Chapter 3

EXERCISE 3-3

a.

Event

Assets

=

Liab.

+

Equity

 

Cash

Prepaid

Rent

     

Contributed

Capital

+

Retained Earnings

1.

(18,000)

18,000

           

Adj.

 

(6,000)*

         

(6,000)

                 

*$18,000 x 4/12 = $6,000

b.

Event

Assets

=

Equity

 

Cash

Equipment

Accumulated

Depreciation

 

Contributed

Capital

+

Retained Earnings

1.

(5,200)

5,200

         

Adj.

   

(1,200)*

     

(1,200)

               

*$5,200 - $400 = $4,800; $4,800 ¸ 4 = $1,200

c.

Event

Assets

=

Liab.

+

Equity

 

Cash

 

Unearned Revenue

 

Contributed

Capital

 

Retained Earnings

1.

10,000

 

10,000

       

Adj.

   

(3,333)*

     

3,333

               

*$10,000 x 2/6 = $3,333


EXERCISE 3-5

a. 

Help-U Consulting Services

Effect of Events on the Accounting Equation

 
 

Assets

=

Equity

Event

Cash

Prepaid

Rent

=

Cont.

Capital

Retained Earnings

1. Acquired Cap.

30,000

   

30,000

 

2. Prepaid Rent

(24,000)

24,000

     

3. Provided Service

36,000

     

36,000

4. Used Rent

 

(22,000)*

   

(22,000)

Totals

42,000

2,000

=

30,000

14,000

           

*$24,000 x 11/12 = $22,000

b.

Help-U Consulting Services

Income Statement

For the Period Ended December 31, 20X7

       
 

      Revenue

$36,000

 
 

      Expense

(22,000)

 
       
 

      Net Income

$14,000

 
       

Help-U Consulting Services

Statement of Changes in Equity

For the Period Ended December 31, 20X7

         
 

Beginning Contributed Capital

$       -0-

   
 

Plus:  Acquired Capital

30,000

   
 

Ending Contributed Capital

 

$30,000

 
         
 

Beginning Retained Earnings

    -0-

   
 

Plus: Net Income

 14,000

   
 

Less: Distributions

-0-

   
 

Ending Retained Earnings

 

14,000

 
         
 

Total Equity

 

$44,000

 
         

EXERCISE 3-5 b. (cont.)

Help-U Consulting Services

Balance Sheet

As of December 31, 20X7

         
 

Assets

     
 

          Cash

$42,000

   
 

          Prepaid Rent

2,000

   
 

Total Assets

 

$44,000

 
         
 

Liabilities

 

$        -0-

 
         
 

Equity

     
 

          Contributed Capital

$30,000

   
 

          Retained Earnings

14,000

   
 

Total Equity

 

44,000

 
         
 

Total Liabilities and Equity

 

$44,000

 
         

EXERCISE 3-5 b. (cont.)

Help-U Consulting Services

Statement of Cash Flows

For the Period Ended December 31, 20X7

         
 

Cash Flows From Operating Activities:

     
 

      Cash Receipt from Revenue

$36,000

   
 

      Cash Payment for Expense

(24,000)

   
 

Net Cash Flow from Operating Activities

 

$12,000

 
         
 

Cash Flows From Investing Activities

 

      -0-

 
         
 

Cash Flows From Financing Activities

     
 

      Cash Investment by Owners

30,000

   
 

Net Cash Flow from Financing Activities

 

30,000

 
         
 

Net Change in Cash

 

42,000

 
 

Plus: Beginning Cash Balance

 

-0-

 
 

Ending Cash Balance

 

$42,000

 
         

c.   The difference of $2,000 ($14,000 - $12,000) is attributed to recognizing rent expense of $22,000 in the income statement, whereas the cash payment for rent expense is $24,000.


EXERCISE 3-6

a.

Kopy King, Inc.

Accounting Equation 20X3

 
 

Assets

=

Liabilities

+

Equity

Event

Cash

Supplies

=

Accounts

Payable

+

Cont.

