EXERCISE 2-7

a.

 Wilson and Wilson Statements Model For the 20X6 Accounting Period Balance Sheet Income Statement Statement of Event Assets = Liabilities + Equity Rev. – Exp. = Net Inc. Cash Flows No. Cash + Accts. Rec. = Acct. Payable + Sal. Pay. + Ret. Earn. 1. n/a 110,000 n/a n/a 110,000 110,000 n/a 110,000 n/a 2. 20,000 n/a n/a n/a 20,000 20,000 n/a 20,000 20,000         OA 3. n/a n/a 47,000 n/a (47,000) n/a 47,000 (47,000) n/a 4. (18,000) n/a n/a n/a (18,000) n/a 18,000 (18,000) (18,000)         OA 5. 91,000 (91,000) n/a n/a n/a n/a n/a n/a 91,000         OA 6. (36,000) n/a (36,000) n/a n/a n/a n/a n/a (36,000)         OA 7. (8,000) n/a n/a n/a (8,000) n/a n/a n/a (8,000)         FA 8. n/a n/a n/a 2,500 (2,500) n/a 2,500 (2,500) n/a Totals 49,000 + 19,000 = 11,000 + 2,500 + 54,500 130,000 - 67,500 = 62,500 49,000

b. Total assets: \$68,000 (\$49,000 + \$19,000)

c.  \$19,000

d. \$11,000

e.  Accounts Receivable (an asset) is an amount owed to you: \$19,000;

Accounts Payable (a liability) is an amount that you owe: \$11,000.

f.   \$62,500

g. \$57,000 (\$20,000 – \$18,000 + \$91,000 – \$36,000)

EXERCISE 2-8

a.   \$5,400 (\$120,000 x 6% x 9/12)

b.

 Tapia Company Accounting Equation for 20X6 Assets = Liab. + Equity Event Cash + Interest Rec. + CD = + Cont. Capital + Retained Earnings CD (120,000) +120,000 Adj. +5,400 +5,400

See the adjusting entry in the accounting equation above (assets increase, equity increases).

c.   \$-0-.  All interest will be paid at maturity, April 1, 20X7, for this CD.

d.   \$5,400

e.   \$7,200 (\$120,000 x 6%).  All interest will be collected when the CD matures.

f.     \$1,800 (\$120,000 x 6% x 3/12)

g.   \$-0-, unless the funds are reinvested in another CD.

EXERCISE 2-9

Note to instructor:  The accounting equation is not required.

 Hewitt Corporation Accounting Equation for 20X3 Assets = Liabilities + Equity Event Cash = Notes Payable Interest Payable + Cont. Capital + Retained Earnings 20X3 9/1/X3 +60,000 +60,000 12/31/X3 +1,600* (1,600) 20X4 2/28/X4 +800** (800) 2/28/X4 (2,400) (2,400) 2/28/X4 (60,000) (60,000)

*\$60,000 x 8% x 4/12=\$1,600

**\$60,000 x 8% x 2/12= \$800

a.   \$-0-.  Interest will be paid at maturity of the note.

b.   \$1,600 (\$60,000 x 8% x 4/12)

c.   \$61,600 (\$60,000 + \$1,600)

d.   \$62,400 (\$60,000 principal + \$2,400 interest)

e.   \$800 (\$60,000 x 8% x 2/12)

EXERCISE 2-14

a.

 Boyler Company Accounting Equation for 20X4 Assets = Liabilities + Equity Event No. Contributed Capital + Retained Earnings 1. +50,000 n/a +50,000 n/a 2. +145,000 n/a n/a +145,000 3. n/a +80,000 n/a (80,000) 4. (10,000)   +10,000 n/a n/a n/a 5. +105,000    (105,000) n/a n/a n/a 6. (60,000) (60,000) n/a n/a 7. +18,500 n/a n/a +18,500 8. (7,500) n/a n/a (7,500) 9. (15,000) n/a n/a (15,000) 10. +20,000 +20,000 n/a n/a 11. n/a +1,200 n/a (1,200) Totals 151,000 = 41,200 + 50,000 + 59,800

b.   \$145,000 – \$80,000 + \$18,500 – \$7,500 – \$1,200 = \$74,800

c.   \$151,000

d. \$41,200

SOLUTIONS TO PROBLEMS - CHAPTER 2

PROBLEM 2-1A

 Fix It Auto Service Effect of Events on the Accounting Equation for 20X3 Assets = Liabilities + Equity Event Cash Acct. Rec. = Acct. Pay Note Pay. Int. Pay. + Cont. Cap. Ret. Earn. 1. Cash Rev. +4,000 n/a n/a n/a n/a n/a +4,000 2. Paid Exp. (1,000) n/a n/a n/a n/a n/a (1,000) 3. Loan +12,000 n/a n/a +12,000 n/a n/a n/a 4. Rev. on Acc. n/a +18,000 n/a n/a n/a n/a +18,000 5. Incur. Exp. n/a n/a +6,000 n/a n/a n/a (6,000) 6. Coll. AR +13,500 (13,500) n/a n/a n/a n/a n/a 7. Paid AP (3,100) n/a (3,100) n/a n/a n/a n/a 8. Acc. Int. n/a n/a n/a n/a +240* n/a (240) Ending Bal. +25,400 +4,500 = +2,900 +12,000 +240 + -0- +14,760

*\$12,000 x 8% x 3/12 = \$240

PROBLEM 2-1A (cont.)

b.

