Fundamental Accounting Principles, Volume 1, 14th Canadian Edition Solution Manual

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Last revised:October26,20121-1SOLUTIONS MANUALto accompanyFundamental Accounting Principles14thCanadian Editionby Larson/JensenPrepared by:Tilly Jensen, Athabasca UniversityWendy Popowich, Northern Alberta Institute of TechnologySusan Hurley, Northern Alberta Institute of TechnologyRuby So Koumarelas, Northern Alberta Institute of TechnologyTechnical checks by:Ross MeacherBetty Young, Red River College,ANSR Source

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Last revised:October26,20121-2Chapter 1Accountingin BusinessChapter Opening VignetteCritical Thinking ChallengeQuestions*1.What questions might Jake need the answers to in order to get a loan from abank?How many employees does he need to hire to provide services to clients? DoesJake pay hisemployees a salary or a wage? How much does he pay them? Doeshe have the cash in the bank to pay his employees? Does he have rentalequipment? Does he have a vehicle? Does he have insurance? Is the buildingrented or purchased? If he rents a building, did he make rental payments inadvance or does he pay monthly? If the building was purchased, did he pay cashor does he owe money on it? Ifhe owes money, does he pay interest? If he owns abuilding, how much does he pay on property taxes and utilities? If he owns abuilding, how much does he pay for repairs and maintenance? What about buyingand paying for supplies? Does he advertise? If so, how much does he pay? Howmuch is the business actually earning? Do customers pay in advance or do theypay per session? Do customers pay cash or on account? What is the amount ofincome tax he has to pay? Are there any outstanding loans? If so, what is thebalance outstanding, the term, the payments, and the interest rate? There aremany other questions that could be asked.2.Who else might require accounting information from Jake’s business?Other stakeholders that might require accounting information from Jake’sbusiness include Canada Revenue Agency (CRA), employees, and potentialinvestors.*The Chapter 1 Critical Thinking Challenge questions areaskedat the beginning of thischapter.Students are reminded at the conclusion ofthe chapterto refer to the CriticalThinking Challenge questions at the beginning of the chapter.The solutionsto theCritical Thinking Challenge questionsare availablehere in the Solutions Manualandaccessible to studentsat Connect.

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Last revised:October26,20121-3Concept ReviewQuestions1.Jakeidentifies accounting knowledgeas the key to success in business.2.Businesses offering products include Danier Leather, Bauer, NIKE,andReebokwhich produce apparel;Dell, Hewlett-Packard,andApplewhich produce computerequipment;andTilley, Levis, and GAPwhich produce clothing.Service businessexamples include: WestJet Airlineswhich provides airline services;Sympatico, AOLCanada,andCompuServeprovide information communication services;andTilden,Hertz, and Budgetwhich provide vehicle rental services.3.Business organizations can be organized in one of three forms: sole proprietorship,partnership,orcorporation.Theseformshaveimplicationsforlegalliability,taxation, continuity, number of owners, and legal status as follows:SoleProprietorshipPartnershipCorporationLegal entitynonoyesLimited liabilitynonoyesUnlimited lifenonoyesBusiness income taxednonoyesOne owner allowedyesnoyes4.The equity section of the balance sheet reports a Virgil Klimb, Capital account. Thepresence of the owner’s capital account indicates that Vertically Inclined has beenorganized as a sole proprietorship.5.The two organizations for which accounting information is available in Appendix1atthe end of the book are WestJet Airlines and Danier Leather.6.Hospitals, colleges, prisons, and bus lines are examples of organizations that can beformedasprofit-orientedbusinesses,governmentunits,ornonprofitestablishments.7.Individuals responsible for marketing activities are likely interested in informationsuchassalesvolume,advertisingcosts,promotioncosts,salariesofsalespersonnel, and sales commissions.8.External users and their uses of accounting information include: (a) lenders formeasuring the return of loans; (b) shareholders for assessing the acquisition ofshares; (c)members of the board ofdirectors for overseeing management; and (d)potentialemployeesforjudgingemploymentopportunities.Otherusersareauditors, consultants, regulators, unions, suppliers, and appraisers.Internal usersand their uses of accounting information include:(a)management for overseeingperformance,financialposition,andcashflow;and(b)currentemployeesforgenerating special purpose reports to assist management.9.The internal role of accounting is to serve the organization’s internal operatingfunctions by providing useful information in completing their tasks more effectivelyand efficiently. By providing this information, accounting helps the organizationreach its overall goals.10.Managerialaccountingtasksperformedbybothprivateandgovernmentaccountants include general accounting, cost accounting, budgeting, auditing, andmanagement consulting.11.Management consulting services offered by public accounting professionals includedesigning and installing accounting systems, establishing internal controls, advice

