Solutions to Exercises

SOLUTIONS TO EXERCISES Ex. 3.1 a. Accounting period b. Accounting cycle c. None (This statement describes the accounting convention of conservatism.) d. Net income e. Realization principle f. Credit g. Matching principle h. Expenses Ex. 3.2 a. Costs of owning and operating an automobile (estimates will vary; the following list is only an example): Insurance ……………………………………………………………………… $ 1,000 Gasoline (15,000 miles at 30 mpg. = $4.20/gal.) ……………………………… 2,100 Registration and license ……………………………………………………… 100 Repairs and maintenance ……………………………………………………… 200 Depreciation …………………………………………………………………… 1,200 500 Interest on car loan* …………………………………………………………… Annual total…………………………………………………………………… $ 5,100 Average cost per mile ($5,100 / 15,000 miles)………………………………… $0.34 *Note to instructor: It is worth noting that including both depreciation and the “principal” portion of the car loan would be “double-counting” the purchase price of the car. Depreciation issues are introduced in Chapter 4. b. Although you spent no money during this trip, you incurred significant costs. For example, you have used much of the gasoline in your tank. Also, the more miles you drive, the higher your repair and maintenance costs, depreciation, and insurance. Assuming that it cost you about 34 cents per mile to own and operate your vehicle, about $34 would be a reasonable estimate of your “driving expenses.” Note to instructor: Most employers do base their reimbursement of driving expenses on an average cost per mile. You may want to point out that the incremental costs of this trip are much less than the average cost. Thus, employees usually benefit somewhat in the short-term when they are reimbursed for using their own cars. E3.1,2 Ex. 3.3 Nov. 1 Cash ……………………………………………………… Capital Stock ……………………………… Issued stock in exchange for cash. 120,000 8 Land ……………………………………………………… Building …………………………………………………… Cash ……………………………………… Notes Payable …………………………… Purchased land and building, by paying $33,600 cash and issuing a note payable for the remaining balance. 70,000 58,600 15 Office Equipment ………………………………………… Accounts Payable ……………………… … Purchased office equipment on account. 3,200 21 Accounts Payable ………………………………………… Office Equipment ………………………… Returned some of the office equipment purchased on November 15. 480 25 Notes Payable …………………………………………… Cash ……………………………………… Paid note payable. AVENSON INSURANCE COMPANY Trial Balance November 30, 20__ Cash …………………………………………………………… Land …………………………………………………………… Building ……………………………………………………….. Office equipment ………………………………………………. Vehicles ……………………………………………………….. Notes payable …………………………………………………. Accounts payable ……………………………………………… Capital stock …………………………………………………… 33,600 95,000 3,200 480 12,000 12,000 30 Vehicles …………………………………………………… Cash ……………………………………… Notes Payable …………………………… Purchased vehicles by paying $1,400 cash and issuing a note payable for the remaining balance. Ex. 3.4 120,000 $ 9,400 1,400 8,000 73,000 70,000 58,600 2,720 9,400 $ $ 213,720 E3.3,4 91,000 2,720 120,000 $ 213,720 Ex. 3.5 a. Liabilities at the beginning of the year: $39.6 billion – $21.0 billion = $18.6 billion b. Owners’ equity at the end of the year: $53.9 billion – $26.0 billion = $27.9 billion c. Ending retained earnings ………............... Less: Beginning retained earnings ….….. Increase in retained earnings …..……….. Less: Dividends …………....................… Net income ………………………………. Income Statement Ex. 3.6 Transaction 1. 2. 3. 4. 5. 6. Revenue I NE NE NE NE NE Ex. 3.7 a. Expenses = NE NE NE I NE NE Balance Sheet Net Income Assets I I NE D NE NE D NE NE I NE D Income Statement Transaction 1. 2. 3. 4. 5. 6. 7. 8. b. $ 19,500,000,000 (13,800,000,000) $ 5,700,000,000 $ 5,700,000,000 1. 2. 3. 4. 5. 6. 7. 8. Revenue NE I NE NE NE NE NE NE Expenses = I NE NE NE I NE NE NE Liabilities = NE D NE I I NE Owners' Equity I NE NE D NE D Balance Sheet Net Income Assets D NE I I NE D NE I D D NE NE NE I NE D Liabilities = I NE NE I NE NE I D Owners' Equity D I D NE D NE NE NE Incurred wages expense to be paid at a later date. Earned revenue to be collected at a later date. Declared and paid a cash dividend. Purchased office supplies on account. Incurred and paid repairs expense. Collected cash from a customer for revenue earned previously on account. Purchased tools and equipment by paying part in cash and issuing a note payable for the remaining balance. Paid an outstanding account payable. E3.5,6,7 Ex. 3.8 a. Apr. 5 May 17 May 29 June 4 June 10 June 25 Accounts Receivable …………………………… Drafting Fees Earned …………………… Prepared plans for Spangler Construction; payment due in 30 days. 900 Dividends ………………………………………. Dividends Payable ……………………… Declared cash dividend; payment due June 25. 