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Solution Manual for Accounting Principles, 9th Edition

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    Weygandt, Accounting Principles, 9/e, Solutions Manual (For Use Only) 1-1 CHAPTER 1 Accounting in Action ANSWERS TO QUESTIONS 1. Yes, this is correct. Virtually every organization and person in our society uses accounting information. Businesses, investors, creditors, government agencies, and not-for-profit organizations must use accounting information to operate effectively. 2. Accounting is the process of identifying, recording, and communicating the economic events of an organization to interested users of the information. The first step of the accounting process is therefore to identify economic events that are relevant to a particular business. Once identified and measured, the events are recorded to provide a history of the financial activities of the organization. Recording consists of keeping a chronological diary of these measured events in an orderly and systematic manner. The information is communicated through the preparation and distribution of accounting reports, the most common of which are called financial statements. A vital element in the communication process is the accountant’s ability and responsibility to analyze and interpret the reported information. 3. (a) Internal users are those who plan, organize, and run the business and therefore are officers and other decision makers. (b) To assist management, managerial accounting provides internal reports. Examples include financial comparisons of operating alternatives, projections of income from new sales campaigns, and forecasts of cash needs for the next year. 4. (a) Investors (owners) use accounting information to make decisions to buy, hold, or sell owner- ship shares of a company. (b) Creditors use accounting information to evaluate the risks of granting credit or lending money. 5. Bookkeeping usually involves only the recording of economic events and therefore is just one part of the entire accounting process. Accounting, on the other hand, involves the entire process of identifying, recording, and communicating economic events. 6. Karen Sommers Travel Agency should report the land at $90,000 on its December 31, 2010 balance sheet. An important concept that accountants follow is the cost principle. The cost principle states that assets should be recorded at their cost. Cost has an important advantage over other valuations: it is reliable. Cost can be objectively measured and can be verified. 7. The monetary unit assumption requires that only transaction data that can be expressed in terms of money be included in the accounting records. This assumption enables accounting to quantify (measure) economic events. 8. The economic entity assumption requires that the activities of the entity be kept separate and distinct from the activities of its owners and all other economic entities.

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    1-2 Weygandt, Accounting Principles, 9/e, Solutions Manual (For Use Only) Questions Chapter 1 (Continued) 9. The three basic forms of business organizations are: (1) proprietorship, (2) partnership, and (3) corporation. 10. One of the advantages Maria Gonzalez would enjoy is that ownership of a corporation is repre- sented by transferable shares of stock. This would allow Maria to raise money easily by selling a part of her ownership in the company. Another advantage is that because holders of the shares (stockholders) enjoy limited liability; they are not personally liable for the debts of the corporate entity. Also, because ownership can be transferred without dissolving the corporation, the corporation enjoys an unlimited life. 11. The basic accounting equation is Assets = Liabilities + Owner’s Equity. 12. (a) Assets are resources owned by a business. Liabilities are claims against assets. Put more simply, liabilities are existing debts and obligations. Owner’s equity is the ownership claim on total assets. (b) Owner’s equity is affected by owner’s investments, drawings, revenues, and expenses. 13. The liabilities are: (b) Accounts payable and (g) Salaries payable. 14. Yes, a business can enter into a transaction in which only the left side of the accounting equation is affected. An example would be a transaction where an increase in one asset is offset by a decrease in another asset. An increase in the Equipment account which is offset by a decrease in the Cash account is a specific example. 15. Business transactions are the economic events of the enterprise recorded by accountants because they affect the basic equation. (a) The death of the owner of the company is not a business transaction as it does not affect the basic equation. (b) Supplies purchased on account is a business transaction as it affects the basic equation. (c) An employee being fired is not a business transaction as it does not affect the basic equation. (d) A withdrawal of cash from the business is a business transaction as it affects the basic equation. 16. (a) Decrease assets and decrease owner’s equity. (b) Increase assets and decrease assets. (c) Increase assets and increase owner’s equity. (d) Decrease assets and decrease liabilities. 17. (a) Income statement. (d) Balance sheet. (b) Balance sheet. (e) Balance sheet and owner’s equity statement. (c) Income statement. (f) Balance sheet. 18. No, this treatment is not proper. While the transaction does involve a receipt of cash, it does not represent revenues. Revenues are the gross increase in owner’s equity resulting from business activities entered into for the purpose of earning income. This transaction is simply an additional investment made by the owner in the business.