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Last revised:October26,20121-4onbudgeting,guidanceininformationtechnology,andconstructingemployeebenefit plans.12.In addition to preparing tax returns, tax accountants help companies plan futuretransactions to minimize the amount of tax to be paid.13.The independent auditor for Danier Leather is PricewaterhouseCoopers LLP.14.The purpose of accounting is to provide decision makers with information helpingthemmakebetterdecisions.Examplesincludeinformationforpeoplemakinginvestments, loans and similar decisions.15. Accounting professionals deal with a variety of information about their employersandclientsthatisnotgenerallyavailabletothepublic.Ethicalissuesariseconcerning the possibility that accounting professionals might personally benefit byusing confidential information. There is also the possibility that their employers andclients might be harmed if certain information is not kept confidential.16.An income statement user must know what time period is covered to judge whetherthe company’s performance is satisfactory. For example, a statement user would notbe able to assess whether the amounts of revenue and net income are satisfactorywithout knowing whether they were earned over a week, a month, or a year.17.The revenue recognition principle provides guidance that managers and auditorsneed for knowing when to recognize revenue. For example, if revenue is recognizedtoo early,theincomestatementreportsincomeearlierthan itshould andthebusiness looks more profitable than it really is. On the other hand, if the revenue isnot recognized on time, the income statement shows lower amounts of revenue andnet income than it should and the business looks less profitable than it really is.Basically, this principle requires revenue to be recognized when it is earned and canbe measured reliably. The amount of revenue should equal the value of the assetsreceived from the customers.18.The four financial statements are: the income statement, the balance sheet, thestatement of changes in equity, and the statement of cash flows.19.An income statement reports on the business’s performance during the period.Itshows whether the business earned a net income (or net loss). The statement doesnot simply report the amount of net income or loss but lists the types and amountsof the revenues and expenses.20.Arevenueisaninflowof assetsreceived inexchangeforgoodsorservicesprovided to customers as part of the major or central operations of the business. Arevenue also may occur as a decrease in liabilities as when a service or product isdelivered having been paid for in advance.21.A business’s equity is increased by investments into the business made by theowner and by net income. It is decreased by withdrawals made by the owner and bya net loss, which is the excess of expenses over revenues.22.The balance sheet reports on the financial position of a business at a specific pointin time.It is often called the statement of financial position. It provides informationthat helps users understand a company’s financial status. The balance sheet liststhe types and dollar amounts of assets, liabilities, and equity of the business.

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Last revised:October26,20121-523.(a)Assetsareprobablefutureeconomicbenefitsobtainedorcontrolledbyaparticular entity as a result of past transactions or events. (b) Liabilities are probablefuturesacrificesofeconomicbenefitsarisingfrompresentobligationsofaparticular entity to transfer assets or provide services to other entities in the futureas a result of past transactions or events. (c) Equity is the residual interest in theassets of an entity that remains after deducting its liabilities. (d) The term “netassets” means the same thing as equity, which is also determined as assets lessliabilities.QUICK STUDYQuick Study 1-1There are a variety of questions and this list is certainly not exhaustive:1.How much was spent on advertising last year? And/or how much is projected to bespent this year?2.What is the effect of advertising on sales? And/or what is the projectedeffect ofadvertising on this year’s sales?3.How much was spent on delivering flowers last year? And/or how much is projectedto be spent this year?4.How much will it cost to create a webpage and sell flowers online?5.Can sales be increased by selling online? And/or what is the experience of ourcompetitors in this regard?6.When pricing flowers, how much is being charged for delivery?7.Are there enough sales staff to answer phones/emails and/or are sales being lostbecause of insufficient staffing and/or staffing issues?Quick Study 1-2a.AccountingMeeting with the mechanical staff to determine new machinerequirements for next year.b.RecordkeepingData entry of sales orders received via the telephone.c.AccountingAnalyzing a sales report to determine if the discount policy iseffective in getting customers to buy in multiple quantities.d.RecordkeepingListing cheques received in the mail.Quick Study 1-3a.Highlands United ChurchNon-businessd.CDI CollegeBusinessb.Royal Alexandra HospitalNon-businesse.LoblawBusinessc.RBCBusinessf.World VisionNon-business

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Last revised:October26,20121-6Quick Study 1-4Accounting professionals practice in fourbroad fields including:Accounting-related opportunities withineach field are numerous and include:Financial accounting-Statement preparation-Statement analysis-Auditing-Regulatory-Consulting-Planning-Criminal investigationManagerial accounting-General accounting-Cost accounting-Budgeting-Internal auditing-Management advisory servicesTaxation-Preparation-Planning-Regulatory-Investigations-ConsultingAccounting-related-Lenders-Consultants-Analysts-Traders-Managers-Directors-Underwriters-Planners-AppraisersQuick Study 1-5Accounting information could be used to determine if a product should be sold or if aninvestment should be made.