Capital

+

Retained Earnings

Bal.

1,000

-0- 

 

-0-

 

400

 

600

  1

 

3,600

 

3,600

       

  2

10,000

           

10,000

  3

(2,500)

   

(2,500)

       

  4

 

(3,200)

         

(3,200)

Totals

8,500

400

=

1,100

+

400

+

7,400

                 

EXERCISE 3-6 (cont.)

b.

Kopy King, Inc.

Income Statement

For the Period Ended December 31, 20X3

       
 

Service Revenue

$10,000

 
       
 

Supplies Expense

(3,200)  

 
       
 

Net Income

$  6,800

 
       

Kopy King, Inc.

Statement of Changes in Equity

For the Period Ended December 31, 20X3

         
 

Beginning Contributed Capital

$   400

   
 

Plus:  Capital Acquired

-0-

   
 

Ending Contributed Capital

 

$   400

 
         
 

Beginning Retained Earnings

600

   
 

   Plus: Net Income

 6,800

   
 

   Less: Distributions

-0-

   
 

Ending Retained Earnings

 

7,400

 
         
 

Total Equity

 

$7,800

 
         

EXERCISE 3-6 b.(cont.)

Kopy King Inc.

Balance Sheet

As of December 31, 20X3

           
 

Assets

       
 

      Cash

$8,500

     
 

      Supplies

400

     
 

Total Assets

 

$8,900

   
 

     

       
 

Liabilities

       
 

      Accounts Payable

 

$1,100

   
           
 

Equity

       
 

      Contributed Capital

$   400

     
 

      Retained Earnings

7,400

     
 

Total Equity

 

7,800

   
           
 

Total Liabilities and Equity

 

$8,900

   
           

Kopy King, Inc.

Statement of Cash Flows

For the Period Ended December 31, 20X3

         
 

Cash Flows From Operating Activities:

     
 

      Cash Receipt from Revenue

$10,000

   
 

      Cash Payment for Accounts Payable

(2,500)

   
 

Net Cash Flow from Operating Activities

 

$7,500

 
         
 

Cash Flows From Investing Activities

 

      -0-

 
         
 

Cash Flows From Financing Activities

 

-0-

 
         
 

Net Change in Cash

 

7,500

 
 

Add: Beginning Cash Balance

 

1,000

 
 

Ending Cash Balance

 

$8,500

 
         

EXERCISE 3-6 (cont.)

c.  The difference in net income and cash flow from operating activities of $700 ($6,800 - $7,500) is attributed to recognizing supplies expense of $3,200 in the income statement, whereas the cash payment on accounts payable (for supplies) was only $2,500.


EXERCISE 3-7

a.

Tasty Bar B Q

Accounting Equation for 20X6

 
 

Assets

=

Equity

Event

Cash

Pit

Accum. Depr.

=

Cont.

Capital

+

Retained

Earnings

1. Acq. Cap.

24,000

     

24,000

   

2. Pur. Pit

(22,000)

22,000

         

3. Rev.

16,000

         

16,000

4. Paid Exp.

(4,000)

         

(4,000)

5. Depr. Exp.

   

(5,000)*

     

(5,000)

Totals

14,000

22,000

(5,000)

=

24,000

+

7,000

               

     *(22,000 - $2,000) ¸ 4=$5,000 depreciation per year


EXERCISE 3-7 (cont.)

b.

Tasty Bar B Q

Income Statement

For the Period Ended December 31, 20X6

         
 

Service Revenue

 

$16,000

 
         
 

Expenses

 

 

 
 

      Operating Expenses

$4,000

   
 

      Depreciation Expense

5,000

   
 

Total Expenses

 

(9,000)

 
         
 

Net Income

 

$  7,000

 
         

Tasty Bar B Q

Statement of Changes in Equity

For the Period Ended December 31, 20X6

         
 

Beginning Contributed Capital

$       -0-

   
 

      Plus: Capital Acquired

24,000

   
 

Ending Contributed Capital

 

$24,000

 
         
 

Beginning Retained Earnings

-0-

   
 

      Plus: Net Income

7,000

   
 

      Less: Distributions

-0-

   
 

Ending Retained Earnings

 

7,000

 
         
 

Total Equity

 

$31,000

 
         

EXERCISE 3-7 b. (cont.)

