EXERCISE 2-7

EXERCISE 2-7

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.

n/a

110,000

n/a

110,000

n/a

110,000

n/a

20,000

n/a

20,000

n/a

20,000

20,000 OA

n/a

47,000

n/a

(47,000)

n/a

47,000

(47,000)

n/a

(18,000)

n/a

(18,000)

n/a

18,000

(18,000)

(18,000) OA

91,000

(91,000)

n/a

91,000 OA

(36,000)

n/a

(36,000)

n/a

(36,000) OA

(8,000)

n/a

(8,000)

n/a

(8,000) FA

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)

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

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.)

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

Fox Company

Effect of Events on the Accounting Equation

For 20X7

Assets

Liabilities

Equity

Event

Cash

Accts.

Rec.

Int.

Rec.

Land

Sal.

Pay.

Notes

Pay.

Int.

Pay.

Cont.

Cap.

Ret.

Earn.

20X7

1. Cap. Acq.

+40,000

2. Revenue

+95,000

3. Coll. AR

+83,000

(83,000)

4. Dist.

(5,000)

5. Sal. Exp.

(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-

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.

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-

40,000

42,200

1. Pay Acc.

(3,000)

2. Cap. Acq.

+30,000

3. Revenue

+105,000

4. Coll. AR

+112,000

(112,000)

5. Dist.

(15,000)

6. Paid Sal.

(35,000)

7. Pur. Land

(140,000)

+140,000

8. Loan

+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-

+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.)

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

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

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.

20,000

n/a

20,000

n/a

20,000 FA

(2,400)

n/a

(2,400)

n/a

2,400

(2,400)

(2,400) OA

n/a

16,000

n/a

16,000

n/a

16,000

n/a

3,500

n/a

(3,500)

n/a

3,500

(3,500)

n/a

(2,800)

n/a

(2,800)

n/a

(2,800) OA

3,000

n/a

3,000

n/a

3,000 FA

(700)

n/a

(700)

n/a

(700) OA

7,000

n/a

7,000

n/a

7,000

7,000 OA

(1,000)

n/a

(1,000)

n/a

(1,000) FA

10.

14,500

(14,500)

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)