Chapter 2

Basic Financial Statements

Solutions:

Exercise 2.2Preparing a Balance Sheet

Majestic LimoManager’s Report8 P.m. Thursday

Assets Owner’s EquityCash $ 69,000 Liabilities:Accounts Receivable 78,000 Notes Payable $ 288,000Supplies 14,000 Accounts Payable 26,000Land 70,000 Total Liabilities $ 314,000Building 80,000 Owner’s equity:Automobiles 165,000 J.Snow, capital 162,000Total $ 476,000 Total $ 476,000

Exercise 2.3Preparing a Balance Sheet

PEREZ COMPANYBalance Sheet

December 31, 2001Assets Liability & Owner’s Equity

Cash $ 36,300 Liabilities:Accounts Receivable 56,700 Notes Payable $ 213,000Land 90,000 Accounts Payable 43,800Building 210,000 Total Liabilities $ 257,400Automobiles 10,000 Owner’s equity:

Eduardo Perez, capital 145,800Total $ 403,200 Total $ 403,200

Exercise 2.5Using the Accounting Equation

Assets = Liabilities + Owner’s Equity a. $ 558,000 $ 342,000 ?b. ? $ 565,000 $ 375,000c. $ 307,500 ? $ 142,500

a. $ 216,000:

Assets $ 558,000 – liabilities $ 342,000 = owner’s equity $ 216,000

b. $ 937,500:

Liabilities $ 565,500 + owner’s equity $ 375,000 = assets $ 937,500

c. $ 165,000:

Assets $ 307,500 – owner’s equity $ 142,500 = liabilities $ 165,000

Exercise 2.6The Accounting Equation

A number of business transactions carried out by Green River Farms are as follows:

a. Borrowed money from a Bank.b. Sold land for cash at a price equal to its cost.c. Paid a liability.d. Returned for credit some of the office equipment previously purchased on credit but not yet paid for.e. Sold land for cast at a price in excess of cost.f. Purchased a computer on credit.g. The owner invested cash in the business.h. Purchased office equipment for cash.i. Collected an account receivable.

Transactions Assets = Liabilities + Owner’s equitya I I NEb NE NE NEc D D NEd D D NEe I NE If I I Neg I NE Ih NE NE NEI NE NE Ne

Exercise 2.7Effects of Business Transactions

For each of the following categories, state concisely a transaction that will have the required effect on the elements of the accounting equation.

a. Increase an asset and increase in liability.b. Decrease an asset and decrease a liability.c. Increase one asset and decrease another asset.d. Increase an asset and increase owner’s equity.e. Increase one asset, decrease another asset, and increase a liability.

Solutions:

a. Purchase of office equipment on cash.b. Payment against liability.c. Sold land on cash.d. Investment of cash in business.e. Bought land, paid some cash in advance and the rest amount is A/P,N/P.

Exercise 2.12Income Statement

Walter, Inc., had the following transactions during the month of march 2001. Prepare an income statement based on this information, being careful to include only those items that should appear in that financial Statement.

1. Cash received from bank loans was $ 10,000.2. Revenues earned and received in cash were $ 8,500.3. The owner, Bev Walters, withdrew $ 4,000 in cash.4. Expenses incurred and paid were $ 5,000.

Walters, Inc.Income Statement

For the Month Ended March 31,2001Revenues $ 8,500Expenses 5,000Net income $ 3,500

Exercise 2.13Income Statement

Fowler CompanyIncome Statement

For the month ended August 31, 2001Services provided to customers $ 10,000Expenses required to provide servers to customers 7,500Net income $ 2,500

Problems

Problem 2.1Preparing and Evaluating a Balance Sheet

Mystery Mountain LodgeBalance Sheet

December 31, 2001Assets Liabilities + Owner’s Equity

Cash $ 21,400 liabilities:Accounts receivable 10,609 Notes Payable $ 620,000Land 425,000 Accounts Payable 54,800Buildings 450,000 Salaries Payable 33,500Furnishings 58,700 Interest Payable 12,000Equipment 29,200 Total liabilities $ 720,300Snowmobiles 15,400 Owner’s equity:

* Stanley Gardner, capital 290,000Total $ 1,010,300 Total $ 1,010,900

* Stanley Gardner, Capital =?

