

Purchase office equipment with cash of $2,200.

Credit 15,000

4,000

300 600 2,200

Note: Accounts in blue are corrected items. Accounts in black need no correction.

Chapter 2 - The Accounting Cycle: During the Period

Exercise 2-13 (LO 2-4) Corrections 1.

2. 3.

External Transaction Pay cash dividends of $800 to stockholders.

Accounts Dividends Cash

Debit 800

Provide services on account for customers, $3,400

Accounts Receivable Service Revenue

3,400

Pay a $500 utilities bill for the current period.

Utilities Expense Cash

Receive cash of $400 from previously billed customers.

Cash 400 Accounts Receivable

Pay for supplies previously purchased on account, $1,200.

Accounts Payable Cash

Credit 800

3,400 500 500 400

1,200 1,200

Note: Accounts in blue are corrected items. Accounts in black need no correction.

Chapter 2 - The Accounting Cycle: During the Period

Exercise 2-14 (LO 2-5)

(1) (4) (6)

Cash 5,000 15,000 9,000 8,000 3,000 4,000 1,000 7,000 12,000

(2) (3) (5) (7)

Transaction (8) is not posted to the Cash T-account because a purchase on account does not involve cash.

Exercise 2-15 (LO 2-5)

(3) (6)

(2)

Cash 3,400 10,200 1,000 (4) 1,100 3,700 (5) 10,000

Accounts Receivable 4,200 (1) 8,400 10,200 (3)

Supplies 400 2,300 2,700

Accounts Payable 3,500 (5) 3,700 2,300 (2) 2,100

2,400

Deferred Revenue 300 1,100 (6) 1,400

(4)

Service Revenue 0 8,400 8,400

(1)

Advertising Expense 0 1,000 1,000

Chapter 2 - The Accounting Cycle: During the Period

Exercise 2-16 (LO 2-5) 1. Provide services to customers for cash, $20,000. 2. Provide services to customers on account, $5,000. 3. Receive cash from customers on account, $4,000. 4. Purchase supplies on account, $6,000. 5. Pay employees for current salaries, $14,000. 6. Pay cash on account, $7,000.

Exercise 2-17 (LO 2-6) Sooner Company Trial Balance April 30 Accounts Debit Cash $ 3,900 Accounts Receivable 6,100 Prepaid Rent 7,400 Land 60,000 Accounts Payable Deferred Revenue Common Stock Retained Earnings Service Revenue Supplies Expense 9,400 Salaries Expense 8,200 Totals $95,000

Credit

$ 4,300 2,300 40,000 23,000 25,400 $95,000

Chapter 2 - The Accounting Cycle: During the Period

Exercise 2-18 (LO 2-6) Cobras Incorporated Trial Balance March 31 Accounts Debit Cash $ 3,500 Accounts Receivable 4,200 Supplies 1,000 Prepaid Insurance 1,200 Buildings 55,000 Accounts Payable Salaries Payable Common Stock Retained Earnings Service Revenue Salaries Expense 6,400 Utilities Expense 3,700 Totals $75,000

Credit

$ 2,200 500 35,000 17,800 19,500 $75,000

Chapter 2 - The Accounting Cycle: During the Period

Exercise 2-19 (LO 2-4, 2-5, 2-6) Requirement 1 (1) January 1

Debit

Cash

42,000 Common Stock (Issue common stock)

Credit 42,000

(2) January 5 Land

24,000 Notes Payable (Purchase land with note payable)

24,000

(3) January 9 Equipment Cash (Purchase storage containers)

9,000 9,000

(4) January 12 No entry (5) January 18 Cash

13,000 Service Revenue (Receive cash for current month’s rent)

13,000

(6) January 23 Supplies 3,000 Accounts Payable (Purchase office supplies on account)

3,000

(7) January 31 Salaries Expense Cash (Pay salaries for the current month)

9,000 9,000

Chapter 2 - The Accounting Cycle: During the Period

Exercise 2-19 (continued) Requirement 2

(1)

Cash 0 42,000

Common Stock 0 42,000

(1)

9,000 (3) (5)

13,000 9,000 (7) 37,000

(2)

(3)

42,000

Land 0 24,000 24,000

Notes Payable

Equipment 0 9,000 9,000

Service Revenue 0 13,000 13,000

0 24,000 24,000

(2)

(5)

Accounts Payable (6)

(7)

Supplies 0 3,000 3,000

0 3,000 3,000

(6)

Salaries Expense 0 9,000 9,000

Chapter 2 - The Accounting Cycle: During the Period

Exercise 2-19 (concluded) Requirement 3 Green Wave Company Trial Balance Accounts Cash Supplies Land Equipment Accounts Payable Notes Payable Common Stock Service Revenue Salaries Expense Totals