Tasty Bar B Q

Balance Sheet

As of December 31, 20X6

           
 

Assets

       
 

      Cash

 

$14,000

   
 

      Pit

$22,000

     
 

      Less: Accum. Depreciation

(5,000)

17,000

   
 

Total Assets        

 

$31,000

   
 

         

       
 

Liabilities

 

      $      -0-

   
           
 

Equity

       
 

      Contributed Capital

$24,000

     
 

      Retained Earnings

7,000

     
 

Total Equity

 

31,000

   
           
 

Total Liabilities and Equity

 

$31,000

   
           

EXERCISE 3-7 b. (cont.)

Tasty Bar B Q

Statement of Cash Flows

For the Period Ended December 31, 20X6

         
 

Cash Flows From Operating Activities:

     
 

      Cash Receipt from Revenue

$16,000

   
 

      Cash Payment for Accounts Payable

(4,000)

   
 

Net Cash Flow from Operating Activities

 

$12,000

 
         
 

Cash Flows From Investing Activities:

     
 

      Cash Outflow to Purchase Pit

(22,000)

   
 

Net Cash Flow from Investing Activities

 

(22,000)

 
         
 

Cash Flows From Financing Activities:

     
 

      Cash Receipts from Owner Investment

24,000

   
 

Net Cash Flow from Financing Activities

 

24,000

 
         
 

Net Change in Cash

 

14,000

 
 

Plus: Beginning Cash Balance

 

-0-

 
 

Ending Cash Balance

 

$14,000

 
         

c.   $5,000 each year.

d.   $10,000 of accumulated depreciation ($5,000 for 20X6 + $5,000 for 20X7).

e.   No, because depreciation is a non-cash expense.  Depreciation is the systematic allocation of the cost of an asset to expense.  The cash payment occurred when the pit was purchased.


EXERCISE 3-8 a.

Chris Dew Personal Financial Planning

Accounting Equation

 
 

Assets

=

Liabilities

+

Equity

Event

Cash

=

Unearned

Revenue

+

Cont.

Capital

+

Retained

Earnings

1.  Advance Payment

+36,000

 

+36,000

       

2.  Revenue Earned

   

(30,000)*

     

+30,000

Totals

+36,000

=

+6,000

     

+30,000

               

*$36,000 x 10/12 = $30,000

b.

Chris Dew Personal Financial Planning

Income Statement

For the Period Ended December 31, 20X3

       
 

Revenue

   
 

      Consulting Revenue

$30,000

 
       
 

Expense

-0-

 
       
 

Net Income

$30,000

 
       

EXERCISE 3-8 b. (cont.)

Chris Dew Personal Financial Planning

Statement of Changes in Equity

For the Period Ended December 31, 20X3

         
 

Beginning Contributed Capital

$       -0-

   
 

Ending Contributed Capital

 

$        -0-

 
         
 

Beginning Retained Earnings

-0-

   
 

Plus: Net Income

30,000

   
 

Ending Retained Earnings

 

30,000

 
         
 

Total Equity

 

$30,000

 
         

Chris Dew Personal Financial Planning

Balance Sheet

As of December 31, 20X3

         
 

Assets

     
 

      Cash

$36,000

   
 

Total Assets

 

$36,000

 
 

         

     
 

Liabilities

     
 

      Unearned Revenue

$  6,000

   
 

Total Liabilities

 

$  6,000

 
         
 

Equity

     
 

      Contributed Capital

-0-

   
 

      Retained Earnings

30,000

   
 

Total Equity

 

30,000

 
         
 

Total Liabilities and Equity

 

$36,000

 
         

EXERCISE 3-8 b. (cont.)