Total Assets= $ 1,010,300 – total liabilities $ 720,300 = Capital = $ 290,000

B. The balance sheet indicates that Mystery Mountain Lodge is in a very weak financial position because liquid assets (cash and accounts receivable) are only $ 32,000, and the company has liabilities in near future (A/P, S/P, I/P) are $ 100,300. So based on this balance sheet the company’s financial position is very weak.

Problem 2.2Interpreting the Effects of Business Transactions

Assets = Liabilities + Owner’s Equity Cash + A/R + Land + Building + Equipment = A/P + P.YoungBlood,capital

Balances $ 26,000 $ 39,000 $ 45,000 $ 110,000 $ 36,000 $ 42,000 $ 214,000(a) - 3,200 -3,200Balances $ 22,000 $ 39,000 $ 45,000 $ 110,000 $ 39,200 $ 42,000 $ 214,000(b) -900 -900Balances $ 23,700 $ 38,100 $ 45,000 $ 110,000 $ 39,200 $ 42,000 $ 214,000(c) -3,500 - 13,500 -10,000Balances $ 20,200 $ 38,100 $ 45,000 $ 110,000 $ 52,700 $ 52,000 $ 214,000(d) - 14,500 - 14,500Balances $ 5,700 $ 38,100 $ 45,000 $ 110,000 $ 52,700 $ 37,500 $ 214,000(e) + 15,000 + 15,000Balances $ 20,700 $ 38,100 $ 45,000 $ 110,000 $ 52,700 $ 37,500 $ 229,000(f) + 2,100 + 2,100Balances $ 20,700 $ 38,100 $ 45,000 $ 110,000 $ 54,800 $ 39,600 $ 229,000

a. Purchased equipment for cash at a cost of $ 3,200.b. Received $ 900 cash from collection of accounts receivable.c. Purchased equipment at a cost of $ 13,500, paid $ 3,500 cash as down payment and incurred a liability for the remaining $ 10,000.d. Paid $ 14,500 of A/P.e. Youngblood invested $ 15,000 in business.f. Purchased equipment on account for $ 2,100.

Problem 2.3Recording the effects of Transactions

1. C.Sagan, the owner, deposited $ 25,000 of personal funds into the business’s bank account.2. Purchased land and a small office building for a total price of $ 90,000, of which $ 35,000 was the value of the land and $ 55,000 was the value of the

building. Paid @22,500 in cash and signed a note payable for the remaining $ 67,500.3. Bought several computer systems on credit for $ 8,500 (30-day open account).4. Obtained a loan from capital bank in the amount of @ 10,000. Signed a note payable.5. Paid the @ 28,250 account payable owed as of December 31.

NOVA COMMUNICATIONS Transactions Assets = Liabilities + Owner’s Equity December 31 balances Cash + Land + Building + Office Equipment = N/P + A/P + C.sagan,capital Balances $ 37,000 $ 95,000 $ 125,000 $ 51,250 $ 80,000 $ 28,250 $ 200,000

1. 25,000 + 25,000Balances $ 62,000 $ 95,000 $ 125,000 $ 51,250 $ 80,000 $ 28,250 $ 225,000

2. - 22,500 + 35,000 + 55,000 + 67,500Balances $ 39,500 $ 130,000 $ 180,000 $ 51,250 $ 147,500 $ 28,250 $ 225,000

3. + 8,500 + 8,500Balances $ 39,500 $ 130,000 $ 180,000 $ 59,750 $ 147,500 $ 36,750 $ 225,000

4. + 10,000 + 10,000Balances $ 49,500 $ 130,000 $ 180,000 $ 59,750 $ 157,500 $ 36,750 $ 225,000

5. - 28,250 - 28,250Balances $ 21,250 $ 130,000 $ 180,000 $ 59,750 $ 157,500 $ 8,500 $ 225,000

Problem 2.4Recording the effects of Transactions

1. Bought office equipment at a cost of $ 2,700. Paid cash.2. Collected $ 4,000 of A/R.3. Paid $ 3,200 of A/P.4. Borrowed $ 10,000 from a bank. Signed a N/P for that amount.5. Purchased two trucks for $ 30,500. Paid $ 15,000 cash and signed a N/P for the balance.6. Bill Foreman, the owner, invested $ 20,000 cash in the business.