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    Weygandt, Accounting Principles, 9/e, Solutions Manual (For Use Only) 1-3 Questions Chapter 1 (Continued) 19. Yes. Net income does appear on the income statement—it is the result of subtracting expenses from revenues. In addition, net income appears in the statement of owner’s equity—it is shown as an addition to the beginning-of-period capital. Indirectly, the net income of a company is also included in the balance sheet. It is included in the capital account which appears in the owner’s equity section of the balance sheet. 20. (a) Ending capital balance ...................................................................................... $198,000 Beginning capital balance ................................................................................. 168,000 Net income ........................................................................................................ $ 30,000 (b) Ending capital balance ...................................................................................... $198,000 Beginning capital balance ................................................................................. 168,000 30,000 Deduct: Investment .......................................................................................... 13,000 Net income ........................................................................................................ $ 17,000 21. (a) Total revenues ($20,000 + $70,000) ................................................................. $90,000 (b) Total expenses ($26,000 + $40,000)................................................................. $66,000 (c) Total revenues................................................................................................... $90,000 Total expenses .................................................................................................. 66,000 Net income ........................................................................................................ $24,000 22. Coca-Cola’s accounting equation at December 31, 2007 was $43,269,000,000 = $21,525,000,000 + $21,744,000,000.

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    1-4 Weygandt, Accounting Principles, 9/e, Solutions Manual (For Use Only) SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 1-1 (a) $120,000 + $232,000 = $352,000 (Total assets). (b) $190,000 – $80,000 = $110,000 (Total liabilities). (c) $800,000 – 0.5($800,000) = $400,000 (Owner’s equity). BRIEF EXERCISE 1-2 (a) $90,000 – $50,000 = $40,000 (Owner’s Equity). (b) $40,000 + $70,000 = $110,000 (Assets). (c) $94,000 – $60,000 = $34,000 (Liabilities). BRIEF EXERCISE 1-3 A (a) Accounts receivable A (d) Office supplies L (b) Salaries payable OE (e) Owner’s investment A (c) Equipment L (f) Notes payable BRIEF EXERCISE 1-4 Owner’s Equity Assets = Liabilities + Owner, Capital – Owner Drawings + Revenues – Expenses (a) X = $90,000 + $150,000 – $40,000 + $450,000 – $320,000 X = $90,000 + $240,000 X = $330,000 (b) $57,000 = X + $25,000 – $7,000 + $50,000 – $35,000 $57,000 = X + $33,000 X = $24,000 ($57,000 – $33,000) (c) $600,000 = ($600,000 x 2/3) + X (Owner’s equity) $600,000 = $400,000 + X X = $200,000

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    Weygandt, Accounting Principles, 9/e, Solutions Manual (For Use Only) 1-5 BRIEF EXERCISE 1-5 (a) ($800,000 + $150,000) – ($500,000 – $80,000) = $530,000 (Owner’s equity). (b) ($500,000 + $100,000) + ($800,000 – $500,000 – $70,000) = $830,000 (Assets). (c) ($800,000 – $80,000) – ($800,000 – $500,000 + $120,000) = $300,000 (Liabilities). BRIEF EXERCISE 1-6 Assets Liabilities Owner’s Equity (a) + + NE (b) + NE + (c) – NE – BRIEF EXERCISE 1-7 Assets Liabilities Owner’s Equity (a) + NE + (b) – NE – (c) NE NE NE BRIEF EXERCISE 1-8 E (a) Advertising expense D (e) Bergman, Drawing R (b) Commission revenue R (f) Rent revenue E (c) Insurance expense E (g) Utilities expense E (d) Salaries expense BRIEF EXERCISE 1-9 R (a) Received cash for services performed NOE (b) Paid cash to purchase equipment E (c) Paid employee salaries