5,000 Professional Expenses ………………………….. Accounts Payable ………………………. Received accounting bill from Bob Needham due on June 10. 2,000 Cash ……………………………………………. Accounts Receivable ……………………. Received full payment from Spangler Construction for bill sent April 5. 900 Accounts Payable ……………………………… Cash ……………………………………. Paid amount owed to Bob Needham, CPA. 2,000 Dividends Payable …………………………….. Cash ……………………………………. Paid cash dividend declared May 17. 5,000 b. The following transactions will not cause a change in net income. May 17: June 4: June 10: June 25: Declaration of a cash dividend. Collection of an account receivable. Payment of an account payable. Payment of a dividend payable. E3.8 900 5,000 2,000 900 2,000 5,000 Ex. 3.9 Transaction Net Income Assets Liabilities Equity a. NE I NE I b. NE I I NE c. D NE I D d. NE NE NE NE e. NE D D NE f. NE NE I D g. NE NE NE NE h. NE NE NE NE E3.9 Ex. 3.10 a. May 3 4 5 15 18 20 26 29 30 31 Cash……………………………………………. Capital Stock……………………………. Issued capital stock for $800,000. 800,000 800,000 Office Rent Expense…………………………….. Cash………………………………………. Paid May office rent expense. 1,000 Office Supplies…………………………………… Cash…………………………………. Purchased office supplies. 400 Office Equipment………………………………… Accounts Payable……………………… Purchased office equipment on account. Amount due June 15. 8,000 Vehicles………………………………………… Cash ……………………………………. Notes Payable…………………………… Purchased a company car. Paid $7,000 cash and issued a $20,000 note payable for the balance. 27,000 Accounts Receivable………………………… Client Revenue……………………….. Billed clients for services on account. 32,000 1,000 400 8,000 7,000 20,000 32,000 Dividends………………………………………. Dividends Payable……………………… Declared dividend to be distributed in June. 5,000 Utilities Expense……………………………….. Cash……………….…………………… Paid May utilities. 200 Cash…………………………………………… Accounts Receivable…………………… Collected cash on account from clients billed on May 20. 30,000 Salary Expense………………………………… Cash…………………………………… Paid salary expense incurred in May. 14,000 E3.10a 5,000 200 30,000 14,000 b. May 31 bal. Cash 800,000 May 4 30,000 May 5 May 18 May 29 May 31 807,400 May 5 Office Supplies 400 May 3 May 30 May 31 bal. May 31 bal. 27,000 May 31 bal. Capital Stock May 3 May 31 bal. May 31 bal. Accounts Receivable 32,000 May 30 Office Equipment 8,000 8,000 Notes Payable May 18 Dividends Payable May 26 8,000 8,000 May 31 bal. Client Revenue May 20 800,000 800,000 Office Rent Expense 1,000 1,000 Utilities Expense 200 200 E3.10b 30,000 2,000 May 31 bal. Accounts Payable May 15 May 29 May 15 May 31 bal. Vehicles 27,000 May 31 bal. May 20 May 31 bal. 400 May 18 May 4 1,000 400 7,000 200 14,000 May 31 bal. May 31 Salary Expense 14,000 May 31 bal. 14,000 May 26 Dividends 5,000 May 31 bal. 5,000 20,000 20,000 5,000 5,000 32,000 32,000 c. Trafflet Enterprises Incorporated Trial Balance May 31, 2011 Debit Cash……………………………………. $807,400 Accounts receivable……………………… 2,000 Office supplies………………………… 400 Office equipment……………………… 8,000 Vehicles……………………………….. 27,000 Notes payable…………………………. Accounts payable………………………. Dividends payable…………………….. Dividends……………………………….. 5,000 Capital stock………………………….. Client revenue…………………………. Office rent expense……………………… 1,000 Salary expense……………………….. 14,000 Utilities expense……………………….. 200 Total……………………………………. $865,000 E3.10c Credit $20,000 8,000 5,000 800,000 32,000 $865,000 Ex. 3.11 a. Sep. 2 Cash……………………………………………. Capital Stock……………………………. Issued capital stock for $900,000. 900,000 4 Land……………………………………………… Building………………………………………….. Cash ……………………………………. Notes Payable…………………………… Purchased land and building for $350,000. Paid $200,000 cash and issued a note payable for the balance. 50,000 300,000 12 Office Supplies………………………………… Accounts Payable………………………… Purchased office supplies on account. 600 900,000 200,000 150,000 600 19 Accounts Receivable…………………………. Client Revenue…………………………. Billed clients on account for services. 