SOLUTIONS TO EXERCISES

SOLUTIONS TO EXERCISES - CHAPTER 1

EXERCISE 1-11

Mars Company Accounting Equation For 20X2

					Equity
Event	Assets	=	Liabilities	+	Cont. Capital		+	Retained Earnings
1. Acq. Cap.	+20,000		n/a			+20,000		n/a
2. Pur. Land	(9,000) +9,000		n/a		n/a			n/a
3. Loan	+5,000		+5,000		n/a			n/a
4. Revenue	+12,000		n/a		n/a			+12,000
5. Expense	(7,500)		n/a		n/a			(7,500)
6. Dist.	(2,000)		n/a		n/a			(2,000)
Totals	27,500	=	5,000	+	20,000		+	2,500

Mars Company Income Statement For the Period Ended 20X2

	Revenue	$12,000
	Expense	(7,500)
	Net Income	$ 4,500

EXERCISE 1-11 b. (cont.)

Mars Company Statement of Changes in Equity For the Period Ended 20X2

	Beginning Contributed Capital	$ -0-
	Plus: Capital Acquisitions	20,000
	Ending Contributed Capital		$20,000

	Beginning Retained Earnings	-0-
	Plus: Net Income	4,500
	Less: Distributions	(2,000)
	Ending Retained Earnings		2,500

	Total Equity		$22,500

Mars Company Balance Sheet As of the End of the Period 20X2

	Assets		$27,500

	Liabilities		$ 5,000

	Equity
	Contributed Capital	$20,000
	Retained Earnings	2,500
	Total Equity		22,500

	Total Liabilities and Equity		$27,500

EXERCISE 1-11 b. (cont.)

Mars Company Statement of Cash Flows For the Period Ended 20X2

	Cash Flows From Operating Activities:
	Cash Receipt from Revenue	$12,000
	Cash Payment for Expense	(7,500)
	Net Cash Flow from Operating Activities		$ 4,500

	Cash Flows From Investing Activities:
	Purchase of Land	(9,000)
	Net Cash Flow from Investing Activities		(9,000)

	Cash Flows From Financing Activities:
	Cash Receipts from Capital Acquisitions	20,000
	Cash Receipts from Creditors	5,000
	Cash Payment for Distributions	(2,000)
	Net Cash Flow from Financing Activities		23,000

	Net Increase in Cash		18,500
	Plus: Beginning Cash Balance		-0-
	Ending Cash Balance		$18,500

EXERCISE 1-12

Tax Time Accounting Equation for 20X4

	Assets			=	Liabilities	+	Equity
Event	Cash	+	Land	=	Notes Payable	+	Cont. Capital	+	Retained Earnings
1. Acq. Cap.	+20,000		n/a		n/a		+20,000		n/a
2. Pur. Land	(8,000)		+8,000		n/a		n/a		n/a
3. Revenue	+18,000		n/a		n/a		n/a		+18,000
4. Pd. Exp.	(9,500)		n/a		n/a		n/a		(9,500)
5. Acq. Cap.	+ 2,000		n/a		n/a		+ 2,000		n/a
6. Loan	+10,000		n/a		+10,000		n/a		n/a
7. Pur. Land	(5,000)		+5,000		n/a		n/a		n/a
8. Pd. Exp.	(4,000)		n/a		n/a		n/a		(4,000)
9. Dist.	(1,800)		n/a		n/a		n/a		(1,800)
Totals	21,700	+	13,000	=	10,000	+	22,000	+	2,700

b. Revenue - Expenses = Net Income: $18,000 - $13,500 = $4,500

c. Cash + Land: $21,700 + $13,000 = $34,700 Total Assets

d. Operating activities are events 3, 4, and 8: $18,000 - ($9,500 + $4,000) = $4,500

e. Financing activities are events 1, 5, 6, and 9: $20,000 + $2,000 + $10,000 - $1,800 = $30,200

f. Investing activities are events 2, and 7: $(8,000) + $(5,000) = $(13,000)

g. $21,700 (see above)

h. From $-0- to $21,700 = Net change of $21,700

EXERCISE 1-15

a. 20X2

Assets = Liabilities + Contributed Capital + Retained Earnings

$144,000 = $72,600 + $48,400 + $23,000

Or: $144,000 - $72,600 - $48,400 = $23,000.

b. 20X3

Revenue - Expenses = Net Income

$15,000 - $9,500 = $5,500

c. Retained Earnings, Jan 1, 20X3 $23,000

Plus: 20X3 Net Income 5,500

Less: 20X3 Distributions to Owners (900)

Retained Earnings, December 31, 20X3 $27,600

SOLUTIONS TO PROBLEMS - CHAPTER 1

PROBLEM 1-1A

The accounting equation is provided for use of the instructor:

