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Accounting, 7th Edition Solution Manual

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    1 Chapter 1 The Role of Accounting in Business Quick Check Answers: 1. a 2. b 3. b 4. c 5. b 6. d 7. b 8. a 9. a 10. c

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    2 Starters (5 min.) S1 - 1 Req. 1 Revenues are increases in equity from delivering goods or services to customers. Expenses are decreases in equity from using assets or increasing liabilities in the course of delivering goods or services to customers. Profit : where total revenues exceed total expenses. Equity : the residual interest of the owners after deducting all liabilities. Req. 2 No answer required. (5 min.) S1 - 2 Accounting as practiced is based on accrual principles. Financial accountants prepare financial statements for external users. (5 min.) S1 - 3 Req. 1 The banker is an external user of financial information. Req. 2 The financial statement that would provide the best information to answer the banker’s questions is the balance sheet. (5 - 10 min.) S1 - 4 Req. 1 This organisation is the Australian Accounting Standards Board (AASB).

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    3 (5 - 10 min.) S1 - 5 Req. 1 Chloe’s needs will best be met by organising a corporation. (5 - 10 min.) S1 - 6 Req. 1 a. The Entity Concept b. Accounting Period Concept c. The Going Concern Assumption d. The Conservatism Principle (5 min.) S1 - 7 Req. 1 Req. 2 Michael McNamee has $11 000 equity in the business. Assets = Liabilities + Owners’ equity Accounts Cash + Furniture = Payable + Owners’ equity $8 000 + $9 000 = $6 000 + $11 000 Assets = Liabilities + Owners’ equity Type of Transaction (a) Cash $320 = (not affected) $ 0 + Capital $320 Revenues (b) Cash $(125) = (not affected) 0 + Capital $(125) Expenses (c) Accts receivable $440 = (not affected) 0 + Capital $440 Revenues (d) (not affected) 0 = Accts payable $65 + Capital $(65) Expenses

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    4 (5 min.) S1 - 8 Req. 1 Account Amount Cash $ (26 000) Land $ 26 000 (5 min.) S1 - 9 Req. 1 After this transaction (the first and only for the business), cash equals $0 and the total assets equal $2 800 . Req. 2 The business’ asset which was increased as a result of the transaction is accounts receivable . (5 min.) S1 - 10 Req. 1 The business did not record any revenue when it collected cash on account because the business recorded the revenue one month earlier, when it was earned . Req. 2 Assets = Liabilities + Owners’ Equity Type of Transaction Cash + Accounts receivable = (not affected) + Martin, capital (a) $ 500 + $ 0 = $ 0 + $ 500 Revenues (b) 500 + (500) = 0 + 0 No effect on equity

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    5 (10 min.) S1 - 11 Req. 1 Smart Touch Learning Balance Sheet 21 May 2014 ASSETS LIABILITIES Cash $11 900 Accounts payable $ 200 Accounts receivable 3 000 Office supplies 500 OWNERS’ EQUITY Land 20 000 Bright, capital 35 200 _______ Total liabilities and _______ Total assets $35 400 owners’ equity $35 400 (10 min.) S1 - 12 Req. 1 Elegant Arrangements Income Statement Year Ended December 31, 2012 Revenue: Service revenue $74 000 Expenses: Salary expense $42 000 Rent expense 13 000 Insurance expense 4 000 Supplies expense 1 100 Total expenses 60 100 Profit $13 900 (10 min.) S1 - 13 Req. 1 The operations of Elegant Arrangements in 2012 resulted in a good year. This can be measured by the profit of $13 900. Req. 2 Profit would be lower by $14 800 . Req. 3 Profit would be lower by $8 400 .

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    6 Exercises (10 - 15 min.) E1 - 1 Req. 1 1. E 2. A 3. I 4. F 5. J 6. B 7. D 8. C 9. G 10. H 11. K (15 - 20 min.) E1 - 2 Req. 1 The balance sheet is prepared by summarising the assets, liabilities and owners’ equity of the entity at a particular date. The assets are the resources the business has to work with. Liabilities are debts owed to creditors. Owners’ equity is the portion of the business assets owned outright by the proprietor. The income statement is prepared by summarising the revenues and the expenses of a particular entity for a period such as a month or a year. Total revenues minus total expenses equals profit (or loss ). Req. 2 The Australian Accounting Standards Board (AASB) is the self - regulating body of accountants that defines pronouncements that guide how the financial statements will be prepared. Req. 3 Before lending money, the lender evaluates O’Brien’s ability to make the loan payments. Lenders will use the reported profit and other information in the financial statements to predict future income of the O’Brien travel magazine. Therefore the bank requires the financial statements of the O’Brien travel magazine to make a decision about lending money to O’Brien.