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Last revised:October26,20121-7Quick Study 1-6The four elements need to be addressed as follows:1.Is it the Truth? No, personal dinners with a spouse are not business expenses soyou are not being truthful in submitting these as part of the expense report.2.Is it Fair to all concerned? No, it is not fair to the owner(s) of the business, to theother employees, or to your spouse (since they are likely not aware of the deceit).3.Will it build goodwill and better friendships? It may build a good relationship withthe restaurant owners where you take your spouse but it will damage goodwillbetween the employer and you as well as strain friendships with other employees.4.Will it be beneficial to all concerned? It will benefit you, your spouse, and therestaurant owner but it will not benefit the business owner(s) and the otheremployees.Conclusion: The behaviour in the situation described appears to be unethical based onthe application of the Rotary 4-Way Test.Quick Study 1-7a.Business entity principleb.Revenue recognition principlec.Cost principleQuick Study 1-81.Revenue Recognition2.Cost3.Business Entity4.Going Concern5.Monetary UnitQuick Study 1-9Monetary Unita.Delco performed work for a client located in China and collected8,450,000 RMB (Chinese currency), the equivalent of about $1,320,000Canadian. Delco recorded it as 8,450,000.RevenueRecognitionb.Delco collected $180,000 froma customer on December 20, 2014forwork to be done in February 2015. The $180,000 was recorded asrevenue during 2014. Delco’s year end is December 31.GoingConcernc.Delco’s December 31, 2014balance sheet showed total assets of$840,000 and liabilities of $1,120,000. The income statement for thepast 6 years has shown a trend of increasing losses.Costd.Included in Delco’s assets was land and building purchased for$310,000 and reported on the balance sheet at $470,000.BusinessEntitye.Delco’s owner, Tom Del, consistently buys personal supplies andcharges them to the company.

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Last revised:October26,20121-8Quick Study 1-101.SP2.C3.P4.SP5.C6.C7.PQuick Study 1-11a.Equity=$ 75,000–$ 40,500=$ 34,500b.Liabilities=$300,000–$ 85,500=$214,500c.Assets=$187,500+$ 95,400=$282,900Quick Study 1-12a.Equity=$374,700–$252,450=$122,250b.Liabilities=$150,900–$126,000=$ 24,900c.Assets=$ 37,650+$112,500=$150,150

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Last revised:October26,20121-9Quick Study 1-13a.Allin ServicingIncome StatementFor Month Ended April 30, 2014Revenues$300Expenses125Net income (loss)175Allin ServicingStatement of Changes in EquityFor Month Ended April 30, 2014Tim Allin, capital, April 1$ 50Add: Investments byowner$ 30Net income175205Total$255Less: Withdrawals by owner15Tim Allin, capital, April 30$240Allin ServicingBalance SheetApril 30, 2014AssetsLiabilitiesCash$ 60Accounts payable$ 25Equipment205EquityTim Allin, capital240Total liabilities andTotal assets$265equity$265b.Allin ServicingIncome StatementFor Month Ended May 31, 2014Revenues$135Expenses85Net income (loss)$50Allin ServicingStatement of Changes in EquityFor Month Ended May 31, 2014Tim Allin, capital, May 1$240Add: Investments byowner$ 60Net income50$110Total350Less: Withdrawals by owner75Tim Allin, capital, May31$275Allin ServicingBalance SheetMay 31, 2014AssetsLiabilitiesCash$120Accounts payable$ 45Equipment200EquityTim Allin, capital275Total liabilities andTotal assets$320equity$320

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Last revised:October26,20121-10Quick Study 1-141.$20,000-$15,000 =$5,000beginning capital on January 1, 20142.$5,000 + $3,000 + $8,000-$4,000 =$12,000ending capital on December 31, 2014Quick Study 1-15The source documents include:c.Telephone billd.Invoice from supplierg.Bank statementh.Sales invoiceQuick Study 1-16Assets=Liabilities+Equitya.Increase/Decreaseb.IncreaseIncreasec.DecreaseDecreased.IncreaseDecreasee.DecreaseDecreaseQuick Study 1-17c1.Supplies...................................................$10a2.Supplies expense....................................22c3.Accounts receivable................................25c4.Accounts payable....................................12c5.Equipment................................................40b6.Tim Roadster’s withdrawals in April......35c7.Notes payable..........................................30a8.Utilities expense.......................................10c9.Furniture...................................................20a10.Fees earned..............................................70a11.Rent revenue.............................................35a12.Salaries expense......................................45b13.Tim Roadster’s investments in April.......60a+b14.Net income*...............................................28*Calculated as: 70 + 35–22–10–45 = 28