 Fix It Auto Service Income Statement For the Period Ended 20X3 Revenue Service Revenue \$22,000 Total Revenue \$22,000 Expenses Operating Expense 7,000 Interest Expense 240 Total Expenses (7,240) Net Income \$14,760
 Fix It Auto Service Statement of Changes in Equity For the Period Ended 20X3 Beginning Contributed Capital \$        -0- Plus: Capital Acquisition -0- Ending Contributed Capital \$        -0- Beginning Retained Earnings -0- Plus: Net Income 14,760 Ending Retained Earnings 14,760 Total Equity \$14,760

PROBLEM 2-1A b. (cont.)

 Fix It Auto Service Balance Sheet As of the End of the Period 20X3 Assets Cash \$25,400 Accounts Receivable 4,500 Total Assets \$29,900 Liabilities Accounts Payable \$  2,900 Notes Payable 12,000 Interest Payable 240 Total Liabilities \$15,140 Equity Contributed Capital -0- Retained Earnings 14,760 Total Equity 14,760 Total Liabilities and Equity \$29,900

PROBLEM 2-1A b. (cont.)

 Fix It Auto Service Statement of Cash Flows For the Period Ended 20X3 Cash Flows From Operating Activities: Cash Receipts from Service Revenue \$17,500 Cash Payments for Oper. Expense (4,100) Net Cash Flow from Operating Activities \$13,400 Cash Flows From Investing Activities -0- Cash Flows From Financing Activities: Cash Receipts from Bank Loan 12,000 Net Cash Flow from Financing Activities 12,000 Net Change in Cash 25,400 Plus: Beginning Cash Balance -0- Ending Cash Balance \$25,400

c.   Ending Retained Earnings is \$14,760.

Net Income is \$14,760.

The amounts are the same in this example for two reasons:

(1)   This is the first year of operations, so there is no beginning balance in retained earnings.

(2)   No distributions were made to the owner that would reduce retained        earnings.

A distribution to the owner would cause net income and retained earnings to be different in the first year of operations.

PROBLEM 2-3A

 Mink Enterprises Effect of Events on the Accounting Equation 20X6 and 20X7 Assets = Liabilities + Equity Event Cash Acct. Rec. Notes Pay. Int. Pay. Cont. Capital Retained Earnings 20X6 1. Loan +36,000 +36,000 2. Rev. +2,500 +2,500 3. Coll. AR +1,200 (1,200) 4. Int. Acc. +1,440* (1,440) End. Bal. +37,200 +1,300 = +36,000 +1,440 -0- +1,060 20X7 1. Rev. +9,000 +9,000 2. Coll. AR +7,000 (7,000) 3. Int. Acc. +1,440* (1,440) 4. Pay Int. (2,880) (2,880) 5. Pay Loan (36,000) (36,000) End. Bal. +5,320 +3,300 = -0- -0- -0- +8,620

*\$36,000 x 8% x 6/12 = \$1,440

 a. \$1,440 f. \$1,440 b. \$1,200 coll. accts. rec. g. \$4,120  (\$7,000 - \$2,880) c. \$37,440 (\$36,000+ \$1,440) h. \$8,620  (\$5,320 + \$3,300) d. \$1,060 i. \$-0- e. \$36,000 loan j. \$8,320  (\$8,620 - \$300)

PROBLEM 2-4A

a.

 Fox Company Effect of Events on the Accounting Equation For 20X7 Assets = Liabilities + Equity Event Cash Accts. Rec. CD Int. Rec. Land = Sal. Pay. Notes Pay. Int. Pay. + Cont. Cap. + Ret. Earn. 20X7 1. Cap. Acq. +40,000 +40,000 2. Revenue +95,000 +95,000 3. Coll. AR +83,000 (83,000) 4. Dist. (5,000) (5,000) 5. Sal. Exp. (46,000) (46,000) 6. Pur. CD (24,000) +24,000 7. Acc. Sal. +3,000 (3,000) 8. Acc. Int. +1,2001 +1,200 End. Bal. +48,000 +12,000 +24,000 +1,200 -0- = +3,000 -0- -0- + 40,000 + 42,200

1\$24,000 x 10% x 6/12 = 1,200

PROBLEM 2-4A a. (cont.)

