Solutions to Practice Questions by Chapter (Chapters 1-4)

Here are some practice questions you may want to try. They are on the white pages at the end of
each chapter. The solutions are posted in the file labelled “Solution to Selected Questions”.
If you would like more practice, you may also choose to try some “Review and Practice” questions (on
the blue pages) at the end of each chapter. The answers are in your textbook.

Chapter Questions Brief Exercises Problem Set A Broaden Your

Exercises Perspective
1 6, 17, 18, 19 1-3, 1-4 1-6, 1-7, 1-8 1-1A

3 3-13, 3-14 3-20, 3-21

(appendix)
2 7 2-5, 2-6 2-5, 2-6 2-1A, 2-2A(a) 2-5 (1)
3 4, 10, 11 3-5, 3-7 3-1A (a) 3-3
4 4-11 4-14, 4-15, 14-17

(1)
[Link]

CHAPTER 1

Questions

6. Harper Travel Agency should report the land at $85,000 on its December 31, 2017 balance sheet. This is
true not only at the time the land is purchased, but also over the time the land is held. In determining
which measurement principle to use (cost or fair value) companies weigh the factual nature of cost figures
versus the relevance of fair value. In general, companies use cost. Only in situations where assets are
actively traded do companies apply the fair value principle. An important concept that accountants follow
is the cost principle.

17. (a) Income statement. (d) Balance sheet.

(b) Balance sheet. (e) Balance sheet and retained earnings 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 stockholders’ equity resulting from business activities
entered into for the purpose of earning income. This transaction is simply an additional investment made
by one of the owners of the business.

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 retained earnings statement—it is shown as an addition
to the beginning-of-period retained earnings. Indirectly, the net income of a company is also included in
the balance sheet. It is included in the Retained Earnings account which appears in the stockholders’
equity section of the balance sheet.

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Brief Exercises
BRIEF EXERCISE 1-3

(a) ($870,000 + $150,000) – ($500,000 – $80,000) = $600,000

(Stockholders’ equity).
(b) ($500,000 + $100,000) + ($870,000 – $500,000 – $66,000) = $904,000
(Assets).
(c) ($870,000 – $80,000) – ($870,000 – $500,000 + $120,000) = $300,000
(Liabilities).

BRIEF EXERCISE 1-4

Stockholders’ Equity
Common Retained Earnings
Assets = Liabilities + Stock + Revenues – Expenses – Dividends

(a) X = $90,000 + $150,000 + $450,000 – $320,000 – $40,000

X = $90,000 + $240,000
X = $330,000

(b) $57,000 = X + $23,000 + $50,000 – $35,000 – $7,000

$57,000 = X + $31,000
X = $26,000 ($57,000 – $31,000)

(c) $600,000 = ($600,000 x 2/3) + X (Stockholders’ equity)

$600,000 = $400,000 + X
X = 200,000

BRIEF EXERCISE 3-13

(a) Relevant.
(b) Faithful representation.
(c) Consistency.

BRIEF EXERCISE 3-14

(a) 1. Predictive value.

(b) 2. Neutral.
(c) 3. Verifiable.

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(d) 4. Timely.

Exercises

EXERCISE 1-6

1. Increase in assets and increase in stockholders’ equity.

2. Decrease in assets and decrease in stockholders’ equity.

3. Increase in assets and increase in liabilities.

4. Increase in assets and increase in stockholders’ equity.

5. Decrease in assets and decrease in stockholders’ equity.

6. Increase in assets and decrease in assets.

7. Increase in liabilities and decrease in stockholders’ equity.

8. Increase in assets and decrease in assets.

9. Increase in assets and increase in stockholders’ equity.

EXERCISE 1-7

1. (c) 5. (d)

2. (d) 6. (b)

3. (a) 7. (e)

4. (b) 8. (f)

EXERCISE 1-8

(a)

1. Stockholders 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 $9,400 in revenue, receiving $4,900 cash and $4,500 on account.

5. Paid $1,500 cash on accounts payable.

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6. Paid $2,000 cash dividends to stockholders.