Triad-Truck Rental Transactions Assets = Liabilities + Owner’s Equity December 31 balances Cash + A/R + Trucks + Office Equipment = N/P + A/P + Bill Foreman,capital Balances $ 9,500 $ 8,900 $ 58,000 $ 3,800 $ 20,000 $ 5,200 $ 55,000

1. - 2,700 + 2,700Balances $ 6,800 $ 8,900 $ 58,000 $ 6,500 $ 20,000 $ 5,200 $ 55,000

2. + 4,000 - 4,000Balances $ 10,800 $ 4,900 $ 58,000 $ 6,500 $ 20,000 $ 5,200 $ 55,000

3. - 3,200 - 3,200Balances $ 7,600 $ 4,900 $ 58,000 $ 6,500 $ 20,000 $ 2,000 $ 55,000

4. + 10,000 + 10,000Balances $ 17,600 $ 4,900 $ 58,000 $ 6,500 $ 30,000 $ 2,000 $ 55,000

5. - 15,000 + 30,500Balances $ 2,600 $ 4,900 $ 88,000 $ 6,500 $ 30,000 $ 2,000 $ 55,000

6. + 20,000 + 20,000Balances $ 22,600 $ 4,900 $ 88,000 $ 6,500 $ 30,000 $ 2,000 $ 75,000

Problem 2.5Preparing a Balance Sheet

HERE COME THE CLOWNS!Balance SheetJune 30, 2001

Assets Liability & Owner’s EquityCash $ 32,520 Liabilities:Notes Receivable 9,500 Notes Payable $ 180,000Accounts Receivable 7,450 Accounts Payable 26,100Animals 189,060 Salaries Payable 9,750Cages 24,630 Total Liabilities $ 257,400Costumes 31,500 Owner’s equity:Props and equipment 89,580 Red Costello, capital 145,800Tents 63,000Trucks 105,840Total $ 553,080 Total $ 553,080

After loss of tent worth of $ 14,300. Less $ 14,300 from Tent in assets and from capital in owner’s equity.

HERE COME THE CLOWNS!Balance SheetJune 30, 2001

Assets Liability & Owner’s EquityCash $ 32,520 Liabilities:Notes Receivable 9,500 Notes Payable $ 180,000Accounts Receivable 7,450 Accounts Payable 26,100Animals 189,060 Salaries Payable 9,750Cages 24,630 Total Liabilities $ 257,400Costumes 31,500 Owner’s equity:Props and equipment 89,580 Red Costello, capital 131,500Tents 48,700Trucks 105,840Total $ 538,780 Total $ 538,780

Problem 2.6Preparing a Balance Sheet

RED RIVER FARMSBalance Sheet

September 30, 2001Assets Liability & Owner’s Equity

Cash $ 16,710 Liabilities:Accounts Receivable 22,365 Notes Payable $ 530,000Land 550,000 Accounts Payable 77,095Barns and Sheds 78,300 Property Taxes Payable 9,135Citrus Trees 76,650 Salaries Payable 1,820Livestock 120,780 Total Liabilities $ 618,050Irrigation System 20,125 Owner’s equity:Farm machinery 42,970 Hollis Roberts, capital 343,420Fences and gates 33,570Total $ 961,470 Total $ 961,470After loss of barn and shed worth of $ 23,800. Less $ 23,800 from Barns and Sheds in assets and from owner’s equity.

