Demonstration Problem 2-1 ─ Solution ─ Accounting Equation
Assets |
= |
Liab. |
+ |
Equity |
|||||
20X1 |
Cash |
+ |
Acct. Rec. |
= |
Liab. |
+ |
Cont. Capital |
+ |
Ret. Ear. |
Beginning Balances |
$ -0- |
$ -0- |
$ -0- |
$ -0- |
$ -0- |
||||
1. Effect of Rev. Recog. |
5,000 |
5,000 |
|||||||
20X2 |
|||||||||
1. Effect of Cash Collect. |
5,000 |
(5,000) |
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───── |
──── |
──── |
───── |
───── |
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Ending Balances |
$5,000 |
+ |
$ -0- |
= |
$ -0- |
+ |
$ -0- |
+ |
$5,000 |
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Solution for Demonstration Problem 2-1
The Packard Consultants |
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Income Statements |
|||||
For the Periods Ended |
20X1 |
20X2 |
|||
Revenue |
$5,000 |
$-0- |
|||
Expense |
-0- |
-0- |
|||
Net Income |
$5,000 |
$-0- |
|||
Statements of Retained Earnings |
|||||
Beginning Retained Earnings |
$ -0- |
$5,000 |
|||
Net Income |
$5,000 |
-0- |
|||
Distributions |
-0- |
-0- |
|||
Ending Retained Earnings |
$5,000 |
$5,000 |
|||
Balance Sheets |
|||||
Assets |
|||||
Cash |
$ -0- |
$5,000 |
|||
Accounts Receivable |
5,000 |
-0- |
|||
Total Assets |
$5,000 |
$5,000 |
|||
Equity |
|||||
Retained Earnings |
$5,000 |
$5,000 |
|||
Statements of Cash Flows |
|||||
Cash Flows from Operating Activities |
-0- |
$5,000 |
|||
Cash Flows from Investing Activities |
-0- |
-0- |
|||
Cash Flows from Financing Activities |
-0- |
-0- |
|||
Net Change in Cash |
-0- |
$5,000 |
|||
Beginning Cash Balance |
-0- |
-0- |
|||
Ending Cash Balance |
-0- |
$5,000 |
|||
Demonstration Problem 2-2 — Solution — Accounting Equation
Assets |
= |
Liab. |
+ |
Equity |
|||||||
20X1 |
Cash |
+ |
Inv. Sec. |
= |
Bank Loan |
+ |
Int. Pay. |
+ |
Cont. Capital |
+ |
Ret. Ear. |
Beginning Balances |
$ -0- |
$ -0- |
$ -0- |
$ -0- |
$ -0- |
$ -0- |
|||||
1. Effect of Borrowing |
10,000 |
10,000 |
|||||||||
2. Purch. of Securities |
(10,000) |
10,000 |
|||||||||
3. Earned Revenue |
600 |
600 |
|||||||||
4. Accrued Int. Exp. |
400 |
(400) |
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───── |
──── |
──── |
──── |
───── |
───── |
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End. / Beg. Balances |
$ 600 |
+ |
$10,000 |
= |
$10,000 |
+ |
$ 400 |
+ |
$ -0- |
+ |
$ 200 |
20X2 |
|||||||||||
1. Earned Revenue |
1,350 |
1,350 |
|||||||||
2. Sale of Securities |
10,000 |
(10,000) |
|||||||||
3. Accrued Int. Exp. |
800 |
(800) |
|||||||||
4. Pay Interest |
(1,200) |
(1,200) |
|||||||||
5. Repay Loan |
(10,000) |
(10,000) |
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───── |
──── |
──── |
──── |
───── |
───── |
||||||
Ending Balances |
$ 750 |
+ |
$ -0- |
= |
$ -0- |
+ |
$ -0- |
+ |
$ -0- |
+ |
$ 750 |
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Demonstration Problem 2-2 — Solution ─ Financial Statements
The Canton Company |
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Income Statements |
|||||
For the Periods Ended |
20X1 |
20X2 |
|||
Revenue |
$600 |
$1,350 |
|||
Interest Expense |
(400) |
(800) |
|||
Net Income |
$200 |
$550 |
|||
Statements of Retained Earnings |
|||||
Beginning Retained Earnings |
-0- |
$200 |
|||
Net Income |
$200 |
550 |
|||
Distributions |
-0- |
-0- |
|||
Ending Retained Earnings |
$200 |
$750 |
|||
Balance Sheets |
|||||
Assets |
|||||
Cash |
$ 600 |
$750 |
|||
Securities |