7. Paid $850 cash for rent.

8. Collected $450 cash from clients on account.

9. Paid salaries and wages of $3,900.

10. Incurred $500 of utilities expense on account.

(b) Investment $15,000

Service revenue 9,400

Dividends (2,000 )

Rent expense (850 )

Salaries and wages expense (3,900 )

Utilities expense (500 )

Increase in stockholders’ equity$17,150

(c) Service revenue $9,400

Rent expense (850 )

Salaries and wages expense (3,900 )

Utilities expense (500 )

Net income $4,150

EXERCISE 3-20

1. Comparability
2. Going concern assumption
3. Materiality
4. Full disclosure principle
5. Time period assumption
6. Relevance
7. Historical cost principle
8. Consistency
9. Economic entity assumption
10. Faithful representation

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 11. Monetary unit assumption
12. Expense recognition principle

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EXERCISE 3-21

(a) The primary objective of financial reporting is to provide financial information that is useful to
investors and creditors for making decisions about providing capital. Since Net Nanny’s shares
appear to be actively traded, investors must be capable of using the information made available
by Net Nanny to make decisions about the company.

(b) The investors must feel as if the company will show earnings in the future. They must recognize
that information relevant to their investment choice is indicated by more than Net Nanny’s net
income.

(c) The change from Canadian dollars to U.S. dollars for reporting purposes should make Net Nanny
more comparable with companies traded on U.S. stock exchanges.

Chapter 1 Problem Set 1-1A (next page)

Fredonia Repair Inc.

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 Stockholders’ Equity

Accounts Accounts Common Retained Earnings

Cash + Receivable + Supplies + Equipment = Payable + Stock + Revenues – Expenses – Dividends

1. +$10,000 +$10,000 +
+ 10,000 = 0010,000
2. + –5,000 +$5,000 +000,
+ 5,000 + + 5,000 = + 0010,000 +
3. + –400 +00,000 –$400 (a)
+ 4,600 + + 5,000 = + 10,000 + –400
4. + –300 +$300 +00,000 +
+ 4,300 + + 300 + + 5,000 = + 10,000000
+ –400
5. +000,000 +0000 +00,000 +$250 –250 (b)
+ 4,300 + + 300 + + 5,000 = + 250 + 00010,000000
+ –650
6. –+4,700 +0000 +00,000 +0000 +$4,700 (c)
+ 9,000 + + 300 + + 5,000 = + 250 + 00010,000 + 4,700 –650
7. –700 +0000 +00,000 +0000 0 –$700 (d)
+ 8,300 + + 300 + + 5,000 = + 250 + 10,000 + 4,700 –650 –700
8. + –1,000 +0000 +00,000 +0000 –1,000 (e)
+ 7,300 + + 300 + + 5,000 = + 250 + 10,000 + 4,700 –1,650 –700
9. + –140 +0000 +00,000 +0000 –140 (f)
+ 7,160 + + 300 + + 5,000 = +0250 + 10,000 + 4,700 –1,790 –700
10. +000,000 +$1,100 +0000 +00,000 +0000 +1,100 (g)
+ 7,160 + + 1,100 + + 300 + + 5,000 = +0250 + 10,000 + 5,800 –1,790 –700
11. – +120 +–120
+$ 7,280 + +$980 + +$300 + +$5,000 = +$250 + $10,000 + $5,800 – $1,790 – $700

$13,560 $13,560

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PROBLEM 1-1A (Continued)

Key to Retained Earnings Column

(a) Rent expense

(b) Advertising expense
(c) Service revenue
(d) Dividends
(e) Salaries and wages expense
(f) Utilities expense
(g) Service revenue

(b) Service revenue ($4,700 + $1,100) $5,800

Expenses
Salaries and wages $1,000
Rent 400
Advertising 250
Utilities 140 1,790
Net income $4,010

CHAPTER 2
Questions

7. (a) Accounts Receivable—asset—debit balance.

(b) Accounts Payable—liability—credit balance
(c) Equipment—asset—debit balance.
(d) Dividends—stockholders’ equity—debit balance.
(e) Supplies—asset—debit balance.

BRIEF EXERCISE 2-5

(a) Effect on Accounting Equation (b) Debit-Credit Analysis

Aug. 1 The asset Cash is increased; the stockholders’ Debits increase assets:
equity account debit Cash $5,000.
Common Stock is increased. Credits increase stockholders’ equity: credit Common
Stock $5,000.

4 The asset Prepaid Insurance is increased; the Debits increase assets:

asset Cash is decreased. debit Prepaid Insurance $1,800.

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 Credits decrease assets:
credit Cash $1,800.

