CHAPTER 1

ACCOUNTING IN ACTION

CHAPTER LEARNING OBJECTIVES

1. Identify the use and users of accounting and the objective of financial reporting. Accounting is the information system that identifies, records, and communicates the economic events of an organization to a wide variety of interested users. Good accounting is important to people both inside and outside the organization. Internal users, such as management, use accounting information to plan, control, and evaluate business operations. External users include investors and creditors, among others. Accounting data are used by investors (owners or potential owners) to decide whether to buy, hold, or sell their financial interests. Creditors (suppliers and bankers) evaluate the risks of granting credit or lending money based on the accounting information. The objective of financial reporting is to provide useful information to investors and creditors to make these decisions. Users need information about the business’s ability to earn a profit and generate cash. For our economic system to function smoothly, reliable and ethical accounting and financial reporting are critical.

2. Compare the different forms of business organization. The most common examples of business organization are proprietorships, partnerships, and corporations. Proprietorships and partnerships are not separate legal entities but are separate entities for accounting purposes; income taxes are paid by the owners and owners have unlimited liability. Corporations are separate legal entities as well as separate entities for accounting purposes; income taxes are paid by the corporation and owners of the corporation have limited liability.

3. Explain the building blocks of accounting: ethics and the concepts included in the conceptual framework. Generally accepted accounting principles are a common set of guidelines that are used to prepare and report accounting information. The conceptual framework outlines some of the body of theory used by accountants to fulfill their goal of providing useful accounting information to users. Ethical behaviour is fundamental to fulfilling the objective of financial accounting. The reporting entity concept requires the business activities of each reporting entity to be kept separate from the activities of its owner and other economic entities. The going concern assumption presumes that a business will continue operations for enough time to use its assets for their intended purpose and to fulfill its commitments. The periodicity concept requires businesses to divide up economic activities into distinct periods of time. Qualitative characteristics include fundamental and enhancing characteristics that help to ensure accounting information is useful.

Only events that cause changes in the business’s economic resources or changes in the claims on those resources are recorded. Recognition is the process of recording items and measurement is the process of determining the amount that should be recognized. The historical cost concept states that economic resources should be recorded at their historical (original) cost. Fair value may be a more appropriate measure for certain types of resources. Generally, fair value is the amount the resource could be sold for in the market. The monetary unit concept requires that only transactions that can be expressed as an amount of money be included in the accounting records, and it assumes that the monetary unit is stable.

The revenue recognition principle requires companies to recognize revenue when a performance obligation(s) is satisfied. The matching concept requires that costs be recognized as expenses in the same period as revenue is recognized when there is a direct association between the cost incurred and revenue recognized.

In Canada, there are two sets of standards for profit-oriented businesses. Publicly accountable enterprises must follow International Financial Reporting Standards (IFRS) and private enterprises have the choice of following IFRS or Accounting Standards for Private Enterprises (ASPE).

4. Describe the components of the financial statements and explain the accounting equation. Assets, liabilities, and owner’s equity are reported in the balance sheet. Assets are present economic resources controlled by the business as a result of past events and have the potential to produce economic benefits. Liabilities are present obligations of a business to transfer an economic resource as a result of past events. Owner’s equity is the owner’s claim on the company’s assets and is equal to total assets minus total liabilities. The balance sheet is based on the accounting equation: Assets = Liabilities + Owner’s equity.

The Income statement reports the profit or loss for a specified period of time. Profit is equal to revenues minus expenses. Revenues are the increases in assets, or decreases in liabilities, that result from business activities that are undertaken to earn profit. Expenses are the cost of assets consumed or services used in a company’s business activities. They are decreases in assets or increases in liabilities, excluding withdrawals made by the owners, and result in a decrease to owner’s equity.

The statement of owner’s equity summarizes the changes in owner’s equity during the period. Owner’s equity is increased by investments by the owner and profits. It is decreased by drawings and losses. Investments are contributions of cash or other assets by owners. Drawings are withdrawals of cash or other assets from the business for the owner’s personal use. Owner’s equity in a partnership is referred to as partners’ equity and in a corporation as shareholders’ equity.

A cash flow statement summarizes information about the cash inflows (receipts) and outflows (payments) for a specific period of time.

5. Analyze the effects of business transactions on the accounting equation. Each business transaction must have a dual effect on the accounting equation. For example, if an individual asset is increased, there must be a corresponding (1) decrease in another asset, (2) increase in a liability, and/or (3) increase in owner’s equity.