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    1-6 Weygandt, Accounting Principles, 9/e, Solutions Manual (For Use Only) BRIEF EXERCISE 1-10 LOPEZ COMPANY Balance Sheet December 31, 2010 Assets Cash ................................................................................................ $ 49,000 Accounts receivable ...................................................................... 72,500 Total assets ............................................................................ $121,500 Liabilities and Owner’s Equity Liabilities Accounts payable .................................................................. $ 90,000 Owner’s equity Kim Lopez, Capital ................................................................. 31,500 Total liabilities and owner’s equity ............................... $121,500 BRIEF EXERCISE 1-11 BS (a) Notes payable IS (b) Advertising expense OE, BS (c) Trent Buchanan, Capital BS (d) Cash IS (e) Service revenue

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    Weygandt, Accounting Principles, 9/e, Solutions Manual (For Use Only) 1-7 SOLUTIONS FOR DO IT! REVIEW EXERCISES DO IT! 1-1 1. False. The three steps in the accounting process are identification, recording, and communication. 2. True 3. False. Congress passed the Sarbanes-Oxley Act of 2002 to reduce unethical behavior and decrease the likelihood of future corporate scandals. 4. False. The primary accounting standard-setting body in the United States is the Financial Accounting Standards Board (FASB). 5. True. DO IT! 1-2 1. Drawings is owner’s drawings (D); it decreases owner’s equity. 2. Rent Revenue is revenue (R); it increases owner’s equity. 3. Advertising Expense is an expense (E); it decreases owner’s equity. 4. When the owner puts personal assets into the business, it is investment by owner (I); it increases owner’s equity. DO IT! 1-3 Assets Liabilities Owner’s Equity Cash + Accounts Receivable = Accounts Payable + O. Cabrera, Capital – O. Cabrera, Drawings + Revenues – Expenses (1) +$20,000 +$20,000 (2) +$20,000 –$20,000 (3) +$2,000 –$2,000 (4) –$ 5,000 –$5,000

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    1-8 Weygandt, Accounting Principles, 9/e, Solutions Manual (For Use Only) DO IT! 1-4 (a) The total assets are $49,500, comprised of Cash $7,000, Accounts Receivable $13,500, and Equipment $29,000. (b) Net income is $21,000, computed as follows: Revenues Service revenue .................................................. $54,000 Expenses Rent expense ...................................................... $10,500 Salaries expense ................................................ $16,500 Advertising expense .......................................... 6,000 Total expenses ........................................... 33,000 Net income.................................................................. $21,000 (c) The ending owner’s equity balance of Broadway Company is $21,500. By rewriting the accounting equation, we can compute Owner’s Equity as Assets minus Liabilities, as follows: Total assets [as computed in (a)] ............................. $49,500 Less: Liabilities Notes payable ..................................................... $25,000 Accounts payable............................................... 3,000 28,000 Owner’s equity ........................................................... $21,500 Note that it is not possible to determine the company’s owner’s equity in any other way, because the beginning balance for owner’s equity is not provided.

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    Weygandt, Accounting Principles, 9/e, Solutions Manual (For Use Only) 1-9 SOLUTIONS TO EXERCISES EXERCISE 1-1 R Summarizing economic events. I Selecting economic activities relevant to the company. C Reporting information in a standard format. C Preparing accounting reports. R Measuring events in dollars and cents. R Keeping a systematic chronological diary of events. C Explaining uses, meaning, and limitations of data. R Classifying economic events. C Analyzing and interpreting information. EXERCISE 1-2 (a) Internal users Marketing manager Production supervisor Store manager Vice-president of finance External users Customers Internal Revenue Service Labor unions Securities and Exchange Commission Suppliers (b) I Can we afford to give our employees a pay raise? E Did the company earn a satisfactory income? I Do we need to borrow in the near future? E How does the company’s profitability compare to other companies? I What does it cost us to manufacture each unit produced? I Which product should we emphasize? E Will the company be able to pay its short-term debts?