16 The asset Cash is increased; the revenue Debits increase assets:

Service Revenue is increased. debit Cash $1,900.
Credits increase revenues:
credit Service Revenue $1,900.

27 The expense Salaries and Wages Expense is Debits increase expenses:

increased; the asset Cash is decreased. debit Salaries and Wages Expense $1,000.
Credits decrease assets:
credit Cash $1,000.

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BRIEF EXERCISE 2-6

Aug. 1 Cash ...................................................................... 5,000

Common Stock ............................................... 5,000

4 Prepaid Insurance .................................................. 1,800

Cash............................................................... 1,800

16 Cash ...................................................................... 1,900

Service Revenue ............................................ 1,900

27 Salaries and Wages Expense ................................ 1,000

Cash............................................................... 1,000

EXERCISE 2-5

General Journal
Date Account Titles and Explanation Ref. Debits Credit
Oct. 1 Cash ................................................. 20,000
Common Stock ........................ 20,000

2 No entry.

3 Equipment ....................................... 2,300

Accounts Payable .................... 2,300

6 Accounts Receivable ........................ 3,600

Service Revenue...................... 3,600

27 Accounts Payable ............................. 850

Cash ........................................ 850

30 Salaries and Wages Expense ........... 2,500

Cash ........................................ 2,500

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EXERCISE 2-6

(a) 1. Increase the asset Cash, increase the liability Notes Payable.
2. Increase the asset Equipment, decrease the asset Cash.
3. Increase the asset Supplies, increase the liability Accounts Payable.

(b) 1. Cash .................................................................. 5,000

Notes Payable ............................................ 5,000
2. Equipment ........................................................ 2,500
Cash ........................................................... 2,500
3. Supplies ............................................................ 450
Accounts Payable ....................................... 450

PROBLEM 2-1A

J1
Date Account Titles and Explanation Ref. Debit Credit
Apr. 1 Cash ...................................................... 50,000
Common Stock............................... 50,000
(Issued shares of stock
for cash)

4 Land 34,000
Cash .............................................. 34,000
(Purchased land for cash)

8 Advertising Expense .............................. 1,800

Accounts Payable .......................... 1,800
(Incurred advertising
expense on account)

11 Salaries and Wages Expense ................ 1,500

Cash .............................................. 1,500
(Paid salaries)

12 No entry—Not a transaction.

13 Prepaid Insurance .................................. 2,400

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 Cash .............................................. 2,400
(Paid for one-year
insurance policy)

17 Dividends ............................................... 1,400

Cash .............................................. 1,400
(Declared and paid cash
dividends)

20 Cash ...................................................... 5,700

Service Revenue ............................ 5,700
(Received cash for services
provided)

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PROBLEM 2-1A (Continued)

Date Account Titles and Explanation Ref. Debit Credit

Apr. 25 Cash ..................................................... 3,000
Unearned Service Revenue............. 3,000
(Received cash for future
services)

30 Cash ..................................................... 8,900

Service Revenue .......................... 8,900
(Received cash for services
provided)

30 Accounts Payable ............................... 840

Cash .............................................. 840
(Paid creditor on account)

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 PROBLEM 2-2A

(a)
J1
Date Account Titles and Explanation Ref. Debit Credit
May 1 Cash ...................................................... 101 20,000
Common Stock ............................. 311 20,000
(Issued shares of stock
for cash)

2 No entry—not a transaction.

3 Supplies ................................................ 126 1,500

Accounts Payable ........................ 201 1,500
(Purchased supplies on
account)

7 Rent Expense ....................................... 729 900

Cash .............................................. 101 900
(Paid office rent)

11 Accounts Receivable ........................... 112 2,800

Service Revenue .......................... 400 2,800
(Billed client for services
provided)

12 Cash 101 3,500

.......................................................
Unearned Service Revenue ......... 209 3,500
(Received cash for future
services)

17 Cash 101 1,200

.......................................................
Service Revenue .......................... 400 1,200
(Received cash for services
provided)

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 31 Salaries and Wages Expense .............. 726 2,000
Cash .............................................. 101 2,000
(Paid salaries)

PROBLEM 2-2A (Continued)

Date Account Titles and Explanation Ref. Debit Credit

May 31 Accounts Payable ($1,500 X 40%) ........ 201 600
Cash ............................................. 101 600
(Paid creditor on account)

BYP 2-5 REAL–WORLD FOCUS

(a) The reason the Green Bay Packers’ issue an annual report is because
they are a publicly owned, nonprofit company. They issue the report to
more than 100,000 shareholders who hold shares. None of the other
teams are publicly owned, so they have no obligation to make their
financial information available except to their small group of owners.