10,000 |
-0- |
|||
Total Assets |
$10,600 |
$750 |
|||
Liabilities |
|||||
Interest Payable |
$ 400 |
-0- |
|||
Note Payable |
$10,000 |
-0- |
|||
Equity |
|||||
Retained Earnings |
200 |
$750 |
|||
Total Liabilities and Equity |
$10,600 |
$750 |
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Statements of Cash Flows |
|||||
Cash Flows from Operating Activities |
|||||
Inflow for Securities Income |
$ 600 |
$ 1,350 |
|||
Outflow for Interest Expense |
-0- |
(1,200) |
|||
Net Inflow from Operating Act. |
$ 600 |
$ 150 |
|||
Cash Flow from Investing Activities |
|||||
Inflow from Sale of Securities |
-0- |
$10,000 |
|||
Outflow for Purchase of Securities |
(10,000) |
-0- |
|||
Net Inflow (Outflow) from Investing Act. |
(10,000) |
$10,000 |
|||
Cash Flows from Financing Activities |
|||||
Inflow from Issue of Note |
10,000 |
-0- |
|||
Outflow for Repayment of Note |
-0- |
$(10,000) |
|||
Net Inflow (Outflow) from Financing Act. |
10,000 |
$(10,000) |
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Net Change in Cash |
600 |
$ 150 |
|||
Beginning Cash Balance |
-0- |
600 |
|||
Ending Cash Balance |
$ 600 |
$ 750 |
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Demonstration Problem 2-3 ─ Solution
The amount of expense incurred by Johnson is equal to the amount of revenue earned by McCoy. Accordingly, the amount of accrued interest expense and the amount of accrued interest revenue are as follows:
Date |
Principal |
x |
Rate |
x |
Time |
= |
Accrued Interest |
April 1, 20X1 |
$1,000 |
x |
.12 |
x |
(9 ÷ 12) |
= |
$90 |
June 1, 20X1 |
$1,000 |
x |
.12 |
x |
(7 ÷ 12) |
= |
$70 |
October 1, 20X1 |
$1,000 |
x |
.12 |
x |
(3 ÷ 12) |
= |
$30 |
Demonstration Problem 2-4— Solution ─ Accounting Equation 20X7
ASSETS |
= |
LIABILITIES |
+ |
EQUITY |
|||||||||
20X7 |
Accts. |
Int. |
Sal. |
Int. |
Note |
Cont. |
Ret. |
||||||
Accounting Events |
Cash |
Rec. |
Rec. |
CD |
Land |
= |
Pay. |
Pay. |
Pay. |
+ |
Cap. |
Ear. |
|
Beginning Balances |
$ -0- |
$ -0- |
$ -0- |
$ -0- |
$ -0- |
$ -0- |
$ -0- |
$ -0- |
$ -0- |
$ -0- |
|||
(1) Capital Acquisition |
2,000 |
2,000 |
|||||||||||
(2) Invested in C.D. |
(1,000) |
1,000 |
|||||||||||
(3) Recognized Consulting Rev. |
1,500 |
1,500 |
|||||||||||
(4) Collected Cash from Rec. |
1,200 |
(1,200) |
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(5) Recognized Salary Expense |
900 |
(900) |
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(6) Paid Liability for Salaries |
(700) |
(700) |
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(7) Distributed Cash to Owners |
(100) |
(100) |
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(8) Recognized Int. Rev. on C.D. |
20 |
20 |
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──── |
──── |
──── |
──── |
──── |
──── |
──── |
──── |
──── |
──── |
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Ending Balances |
$1,400 |
$ 300 |
$ 20 |
$1,000 |
$ -0- |
$ 200 |
$ -0- |
$ -0- |
$2,000 |
$ 520 |
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Demonstration Problem 2-4 — Solution ─ Accounting Equation 20X8
ASSETS |
= |
LIABILITIES |
+ |
EQUITY |
|||||||||
20X8 |
Accts. |
Int. |
Sal. |
Int. |
Note |
Cont. |
Ret. |
||||||
Accounting Events |
Cash |
Rec. |
Rec. |
CD |
Land |
= |
Pay. |
Pay. |
Pay. |
+ |
Cap. |
Ear. |
|
Beginning Balances |
$1,400 |
$ 300 |
$ 20 |
$1,000 |
$ -0- |
$ 200 |
$ -0- |
$ -0- |
$2,000 |
$ 520 |
|||
(1) Capital Acquisition |