6. Prepare financial statements. The income statement is prepared first. Expenses are deducted from revenues to calculate the profit or loss for a specific period of time. Then the statement of owner’s equity is prepared using the profit or loss reported in the income statement. The profit is added to (losses are deducted from) the owner’s equity at the beginning of the period. Drawings are then deducted to calculate owner’s equity at the end of the period. A balance sheet reports the assets, liabilities, and owner’s equity of a business as at the end of the accounting period. The owner’s equity at the end of the period, as calculated in the statement of owner’s equity, is reported in the balance sheet in the owner’s equity section.

Exercises

Exercise 1

Mike Homes is a business owned by Mike Smith. The accounting for this business is done by Mike’s sister Leigh. Leigh is currently preparing the 2021 year-end financial statements which Mike will use for three purposes:

1. to submit with his tax returns;

2. to support a loan application; and

3. to help him evaluate the success of the business.

Instructions

a) For each of the three purposes identified, describe the information needs the user will fulfill based on Mike Home’s financial statements.

b) Leigh has suggested that she can help Mike out by recording some January 2022 revenue in December 2021. She feels this is reasonable because it is just a slight timing difference and so “not really dishonest.” Comment on the ethical implications of this suggestion and explain how each of the three users’ needs may be affected if Leigh implements her suggestion.

Exercise 2

The following are six questions that users of accounting information might ask about Agusta Auto Towing.

Instructions

For each question, indicate who the decision maker is and whether it is an external or internal user.

Exercise 3

MGS Company recently released its first set of financial statements. Below is a list of potential users of the financial statements:

1. Labour union

2. Customers

3. Canadian Imperial Bank of Commerce

4. CRA

5. Potential shareholders/ investors

6. Sales Manager

7. Marketing Manager

8. Economic planners

9. Provincial securities commission

10. Human Resource Director

Instructions

a) For each user, identify whether the user is an external or internal user.

b) Provide a brief explanation as to the difference between external and internal users.

Exercise 4

The following is a list of users of accounting information:

A) Managers

B) Regulators

C) Employees

D) Shareholders

E) Lenders

F) Suppliers

G) External auditors

Instructions

Match the most appropriate user to the following user objectives. (Note: Each user should only be applied once.)

_______(1) The accuracy of the internal budgeted financial information

_______(2) Verification that the financial statements are fairly presented

_______(3) Compliance with income tax laws

_______(4) The ability of a company to repay its loans

_______(5) Fairness of wages

_______(6) Ensuring orders received are filled and shipped as quickly as possible

_______(7) The company’s ability to generate profits and provide a return on investment

Exercise 5

The following is a list of users of accounting information:

a) Managers

b) Regulators

c) Employees

d) Shareholders

e) Lenders

f) Suppliers

g) External auditors

Instructions

Identify the above users as internal (I) or external (E) using the following format:

_______(a) Managers

_______(b) Regulators

_______(c) External auditors

_______(d) Shareholders

_______(e) Lenders

_______(f) Suppliers

Exercise 6

Listed below are various types of business organizations:

1. Three individuals created a law practice. The law practice does not pay its own taxes.

2. Two individuals bought shares of a company as an investment.

3. A single mother opens her own hair salon. The hair salon pays its own taxes

4. Husband and wife decide to open a daycare business. The wife will operate and maintain the daycare while the husband works his normal full-time job. The daycare income will be reported solely on the wife’s personal tax return.

5. A public company with 100 shareholders.

6. Two friends create a chocolate company business. All profits will be on their personal returns.

Instructions

a) For each of the six situations, identify the type of business organization.

b) For each of the six situations, identify the owner’s liability.

Exercise 7

Listed below are various situations relating to business organizations:

1. Paul’s Woodworking does not have a separate legal existence apart from the one person who owns it.

2. Luke and Sheri own Wise Financial Inc., a financial and personal taxation services provider. Neither Luke nor Sheri has personal responsibility of the debts of Wise Financial Inc.

3. Lucky Snacks is owned by Ray Umber, who is personally liable for the debts of the business.

4. Ownership of Tractor and Wheels is divided into thousands of shares.

5. Chris and Melissa own Chris’ Curiosity, a restaurant. Both Chris and Melissa are personally liable for the debts of the business.

6. Torby Technologies has two owners and does not pay income taxes.

Instructions

Determine whether the situation described above refers to a proprietorship, partnership, or corporation.

Exercise 8

Each of the following independent situations represents a violation of accounting principles:

1. It is now the end of 2021 and Stella Co. is preparing its annual financial statements. The company has been experiencing severe financial difficulties and management anticipates that the company will cease operations in 2022 but this is not disclosed in the financial statements.