The Azure Co. Accounting Equation

					Equity
					Cont.		Retained
Event	Assets	=	Liabilities	+	Capital	+	Earnings
20X4
1. Effect of Cap. Acq.	20,000				20,000
2. Effect of Borrowing	10,000		10,000
3. Effect of Revenue	15,500						15,500
4. Effect of Expense	(8,500)						(8,500)
5. Effect of Distribution	(2,100)						(2,100)
Ending Balance	34,900	=	10,000	+	20,000	+	4,900
20X5
1. Effect of Cap. Acq.	4,200				4,200
2. Effect of Revenue	13,750						13,750
3. Effect of Expense	(8,220)						(8,220)
4. Effect of Distribution	(2,100)						(2,100)
5. Repaid Loan	(1,075)		(1,075)
Ending Balance	41,455	=	8,925	+	24,200	+	8,330

PROBLEM 1-1A (cont.)

a. $34,900 (See above).

b. 20X4 events 3 and 4; $15,500 - $8,500 = $7,000.

c. 20X4 events 3 and 4; $15,500 - $8,500 = $7,000.

d. $10,000.

e. 20X4 events 1,2 and 5; $20,000 + $10,000 - $2,100 = $27,900.

f. 20X4 event 1 and 20X5 event 1; $20,000 + $4,200 = $24,200.

g. $8,330 (See above).

h. 20X5 events 2 and 3; $13,750 - $8,220 = $5,530.

i. There were no investing activities in 20X5.

j. 20X4 event 2 and 20X5 event 5; $10,000 - $1,075 = $8,925.

k. 20X5 contributed capital and retained earnings; $24,200 + $8,330 = $32,530.

PROBLEM 1-2A

Bradley’s Professional Services Accounting Equation For the 20X1 Accounting Period

	Assets			=	Liabilities	+	Equity
Event	Cash	+	Land	=	Loan Payable	+	Cont. Capital	+	Retained Earnings
1. Acq. Cap.	60,000						60,000
2. Revenue	100,000								100,000
3. Loan	25,000				25,000
4. Pd. Exp.	(70,000)								(70,000)
5. Pur. Land	(40,000)		40,000
Totals	75,000	+	40,000	=	25,000	+	60,000	+	30,000

Bradley’s Professional Services Accounting Equation For the 20X2 Accounting Period

	Assets			=		Liabilities	+	Equity
Event	Cash	+	Land	=	Loan Payable		+	Cont. Capital	+	Retained Earnings
Beg. Bal.	75,000		40,000		25,000			60,000		30,000
1. Acq. Cap.	20,000							20,000
2. Revenue	120,000									120,000
3. Pd. Loan	(10,000)				(10,000)
4. Pd. Exp.	(80,000)									(80,000)
5. Dist.	(15,000)									(15,000)
Totals	110,000	+	40,000	=	15,000		+	80,000	+	55,000

PROBLEM 1-2A (cont.)

Bradley’s Professional Services

Income Statements

		20X1	20X2

	Revenue	$ 100,000	$ 120,000
	Expense	(70,000)	(80,000)
	Net Income (Loss)	$ 30,000	$ 40,000

Statements of Changes in Equity

	Beginning Contributed Capital	$ -0-	$ 60,000
	Plus: Capital Acquisitions	60,000	20,000
	Ending Contributed Capital	60,000	80,000

	Beginning Retained Earnings	-0-	30,000
	Plus: Net Income (Loss)	30,000	40,000
	Less: Distributions	-0-	(15,000)
	Ending Retained Earnings	30,000	55,000
	Total Equity	$ 90,000	$ 135,000

Balance Sheets

	Assets
	Cash	$ 75,000	$ 110,000
	Land	40,000	40,000
	Total Assets	$ 115,000	$ 150,000

	Liabilities	$ 25,000	$ 15,000

	Equity
	Contributed Capital	60,000	80,000
	Retained Earnings	30,000	55,000
	Total Equity	90,000	135,000
	Total Liabilities and Equity	$ 115,000	$150,000

PROBLEM 1-2A b. (cont.)

Bradley’s Professional Services

Statements of Cash Flows

		20X1	20X2
	Cash Flows From Operating Activities:
	Cash Receipts from Revenue	$ 100,000	$ 120,000
	Cash Payments for Expenses	(70,000)	(80,000)
	Net Cash Flow from Operating Activities	30,000	40,000

	Cash Flows From Investing Activities:
	Cash Payment for Land	(40,000)	-0-
	Net Cash Flow from Investing Activities	(40,000)	-0-

	Cash Flows From Financing Activities:
	Cash Receipts from Borrowed Funds	25,000	-0-
	Cash Payment of Debt	-0-	(10,000)
	Cash Receipts from Capital Acquisition	60,000	20,000
	Cash Payment for Distributions	-0-	(15,000)
	Net Cash Flow from Financing Activities	85,000	(5,000)

	Net Change in Cash	75,000	35,000
	Plus: Beginning Cash Balance	-0-	75,000
	Ending Cash Balance	$ 75,000	$ 110,000

c. In 20X1 and 20X2 net income and cash flows from operating activities are the same because all revenues and expenses are cash. Ordinarily, net income will be different from cash flows from operating activities due to non-cash revenue and expense transactions (discussed in Chapter 2). The net change in cash is different from net income because investing and financing activities do not directly affect revenues or expenses.