3,000 |
3,000 |
|||||||||||
(2) Recognized Consulting Rev. |
2,700 |
2,700 |
|||||||||||
(3) Collected Cash from Rec. |
2,800 |
(2,800) |
|||||||||||
(4) Recognized Salary Expense |
1,500 |
(1,500) |
|||||||||||
(5) Paid Liability for Salaries |
(1,350) |
(1,350) |
|||||||||||
(6) Distributed Cash to Owners |
(300) |
(300) |
|||||||||||
(7) Borrowed Funds from Bank |
2,000 |
2,000 |
|||||||||||
(8a) Recognized Int. Rev. on C.D. |
40 |
40 |
|||||||||||
(8b) Collected Cash for Interest |
60 |
(60) |
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(8c) Redeemed Principal of C.D. |
1,000 |
(1,000) |
|||||||||||
(9) Purchased Land |
(6,000) |
6,000 |
|||||||||||
(10) Recognized Int. Exp. on Note |
75 |
(75) |
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──── |
──── |
──── |
──── |
──── |
──── |
──── |
──── |
──── |
──── |
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Ending Balances |
$2,610 |
$ 200 |
$ -0- |
$ -0- |
$6,000 |
$ 350 |
$ 75 |
$2,000 |
$5,000 |
$1,385 |
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Demonstration Problem 2-4— Solution ─ Financial Statements
Income Statements |
20X7 |
20X8 |
||||
Consulting Revenue |
$1,500 |
$2,700 |
||||
Interest Revenue |
20 |
40 |
||||
Total Revenue |
$1,520 |
$2,740 |
||||
Salary Expense |
(900) |
(1,500) |
||||
Interest Expense |
-0- |
(75) |
||||
Net Income |
$ 620 |
$1,165 |
||||
Statements of Changes in Equity |
||||||
Beginning Contributed Capital |
$ -0- |
$2,000 |
||||
Plus: Capital Acquisition |
2,000 |
3,000 |
||||
Ending Contributed Capital |
$2,000 |
$5,000 |
||||
Beginning Retained Earnings |
$ -0- |
$ 520 |
||||
Plus: Net Income |
620 |
1,165 |
||||
Less: Distributions |
(100) |
(300) |
||||
Ending Retained Earnings |
$ 520 |
$1,385 |
||||
Total Equity |
$2,520 |
$6,385 |
||||
Balance Sheets |
||||||
Cash |
$1,400 |
$2,610 |
||||
Accounts Receivable |
300 |
200 |
||||
Interest Receivable |
20 |
-0- |
||||
Certificate of Deposit |
1,000 |
-0- |
||||
Land |
-0- |
6,000 |
||||
Total Assets |
$2,720 |
$8,810 |
||||
Salaries Payable |
$ 200 |
$ 350 |
||||
Interest Payable |
-0- |
75 |
||||
Note Payable |
-0- |
2,000 |
||||
Total Liabilities |
$ 200 |
$2,425 |
||||
Contributed Capital |
$2,000 |
$5,000 |
||||
Retained Earnings |
520 |
1,385 |
||||
Total Equity |
$2,520 |
$6,385 |
||||
Total Liabilities and Equity |
$2,720 |
$8,810 |
||||
Statements of Cash Flows |
||||||
Cash Flows from Operating Activities |
||||||
Cash Receipts from Consulting Revenue |
$ 1,200 |
$2,800 |
||||
Cash Receipts from Interest Revenue |
-0- |
60 |
||||
Cash Payments for Salaries |
(700) |
(1,350) |
||||
Net Cash Inflow from Operating Activities |
$ 500 |
$1,510 |
||||
Cash Flows from Investing Activities |
||||||
Cash Receipt from C.D. Maturity |
$ -0- |
$1,000 |
||||
Cash Payment to Purchase C.D. |
(1,000) |
-0- |
||||
Cash Payment to Purchase Land |
-0- |
(6,000) |
||||
Net Cash Outflow from Investing Activities |
$(1,000) |
$(5,000) |
||||
Cash Flows from Financing Activities |
||||||
Cash Receipt from Bank Loan |
$ -0- |
$2,000 |
||||
Cash Receipt from Capital Acquisitions |
2,000 |
3,000 |
||||
Cash Payment for Distribution |
(100) |
(300) |
||||
Net Cash Inflow from Financing Activities |
$1,900 |
$4,700 |
||||
Net Change in Cash |
$1,400 |
$1,210 |
||||
Beginning Cash Balance |
-0- |
1,400 |
||||
Ending Cash Balance |
$1,400 |
$2,610 |
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