2. Fritz Schmitz runs a small business. All receipts from the business are deposited into Fritz’s personal bank account and all Fritz’s expenses, both personal and business, are paid out of this same account. Fritz makes no attempt to maintain separate records for the business.

3. Dean has a mining company that is very profitable. Over the past few years, Dean has been very good at maintaining his business records and books. However, Dean’s wife has recently been using the company account to pay for her personal expenses. She informed Dean that since he owns the company all the money earned will go to him anyway and therefore using the company account or their personal bank account makes no difference.

Instructions

For each of the situations listed above, fill in the appropriate letter to indicate which of the following accounting principles has been violated:

a) Going concern assumption

b) Reporting entity concept

Exercise 9

1. Explain the going concern assumption. How is it relevant in accounting for a business that may be going through temporary financial difficulties?

2. Explain how the reporting entity concept applies when a business is owned and operated by a sole proprietor.

Exercise 10

Each of the following independent situations represents a departure from generally accepted accounting principles:

1. Strad Music Supplies is a proprietorship owned and operated by Giuseppe Amati. Giuseppe started the business with funds given to him by his uncle. He gives his uncle a copy of Strad’s financial statements each year so that his uncle will see this was a good investment. In 2020 both Giuseppe and his uncle were disappointed that sales had decreased from the prior year. When Giuseppe wins $ 50,000 in a lottery during 2021, he decides to record the amount as revenue in the financial statements of the business to avoid disappointing his uncle even further.

2. Xavier Quinn, the owner of Quinn’s Travel, is thinking of retiring in two years because the business is not as successful as he had hoped. Xavier has always been very careful to ensure that all assets and liabilities are recorded correctly. However, since he is thinking of retiring, Xavier decides that generally accepted accounting principles are no longer relevant, so he does not double check his work as carefully as he did previously.

Instructions

For each situation listed above:

a) Identify which principle, concept, or assumption has been violated

b) Describe what the correct accounting treatment would be, and

c) Explain why the correct treatment provides better information.

Exercise 11

You were auditing the accounting records of Aldi Tool Company, owned and operated by Chad Fleming, and noticed the following events:

1. Chad deals with foreign suppliers who invoice the company in U.S. dollars. Chad normally records the amounts in the accounting records as displayed in the invoice since the exchange rate is often similar to the Canadian dollar.

2. Chad often receives deposits for contracts to be completed in the following fiscal year. He reports all deposits as revenue once the cash is received.

3. Chad wrote a cheque for $ 900 to Little Hugs Day Care Centre. The amount relates to child care service for Chad’s daughter Gabrielle.

Instructions

Identify the accounting principle, concept, or assumption violated in each of the events described above.

Exercise 12

The following is a list of fundamental and enhancing qualitative characteristics:

a) relevance

b) faithful representation

c) neutral

d) comparability

e) consistency

f) verifiability

g) timeliness

h) understandability

Instructions

Using the list of qualitative characteristics stated above, identify the appropriate qualitative characteristic being described in each of the statements below. (Note: a characteristic cannot be used more than once.)

a) Characteristic that requires that information cannot be selected to favour one set of interested parties over another.

b) Characteristic requiring information be available to decision-makers before it loses its ability to influence decisions.

c) Characteristic requiring that numbers and descriptions in financial statements represent what really existed or happened.

d) Information that is capable of making a difference in a decision is said to have this qualitative characteristic.

e) Characteristic being employed when companies in the same industry use the same accounting principles from year to year.

Exercise 13

In each of the following situations, the accountant for Stan Design Services (Stan) must decide how to record the information in the financial statements. Stan is a proprietorship owned and operated by Maria Steinwald.

1. Maria would like to borrow money from the bank to expand the business. Since she owns a house that can be pledged as security for a bank loan, she asks the accountant to ensure that the house is shown on Stan’s balance sheet.

2. The accountant is confident that with a new contract that was signed, Stan will be a successful business for many years to come. However, before that was finalized, he was curious whether there would be any effect on accounting for the assets and liabilities of the business if its ongoing viability had been in doubt.

Instructions

For each of the situations, identify which generally accepted accounting principle would guide the accountant in deciding how to report the situation, and describe the correct treatment.

Exercise 14

Listed below are various types of organizations:

1. publicly accountable enterprise

2. bank or credit unions

3. private corporation

4. security broker

5. Canadian partnership

Instructions

a For each organization, identify the appropriate accounting standards the organization should follow (ASPE or IFRS).

b) If applicable, identify if any organization has the option to follow both standards.