RED RIVER FARMSBalance Sheet

September 30, 2001Assets Liability & Owner’s Equity

Cash $ 16,710 Liabilities:Accounts Receivable 22,365 Notes Payable $ 530,000Land 550,000 Accounts Payable 77,095Barns and Sheds 54,500 Property Taxes Payable 9,135Citrus Trees 76,650 Salaries Payable 1,820Livestock 120,780 Total Liabilities $ 618,050Irrigation System 20,125 Owner’s equity:Farm machinery 42,970 Hollis Roberts, capital 319,620Fences and gates 33,570Total $ 937,670 Total $ 937,670

Problem 2.7Preparing a Balance Sheet

THE JULIAN BAKERYBalance SheetAugust 1, 2001

Assets Liability & Owner’s EquityCash $ 6,940 Liabilities:Accounts Receivable 11,260 Notes Payable $ 74,900Suppliers 7,000 Accounts Payable 16,200Land 67,000 Salaries Payable 8,900Building 84,000 Total Liabilities $ 100,000Equipment and fixtures 44,500 Owner’s equity:

Julian Lee, capital 120,700Total $ 220,700 Total $ 220,700

Aug 2. Lee invested an addition $ 25,000 in the business. The accounts payable were paid in full. (No payment was made on the notes payable or income taxes payable).

Aug 3. Equipment was purchased at a cost of $ 7,200 to be paid within 10 days. Supplies were purchased for $ 1,250 cash from a restaurant supply center that was going out of business. These supplies would have cost $ 1,890 if purchased through normal channels.

THE JULIAN BAKERYBalance SheetAugust 3, 2001

Assets Liability & Owner’s EquityCash $ 14,490 Liabilities:Accounts Receivable 11,260 Notes Payable $ 74,900Suppliers 8,250 Accounts Payable 7,200Land 67,000 Salaries Payable 8,900Building 84,000 Total Liabilities $ 91,000Equipment and fixtures 51,700 Owner’s equity:

Julian Lee, capital 145,700Total $ 236,700 Total $ 236,700

On Aug 1. The liquid assets cash and A/R are $ 18,200 and liabilities A/P, S/P are $ 25,100, so from this balance sheet it’s financial position is weak.

Aug 3, the liquid assets cash and A/R are $ 25,750 while liabilities are A/P, S/P are equal to $ 10100 so it’s financial position is stronger on aug 3 than aug 1.

Problem 2.8Preparing Financial Statements:Effects of Business Transactions

THE ORGINAL MALT SHOP

Balance SheetSeptember 30, 2001

Assets Liability & Owner’s EquityCash $ 7,400 Liabilities:Accounts Receivable 1,250 *Notes Payable $ 70,000Supplies 3,440 Accounts Payable 8,500Land 45,500 Total Liabilities $ 78,500Building 55,000 Owner’s equity:Equipment and fixtures 20,000 Julian Lee, capital 54,090Total $ 132,590 Total $ 132,590Oct 3. Martin invested an addition $ 30,000 in the business. The accounts payable were paid in full. (No payment was made on the notes payable or income taxes payable).

Oct 6. Equipment was purchased at a cost of $ 18,000 to be paid within 30 days. Supplies were purchased for $ 1,000 cash from a restaurant supply center that was going out of business. These supplies would have cost $ 1,875 if purchased through normal channels.

Oct 1-6. Revenues of $ 5,500 were earned and paid in cash. Expenses required to earn the revenues of $ 4,000 were incurred and paid in cash.

THE ORGINAL MALT SHOPBalance Sheet

October 6, 2001Assets Liability & Owner’s Equity

Cash $ 27,900 Liabilities:Accounts Receivable 1,250 *Notes Payable $ 70,000Supplies 4,440 Accounts Payable 8,500Land 45,500 Total Liabilities $ 78,500Building 55,000 Owner’s equity:Equipment and fixtures 38,000 Julian Lee, capital 84,090Total $ 172,090 Total $ 172,090

Oct 1-6. Revenues of $ 5,500 were earned and paid in cash. Expenses required to earn the revenues of $ 4,000 were incurred and paid in cash.

THE ORGINAL MALT SHOPIncome StatementOctober 1-6, 2001

Revenues $ 5,500

Expenses (4,000)Net income $ 1,500

C. The original Mark has a liquid assets (cash and A/R) are $ 8,650 and liabilities in near future are (A/R) $ 8,500, so it’s in a stronger financial position though the difference is very little but still it’s in a stronger financial position by looking at the balance sheet of September 30.while the liquid assets (cash and A/R) on October 6 are $ 29,150 because of addition investment by the owner and liabilities in the near future are $ 8,500, so the company’s financial position is more stronger than that on 30th September because the there is more excess amount of cash with the company on October 6 than September 30th.