Debit $37,000 3,000 24,000 9,000

Credit

$ 3,000 24,000 42,000 13,000 9,000 $82,000

$82,000

Chapter 2 - The Accounting Cycle: During the Period

Exercise 2-20 (LO 2-4, 2-5, 2-6) Requirement 1 (1) September 3

Debit

Accounts Receivable Service Revenue (Provide painting on account) (2) September 8

20,000

Equipment Cash (Purchase painting equipment) (3) September 12

21,000

Credit 20,000

21,000

Supplies 3,500 Accounts Payable (Purchase office supplies on account) (4) September 15 Salaries Expense Cash (Pay salaries for the current month) (5) September 19

3,500

4,200 4,200

Advertising Expense 1,000 Cash (Pay advertising for the current month) (6) September 22 Rent Expense Cash (Pay rent for the current month) (7) September 26

5,400

Cash

15,000

1,000

5,400

Accounts Receivable (Receive cash on account) (8) September 30 Cash

15,000

6,000 Deferred Revenue (Receive cash in advance for painting)

6,000

Chapter 2 - The Accounting Cycle: During the Period

Exercise 2-20 (continued) Requirement 2 Accounts Receivable Beg. 1,700 (1) 20,000 15,000 (7) 6,700 Beg. (2)

Equipment 7,400 21,000

Beg.

(7) (8) 28,400 Beg. (3)

Supplies 500 3,500 4,000

Beg. (4)

Salaries Expense 0 4,200 4,200

Beg. (6)

Rent Expense 0 5,400 5,400

20,000 Cash 46,100 21,000 4,200 1,000 5,400 15,000 6,000 35,500

(2) (4) (5) (6)

Accounts Payable 1,200 Beg. 3,500 (3) 4,700 Advertising Expense Beg. 0 (5) 1,000 1,000

Common Stock 25,000 Beg. 25,000

Service Revenue 0 Beg. 20,000 (1)

Deferred Revenue 0 Beg. 6,000 (8) 6,000 Retained Earnings 29,500

Beg.

29,500

Chapter 2 - The Accounting Cycle: During the Period

Exercise 2-20 (concluded) Requirement 3 Boilermaker House Painting Company Trial Balance Accounts Cash Accounts Receivable Supplies Equipment Accounts Payable Deferred Revenue Common Stock Retained Earnings Service Revenue Salaries Expense Advertising Expense Rent Expense Totals

Debit $35,500 6,700 4,000 28,400

Credit

$ 4,700 6,000 25,000 29,500 20,000 4,200 1,000 5,400 $85,200

$85,200

Chapter 2 - The Accounting Cycle: During the Period

PROBLEMS: SET A Problem 2-1A (LO 2-2) Transaction

Assets

Liabilities

Stockholders’ Equity

1. Issue common stock in exchange for cash.

Increase

No effect

Increase

2. Purchase business supplies on account.

Increase =

Increase

No effect

3. Pay for legal services for the current month.

Decrease =

No effect

Decrease

4. Provide services to customers on account.

Increase =

No effect

Increase

5. Pay employee salaries for the current month.

Decrease =

No effect

Decrease

6. Provide services to customers for cash.

Increase =

No effect

Increase

7. Pay for advertising for the current month.

Decrease =

No effect

Decrease

8. Repay loan from the bank.

Decrease =

Decrease

No effect

9. Pay dividends to stockholders.

Decrease =

No effect

Decrease

10. Receive cash from customers in (4) above.

No effect* =

No effect

11. Pay for supplies Decrease = purchased in (2) above.

Decrease

No effect

*One asset (cash) increases and another asset (accounts receivable) decreases

Chapter 2 - The Accounting Cycle: During the Period

Problem 2-2A (LO 2-2)

Stockholders’ + Equity

Transaction

Assets

Liabilities

1. Provide services to customers on account, $1,600.

+$1,600

2. Pay $400 for current month’s rent.

−$400

3. Hire a new employee, who will be paid $500 at the end of each month.

4. Pay $100 for advertising aired in the current period.

−$100

5. Purchase office supplies for cash.

+$400 −$400

6. Receive cash of $1,000 from customers in (1) above.

+$1,000 −$1,000

7. Obtain a loan from the bank for $7,000.

+$7,000

8. Receive a bill of $200 for utility costs of the current period.

+$200

−$200

9. Issue common stock for $10,000 cash.

+$10,000 =

+$10,000

10. Pay $500 to employee in (3) above.

−$500

$17,600

$7,200

$10,400

Totals

Chapter 2 - The Accounting Cycle: During the Period

Problem 2-3A (LO 2-3) Type of Account

Normal Balance (Debit or Credit)