Exercise 15

For the items listed below, fill in the appropriate code letter to indicate whether the item is an Asset (A), Liability (L), or Owner's Equity (OE) item.

1. Rent Expense 6. Cash

2. Office Equipment 7. Accounts Receivable

3. Accounts Payable 8. L. Landry, Drawings

4. L. Landry, Capital 9. Service Revenue

5. Insurance Expense 10. Notes Payable

Exercise 16

1. What is meant by the historical cost measurement method? Explain why the method is used primarily when accounting for assets used in a business.

2. Explain the monetary unit concept. Explain how a business may have competitive advantage(s) that are not reported in the financial statements due to this principle, and provide an example.

Exercise 17

Each of the following independent situations represents a departure from generally accepted accounting principles:

1. Homer Properties owns a number of apartment buildings. In April 2021 a new building was purchased for $ 1,000,000. Because of the rapid increase in real estate prices, by the time Homer’s accountant recorded the purchase in July 2021, the estimated value of the property had increased to $ 1,200,000. The accountant decided to record the new building at $ 1,200,000.

2. Expat Imports International purchases products in the United States for resale in Canada. The goods they buy in the U.S. are paid for in U.S. dollars. In Expat’s financial statements, each amount is identified as being in either U.S. or Canadian dollars, for example as follows:

Sales $ 40,000 (Canadian $)

Cost of goods sold (25,000) (U.S. $)

Wages expense (7,000) (Canadian $)

Freight expense (2,000) (U.S. $)

Profit $ 6,000

Instructions

For each situation, (i) identify which principle, concept, or assumption has been violated, (ii) describe what the correct accounting treatment would be, and (iii) why the correct treatment provides better information.

Exercise 18

In each of the following situations, the accountant for Meg Design Services (Meg ) must decide how to record the information in the financial statements. Meg is a proprietorship owned and operated by Petra Smith.

1. In April, Meg purchased some furniture that will be used in a client’s newly designed office. Meg paid $ 4,000 for the furniture, and the client will pay Meg $ 5,600 when it is delivered and assembled in May. The accountant wants to know at which amount the furniture should be reported on the April 30 balance sheet.

2. In June, Meg signed a long-term contract with a hotel chain to review all of their hotels’ décor annually and recommend updates as fashions change. The fees will be based on the amount of time spent on the annual review. The first location will be evaluated starting in September. The accountant believes this contract is of great value to Meg even though no money has changed hands yet, and wonders how it can be shown in the June 30 financial statements.

Instructions

For each of the situations, identify which generally accepted accounting principle would guide the accountant in deciding how to report the situation, and describe the correct treatment.

Exercise 19

For each of the situations listed below, indicate which of the following generally accepted accounting principles have been violated:

a) Monetary unit concept

b) Historical cost measurement method

1. Cheers International revalues its financial statements each year to take into consideration the effects of inflation. The company justifies its decision by stating the “inflation adjusted statements more fully reflect the purchasing power of the company’s earnings.”

2. Bert began operations 11 years ago and purchased land for $ 200,000. Bert has since built a manufacturing plant on this land to use in daily operations. Today Bert has appraised the value of his land to be $ 1.5 million. He increases the value of the land to be reported on the financial statements to $ 1.5 million.

Exercise 20

From the following list of selected accounts taken from the records of Miller Clinic, identify which accounts would appear on the balance sheet.

a) Jane Miller, Capital f) Accounts Payable

b) Patient Revenue g) Cash

c) Land h) Rent Expense

d. Wages Expense i) Medical Supplies

e) Notes Payable j) Utilities Expense

Exercise 21

Carrie's Carpet Cleaning has the following accounts:

Van Notes Payable

Accounts Payable T. Carrie, Capital

Cash T. Carrie, Drawings

Supplies Equipment

Accounts Receivable

Instructions

Identify which items are

a) Assets

b) Liabilities

c) Owner's Equity

Exercise 22

The following is a list of accounts and ending balances for Tony’s Consulting Services.

Accounts payable $ 4,200

Accounts receivable 9,000

Bank loan payable 60,000

Building 65,000

Cash 13,000

A. Mercer, Drawings 12,000

Equipment 6,000

Expenses 23,800

Land 95,000

A. Mercer, Capital, beginning of year 25,000

Revenues 135,000

Supplies 400

Instructions

a) For each account, indicate whether it is classified as an Asset (A), Liability (L), or Owner’s Equity (OE).

b) Calculate total assets, total liabilities, and total owner’s equity. Use these amounts to show that the accounting equation is in balance.