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    7 Req. 4 Evan O’Brien is organised as a proprietorship. Req. 5 A corporation would be the best option. (5 - 10 min.) E1 - 3 Assets = Liabilities + Owners’ equity New Rock Gas $ ? $24 000 $50 000 DJ Video Rentals 75 000 ? 32 000 Corner Grocery 100 000 53 000 ? Req. 1 New Rock Gas Assets = $24 000 + $50 000 = $74 000 DJ Video Rentals Liabilities = $75 000 – $32 000 = $43 000 Corner Grocery Owners’ equity = $100 000 – $53 000 = $47 000 Req. 2 The main characteristics of a proprietorship are: 1. The life of the organisation is limited by owner’s choice or death 2. There is a single owner 3. Unlimited liability of owner Req. 3 The accounting concept or principle that tells us that the above three proprietorships will continue to exist in the future is the going concern concept . (5 - 10 min.) E1 - 4 Req. 1 Under US GAAP, the land would be reported on the balance sheet at 3 January 2014 at $50 000. On the 31 December 2014 balance sheet, the land could be reported at $50 000.

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    8 Req. 2 Under IFRS, the land would be reported on the balance sheet at 3 January 2014 at $50 000. On the 31 December 2014 balance sheet, the land would be recorded at $55 000. (5 - 10 min.) E1 - 5 Req. 1 a. b. c. Owners’ equity, 31 May 2014 ($177 000 – $122 000) $55 000 $55 000 $55 000 Owners’ investment 6 000 0 18 000 Profit for the month 8 000 24 000 16 000 69 000 79 000 89 000 Drawings 0 (10 000) (20 000) Owners’ equity, 30 June 2014 ($213,000 – $144,000) $69 000 $69 000 $69 000 (5 - 10 min.) E1 - 6 Req. 1 a. Purchase of asset for cash Sale of asset for cash Collection of accounts receivable b. Pay an expense Drawings c. Pay an account payable d. Investment by owner Revenue transaction e. Purchase of asset on account Borrow money Note: wording may vary.

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    9 (10 - 20 min.) E1 - 7 Req. 1 a. Increase asset (Cash) Increase capital (Capital) b. Increase asset (Accounts receivable) Increase capital (Capital) c. Increase asset (Office furniture) Increase liability (Accounts payable) d. Increase asset (Cash) Decrease asset (Accounts receivable) e. Decrease asset (Cash) Decrease liability (Accounts payable) f. Increase asset (Cash) Decrease asset (Land) g. Increase asset (Cash) Increase capital (Capital) h. Decrease asset (Cash) Decrease capital Capital) i. Increase asset (Supplies) Decrease asset (Cash)

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    10 (10 - 20 min.) E1 - 8 Req. 1 Analysis of Transactions Caren Smith, GP ASSETS = LIABILITIES + OWNERS’ EQUITY DATE CASH + MEDICAL SUPPLIES + LAND = ACCOUNTS PAYABLE + SMITH, CAPITAL TYPE OF OWNERS’ EQUITY TRANSACTION July 6 55 000 55 000 Owners’ investment Bal. 55 000 0 0 0 55 000 9 (46 000) 46 000 No effect Bal. 9 000 0 46 000 0 55 000 12 1 800 1 800 No effect Bal. 9 000 1 800 46 000 1 800 55 000 15 No effect Bal. 9 000 1 800 46 000 1 800 55 000 15 - 31 8 000 8 000 Service revenue Bal. 17 000 1 800 46 000 1 800 63 000 29 (1 600) (1 600) Salary expense (900) (900) Rent expense (100) (100) Electricity and gas expense Bal. 14 400 1 800 46 000 1 800 60 400 30 (700) (700) No effect Bal. 14 400 1 100 46 000 1 100 60 400 31 (1 100) (1 100) No effect Bal. 13 300 1 100 46 000 0 60 400 $60 400 = $ 60 400 Total assets = Total liabilities and owners’ equity