1. Salaries Payable

Liability

Credit

2. Common Stock

Stockholders’ equity

Credit

3. Prepaid Rent

Asset

Debit

4. Buildings

Asset

Debit

5. Utilities Expense

Expense

Debit

6. Equipment

Asset

Debit

7. Rent Expense

Expense

Debit

8. Notes Payable

Liability

Credit

9. Salaries Expense

Expense

Debit

10. Insurance Expense

Expense

Debit

11. Cash

Asset

Debit

12. Service Revenue

Revenue

Credit

Accounts

Chapter 2 - The Accounting Cycle: During the Period

Problem 2-4A (LO 2-4) Transactions for Jake’s Lawn Maintenance Company July 3

Debit

Accounts Receivable Service Revenue (Provide services on account) July 6

500

Repairs and Maintenance Expense Accounts Payable (Receive maintenance on account) July 9

450

Cash

500

450

Accounts Receivable (Receive cash on account) July 14

500

Notes Receivable 600 Cash (Loan cash by accepting note receivable) July 18 Advertising Expense 110 Cash (Pay advertising for the current month) July 20 Accounts Payable Cash (Pay cash on account) July 27

Credit

600

110

450 450

No entry for Jake. July 30 No entry for Jake. July 31 Cash

600 Notes Receivable (Receive cash on note receivable)

600

Chapter 2 - The Accounting Cycle: During the Period

Problem 2-5A (LO 2-2, 2-4) Transactions for Luke’s Repair Shop July 3 Repairs and Maintenance Expense Accounts Payable (Receive services on account) July 6 Accounts Receivable Service Revenue (Provide services on account) July 9 Accounts Payable Cash (Pay cash on account) July 14 Cash Notes Payable (Borrow by signing note payable) July 18 No entry for Luke. July 20 Cash Accounts Receivable (Receive cash on account) July 27 Cash Service Revenue (Provide services for cash) July 30 Salaries Expense Cash (Pay salaries to employees) July 31 Notes Payable Cash (Pay note payable)

Debit 500

Credit 500

450 450 500 500 600 600

450 450 800 800 300 300 600 600

Chapter 2 - The Accounting Cycle: During the Period

Problem 2-5A (concluded) Jake’s Lawn Maintenance Company

Luke’s Repair Shop

Stockholders’ Stockholders’ Assets = Liabilities + Equity Assets = Liabilities + Equity July 3 +$500 = =

+$500

= +$500

+$450

−$450

+$450 =

−$500

+$450

+$500 = −$500

−$500 = −$500

+$600 = −$600

+$600 = +$600

−$110 =

−$110

−$450 =

−$450

+$450 = −$450

+$800 =

+$800

−$300 =

−$300

+$600 = −$600

−$600 = −$600

Chapter 2 - The Accounting Cycle: During the Period

Problem 2-6A (LO 2-6) Bruins Company Trial Balance November 30 Accounts Cash Accounts Receivable Supplies Prepaid Rent Equipment Accounts Payable Salaries Payable Interest Payable Deferred Revenue Notes Payable Common Stock Retained Earnings Dividends Service Revenue Salaries Expense Rent Expense Interest Expense Supplies Expense Utilities Expense Totals

Debit $ 40,000 50,000 1,100 3,000 60,800

Credit

$ 17,000 5,000 3,000 9,000 30,000 50,000 35,000 1,100 65,000 30,000 12,000 3,000 7,000 6,000 $214,000

$214,000

Chapter 2 - The Accounting Cycle: During the Period

Problem 2-7A (LO 2-4, 2-5, 2-6)

Requirement 1 Entries are numbered for posting. (1)

(2)

(3)

(4)

(5)

(6)

(7)

(8)

(9)

March 1 Debit Cash 3,000 Common Stock (Issue common stock) March 3 Equipment 2,700 Notes Payable (Purchase sewing equipment with note payable) March 5 Rent Expense 600 Cash (Pay rent for current month) March 7 No entry March 12 Supplies 130 Accounts Payable (Purchase sewing supplies on account) March 15 Cash 800 Service Revenue (Provide services for cash) March 19 Cash 700 Deferred Revenue (Receive cash in advance from customer) March 25 Deferred Revenue 700 Service Revenue (Provide services to customer) March 30 Utilities Expense 95 Cash (Pay utilities for current month) March 31 Dividends 150 Cash (Pay dividends)