Exercise 23

At the beginning of the year, Diskman Company had total assets of $ 700,000 and total liabilities of $ 300,000.

Instructions

Answer the following questions viewing each situation as being independent of the others:

a) If total assets increased $ 250,000 during the year, and total liabilities decreased $ 100,000, what is the amount of owner's equity at the end of the year?

b) During the year, total liabilities increased $ 340,000 and owner's equity decreased $ 130,000. What is the amount of total assets at the end of the year?

c) If total assets decreased $ 60,000 and owner's equity increased $ 190,000 during the year, what is the amount of total liabilities at the end of the year?

Exercise 24

Calculate the missing amount in each category of the accounting equation.

Assets Liabilities Owner's Equity

a) $ 280,000 $ ? $ 98,000

b) $ 178,000 $ 63,000 $ ?

c) $ ? $ 202,000 $ 300,000

Exercise 25

Below are three lists of accounting information with missing amounts. Each list is independent of the others.

Instructions

Use the accounting equation to determine the missing amounts.

Exercise 26

Summaries of information from the balance sheets and income statements for four different proprietorships are provided below, with several amounts missing.

Instructions

Determine the missing amounts.

Exercise 27

The following are six questions that users of accounting information might ask about Agusta Auto Towing (Agusta).

Instructions

For each question, determine which part of the financial statements (Income statement, balance sheet, or cash flow statement) would provide the information required.

Exercise 28

At the beginning of the year, Klitch Komatsu Co. had total assets of $ 1,650,000 and total liabilities of $ 990,000.

Instructions

Answer the following questions viewing each situation as being independent of the others:

a) If total assets decreased $ 416,000 during the year, and total liabilities increased $ 92,000, what is the amount of owner's equity at the end of the year?

b) During the year, total liabilities decreased $ 86,000 and owner's equity increased $ 51,000. What is the amount of total assets at the end of the year?

c) If total assets decreased $ 29,000 and owner's equity decreased $ 67,000 during the year, what is the amount of total liabilities at the end of the year?

Exercise 29

Calculate the missing amount in each category of the accounting equation.

Assets Liabilities Owner's Equity

a) $ 2,800,000 $? $ 1,950,000

b) $ 10,220,000 $ 3,660,000 $ ?

c) $ ? $ 4,100,000 $ 9,990,000

Exercise 30

Analyze the transactions described below and indicate their effect on the basic accounting equation. Use a plus sign (+) to indicate an increase and a minus sign (–) to indicate a decrease.

Assets = Liabilities + Owner's Equity

1. Purchased supplies paying cash.

2. Purchased supplies on credit.

3. Owner withdrew cash from company.

4. Performed services for cash. ________

5. Performed services on credit.

6. Paid wages to employees.

7. Paid for repairs and maintenance expenses.

8. Collected amount owed from customer.

9. Owner invested cash in company.

10. Paid an amount owing to supplier.

Exercise 31

Listed below are various accounts that can be found in the financial statements:

1. Cash

2. Unearned revenue

3. Delivery truck

4. Accounts receivable

5. Prepaid expenses

6. Rental income

7. Accounts payable

8. Service revenue

9. Telephone expense

10. Bank loan payable

11. Supplies expense

12. Interest revenue

13. Sales

14. Salaries payable

15. Building

16. Note payable

17. Insurance expense

18. Owner’s capital

19. Commission revenue

20. Owner’s drawings

Instructions

For each account listed, identify the applicable financial statement on which the account will be presented (balance sheet, income statement or statement of owner’s equity).

Exercise 32

One item is omitted in each of the following summaries of balance sheet and income statement data for three different sole proprietorships, A, B, and C.

Proprietorship

A B C

Beginning of the Year:

Assets $ 400,000 $ 150,000 $ 199,000

Liabilities 250,000 105,000 168,000

End of the Year:

Assets 450,000 195,000 195,000

Liabilities 280,000 95,000 169,000

During the Year:

Additional investment by the owner ? 79,000 80,000

Withdrawals by the owner 90,000 83,000 ?

Revenue 195,000 ? 187,000

Expenses 170,000 113,000 185,000

Instructions

Determine the amounts of the missing items, identifying each proprietorship by letter.