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    1-10 Weygandt, Accounting Principles, 9/e, Solutions Manual (For Use Only) EXERCISE 1-3 John Sturm, president of Lions Company, instructed Jon Kitna, the head of the accounting department, to report the company’s land in their accounting reports at its market value of $225,000 instead of its cost of $125,000, in an effort to make the company appear to be a better investment. The cost prin- ciple requires that assets be recorded and reported at their cost, because cost is reliable and can be objectively measured and verified. The stakeholders include stockholders and creditors of Lions Company, potential stockholders and creditors, other users of Lion’s accounting reports, John Sturm, and Jon Kitna. All users of Lion’s accounting reports could be harmed by relying on information which violates accounting principles. John Sturm could benefit if the company is able to attract more investors, but would be harmed if the fraudulent reporting is discovered. Similarly, Jon Kitna could benefit by pleasing his boss, but would be harmed if the fraudulent reporting is discovered. Jon’s alternatives are to report the land at $125,000 or to report it at $225,000. Reporting the land at $225,000 is not appropriate since it would mislead many people who rely on Lion’s accounting reports to make financial decisions. Jon’s should report the land at its cost of $125,000. He should try to convince John Sturm that this is the appropriate course of action, but be prepared to resign his position if Sturm insists. EXERCISE 1-4 Asset Liability Owner’s Equity Cash Accounts payable Karin Meredith, Capital Cleaning equipment Notes payable Cleaning supplies Salaries payable Accounts receivable

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    Weygandt, Accounting Principles, 9/e, Solutions Manual (For Use Only) 1-11 EXERCISE 1-5 1. Incorrect. The cost principle requires that assets be recorded and reported at their cost. 2. Correct. The monetary unit assumption requires that companies include in the accounting records only transaction data that can be expressed in terms of money. 3. Incorrect. The economic entity assumption requires that the activities of the entity be kept separate and distinct from the activities of its owner and all other economic entities. EXERCISE 1-6 1. (c) 5. (d) 2. (d) 6. (b) 3. (a) 7. (e) 4. (b) 8. (f) EXERCISE 1-7 1. Increase in assets and increase in owner’s equity. 2. Increase in assets and increase in liabilities. 3. Decrease in assets and decrease in owner’s equity. 4. Increase in assets and increase in owner’s equity. 5. Increase in assets and decrease in assets. 6. Decrease in assets and decrease in owner’s equity. 7. Increase in liabilities and decrease in owner’s equity. 8. Increase in assets and decrease in assets. 9. Increase in assets and increase in owner’s equity. EXERCISE 1-8 (a) 1. Owner invested $15,000 cash in the business. 2. Purchased office equipment for $5,000, paying $2,000 in cash and the balance of $3,000 on account. 3. Paid $750 cash for supplies. 4. Earned $8,300 in revenue, receiving $4,600 cash and $3,700 on account.

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    1-12 Weygandt, Accounting Principles, 9/e, Solutions Manual (For Use Only) EXERCISE 1-8 (Continued) 5. Paid $1,500 cash on accounts payable. 6. Owner withdrew $2,000 cash for personal use. 7. Paid $650 cash for rent. 8. Collected $450 cash from customers on account. 9. Paid salaries of $4,900. 10. Incurred $500 of utilities expense on account. (b) Investment ................................................................................ $15,000 Service revenue........................................................................ 8,300 Drawings ................................................................................... (2,000) Rent expense............................................................................ (650) Salaries expense ...................................................................... (4,900) Utilities expense....................................................................... (500) Increase in capital .................................................................... $15,250 (c) Service revenue........................................................................ $8,300 Rent expense............................................................................ (650) Salaries expense ...................................................................... (4,900) Utilities expense....................................................................... (500) Net income................................................................................ $2,250 EXERCISE 1-9 S. MOSES & CO. Income Statement For the Month Ended August 31, 2010 Revenues Service revenue.......................................................... $8,300 Expenses Salaries expense ........................................................ $4,900 Rent expense.............................................................. 650 Utilities expense......................................................... 500 Total expenses.................................................... 6,050 Net income.......................................................................... $2,250