(b) At the time that the article was written the owners of the NFL teams and
the players’ labor union were negotiating a new contract. Knowing how
profitable the NFL teams are would be useful information for the
players to know so that they would have a better sense of how much
the teams could afford to play. The Packers are obviously a “small
market” team; they are not necessarily representative of teams in
general. However, the Packers’ annual report does give the players
some sense of the profitability of other teams.

(c) Since some of the cost of the stadium that the Packers play in is
covered by taxpayers, the county and state government has an interest
in the team’s finances.

(d) The Packers’ revenues increased during recent years. However,

because the cost of players’ salaries increased at a faster rate than
revenues, the Packers’ operating profit actually declined.

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CHAPTER 3
Questions

4. Information presented on an accrual basis is more useful than on a cash basis

because it reveals relationships that are likely to be important in predicting future
results. To illustrate, under accrual accounting, revenues are recognized when the
performance obligation is satisfied so they can be related to the economic
environment in which they occur. Trends in revenues are thus more meaningful.
10. No. Depreciation is the process of allocating the cost of an asset to expense over
its useful life in a rational and systematic manner. Depreciation results in the
presentation of the book value of the asset, not its fair value.
11. Depreciation expense is an expense account whose normal balance is a debit. This
account shows the cost that has expired during the current accounting period.
Accumulated depreciation is a contra asset account whose normal balance is a
credit. The balance in this account is the depreciation that has been recognized
from the date of acquisition to the balance sheet date.

EXERCISE 3-5

1. Interest Expense..................................................... 400

Interest Payable
($10,000 X 12% X 4/12) ................................. 400

2. Supplies Expense................................................... 1,550

Supplies ($2,450 – $900) ................................. 1,550

3. Depreciation Expense ............................................ 1,000

Accumulated Depreciation—Equipment ........ 1,000

4. Insurance Expense ................................................. 1,225

Prepaid Insurance
($2,100 X 7/12) .............................................. 1,225

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5. Unearned Service Revenue ................................... 7,500
Service Revenue
($30,000 X 1/4) .............................................. 7,500

6. Accounts Receivable ............................................. 4,200

Service Revenue .............................................. 4,200

7. Salaries and Wages Expense ................................ 5,400

Salaries and Wages Payable
($9,000 X 3/5) ................................................ 5,400

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EXERCISE 3-7

1. Mar. 31 Depreciation Expense ($400 X 3) ................. 1,200

Accumulated Depreciation—
Equipment ......................................... 1,200

2. 31 Unearned Rent Revenue .............................. 3,400

Rent Revenue ($10,200 X 1/3) ............... 3,400

3. 31 Interest Expense ........................................... 500

Interest Payable..................................... 500

4. 31 Supplies Expense ......................................... 1,900

Supplies ($2,800 – $900) ....................... 1,900

5. 31 Insurance Expense ($200 X 3) ..................... 600

Prepaid Insurance ................................. 600

PROBLEM 3-1A

(a)
J4
Date Account Titles Ref. Debit Credit
2017
May 31 Supplies Expense ............................. 631 900
Supplies .................................... 126 900

31 Utilities Expense ............................... 732 250

Accounts Payable .................... 201 250

31 Insurance Expense ........................... 722 150

Prepaid Insurance
($3,600 ÷ 24 months) ............ 130 150

31 Unearned Service Revenue .............. 209 1,600

Service Revenue
($2,000 – $400) ...................... 400 1,600

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 31 Salaries and Wages Expense ........... 726 1,080
Salaries and Wages Payable
[(3/5 X $900) X
2 employees] ........................ 212 1,080

31 Depreciation Expense ....................... 717 190

Accumulated Depreciation—
Equipment ............................ 150 190

31 Accounts Receivable ........................ 112 1,700

Service Revenue ...................... 400 1,700

BYP 3-3 COMPARATIVE ANALYSIS PROBLEM

1.
Amazon Wal-Mart
(a) Increase (decrease) in interest $76,000,000 $64,000,000
expense, from 2011 to 2013.

(b) Increase (decrease) in net income $ (357,000,000) $ 610,000,000

from 2011 to 2013.