PROBLEM 1-3A

The Baldwell Company

Accounting Equation

For 20X2

Assets

Liabilities

Equity

Event

Cash

Land

Loan

Payable

Cont.

Capital

Retained

Earnings

1. Capital Acq.

8,000

2. From Loan

4,800

3. Cash Revenue

3,500

4. Paid Expense

(1,900)

5. Distribution

(750)

Totals

13,650

-0-

4,800

8,000

850

The Baldwell Company Accounting Equation For 20X3

	Assets			=		Liabilities		+	Equity
Event	Cash	+	Land		=		Loan Payable	+	Cont. Capital	+		Retained Earnings
Beginning Bal.	13,650		-0-				4,800		8,000			850
1. Pur. Land	(1,375)		1,375
2. Capital Acq.	2,100								2,100
3. From Loan	2,000						2,000
4. From Revenue	2,700										2,700
5. Paid Expense	(1,650)										(1,650)
6. Distribution	(1,075)										(1,075)
Totals	16,350	+	1,375		=		6,800	+	10,100	+	825

PROBLEM 1-3A a. (cont.)

The Baldwell Company Accounting Equation For 20X4

	Assets			=	Liabilities	+	Equity
Event	Cash	+	Land	=	Loan Payable	+	Cont. Capital	+		Retained Earnings
Beginning Bal.	16,350		1,375		6,800		10,100			825
1. Capital Acq.	1,000						1,000
2. Paid on Loan	(4,350)				(4,350)
3. From Revenue	1,900								1,900
4. Paid Expense	(1,975)								(1,975)
5. Distribution	(500)								(500)
Totals	12,425	+	1,375	=	2,450	+	11,100	+	250

PROBLEM 1-3A (cont.)

The Baldwell Company

Income Statements

	20X2	20X3	20X4
Revenue	$ 3,500	$ 2,700	$ 1,900
Expense	(1,900)	(1,650)	(1,975)
Net Income (Loss)	$ 1,600	$ 1,050	$ (75)

Statements of Changes in Equity

	20X2	20X3	20X4
Beginning Contributed Capital	$ -0-	$ 8,000	$ 10,100
Plus: Capital Acquisitions	8,000	2,100	1,000
Ending Contributed Capital	8,000	10,100	11,100

Beginning Retained Earnings	-0-	850	825
Plus: Net Income (Loss)	1,600	1,050	(75)
Less: Distributions	(750)	(1,075)	(500)
Ending Retained Earnings	850	825	250
Total Equity	$ 8,850	$ 10,925	$ 11,350

PROBLEM 1-3A b. (cont.)

The Baldwell Company

Balance Sheets

	20X2	20X3	20X4
Assets
Cash	$ 13,650	$ 16,350	$12,425
Land	-0-	1,375	1,375
Total Assets	$ 13,650	$ 17,725	$13,800

Liabilities	$ 4,800	$ 6,800	$ 2,450

Equity
Contributed Capital	8,000	10,100	11,100
Retained Earnings	850	825	250
Total Equity	8,850	10,925	11,350
Total Liabilities and Equity	$ 13,650	$ 17,725	$13,800

PROBLEM 1-3A b. (cont.)

The Baldwell Company

Statements of Cash Flows

	20X2	20X3		20X4
Cash Flows From Operating Activities:
Cash Receipts from Revenue	$ 3,500	$ 2,700		$ 1,900
Cash Payments for Expenses	(1,900)	(1,650)		(1,975)
Net Cash Flow from Operating Act.	1,600		1,050		(75)

Cash Flows From Investing Activities:
Cash Payment for Land	-0-	(1,375)		-0-
Net Cash Flow from Investing Activities	-0-	(1,375)		-0-

Cash Flows From Financing Activities
Cash Receipts from Creditors	4,800	2,000		-0-
Cash Payment to Creditors	-0-	-0-		(4,350)
Cash Receipts from Capital Acq.	8,000	2,100		1,000
Cash Payment for Distributions	(750)	(1,075)		(500)
Net Cash Flow from Financing Act.	12,050	3,025		(3,850)

Net Change in Cash	13,650	2,700		(3,925)
Plus: Beginning Cash Balance	-0-	13,650		16,350
Ending Cash Balance	$ 13,650	$ 16,350		$12,425

PROBLEM 1-3A (cont.)

c. The balance sheet lists the assets, liabilities and the equity of a business at a particular point in time. The reader of the balance sheet can compare the amount and composition of the assets and the liabilities. One can determine if equity is increasing or decreasing and whether debt is increasing or decreasing. Between the end of years 20X2 and 20X3, assets, liabilities and equity increased. Between the end of years 20X3 and 20X4, assets, liabilities and equity decreased. In 20X3, the company used contributed capital and debt to buy land and increase its cash position. In 20X4, cash from contributed capital and earnings was used to reduce debt.

d. The income statement indicates that revenues are decreasing and expenses are also increasing. This is not a growing company.