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) ───── ──── ──── ───── ───── Ending Balances \$5,000 + \$     -0- = \$     -0- + \$    -0- + \$5,000 ═════ ════ ════ ═════ ═════

Solution for Demonstration Problem 2-1

 The Packard Consultants 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) ───── ──── ──── ──── ───── ───── 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) ───── ──── ──── ──── ───── ───── Ending Balances \$    750 + \$     -0- = \$     -0- + \$     -0- + \$    -0- + \$   750 ═════ ════ ════ ════ ═════ ═════

Demonstration Problem 2-2 — Solution Financial Statements

 The Canton Company 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 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) Net Change in Cash 600 \$      150 Beginning Cash Balance -0- 600 Ending Cash Balance \$    600 \$     750

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) (5)        Recognized Salary Expense 900 (900) (6)        Paid Liability for Salaries (700) (700) (7)        Distributed Cash to Owners (100) (100) (8)        Recognized Int. Rev. on C.D. 20 20 ──── ──── ──── ──── ──── ──── ──── ──── ──── ──── Ending Balances \$1,400 \$  300 \$   20 \$1,000 \$     -0- \$   200 \$     -0- \$     -0- \$2,000 \$   520 ════ ════ ════ ════ ════ ════ ════ ════ ════ ════

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) (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) ──── ──── ──── ──── ──── ──── ──── ──── ──── ──── Ending Balances \$2,610 \$   200 \$     -0- \$     -0- \$6,000 \$   350 \$    75 \$2,000 \$5,000 \$1,385 ════ ════ ════ ════ ════ ════ ════ ════ ════ ════

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