(c) Increase (decrease) in cash from ($1,572,000,000 $1,948,000,000

operations from 2012 to 2013.

2. Cash flow from operations is the difference between cash receipts from
revenues and cash payments for expenses (see chapter 1).
Depreciation expense is a major reason why cash flow from operations
and net income are different for these two companies. Depreciation
expense reduces a company’s net income, but does not affect cash
flow from operations since it’s a noncash expense. Other reasons

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 would include changes in accounts receivable, inventory, and
accounts payable.

CHAPTER 4
BRIEF EXERCISE 4-11

CL Accounts payable CL Income taxes payable

CA Accounts receivable LTI Debt investments (long-
term)
PPE Accum. depreciation— PPE Land
buildings
PPE Buildings CA Inventory
CA Cash IA Patents
IA Copyrights CA Supplies

EXERCISE 4-14

(a) MARTELL BOWLING ALLEY

Balance Sheet
December 31, 2017

Assets
Current assets
Cash ............................................. $18,040
Accounts receivable ................... 14,520
Prepaid insurance ....................... 4,680
Total current assets ............. $ 37,240
Property, plant, and equipment
Land ............................................. 67,000
Buildings ...................................... $128,800
Less: Acc. depr.—buildings ...... 42,600 86,200
Equipment.................................... 62,400
Less: Acc. depr.—equipment .... 18,720 43,680 196,880
Total assets .......................... $234,120

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EXERCISE 4-14 (Continued)

MARTELL BOWLING ALLEY

Balance Sheet (Continued)
December 31, 2017

Liabilities and Stockholders’ Equity

Current liabilities
Notes payable (due 2018) ................................ $22,000
Accounts payable............................................. 12,300
Interest payable ................................................ 2,600
Total current liabilities.............................. $ 36,900
Long-term liabilities
Notes payable ................................................... 75,780
Total liabilities ........................................... 112,680
Stockholders’ equity
Common stock ................................................. 90,000
Retained earnings ($25,000 + $6,440*) ............ 31,440 121,440
Total liabilities and stockholders’ equity $234,120

*Net income = $17,180 – $780 – $7,360 – $2,600 = $6,440

(b) Current assets exceed current liabilities by only $340 ($37,240 –

$36,900). However, approximately 50% of current assets are in the form
of cash. The company’s liquidity appears to be reasonably good, but
some caution is needed.

EXERCISE 4-15

CL Accounts payable PPE Accumulated depreciation–

equipment
CA Accounts receivable PPE Buildings
CA Cash PPE Land
SE Common stock LTL Notes payable (due in 2 years)
IA Patents CA Supplies
CL Salaries and wages payable PPE Equipment
CA Inventory CA Prepaid expenses

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 CA Stock investments

EXERCISE 4-17

(a)
NORSTED COMPANY
Income Statement
For the Year Ended July 31, 2017

Revenues
Service revenue ....................................... $62,000
Rent revenue ........................................... 8,500
Total revenues ................................. $70,500
Expenses
Salaries and wages expense .................. 51,700
Utilities expense ...................................... 22,600
Depreciation expense ............................. 4,000
Total expense ................................... 78,300
Net loss............................................................ $ (7,800)

NORSTED COMPANY
Retained Earnings Statement
For the Year Ended July 31, 2017

Retained Earnings, August 1, 2016 ............... $21,200

Less: Net loss ................................................ $7,800
Dividends ............................................. 3,000 10,800
Retained Earnings, July 31, 2017................... $10,400

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EXERCISE 4-17 (Continued)

(b)
NORSTED COMPANY
Balance Sheet
July 31, 2017

Assets
Current assets
Cash ................................................................ $14,200
Accounts receivable ...................................... 9,780
Total current assets ................................ $23,980
Property, plant, and equipment
Equipment....................................................... 30,400
Less: Accumulated depreciation—
equipment............................................. 6,000 24,400
Total assets ............................................ $48,380

Liabilities and Stockholders’ Equity

Current liabilities
Accounts payable........................................... $4,100
Salaries and wages payable .......................... 2,080
Total current liabilities............................ $ 6,180
Long-term liabilities
Notes payable ................................................. 1,800
Total liabilities ......................................... 7,980
Stockholders’ equity
Common stock ............................................... 30,000
Retained earnings .......................................... 10,400 40,400
Total liabilities and stockholders’
equity .................................................... $48,380

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