Accounting Answers Note #8

Question 1 stockholders equity consist of which of the following? -long term assets -paid in capital and retained earnings - paid in capital and park value -retained earnings and cash -premiums and discounts Answer Stockholders' equity, also known as shareholders' equity, refers to the portion of a company's assets that belong to its shareholders, or owners. It represents the residual value of a company after deducting liabilities from its total assets. It is an important indicator of a company's financial health and reflects the worth of the company from an investor's perspective. In this answer, we will discuss the components that make up stockholders' equity and their significance. According to investopedia.com, stockholders' equity is composed of two main categories: paid-in capital and retained earnings. Paid-in capital refers to the amount of capital that shareholders have invested in the company, while retained earnings refer to the portion of the company's profits that have been reinvested instead of being distributed as dividends. 1. Paid-in Capital: Paid-in capital, also known as contributed capital, includes the initial investments made by shareholders as well as additional investments made by them. These contributions can be in the form of cash, assets, or services. Paid-in capital is further divided into two categories: common stock and preferred stock. Common stock is issued to shareholders in exchange for their investments, while preferred stock typically comes with a fixed dividend payment and sometimes additional rights. 2. Retained Earnings: Retained earnings are the accumulated net profits of a company that have been reinvested into the business instead of being distributed as dividends. It represents the portion of the company's earnings that have been retained for future growth opportunities. 3. Long-term Assets: Long-term assets refer to assets that are expected to provide economic benefits to a company for an extended period, usually more than one year. These assets are held by the company for its operations and do not include short-term assets like cash and inventory. Examples of long-term assets include fixed assets such as property, plant, and equipment, intangible assets like patents, trademarks, and goodwill, and long-term investments. 4. Cash: Cash is the most liquid asset that a company holds and represents the amount of money available for operations. Although not a direct component of stockholders' equity, cash plays a crucial role in determining the financial stability and liquidity of a company. 5. Premiums and Discounts: Premiums and discounts are not considered direct components of stockholders' equity, but their impact is reflected in the company's retained earnings. Premiums are the difference between the par value and the actual price paid by investors for a company's stock. Discounts, on the other hand, occur when a company sells its stock at a price lower than its par value. These fluctuations in premiums and discounts are adjusted against retained earnings and can have a significant impact on a company's financial statements. In conclusion, stockholders' equity is composed of paid-in capital and retained earnings. While paid-in capital represents the investments made by shareholders, retained earnings reflect the portion of a company's profits that have been reinvested into the business. Other components of stockholders' equity include long-term assets, cash, and premiums and discounts. Understanding these components is crucial for investors and analysts to assess a company's financial health and potential for growth. Question 2 The following financial statements and additional information are reported. IKIBAN INCORPORATED Comparative Balance Sheets At June 30 2021 2020 Assets Cash $ 102,100 $ 53,000 Accounts receivable, net 78,500 60,000 Inventory 72,800 100,000 Prepaid expenses 5,300 7,200 Total current assets 258,700 220,200 Equipment 133,000 124,000 Accumulated depreciation—Equipment (31,500) (13,500) Total assets $ 360,200 $ 330,700 Liabilities and Equity Accounts payable $ 34,000 $ 43,500 Wages payable 6,900 16,800 Income taxes payable 4,300 5,600 Total current liabilities 45,200 65,900 Notes payable (long term) 39,000 69,000 Total liabilities 84,200 134,900 Equity Common stock, $5 par value 238,000 169,000 Retained earnings 38,000 26,800 Total liabilities and equity $ 360,200 $ 330,700 IKIBAN INCORPORATED Income Statement For Year Ended June 30, 2021 Sales $ 723,000 Cost of goods sold 420,000 Gross profit 303,000 Operating expenses (excluding depreciation) 76,000 Depreciation expense 67,600 159,400 Other gains (losses) Gain on sale of equipment 2,900 Income before taxes 162,300 Income taxes expense 44,790 Net income $ 117,510 Additional Information A $30,000 notes payable is retired at its $30,000 carrying (book) value in exchange for cash. The only changes affecting retained earnings are net income and cash dividends paid. New equipment is acquired for $66,600 cash. Received cash for the sale of equipment that had cost $57,600, yielding a $2,900 gain. Prepaid Expenses and Wages Payable relate to Operating Expenses on the income statement. All purchases and sales of inventory are on credit. Answer Based on