75,000 29 Salary Expense………………………………… Cash……………….…………………… Recorded and paid salary expense. 24,000 30 Cash…………………………………………… Accounts Receivable…………………… Collected cash on account from clients billed on September 19. 30,000 E3.11a 75,000 24,000 30,000 b. Sep. 2 Sep. 30 Cash 900,000 Sep. 4 30,000 Sep. 29 Sep. 30 bal. 706,000 Sep. 12 Sep. 30 bal. 200,000 24,000 Office Supplies 600 600 Sep. 4 Building 300,000 Sep. 30 bal. 300,000 Sep. 19 Accounts Receivable 75,000 Sep. 30 Sep. 30 bal. 45,000 Sep. 4 Land 50,000 Sep. 30 bal. 50,000 Notes Payable Sep. 4 Sep. 30 bal. Accounts Payable Sep. 12 Sep. 30 bal. Client Revenue Sep. 19 Sep. 30 bal. Capital Stock Sep. 2 600 600 Sep. 30 bal. 75,000 Sep. 29 Salary Expense 24,000 75,000 Sep. 30 bal. 24,000 E3.11b 30,000 150,000 150,000 900,000 900,000 c. McMillan Corporation Trial Balance September 30, 2011 Debit Cash……………………………………. $706,000 Accounts receivable……………………… 45,000 Office supplies………………………… 600 Land……………………………………. 50,000 Building…………………………………. 300,000 Notes payable…………………………. Accounts payable………………………. Capital stock………………………….. Client revenue…………………………. Salary expense…………………………. 24,000 Total……………………………………. $1,125,600 E3.11c Credit $150,000 600 900,000 75,000 $1,125,600 Ex. 3.12 a. Feb. 1 5 8 Cash……………………………………………. Capital Stock……………………………. Issued capital stock for $750,000. 750,000 Cash……………………………………………. Notes Payable…………………………… Borrowed cash from bank by issuing a note payable. 50,000 Land………………………………………….. Buildings………………………………………. Office Equipment………………………………… Cash…………………………………….. Notes Payable…………………………… Purchased land, building, and equipment building for $600,000. Paid $300,000 and issued a note payable for the balance. 100,000 450,000 50,000 750,000 50,000 300,000 300,000 11 Office Supplies…………………………………. Accounts Payable……………………….. Purchased offices supplies on account. 600 14 Advertising Expense……………………………. Cash ……………………………………. Paid the newspaper $400 for an advertisement to be printed on February 18. 400 20 Accounts Payable……………………………… Office Supplies………………………….. Returned defective office supplies purchased on February 11. Received a $100 credit. 100 22 Cash…………………………………………….. Client Service Revenue………………… Collected cash from clients for services rendered. 6,000 24 Accounts Receivable………………………… Client Service Revenue………………… Billed clients for services on account. 9,000 25 Salary Expense………………………………… Cash…………………………………… Paid salary expense incurred in February. 5,000 28 Accounts Payable……………………………… Cash…………………………………… 500 Paid for office supplies purchased February 11. E3.12a 600 400 100 6,000 9,000 5,000 500 b. Feb. 1 Feb. 5 Feb. 22 Cash 750,000 Feb. 8 50,000 Feb. 14 6,000 Feb. 25 Feb. 28 Feb. 28 bal. 500,100 Feb. 11 Feb. 28 bal. 300,000 400 5,000 500 Feb. 24 Feb. 28 bal. Office Supplies 600 Feb. 20 100 500 Accounts Receivable 9,000 9,000 Feb. 8 Land 100,000 Feb. 28 bal. 100,000 Feb. 8 Buildings 450,000 Feb. 8 Office Equipment 50,000 Feb. 28 bal. 450,000 Feb. 28 bal. 50,000 Feb. 20 Feb. 28 Accounts Payable 100 Feb. 11 500 Feb. 28 bal. Notes Payable Feb. 5 Feb. 8 Feb. 28 bal. 50,000 300,000 350,000 Ca pital Stock Feb. 1 750,000 Feb. 28 bal. Feb. 14 Feb. 28 bal. Client Service Revenue Feb. 22 Feb. 24 Feb. 28 bal. 750,000 Advertisin g Expense 400 400 E3.12b Feb. 25 Salar y Ex p ense 5,000 Feb. 28 bal. 5,000 600 0 6,000 9,000 15,000 c. Herrold Consulting Incorporated Trial Balance February 28, 2011 Debit Cash……………………………………. $500,100 Accounts receivable……………………… 9,000 Office supplies………………………… 500 Land……………………………………. 100,000 Building…………………………………. 450,000 Office equipment………………………. 50,000 Notes payable…………………………. Capital stock………………………….. Client service revenue………………… Advertising expense……………………. 400 Salary expense…………………………. 5,000 Total……………………………………. $1,115,000 Credit $350,000 750,000 15,000 $1,115,000 Ex. 3.13 1. 2. 3. 4. 5. 6. Transaction e. f. b. a. d. c. 1. 2. 3. 4. 5. 6. Transaction d. e. a. f. c. b. Ex. 3.14 Ex. 3.15 a. The company's most recent balance sheet is dated January 31, 2010. Thus, it is apparent financial year does not coincide with the calendar year. b. $40,877 = $21,484 + $19,393 c. Cash (and equivalents) increased from $519 million to $1.421 billion during the year. Thus, debits to Cash exceeded credits by $902 million. E3.12c,13,14,15