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Last revised:October26,20121-11Quick Study 1-181.Total revenues.............................................70 + 35 = 1052.Total operating expenses............................22 + 10 + 45 = 773.Net income...................................................105–77 = 284.Total assets..................................................10 + 25 + 40 + 20 = 955.Total liabilities..............................................12 + 30 = 426.Tim Roadster, capital (April 30, 2014)........60–35 + 28 = 537.Total liabilities and equity...........................42 + 53 = 95Quick Study 1-19d1.Net loss...................................................2Income statement &Statement of changes in equityd2.Rent expense..........................................22Income statementb3.Rent payable...........................................6a4.Accounts receivable..............................14d5.Joan Bennish’s investments in May.....30Statement of changes in equityd6.Interest revenue.....................................2Income statementd7.Joan Bennish, capital, May 1, 2014.......0Statement of changes in equitya8.Repair supplies.......................................5b9.Notes payable..........................................25d10.Joan Bennish’s withdrawals in May......5Statement of changes in equitya11.Truck........................................................15d12.Consulting fees earned..........................18Income statementc13.Joan Bennish, capital, May 31, 2014......23*a14.Cash.........................................................20*See QS1-20 fordetails on how this amount was calculated; this calculation was not arequirement of QS1-19.

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Last revised:October26,20121-12Quick Study 1-20BENNISH CONSULTINGIncome StatementFor Month Ended May 31, 2014Revenues:Consulting fees earned.....................................$18Interest revenue.................................................2Total revenues...........................................................$20Operating expenses:Rent expense.....................................................22Net loss....................................................................$2BENNISH CONSULTINGStatement of Changes in EquityFor Month Ended May 31, 2014Joan Bennish, capital, May 1..............................$ 0Add:Investments by owner............................30Total...............................................................$30Less: Withdrawals by owner..............................$ 5Net loss......................................................27Joan Bennish, capital, May 31............................$23BENNISH CONSULTINGBalance SheetMay 31, 2014AssetsLiabilitiesCash................................................$20Rent payable.............................$ 6Accounts receivable......................14Notes payable...........................25Repair supplies..............................5Total liabilities..........................$31Truck...............................................15EquityJoan Bennish, capital...............23Total liabilities andTotal assets....................................$54equity.....................................$54

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Last revised:October26,20121-13EXERCISESExercise 1-1 (10 minutes)a.Corporationb.Sole proprietorshipc.Corporationd.Partnershipe.Sole proprietorshipf.Sole proprietorshipg.CorporationExercise 1-2 (5 minutes)I or EI or EBank managerEParentEOwnerICanada Revenue AgencyEToy SupplierECleaner contracted by TLCEExercise 1-3(10 minutes)1.A2.C3.B4.A5.A6.B7.B8.CExercise 1-4(20 minutes) (Answers will vary.)a.1.Is it the Truth? No, making personal long distance calls on the company phonewithout paying for the charges is deceitful.2.Is it Fair to all concerned? No, it is not fair to the owner(s) of the business or tothe other employees.3.Will it build goodwill and better friendships? It will damage goodwill andfriendships between the caller and their employer and colleagues as well as withthe people they are calling (since they are likely not aware of the deceit).4.Will it be beneficial to all concerned? It will benefit the caller in the short run interms of cost savings but these costs will reduce the profits of the businessowner(s).Conclusion: The behaviour in the situation described appears to be unethical based onthe application of the Rotary 4-Way Test.

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Last revised:October26,20121-14Exercise 1-4(concluded)b.1.Is it the Truth? It appears that the three people ahead of you entered withouttickets which is deceitful. They may have fabricated a story to enter and/or theticket-taker is part of the deceit.2.Is it Fair to all concerned? It is unfair to the paying patrons of the theatre andunfair to the owner of the theatre.3.Will it build goodwill and better friendships? In the long run, these types ofrelationships (between the ticket-taker and the three individuals admitted withouttickets) are not what goodwill and true friendships are based upon.Havingobserved the event, your respect for the ticket-taker and the three individualsadmitted without tickets will be negatively affected.4.Will it be beneficial to all concerned? In the short run, it will benefit the threepeople who were admitted without paying and the ticket-taker, if an acquaintance,may have accrued future benefits from the three people admitted. If thistransgression is discovered by the ticket-taker’s supervisor, the ticket-taker willlikely lose their job which is certainly not beneficial. The owner(s) of the theatredo not benefit from this event, nor do other patrons because if it is known thatsuch things occur, ticket prices will be priced to include the cost of this kind oflost sale.Conclusion: The behaviour in the situation described appears to be unethical basedon the application of the Rotary 4-Way Test.c.1.Is it the Truth? The cashier is not being truthful by providing receipts only uponrequest because the cash register would be showing fewer drop-in customersthan actually occur.2.Is it Fair to all concerned? No, it is not fair to the paying customers (prices maygo up if drop-in revenues are not what is expected) or the owner of the facility.3.Will it build goodwill and better friendships? No, deceitful acts never buildgoodwill and do not build good friendships. Eventually, the supervisor and/orowner of the facility will recognize that drop-in revenues are lower than the actualnumber of drop-in customers attending the facility and the cashier will losehis/herjob and perhaps face criminal charges.4.Will it be beneficial to all concerned? No, it is not beneficial to the cashier (asthey may losehis/herjob), to the owner, or to the paying patrons.Conclusion: The behaviour in the situation described appears to be unethical basedon the application of the Rotary 4-Way Test.