the given information, it can be determined that IKIBAN INCORPORATED had a significant increase in their total assets from the previous year, with a total of $360,200 compared to $330,700 in 2020. This increase is primarily driven by the increase in cash, accounts receivable, and equipment, as well as a decrease in accumulated depreciation. On the liabilities side, there has been a decrease in total liabilities from the previous year, with a total of $84,200 compared to $134,900 in 2020. This decrease is mostly due to the decrease in notes payable (long term). It is important to note that both common stock and retained earnings have also increased, indicating a positive financial performance for the company. In the income statement, it can be seen that IKIBAN INCORPORATED had a gross profit of $303,000, with operating expenses totaling to $76,000 and depreciation expense at $67,600. This results in a gain of $2,900 from the sale of equipment, bringing the total income before taxes to $162,300. After taxes and net income, the company recorded a profit of $117,510 for the year ended June 30, 2021. The additional information provided also sheds light on the company's financial activities. The retirement of a $30,000 notes payable at its carrying value in exchange for cash resulted in a decrease in liabilities. The acquisition of new equipment for $66,600 cash indicates the company's investment in its operations. The gain from the sale of equipment also reflects positively on the company's financial performance. Question 3 use the following company information to calculate net cash provided or used by investing activities - long term investments were sold for $42,500 cash yielding a gain of $20450 - paid $63,500 cash for new machinery - sold land costing $32,300 for $36,400 cash yielding $4300 gain - equipment with a book value of $178000 and an original cost of $303000 was sold at a loss of $18500 Answer The calculation of net cash provided or used by investing activities is an important aspect of a company's operating performance and financial health. It reflects the amount of cash generated or utilized from buying or selling long-term assets, such as equipment, machinery, and investments. In this scenario, we are given information on various investing activities, including the sale of long-term investments, purchase of new machinery, sale of land, and sale of equipment. To accurately calculate net cash provided or used by investing activities, we need to use the formula: Net cash provided or used by investing activities = Cash inflows from investing activities - Cash outflows from investing activities Using the information provided, we can calculate the net cash provided or used by investing activities as follows: 1) Long term investments were sold for $42,500 cash, yielding a gain of $20,450: - Cash inflow from the sale of long-term investments = $42,500 - Cash outflow for the purchase of long-term investments = $0 (since none were purchased) - Net cash provided by investing activities from the sale of long-term investments = $42,500 - $0 = $42,500 2) Paid $63,500 cash for new machinery: - Cash outflow for the purchase of new machinery = $63,500 - Cash inflow from the sale of old machinery = $0 (no information given) - Net cash used by investing activities for the purchase of new machinery = $63,500 - $0 = $63,500 3) Sold land costing $32,300 for $36,400 cash, yielding a gain of $4,300: - Cash inflow from the sale of land = $36,400 - Cash outflow for the purchase of land = $0 (since it was already owned and sold) - Net cash provided by investing activities from the sale of land = $36,400 - $0 = $36,400 4) Equipment with a book value of $178,000 and an original cost of $303,000 was sold at a loss of $18,500: - Cash inflow from the sale of equipment = $0 (no information given) - Cash outflow for the purchase of equipment = $0 (since it was already owned and sold) - Net cash used by investing activities from the sale of equipment = $0 - $0 = $0 Overall, the net cash provided or used by investing activities can be calculated as follows: Net cash provided or used by investing activities = $42,500 + $63,500 + $36,400 + $0 = $142,400 Question 4 What is the interest on partners' capital for a partnership firm? Answer In a partnership firm, the partners' capital refers to the equity invested by the partners in the business. As with any form of investment, the partners expect a return on their capital in the form of profits. However, in some cases, partners may also receive interest on their capital in addition to their share of profits. There is no standard rate for interest on partners' capital as it is determined by the partnership agreement. Generally, the interest rate on partners' capital is lower than the rate of return generated by the business to ensure that the business has enough funds for growth and other expenses. The partners' share of profits is their primary source of income from the business. One of the most important factors to consider when determining the interest on partners' capital is the risk involved. Unlike a limited liability company, partners are personally liable for the debts and obligations of the partnership firm. Hence, the interest rate should reflect the risk