 Fox Company Effect of Events on the Accounting Equation For 20X8 Assets = Liabilities + Equity Event Cash Acct. Rec. CD Int. Rec. Land = Sal. Pay. Notes Pay. Int. Pay. + Cont. Cap. Ret. Earn. 20X8 Beg. Bal. 48,000 12,000 24,000 1,200 -0- 3,000 -0- -0- 40,000 42,200 1. Pay Acc. (3,000) (3,000) 2. Cap. Acq. +30,000 +30,000 3. Revenue +105,000 +105,000 4. Coll. AR +112,000 (112,000) 5. Dist. (15,000) (15,000) 6. Paid Sal. (35,000) (35,000) 7. Pur. Land (140,000) +140,000 8. Loan +42,000 +42,000 9. Acc. Int.     Coll. CD +26,400 (24,000) +1,2001 (2,400) +1,200 10. Acc. Sal. +5,000 (5,000) 11. Acc. Int. +1,9602 (1,960) End. Bal. +65,400 +5,000 -0- -0- +140,000 = +5,000 +42,000 +1,960 + 70,000 +91,440

1\$24,000 x 10% x 6/12 =1,200

2\$42,000 x 8% x 7/12 = \$1,960

PROBLEM 2-4A (cont.)

b.

 Fox Company Income Statements 20X7 20X8 Revenue Service Revenue \$95,000 \$105,000 Interest Revenue 1,200 1,200 Total Revenue 96,200 106,200 Expense Salaries Expense (49,000) (40,000) Interest Expense -0- (1,960) Total Expense (49,000) (41,960) Net Income (Loss) \$47,200 \$  64,240 Statements of Changes in Equity 20X7 20X8 Beginning Contributed Capital \$        -0- \$  40,000 Plus: Capital Acquisitions 40,000 30,000 Ending Contributed Capital 40,000 70,000 Beginning Retained Earnings -0- 42,200 Plus: Net Income (Loss) 47,200 64,240 Less: Distributions (5,000) (15,000) Ending Retained Earnings 42,200 91,440 Total Equity \$82,200 \$161,440

PROBLEM 2-4A b. (cont.)

 The Fox Company Balance Sheets 20X7 20X8 Assets Cash \$48,000 \$  65,400 Accounts Receivable 12,000 5,000 Certificate of Deposit 24,000 -0- Interest Receivable 1,200 -0- Land -0- 140,000 Total Assets \$85,200 \$210,400 Liabilities Salaries Payable \$  3,000 \$    5,000 Interest Payable -0- 1,960 Notes Payable -0- 42,000 Total Liabilities 3,000 48,960 Equity Contributed Capital 40,000 70,000 Retained Earnings 42,200 91,440 Total Equity 82,200 161,440 Total Liabilities and Equity \$85,200 \$210,400

PROBLEM 2-4A b. (cont.)

 The Fox Company Statements of Cash Flows 20X7 20X8 Cash Flows From Operating Activities: Cash Receipts from Consulting Rev. \$83,000 \$112,000 Cash Receipts from Interest Rev. -0- 2,400 Cash Payments for Salaries (46,000) (38,000) Net Cash Flow from Operating Act. 37,000 76,400 Cash Flows From Investing Activities: Purchased CD (24,000) Purchased Land (140,000) Proceeds of CD 24,000 Net Cash Flow from Investing Act. (24,000) (116,000) Cash Flows From Financing Activities: Cash Receipts from Capital Acq. 40,000 30,000 Cash from Borrowing -0- 42,000 Cash Payment for Distributions (5,000) (15,000) Net Cash Flow from Financing Act. 35,000 57,000 Net Change in Cash 48,000 17,400 Plus: Beginning Cash Balance -0- 48,000 Ending Cash Balance \$48,000 \$ 65,400

PROBLEM 2-6A

a.

 Event Classification Event Classification 1. AS 6. AS 2. AU 7. AU 3. AS 8. AS 4. CE 9. AU 5. AU 10. AE

b.

 Larrs Financial Services Horizontal Statements Model for 20X2 Assets = Liab. + Equity Rev. - Exp. = Net Inc. Cash Flows Event Cash + A. Rec. = A. Pay. + C. Cap. + Ret. Ear. 1. 20,000 + n/a = n/a + 20,000 + n/a n/a - n/a = n/a 20,000              FA 2. (2,400) + n/a = n/a + n/a + (2,400) n/a - 2,400 = (2,400) (2,400)             OA 3. n/a + 16,000 = n/a + n/a + 16,000 16,000 - n/a = 16,000 n/a 4. n/a + n/a = 3,500 + n/a + (3,500) n/a - 3,500 = (3,500) n/a 5. (2,800) + n/a = (2,800) + n/a + n/a n/a - n/a = n/a (2,800)             OA 6. 3,000 + n/a = n/a + 3,000 + n/a n/a - n/a = n/a 3,000              FA 7. (700) + n/a = (700) + n/a + n/a n/a - n/a = n/a (700)             OA 8. 7,000 + n/a = n/a + n/a + 7,000 7,000 - n/a = 7,000 7,000             OA 9. (1,000) + n/a = n/a + n/a + (1,000) n/a - n/a = n/a (1,000)              FA 10. 14,500 + (14,500) = n/a + n/a + n/a n/a - n/a = n/a 14,500             OA Totals 37,600 + 1,500 = -0- + 23,000 + 16,100 23,000 - 5,900 = 17,100 37,600   NC

c.   Net Income = \$17,100

d.   Cash flow from operating activities = \$15,600 (-\$2,400 - \$2,800 - \$700 + \$700 + \$1,450)