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Last revised:October26,20121-15Exercise 1-5(10 minutes)DescriptionB1.Requireseverybusinesstobeaccounted forseparatelyfromitsownerorowners.A2.Requiresfinancialstatementinformationtobebasedoncostsincurredintransactions.D3.Requires financial statements to reflect the assumption that the business willcontinue operating instead of being closed or sold.C4.Requires revenue to be recorded only when the earnings process is completeExercise 1-6(10 minutes)a)$516,000–$492,000 =$24,000net incomeb)$165,000–$240,000 =$75,000net lossc)$32,000 + 0–0 + x = $86,000x = $86,000–$32,000x =$54,000net incomed)$48,000 + $40,000–0 + x = $52,000x =$52,000–$48,000–$40,000x =–$36,000 or a$36,000netlossExercise 1-7(15 minutes)(a)(b)(c)(d)(e)Answers$ (19,750)$46,000$7,000$10,250$102,000Proofs:Equity, January 1................................$0$0$0$0$102,000Owner’s investmentsduring the year................................60,00046,00031,50037,500140,000Net income (loss) for the year...............15,75030,500(4,500)10,250(8,000)Owner’s withdrawalsduring the year................................(19,750)(27,000)(20,000)(15,750)(63,000)Equity, December 31..............................$56,000$49,500$7,000$32,000$171,000

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Last revised:October26,20121-16Exercise 1-8(15 minutes)THEHIGGINSGROUPIncome StatementFor Month Ended November 30, 2014Revenues:Consulting fees earned.....................................$22,000Operating expenses:Salaries expense...............................................$6,000Rent expense.....................................................2,550Telephone expense...........................................1,680Utilities expenses..............................................660Total operating expenses..............................10,890Net income.................................................................$ 11,110Exercise 1-9(15 minutes)THEHIGGINSGROUPStatement of Changes in EquityFor Month Ended November 30, 2014JeanHiggins, capital, November 1.....................$0Add:Investments by owner............................84,000Net income...............................................11,11095,110Total...............................................................$95,110Less: Withdrawals by owner..............................3,360JeanHiggins, capital, November 30...................$91,750Analysis component:The owner, JeanHiggins, invested $84,000 of assets during the month, which causedequity to increase. Also, net income earned during the month was $11,110 also causingequity to increase during November. The total increases in equity during the month werea total of$95,110($84,000 + $11,110).NOTE: Students might point out that equity decreased by a total of $3,360 in withdrawalswhich in combination with the total increase of $95,110 causeda net increase in equity of$91,750.

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Last revised:October26,20121-17Exercise 1-10(15 minutes)THEHIGGINSGROUPBalance SheetNovember 30, 2014AssetsLiabilitiesCash................................................$16,000Accounts payable.....................$ 7,500Accounts receivable......................17,000Office supplies...............................5,000EquityAutomobiles...................................36,000JeanHiggins, capital................91,750Office equipment............................25,250Total liabilities andTotal assets....................................$99,250equity.....................................$99,250Analysis component:$91,750 (or 92.44%calculated as $91,750/$99,250 × 100) of the total $99,250 assets arefinanced by JeanHiggins, the owner of TheHigginsGroup.Exercise 1-11(15 minutes)WINDSORLEARNING SERVICESIncome StatementFor Month Ended July 31, 2014Revenues:Tutoring fees earned.........................................$4,200Textbook rental revenue...................................300Total revenues................................................$ 4,500Operating expenses:Office rent expense...........................................$2,500Tutors wages expense......................................1,540Utilities expense................................................680Total operating expenses..............................4,720Net loss....................................................................$220