taken by the partners. Question 5 The following transactions were completed by the company. A. The company completed consulting work for a client and immediately collected $5,500 cash. B. The company completed commission work for a client and sent a bill for $4,000 to be received within 30 days. C. The company paid an assistant $1,4000 cash as wages for the period. D. The company collected $1,000 cash as a partial payment for the amount owed by the client in transaction b. E. The company paid $700 cash for this period's cleaning services. complete in accounting equation expanded Answer According to the transactions provided, the expanded accounting equation for the company would be as follows: Assets = Liabilities + Owner's Equity Cash + Accounts Receivable + Supplies + Prepaid Expenses = Accounts Payable + Notes Payable + Owner's Capital + Revenue - Expenses Using this equation, we can analyze each of the transactions separately and determine their impact on the company's financial position. A. The first transaction states that the company completed consulting work for a client and immediately collected $5,500 cash. This transaction would increase the company's cash balance by $5,500 and also increase the owner's equity by the same amount, as it represents revenue earned by the company. B. The second transaction states that the company completed commission work for a client and sent a bill for $4,000 to be received within 30 days. This transaction would increase the company's accounts receivable by $4,000 and also increase the revenue by the same amount. However, it would have no impact on cash or owner's equity at this point. C. The third transaction states that the company paid an assistant $1,400 cash as wages for the period. This transaction would decrease the company's cash balance by $1,400 and also decrease owner's equity through the expenses incurred. D. The fourth transaction states that the company collected $1,000 cash as a partial payment for the amount owed by the client in transaction B. This transaction would decrease the accounts receivable balance by $1,000 and increase the cash balance by the same amount. It would also increase the revenue and owner's equity as the company receives cash toward the outstanding amount. E. The final transaction states that the company paid $700 cash for this period's cleaning services. This transaction would decrease the cash balance by $700 and also decrease owner's equity through the expenses incurred. Overall, the transactions have resulted in an increase in cash of $3,100, an increase in accounts receivable of $4,000 and a decrease in cash of $700, leading to a net increase in assets of $6,400. It has also resulted in an increase in revenue of $9,000 and an increase in expenses of $1,400, leading to a net increase in owner's equity of $7,600. There are a few theoretical concepts to consider in these transactions. Firstly, it is important for companies to maintain timely and accurate records of their financial transactions to ensure proper financial management and decision making. This requires the use of accurate and reliable accounting systems. Secondly, it is important to note that the revenue and expenses are recognized when they are earned or incurred, not when cash is received or paid. This means that even though the company has not yet received the $4,000 in transaction B, it is still recognized as revenue in this period. Lastly, companies should carefully monitor their accounts receivable and accounts payable balances to ensure timely collections and payments. This helps to maintain a healthy cash flow and avoid any potential issues with liquidity. Useful sources for further understanding of these transactions and the accounting equation include textbooks such as "Financial Accounting" by Weygandt, Kimmel, and Kieso and "Accounting Principles" by Jerry J. Weygandt, Paul D. Kimmel, and Donald E. Kieso. Additionally, online resources such as the Financial Accounting Standards Board (FASB) website provide in-depth explanations and guidance on accounting principles and standards. Question 6 total assets of martin marine equal $500,000 and its liabilities and equity amounts are equal to each other. What is the amount of its liabilities? What is the amount of its equity? Answer The amount of liabilities and equity can be calculated by using the accounting equation, which states that Assets = Liabilities + Equity. In this case, the total assets of Martin Marine are given as $500,000 and its liabilities and equity amounts are equal to each other. This means that the equation can be rearranged as Liabilities + Equity = $500,000. To find the individual amounts of liabilities and equity, we need to have more information about the company's financial statement. Liabilities refer to the company's debts and obligations, while equity represents the owner's share of the company. Without further information, it is not possible to determine the exact amounts of liabilities and equity. However, we can make some assumptions based on the given information. Since liabilities and equity are equal, we can say that each one represents 50% of the total assets ($500,000/2). This means that the amount of liabilities and equity would both be $250,000.