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    Weygandt, Accounting Principles, 9/e, Solutions Manual (For Use Only) 1-13 EXERCISE 1-9 (Continued) S. MOSES & CO. Owner’s Equity Statement For the Month Ended August 31, 2010 S. Moses, Capital, August 1.......................................... $ 0 Add: Investments ........................................................ $15,000 Net income.......................................................... 2,250 17,250 17,250 Less: Drawings............................................................. 2,000 S. Moses, Capital, August 31........................................ $15,250 S. MOSES & CO. Balance Sheet August 31, 2010 Assets Cash................................................................................................. $ 8,250 Accounts receivable....................................................................... 3,250 Supplies .......................................................................................... 750 Office equipment ............................................................................ 5,000 Total assets ............................................................................. $17,250 Liabilities and Owner’s Equity Liabilities Accounts payable ................................................................... $ 2,000 Owner’s equity S. Moses, Capital .................................................................... 15,250 Total liabilities and owner’s equity................................ $17,250 EXERCISE 1-10 (a) Owner’s equity—12/31/09 ($400,000 – $250,000) ................. $150,000 Owner’s equity—1/1/09 .......................................................... 100,000 Increase in owner’s equity..................................................... 50,000 Add: Drawings ...................................................................... 15,000 Net income for 2009................................................................ $ 65,000

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    1-14 Weygandt, Accounting Principles, 9/e, Solutions Manual (For Use Only) EXERCISE 1-10 (Continued) (b) Owner’s equity—12/31/10 ($460,000 – $300,000)................ $160,000 Owner’s equity—1/1/10—see (a) .......................................... 150,000 Increase in owner’s equity ................................................... 10,000 Less: Additional investment ............................................... 50,000 Net loss for 2010 ................................................................... $ 40,000 (c) Owner’s equity—12/31/11 ($590,000 – $400,000)................ $190,000 Owner’s equity—1/1/11—see (b).......................................... 160,000 Increase in owner’s equity ................................................... 30,000 Less: Additional investment ............................................... 15,000 15,000 Add: Drawings..................................................................... 30,000 Net income for 2011 .............................................................. $ 45,000 EXERCISE 1-11 (a) Total assets (beginning of year) .......................................... $ 95,000 Total liabilities (beginning of year) ...................................... 85,000 Total owner’s equity (beginning of year) ............................ $ 10,000 (b) Total owner’s equity (end of year) ....................................... $ 40,000 Total owner’s equity (beginning of year) ............................ 10,000 Increase in owner’s equity ................................................... $ 30,000 Total revenues ....................................................................... $215,000 Total expenses ...................................................................... 175,000 Net income............................................................................. $ 40,000 Increase in owner’s equity ............................. $ 30,000 Less: Net income ........................................... $(40,000) Add: Drawings............................................... 24,000) (16,000) Additional investment..................................... $ 14,000 (c) Total assets (beginning of year) .......................................... $129,000 Total owner’s equity (beginning of year) ............................ 80,000 Total liabilities (beginning of year) ...................................... $ 49,000

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    Weygandt, Accounting Principles, 9/e, Solutions Manual (For Use Only) 1-15 EXERCISE 1-11 (Continued) (d) Total owner’s equity (end of year) ...................................... $130,000 Total owner’s equity (beginning of year)............................ 80,000 Increase in owner’s equity................................................... $ 50,000 Total revenues ...................................................................... $100,000 Total expenses...................................................................... 55,000 Net income ............................................................................ $ 45,000 Increase in owner’s equity.............................. $ 50,000 Less: Net income ............................................ $(45,000) Additional investment .......................... (25,000) (70,000) Drawings........................................................... $ 20,000 EXERCISE 1-12 OLGA CO. Income Statement For the Year Ended December 31, 2010 Revenues Service revenue ..................................................... $67,000 Expenses Salaries expense.................................................... $30,000 Rent expense ......................................................... 12,000 Utilities expense .................................................... 3,100 Advertising expense.............................................. 1,800 Total expenses ............................................... 46,900 Net income ..................................................................... $20,100 OLGA CO. Owner’s Equity Statement For the Year Ended December 31, 2010 Olga Gutieraez, Capital, January 1 ................................................. $48,000 Add: Net income............................................................................. 20,100 68,100 Less: Drawings ................................................................................ 7,000 Olga Gutieraez, Capital, December 31............................................ $61,100

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