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    11 (10 - 15 min.) E1 - 9 Req. 1 Transaction Description 1. Investment by the owner 2. Earned revenue on account 3. Purchased equipment on account 4. Collected cash on account 5. Cash purchase of equipment 6. Paid on account 7. Earned revenue and received cash 8. Paid cash for expenses Req. 2 All - in - one Accounting Service’s profit = $3 090 . (10 min.) E1 - 10 Req. 1 The owners’ equity increased during the year by $4 000 . Beginning owners’ equity: $19 000 – $9 000 = $10 000 Ending owners’ equity: $27 000 – $13 000 = $14 000 Change in owners’ equity: $14 000 – $10 000 = $4 000 Req. 2 Owners’ equity can change three ways: • Owners’ equity can increase through: Owner contributions and/or Profit • Owners’ equity can decrease t hrough: Owner drawings

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    12 (10 - 15 min.) E1 - 11 Req. 1 Profit for American Express Services (AES) is $7 000 000 . Revenues – Expenses = Profit $21 000 000 – $14 000 000 = $7 000 000 Req. 2 The owners’ equity increased during the year by $7 000 000 . Req. 3 The AES’s performance for 2012 is good , because 2012 was a profitable year and this improves the firm’s ability to make repayments. (30 - 40 min.) E1 - 12 Req. 1 Assets – Liabilities = Owners’ equity Beginning $ 45 000 – $29 000 = $16 000 Ending $ 55 000 – $38 000 = $17 000 Owners ’ equity Beginning balance: $ 16 000 Investment by the owner 0 Profit 20 000 $36 000 Drawings (19 000) Ending balance $17 000 Felix earned profit of $20 000 . Revenue – Profit = Expenses $ 242 000 – $20 000 = $222 000 Req. 2 Felix’s performance for the year was good because the business earned a profit.

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    13 (10 - 15 min.) E1 - 13 Req. 1 Effects on total assets Asset account(s) affected a. Increased total assets Cash b. No effect on total assets Cash and land c. Decreased total assets Cash d. Increased total assets Equipment e. Increased total assets Accounts receivable f. No effect on total assets No asset account(s) affected g. No effect on total assets Cash and Accounts receivable h. Increased total assets Cash i . Decreased total assets Cash j. No effect on total assets No asset account(s) affected (10 - 20 min.) E1 - 14 Req. 1 Wilson Towing Service Balance Sheet 30 June 2014 ASSETS LIABILITIES Cash $ 2 900 Accounts payable $ 3 000 Accounts receivable 6 200 Loan payable 6 900 Supplies 900 Total liabilities 9 900 Equipment 13 600 OWNERS’ EQUITY Wilson, capital 13 700* ______ Total liabilities and Total assets $23 600 owners’ equity $23 600 * Total assets – Total liabilities = Owners’ equity $23 600 – $9 900 = $13 700 Req. 2 The balance sheet reports financial position . Req. 3 The income statement.

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    14 (10 - 15 min.) E1 - 15 Req. 1 Davis Design Studio Income Statement Year Ended 31 December 2012 Revenue: Service revenue $158 300 Expenses: Salary expense $65 000 Rent expense 23 000 Electricity and gas expense 6 900 Supplies expense 4 200 Rates expense 1 500 Total expenses 100 600 Profit $ 57 700 The result of operations is profit of $57 700 . Req. 2 The amount of owner drawings during the year was $39 400 .

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    15 Problems Group A (15 - 20 min.) P1 - 1 Req. 1 1. D 2. E 3. G 4. H 5. A 6. I 7. B 8. C 9. F 10. J (20 - 25 min.) P1 - 2 Req. 1 There is no proprietorship feature that limits Andrea’s personal liability. She is personally liable for the debts of the business. Req. 2 Andrea Scarlett, Real Estate Balance Sheet 30 September 2014 ASSETS LIABILITIES Cash $ 9 000 Accounts payable $ 2 000 Office supplies 1 300 Loan payable 61 000 Franchise 23 000 Total liabilities 63 000 Furniture 15 000 OWNERS’ EQUITY Land 83 000 Scarlett, capital 68 300* ________ Total liabilities and __ ____ Total assets $131 300 owners’ equity $131 300 * Total assets – Total liabilities = Total owners’ equity $131 300 – $63 000 = $68 300

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