Exercise 33

Indicate in the space provided by each item whether it would appear on the income statement (IS), balance sheet (BS), or statement of owner's equity (OE):

1. Service Revenue 7. Accounts Receivable

2. Utilities Expense 8. K. Brown, Capital

3. Cash 9. Equipment

4. Accounts Payable 10. Advertising Expense

5. Office Supplies 11. K. Brown, Drawings

6. Wage Expense 12. Notes Payable

Exercise 34

Indicate in the space provided by each item whether it would appear on the income statement (IS), balance sheet (BS), or statement of owner's equity (OE):

1. Unearned Revenue 7. Notes Payable

2. Prepaid Expense 8. D. Donovan, Capital

3. Salaries Expense 9. Notes Receivable

4. D. Donovan, Drawings 10. Insurance Expense

5. Land 11. Accounts Receivable

6. Service Revenue 12. Cash

Exercise 35

Calculate the missing amount in each category of the accounting equation.

Assets Liabilities Owner's Equity

a) $ 1,610,000 $ ? $ 900,000

b) $ 1,070,000 $ 295,000 $ ?

c) $ ? $ 822,000 $ 1,107,000

Exercise 36

Analyze the transactions described below and indicate their effect on the basic accounting equation. Use a plus sign (+) to indicate an increase and a minus sign (–) to indicate a decrease.

Assets = Liabilities + Owner's Equity

1. Received cash for services performed.

2. Purchased office equipment on credit.

3. Paid employees' salaries.

4. Received cash from customer in payment

on account. ________

5. Paid telephone bill for the month.

6. Paid for office equipment purchased in

transaction 2.

7. Purchased office supplies on credit.

8. Proprietor withdrew cash for personal

expenses.

9. Obtained a loan from the bank.

10. Billed customers for services performed.

Exercise 37

Presented below is a balance sheet for the Marks Lawn Service at December 31, 2021.

MARKS LAWN SERVICE

Balance sheet

December 31, 2021

Assets Liabilities and Owner's Equity

Cash $ 12,000 Liabilities

Accounts receivable 7,000 Accounts payable $ 8,000

Supplies 9,000 Notes payable 15,000

Equipment 11,000 Owner's equity

B. Marks, capital 16,000

Total assets $ 39,000 Total liabilities & owner’s equity $ 39,000

The following additional information is available for the year that began on January 1, 2021: All expenses total $ 11,000. Profit for the year was $ 8,000 and drawings were $ 5,000.

Instructions

Determine the following: (Show all calculations.)

a) Service revenues for the year.

b) Bill Marks' capital balance on January 1.

Exercise 38

The following items are taken from the December 31 financial statements of Scotia Rental Properties, a proprietorship owned by Leo DeRosier.

Additional information:

During the year, L. DeRosier invested $ 8,000 into the business.

Instructions

a) For each of the above items indicate in column a) whether the item is an Asset (A), Liability (L), Capital (C), Drawings (D), Revenue (R), or Expense (E) item.

b) For each of the above items indicate on which financial statement—income statement (IS), statement of owner’s equity (OE), or balance sheet (BS)—each item would be reported.

c) Calculate total assets.

d) Calculate total liabilities.

e) Calculate profit.

f) Calculate total owner’s equity.

g) Demonstrate that the accounting equation is in balance.

Exercise 39

For each of the following, describe a transaction that will have the stated effect on the elements of the accounting equation.

1. Increase one asset and decrease another asset.

2. Increase an asset and increase a liability.

3. Decrease an asset and decrease a liability.

4. Increase an asset and increase owner's equity.

5. Increase one asset, decrease another asset, and increase a liability.

Exercise 40

The following transactions represent part of the activities of Lewis Company for the first month of its existence. Indicate the effect of each transaction upon the total assets of the business by one of the following phrases: increased total assets, decreased total assets, or no change in total assets.

1. The owner invested cash to start the business.

2. Purchased a computer for cash.

3. Purchased office equipment with money borrowed from the bank.

4. Paid the first month's utility bill.

5. Collected an accounts receivable.

6. Owner withdrew cash from the business.

Exercise 41

Selected transactions for Barkley Company are listed below:

1. Paid monthly utility bill.

2. Purchased new display case for cash.

3. Paid cash for repair work on security system.

4. Billed customers for services performed.

5. Received cash from customers billed in 4.

6. Withdrew cash for owner's personal use.

7. Incurred advertising expenses on account.

8. Paid monthly rent.

9. Received cash from customers when service was provided.

Instructions

List the number of the transaction and then describe the effect of each transaction on assets, liabilities, and owner's equity.

Sample: Made initial cash investment in the business. The answer would be: increase in assets and increase in owner's equity.