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Last revised:October26,20121-18Exercise 1-12(15 minutes)WINDSORLEARNING SERVICESStatement of Changes in EquityFor Month Ended July 31, 2014Milton Windsor, capital, July 1...........................$ 7,400Add:Investments by owner............................1,200Total...............................................................$ 8,600Less: Withdrawals by owner..............................$ 1,000Net loss......................................................2201,220Milton Windsor, capital, July 31.........................$ 7,380Analysis component:Withdrawals of $1,000 by the owner,Milton Windsor, caused equity to decrease duringJuly, 2014. Also, the net loss of $220 caused equity to decrease in July. The totaldecrease in equity during the month of July was $1,220 (calculated as $1,000 + $220).NOTE: Students might point out that equity increased by $1,200 of owner investmentswhich, in combinationwith the total decrease of $1,220, caused a net decrease in equityof $20.Exercise 1-13(15 minutes)WINDSORLEARNING SERVICESBalance SheetJuly 31, 2014AssetsLiabilitiesCash................................................$ 1,600Accounts payable.....................$1,500Accounts receivable......................2,000Supplies..........................................1,280EquityFurniture.........................................1,800Milton Windsor, capital............7,380Computer equipment.....................2,200Total liabilities andTotal assets....................................$8,880equity.....................................$8,880Analysis component:$1,500 or 16.89% (calculated as$1,500/$8,880 × 100) of the total $8,880 assets held byWindsorLearning Services are financed by debt.

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Last revised:October26,20121-19Exercise 1-14(20 minutes)Assets–Liabilities=EquityBeginning of the year.........................$ 75,000–$30,000=$ 45,000End of the year...................................$120,000–$46,000=74,000(a)(b)(c)(d)Answers$ 29,000$86,000$(51,000)$(4,000)Proofs:Equity, January 1................................$45,000$45,000$45,000$ 45,000Owner’s investmentsduring the year................................0080,00075,000Net income (loss) for the year...............29,00086,000(51,000)(4,000)Owner’s withdrawalsduring the year................................(0)(57,000)(0)(42,000)Equity, December 31..............................$74,000$74,000$74,000$74,000a.An alternative calculation:$45,000 +0 +x–0 = $74,000; x = $29,000b.An alternative calculation:$45,000 +0 +x-$57,000 = $74,000; x = $86,000c.An alternative calculation:$45,000 + $80,000 + x-0= $74,000; x = ($51,000) where the negative represents aloss.d.An alternative calculation:$45,000+$75,000+x-$42,000=$74,000;x=($4,000)wherethenegativerepresents a loss.Exercise 1-15(10 minutes)a.If assets decreased by $15,000 during August, then$25,000 + $15,000 =$40,000Assets at August 1, 2014.Therefore, Equity at August 1, 2014 = $40,000-$10,000 =$30,000b.Ifliabilities increased by $9,000 during August, then$10,000 + $9,000 =$19,000Liabilities at August 31, 2014.Therefore,Equity at August 31, 2014 = $25,000-$19,000 =$6,000

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Last revised:October26,20121-20Exercise 1-16(15 minutes)AssetsLiabilities+EquityCash+AccountsReceivable+OfficeSupplies=AccountsPayable+Marnie Wesson,Capitala)+ $25,000+ $25,000b)+ $600+ $600c)+7,000+7,000d)*e)–4,500–4,500f)+ $1,250+ 1,250Totals$27,500+$1,250+$600=$600+$28,750$29,350=$29,350*Note: For (d), since no exchange has occurred, no entry is required.Exercise 1-17(20 minutes)AssetsLiabilities+EquityCash+AccountsReceivable+PartsSupplies+Equipment=AccountsPayable+Stacey Crowe,Capitala)+$14,000+$14,000b)-2,500-2,500c)+ $800+ $800d)+ $3,400+ $ 3,400e)–$1,950+ $1,950f)*g)–$800–$800h)+ $3,400+ $ 3,400i)–$2,700–$ 2,700Totals$9,450+$3,400+$800+$1,950=$0+$15,600$15,600=$15,600*Note: For (f), since no exchange has occurred, no entry is required.

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Last revised:October26,20121-21Exercise 1-18: (15 minutes)b.Office Supplies were purchased paying cash of $500.c.Office Furniture was purchased paying cash of $8,000.d.Completed work for a client on credit; $1,000.e.Purchased office supplies on credit; $400.f.Paid $250 to a creditor.g.Collected $750 cash from a credit customer.Exercise 1-19(20 minutes)Assets=Liabilities+EquityExplanationof EquityTransactionCash+AccountsReceivable+Supplies+Equipment=AccountsPayable+MailinMoon,Capitala)+ $3,000+ $2,500+$5,500OwnerInvestmentb)+ $6,500+$6,500Revenuec)+ $600+ $600d)–$1,450–$1,450Sal. Expensee)*f)–$ 1,400–$ 1,400Rent Expenseg)+ $4,500+$4,500RevenueTotals$6,650+$4,500+$600+$2,500=$600+$13,650$14,250=$14,250*Note: For (e), since no exchange has occurred, no entry is required.