Credit 3,000

2,700

600

130

800

700

150

Chapter 2 - The Accounting Cycle: During the Period

Problem 2-7A (continued) Requirements 2 and 3

Cash (1) 3,000 600 (3) (5) 800 95 (8) (6) 700 150 (9) 3,655

Supplies (4) 130 130

(2) 2,700 2,700

Accounts Payable 130 (4) 130

Notes Payable

Common Stock

2,700 (2) 2,700

3,000 (1) 3,000

Service Revenue 800 (5) 700 (7) 1,500

Equipment

Rent Expense

Deferred Revenue (7) 700

700 (6) 0

Dividends (9) 150 150 Utilities Expense

(3) 600

(8) 95

600

Chapter 2 - The Accounting Cycle: During the Period

Problem 2-7A (concluded) Requirement 4 Ute Sewing Shop Trial Balance March 31 Accounts Cash Supplies Equipment Accounts Payable Deferred Revenue Notes Payable Common Stock Dividends Service Revenue Rent Expense Utilities Expense Totals

Debit $3,655 130 2,700

Credit

$ 130 0 2,700 3,000 150 1,500 600 95 $7,330

$7,330

Chapter 2 - The Accounting Cycle: During the Period

Problem 2-8A (LO 2-4, 2-5, 2-6)

Requirement 1 Entries are numbered for posting. (1) Sep. 1 Debit Cash 4,700 Service Revenue (Provide services for cash) (2) Sep. 2 Land 6,400 Notes Payable (Purchase land with note payable) (3) Sep. 4 Advertising Expense 500 Accounts Payable (Receive invoice for current advertising) (4) Sep. 8 Accounts Receivable 6,000 Service Revenue (Provide services on account) (5) Sep. 10 Supplies 1,100 Accounts Payable (Purchase supplies on account) (6) Sep. 13 Notes Payable 4,000 Cash (Pay note payable) (7) Sep. 18 Cash 5,000 Accounts Receivable (Receive cash on account) (8) Sep. 20 Rent Expense 900 Cash (Pay rent for current month) (9) Sep. 30 Utilities Expense 2,000 Cash

Credit 4,700

6,400

500

6,000

1,100

4,000

5,000

900

2,000

(Pay utilities for current month)

Chapter 2 - The Accounting Cycle: During the Period

Problem 2-8A (continued) (10) Sep. 30 Salaries Expense Cash (Pay salaries for current month) (11) Sep. 30 Dividends Cash (Pay dividends)

4,000 4,000 1,100 1,100

Chapter 2 - The Accounting Cycle: During the Period

Problem 2-8A (continued) Requirements 2 and 3

Cash Bal. 6,500 4,000 (6) (1) 4,700 900 (8) (7) 5,000 2,000 (9) 4,000 (10) 1,100 (11) 4,200 Land Bal. 11,200 (2) 6,400

Accounts Receivable Bal. 2,500 5,000 (7) (4) 6,000

3,500

Supplies Bal. 7,600 (5) 1,100

8,700 Notes Payable (6) 4,000 3,000 Bal. 6,400 (2)

17,600

Accounts Payable 7,500 Bal. 500 (3) 1,100 (5) 9,100

Common Stock

Retained Earnings

Dividends

9,000 Bal. 9,000 Service Revenue 4,700 (1) 6,000 (4) 10,700

8,300 Bal. 8,300 Salaries Expense

5,400

(11) 1,100 1,100 Rent Expense

(10) 4,000

(8) 900

4,000

900

Advertising Expense

Utilities Expense

(3) 500 500

(9) 2,000 2,000

Chapter 2 - The Accounting Cycle: During the Period

Problem 2-8A (continued) Requirement 4

Pirates Incorporated Trial Balance September 30 Accounts Cash Accounts Receivable Supplies Land Accounts Payable Notes Payable Common Stock Retained Earnings Dividends Service Revenue Salaries Expense Rent Expense Advertising Expense Utilities Expense Totals

Debit $ 4,200 3,500 8,700 17,600

Credit

$ 9,100 5,400 9,000 8,300 1,100 10,700 4,000 900 500 2,000 $42,500

$42,500

Chapter 2 - The Accounting Cycle: During the Period

Problem 2-9A (LO 2-4, 2-5, 2-6)

Requirement 1 Entries are numbered for posting. (1) December 1 Debit Rent Expense 900 Cash (Pay rent for December) (2) December 5 Cash 2,800 Service Revenue (Provide services for cash) (3) December 8 Cash 10,000 Notes Payable (Borrow by signing note payable) (4) December 12 Cash 3,500 Accounts Receivable (Receive cash from customers on account) (5) December 13 Cash 20,000 Common Stock (Issue shares of common stock) (6) December 15 Salaries Expense 1,200 Cash (Pay salaries for December) (7) December 17 Advertising Expense 1,000 Cash (Purchase advertising for December) (8) December 22 Accounts Receivable 3,200 Service Revenue (Provide services on account) December 23 No journal entry required

Credit 900

2,800

10,000

3,500

20,000

1,200

1,000

3,200