Exercise 42

There are ten transactions listed below:

1. Receive cash from customers on account.

2. Initial cash contribution by an owner.

3. Pay cash to reduce an accounts payable.

4. Purchase supplies for cash.

5. Pay cash to reduce a notes payable.

6. Purchase supplies on account.

7. Customers pay cash for services rendered.

8. Purchase equipment with a note payable.

9. Pay utilities with cash.

10. Owner withdraws money from the business for personal use.

Instructions

Match the transactions that have the identical effect on the accounting equation. You should end up with five matches. The first one has been completed for you with an explanation.

Example: 1. and 4. are a match because both of them include an increase in assets and a decrease in assets. The net effect of these transactions on the accounting equation is zero.

Exercise 43

Selected transactions for Peters Equipment Services are listed below:

1. Purchased a new lawn mower for $ 2,000, making a 10% down payment in cash, the remainder is on account.

2. Purchased $ 350 supplies for cash.

3. Billed customers $ 1,500 for lawn services completed.

4. Purchased used truck for $ 6,500, fully financed by a bank loan.

5. Collected $ 800 from customers for services previously billed.

6. Paid balance owing on lawn mower.

7. Incurred telephone expenses of $ 85 on account.

8. Completed services for customers who pay $ 440 cash.

9. Peter Willes, the owner, invests $ 7,000 of additional funds in the business.

10. Part of the funds invested is used to repay the full balance of the bank loan plus $ 65 in interest expense.

11. $ 1,250 in wages is paid to employees.

12. Peter withdrew $ 1,000 cash for personal use.

Instructions

For each transaction, state whether the transaction increases or decreases assets, liabilities, and/or owner’s equity, and by what amount(s).

Exercise 44

A service proprietorship shows five transactions summarized below. The effect of each transaction on the accounting equation is shown.

Accounts Equip- Accounts

Cash + Rec. + ment + Land + Building= Payable + Capital – Drawings + Revenues – Expenses

$ 5,000 $ 6,500 $ 10,000 $ 7,500 $ 50,000 $ 3,000 $ 66,000 $ 20,000 $ 35,000 $ 5,000

1. –2,000 -2,000

2. +1,000 –1,000

3. +5,000 +5,000

4. +2,500 +2,500

5. +3,000 +3,000

Totals $ 6,500 $ 8,500 $ 15,000 $ 7,500 $ 50,000 $ 6,000 $ 66,000 $ 20,000 $ 40,500 $ 5,000

Instructions

For each transaction, write an explanation of the nature of the transaction.

Exercise 45

Pam’s Custom Cakes shows five transactions summarized below. The effect of each transaction on the accounting equation is shown.

Accounts Equip- Accounts

Cash + Rec. + ment + Land + Building= Payable + Capital – Drawings + Revenues – Expenses

$ 5,000 $ 6,500 $ 10,000 $ 7,500 $ 50,000 $ 3,000 $ 66,000 $ 20,000 $ 35,000 $ 5,000

1. +6,000 +6,000

2. -7,500 +15,000 +7,500

3. -4,000 -4,000

4. +2,000 -2,000

5. _____ +1,100 ______ -1,100

Totals $ 1,500 $ 4,500 $ 25,000 $ 7,500 $ 50,000 $ 11,600 $ 72,000 $ 24,000 $ 35,000 $ 6,100

Instructions

For each transaction, write an explanation of the nature of the transaction.

Exercise 46

Russ Walls decides to open a cleaning and laundry service near the local college campus that will operate as a proprietorship. The transactions for the month of June are listed below:

1. Russ Walls invests $ 20,000 in cash to start a cleaning and laundry business on June 1.

2. Purchased laundry equipment for $ 5,000 paying $ 3,000 in cash and the remainder due in 30 days.

3. Purchased laundry supplies for $ 1,200 cash.

4. Received a bill from Campus News for $ 300 for advertising in the campus newspaper.

5. Provided $ 1,500 of cleaning and laundry services to customers for cash.

6. Paid salaries of $ 200 to student workers.

7. Billed the Tiger Football Team $ 100 for cleaning and laundry services.

8. Paid $ 300 to Campus News for advertising that was previously billed in Transaction 4.

9. Russ Walls withdrew $ 700 from the business for living expenses.

10. Incurred utility expenses for month on account, $ 400.

Instructions

Analyze the transactions above in terms of their effect on the basic accounting equation. Record each transaction by increasing (+) or decreasing (–) the dollar amount of each item affected. Total and balance the equation at the end of the month.