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Last revised:October26,20121-22Exercise 1-20(25 minutes)Mailin Moon–Freelance WritingIncome StatementFor Month Ended March 31, 2014Revenues:Freelance writing revenue$11,000Operating expenses:Salaries expense$1,450Rent expense1,400Total operating expenses2,850Net income$8,150Mailin Moon–Freelance WritingStatement of Changes in EquityFor Month Ended March 31, 2014Mailin Moon, capital, March 1$0Add:Investment by owner$5,500Net income8,15013,650Mailin Moon, capital, March 31$13,650Mailin Moon–Freelance WritingBalance SheetMarch 31, 2014AssetsLiabilitiesCash$6,650Accounts payable$600Accounts receivable4,500Supplies600Equipment2,500EquityMailin Moon, capital13,650Total assets$14,250Total liabilities and equity$14,250Analysis component:a.Supplies of $600were financed by accounts payable, a liability.b.Equipment of $2,500 was financed by owner investment, an equity transaction.c.Cash of $6,650 and Accounts receivable of $4,500 were financed by an investmentby owner of $3,000 and net income of $8,150. Net income includes the equitytransactions of revenues and expenses (revenuesof $11,000 less expenses of$2,850).

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Last revised:October26,20121-23Exercise 1-21(20 minutes)Assets=Liabilities+EquityExplanationof EquityTransactionCash+AccountsReceivable+Supplies+Equipment=AccountsPayable+PeteKequahtooway,Capitala)+$4,300+$15,000+$19,300OwnerInvestmentb)+$1,600+$1,600c)+$950+$950d)*e)+$550+$550Revenuef)+$600+$600Revenueg)-$200-$200h)-$250-$250Adv.Expensei)+$600-$600Totals$4,450+$550+$2,550+$15,000=$2,350+$20,200$22,550=$22,550*Note: For (d), since no exchange has occurred, no entry is required.

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Last revised:October26,20121-24Exercise 1-22(25 minutes)Pete’s Yard CareIncome StatementFor Month Ended March 31, 2014Revenues:Yard care revenue$1,150Operating expenses:Advertising expense250Net income$ 900Pete’s Yard CareStatement of Changes in EquityFor Month Ended March 31, 2014Pete Kequahtooway, capital, March 1$0Add:Investment by owner$19,300Net income90020,200Pete Kequahtooway, capital, March 31$20,200Pete’s Yard CareBalance SheetMarch 31, 2014AssetsLiabilitiesCash$4,450Accounts payable$2,350Accounts receivable550Supplies2,550Equipment15,000EquityPete Kequahtooway, capital20,200Total assets$22,550Total liabilities and equity$22,550Analysis component:The $900 of net income does not represent cash because all of the revenues ($550 + $600= $1,150) were on account. The $250 of advertising expense was paid in cash. The netincome(loss)on an income statement represents the net income (loss) that was actuallyearned which is not necessarily going to agree tothenet income (loss) actually receivedin cash. This is in accordancewiththe revenue recognition principle which says thatrevenues(and also expenses) are recorded at the time earned (or expensed in the caseof expenses) regardless ofwhether cash has been exchanged.

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Last revised:October26,20121-25Exercise 1-23(20 minutes)Assets=Liabilities+EquityExplanationof EquityTransactionCash+AccountsReceivable+Supplies+Equipment=AccountsPayable+OttoIngles,CapitalBal.$6,000$1,200$1,900$6,500$4,000$11,600a)+$800-$800b)-$2,500-$2,500c)+$1,100+$1,100Revenued)-$950-$950Wage Exp.e)-$1,200-$1,200Rent Exp.f)-$600-$600UtilitiesExp.g)+$1,600+$1,600Revenueh)*Totals$2,650+$2,000+$1,900+$6,500=$1,500+$11,550$13,050=$13,050*Note: For (h), since no exchange has occurred, no entry is required.

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Last revised:October26,20121-26Exercise 1-24(25 minutes)Otto’s Wrecking ServiceIncome StatementFor Month Ended July 31, 2014Revenues:Wrecking revenue$2,700Operating expenses:Rent expense$ 1,200Utilitiesexpense600Wageexpense950Total operating expenses2,750Net loss$50Otto’s Wrecking ServiceStatement of Changes in EquityFor Month Ended July 31, 2014Otto Ingles, capital, July 1$ 11,600Less: Net loss50Otto Ingles, capital, July 31$ 11,550Otto’s Wrecking ServiceBalance SheetJuly 31, 2014AssetsLiabilitiesCash$2,650Accounts payable$ 1,500Accounts receivable2,000Supplies1,900Equipment6,500EquityOtto Ingles, capital11,550Total assets$13,050Total liabilities and equity$13,050Analysis component:$11,550or 88.54% (calculated as $11,550/$13,050× 100) of the assets are financed byOtto Ingles, the owner. $1,500 or 11.49% (calculated as $1,500/$13,050× 100) of theassets are financed by debt.