Chris Dew Personal Financial Planning

Statement of Cash Flows

For the Period Ended December 31, 20X3

         
 

Cash Flows From Operating Activities:

     
 

      Cash Receipt from Revenue

$36,000

   
 

Net Cash Flow from Operating Activities

 

$36,000

 
         
 

Cash Flows From Investing Activities

 

      -0-

 
         
 

Cash Flows From Financing Activities

 

-0-

 
         
 

Net Increase in Cash

 

36,000

 
 

Plus: Beginning Cash Balance

 

-0-

 
 

Ending Cash Balance

 

$36,000

 
         

c.   Revenue that will be recognized in 20X4 is $6,000, the remainder of the unearned revenue.

d.   $-0-, no cash is received.  All cash was received in 20X3.


EXERCISE 3-9

Vega Enterprises

20X4 Accounting Equation

 
 

Assets

=

Equity

 Event

Cash

Land

=

Cont.

Capital

+

Retained Earnings

             

  a.1

+11,000

(12,000)

=

   

(1,000)

             

  b.1

+14,000

(12,000)

=

   

+2,000

             

a. (1)  See above.

a.   (2)  Loss of $1,000 ($12,000 cost - $11,000 sales price).

a. (3)  Cash inflow from investing activities, $11,000.

b. (1)  See above.

b. (2)  Gain of $2,000 ($12,000 cost - $14,000 sales price).

b. (3)  Cash inflow from investing activities, $14,000.


EXERCISE 3-10

 

Net Income

Cash Flow from

Operating Activities

Event No.

Direction of Change

Amount of Change

Direction of Change

Amount of Change

a.

Decrease

$1,200

Decrease

$7,200

b.

Decrease

8,000*

No Effect

 

c.

Decrease

700

Decrease

600

d.

Decrease

3,000

No Effect

 

e.

Increase

6,000

Increase

5,000

f.

Increase

900

Increase

1,200

g.

No Effect

 

No Effect

 

h.

Increase

1,000

No Effect

 

i.

Decrease

1,000

Decrease

1,000

j.

Increase

3,000

Increase

3,000

*($40,000 - $8,000) ¸ 4=$8,000 depreciation expense per year.


EXERCISE 3-11

Dowes Attorney At Law

Effect of Transactions on the Financial Statements for 20X2

 
   

Balance Sheet

 

Income Statement

 

Statement of

   

Assets

=

Liabilities

+

Equity

 

Rev

-

Exp.

=

Net Inc.

 

Cash Flows

No.

 

Cash

+

Supp.

=

Acc. Pay.

+

Unearn. Rev.

+

Ret. Earn.

               

1.

 

18,000

+

n/a

=

n/a

+

18,000

+

n/a

 

n/a

-

n/a

=

n/a

 

   18,000   OA

2.

 

n/a

+

1,600

=

1,600

+

n/a

+

n/a

 

n/a

-

n/a

=

n/a

 

          n/a

3.

 

25,600

+

n/a

=

n/a

+

n/a

+

25,600

 

25,600

-

n/a

=

25,600

 

   25,600   OA

4.

 

(13,400)

+

n/a

=

n/a

+

n/a

+

(13,400)

 

n/a

-

13,400

=

(13,400)

 

  (13,400)  OA

5.

 

(8,000)

+

n/a

=

n/a

+

n/a

+

(8,000)

 

n/a

-

n/a

=

n/a

 

    (8,000)  FA

6.

 

(1,400)

+

n/a

=

(1,400)

+

n/a

+

n/a

 

n/a

-

n/a

=

n/a

 

    (1,400)  OA

7.

 

n/a

+

(1,450)

=

n/a

+

n/a

+

(1,450)

 

n/a

-

1,450

=

(1,450)

 

n/a

8.

 

n/a

+

n/a

=

n/a

+

(12,000)*

+

12,000

 

12,000

-

n/a

=

12,000

 

n/a

Totals

 

20,800

+

150

=

200

+

6,000

+

14,750

 

37,600

-

14,850

=

22,750

 

20,800  NC

                                     

*$18,000 x 8/12 = $12,000