R. R.

Trans- Accounts Laundry Laundry Accounts Walls, Walls,

action Cash + Rec. + Supplies + Equip. = Payable + Capital – Drawings + Revenues – Expenses

1.

2.

3.

4.

5.

6.

7.

8.

9.

10.

———————————————————————————————————————————

Totals

Exercise 47

Amanda Mayne recently started a business, Mayne Events, that will provide promotion and advertising for fund raising events hosted by charities. She will operate the business as a proprietorship. The first month’s transactions are listed below:

1. Invests $ 5,000 in the business out of her personal savings.

2. Transfers a computer valued at $ 3,000 to the business.

3. Purchases computer supplies for $ 400 cash.

4. Pays $ 550 for wages to an assistant.

5. Completes advertising brochures for a client, who pays $ 700 for the service.

6. Advertisements for Mayne Events are run in the local newspaper at a cost of $ 600 on account.

7. Provides services totaling $ 1,200 for several clients – one client whose bill is $ 200 pays cash, the remainder are on account.

8. Pays the amount owing to the newspaper for the advertisements described in 6.

9. Half the amount receivable from customers is collected.

10. Purchases additional computer equipment for $ 450, cash.

11. Withdraws $ 300 for personal use.

Instructions

a) For each of the above items, determine the accounts that will be affected and, in the table provided, set up the headings in the order of the accounting equation.

b) For each of the above items, record each transaction in the table provided.

c) Calculate total assets.

d) Calculate total liabilities.

e. Calculate profit.

f) Calculate owner’s equity.

g) Demonstrate that the accounting equation is in balance.

Exercise 48

Greg Stewart was reviewing his business activities at the end of the year (February 28, 2021) and needs your help to prepare a statement of owner's equity. At the beginning of the year, his assets were $ 500,000 and his liabilities were $ 150,000. At the end of the year the assets had grown to $ 950,000 but liabilities had also increased to $ 300,000. The profit for the year was $ 420,000. Greg had withdrawn $ 120,000 during the year for his personal use.

Instructions

Prepare a statement of owner's equity in good form.

Exercise 49

At September 1, 2021, the balance sheet accounts for Reggie’s Restaurant, owned by Reggie Ray were as follows:

Accounts Payable $ 3,800 Land $ 33,000

Accounts Receivable 1,600 R. Ray, Capital ?

Building 68,000 Notes Payable 48,000

Cash 5,000 Supplies 6,600

Furniture 18,700

The following transactions occurred during the next two days:

1. Reggie invested an additional $ 22,000 cash in the business.

2. The accounts payable were paid in full. (No payment was made on the notes payable.)

Instructions

Prepare a balance sheet at September 3, 2021.

Exercise 50

The dental practice of Pamela Bell, DDS has the following items for the month of September, 2021:

P. Bell, Capital (September 1) $ 42,000

Accounts payable 7,000

Equipment 30,000

Service revenue 25,000

P. Bell, Drawings 6,000

Dental supplies expense 3,500

Cash 8,000

Utilities expense 700

Dental supplies 2,800

Salaries expense 7,000

Accounts receivable 14,000

Rent expense 2,000

Instructions

Prepare an income statement, a statement of owner's equity, and a balance sheet for the dental practice in the following formats:

Pamela Bell, DDS

Income Statement

Month Ended September 30, 2021

———————————————————————————————————————————

Revenues $

Expenses

$

Total expenses

Profit $

Pamela Bell, DDS

Statement of Owner's Equity

Month Ended September 30, 2021

———————————————————————————————————————————

P. Bell, Capital, September 1 $

Add:

Less:

P. Bell, Capital, September 30 $

Pamela Bell, DDS

Balance Sheet

September 30, 2021

———————————————————————————————————————————

ASSETS

$

Total assets $

LIABILITIES AND OWNER'S EQUITY

Liabilities

$

Owner's equity

Total liabilities and owner's equity $

Exercise 51

Listed below, in alphabetical order, are the balance sheet items of Solo Company at December 31, 2021:

Accounts Payable $ 9,000

Accounts Receivable 15,000

Building 46,000

Cash 12,000

Land 52,000

Office Equipment 4,000

H. Solo, Capital 120,000

Instructions

Prepare a balance sheet and include a complete heading.

Exercise 52

William Calvin owns and operates Sales Consulting, the business is not a corporation. The following information is based on December 31, 2021 year end balances for the firm. (All amounts are in 000s).

Additional information:

William invested $ 1,500 into the business during the year.

Instructions

a) Prepare the income statement for Sales Consulting.

b) Prepare the statement of owner’s equity.

c) Prepare the balance sheet.