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Last revised:October26,20121-27PROBLEM SET “A”Problem 1-1A (10 minutes)CharacteristicType of Business OrganizationSoleProprietorshipPartnershipCorporationLimited liabilityUnlimited liabilityOwners are shareholdersOwners are partnersTaxed as a separate legal entityProblem 1-2A (20 minutes)Year201520142013Beginning capital125,000128,00030+ Owner investment0010,000+ Net income (loss)(5,000)175,00060,0005–Owner withdrawals078,00042,000= Ending capital120,000125,000228,0004Note: The superscripts show the order in which the answers were calculated.Calculations:1.$120,000 + 5,000 =$125,0002.$125,000(The beginning capital balance for one period is the ending capitalbalance of the previous period)3.$125,000 + $78,000-$175,000 =$28,0004.$28,000(The beginning capital balance for one period is the ending capitalbalance of the previous period)5.$28,000 + $42,000-$10,000 =$60,000

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Last revised:October26,20121-28Problem 1-3A (30 minutes)BEE-CLEANIncome StatementFor Year Ended July 31, 2014Revenues:Service revenue.................................................$131,000Repair revenue...................................................2,500Total revenues................................................$133,500Operating expenses:Wages expense..................................................$68,000Rent expense.....................................................14,000Supplies expense..............................................15,900Utilities expense................................................9,800Interest expense................................................2,100Total operating expenses..............................109,800Net income.................................................................$ 23,700BEE-CLEANStatement of Changes in EquityFor Year Ended July 31, 2014BeeCummins, capital, August 1, 2013..............$79,300Add:Investments by owner............................$-0-Net income...............................................23,70023,700Total...............................................................$103,000Less: Withdrawals by owner..............................46,000BeeCummins, capital, July 31, 2014.................$57,000BEE-CLEANBalance SheetJuly 31, 2014AssetsLiabilitiesCash............................................$ 5,600Accounts payable...................$9,400Accounts receivable..................42,000Notes payable.........................20,000Supplies......................................2,400Total liabilities.................$ 29,400Prepaid rent................................4,000Office equipment........................19,200EquityFurniture.....................................13,200Bee Cummins, capital............57,000Total assets................................$86,400Total liabilities and equity......$86,400

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Last revised:October26,20121-29Problem 1-3A (concluded)Analysis component:$29,400 or 34.03% (calculated as $29,400/$86,400 × 100) of the assets are financed bydebt.$57,000 or 65.97% (calculated as $57,000/$86,400 × 100) of the assets are financedbyBee Cummins, the owner.Problem 1-4A (60 minutes)Part 1LeCLAIRE DELIVERY SERVICESBalance SheetDecember 31, 2013AssetsLiabilitiesCash.....................................$ 26,250Accounts payable.......................$3,750Accounts receivable...........14,250Office supplies....................2,250Trucks..................................27,000EquityOffice equipment.................69,000Jess LeClaire, capital.................135,0001Total assets$138,750Total liabilities and equity..........$138,750______________________Calculations:1.$138,750–$3,750 = $135,000 (calculation of unknown amount)

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Last revised:October26,20121-30Problem 1-4A(concluded)Part 1LeCLAIRE DELIVERY SERVICESBalance SheetDecember 31, 2014AssetsLiabilitiesCash.....................................$ 9,375Accounts payable.......................$ 18,750Accounts receivable...........11,175Notes payable.............................52,500Office supplies....................1,650Total liabilities......................$71,250Trucks..................................27,000Office equipment.................73,500Land.....................................22,500EquityBuilding...............................90,000Jess LeClaire, capital.................163,9502Total assets.........................$235,200Total liabilities and equity..........$235,200Calculations:2.$235,200–$71,250 = $163,950Part 2Calculation of net income for 2014:Jess LeClaire, Capital December 31, 2013$135,000+ Owner investment17,500+ Net income (loss)?–Owner withdrawals18,000= Jess LeClaire, capital December 31, 2014$163,950OR$135,000 + $17,500 + ?-$18,000 = $163,950; ? =$29,450Analysis component:Assets increased by $96,450 ($235,200-$138,750). $67,500 of the increase in assetswere financed by an increase in debt (total liabilities wentfrom $3,750 at December 31,2013 to $71,250 at December 31, 2014). The remaining $28,950 increase in assets($96,450-$67,500) resulted from equity financing (equity increased to $163,950 atDecember 31, 2014from $135,000 at December 31, 2013because of $17,500 ownerinvestment plus $29,450 net income less $18,000 of withdrawals during 2014).

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