EXERCISE 2-1B

Smith Company
Effect of Events on the Year 1 Accounting Equation
Assets = Liabilities + Stockholders’ Equity
Accounts Common Retained
Event Cash + Rec. = + Stock + Earnings
Earned Revenue NA + 12,000 = NA + NA + 12,000
Coll. Acct. Rec. 9,800 + (9,800) = NA + NA +
Ending Balance 9,800 + 2,200 = -0- + -0- + 12,000

a. Accounts Receivable: $12,000 – $9,800 = $2,200

b. $12,000
c. $9,800 cash collected from accounts receivable.
d. $12,000
e. $12,000 of revenue was earned but only $9,800 of it was collected.

2-1
EXERCISE 2-2B
a.
Star Corporation Accounting Equation - Year 1
Event Assets = Liabilities + Stockholders’ Equity
Salaries Common Retained
Cash = Payable + Stock + Earnings
Earned Rev. 5,000 = NA + NA + 5,000
Accrued Sal. NA = 3,000 + NA + (3,000)
Ending Bal. 5,000 = 3,000 + -0- + 2,000

Star Corporation
Balance Sheet
As of December 31, Year 1

Assets
Cash $5,000
Total Assets $5,000

Liabilities
Salaries Payable $3,000
Total Liabilities $3,000

Stockholders’ Equity
Retained Earnings $2,000
Total Stockholders’ Equity 2,000

Total Liab. and Stockholders’ Equity $5,000

b.
Computation of Net Income

Revenue $5,000
Less: Expenses (3,000)
Net Income $2,000

2-2
EXERCISE 2-2B (cont.)

c.
Cash Flow from Operating Activities

Cash from Revenue $5,000

Net Cash Flow from Operating Act. $5,000

d. The salary expense is deducted from revenue in computing net income,

but it has not been paid. This creates a difference of $3,000. The
revenue is the same because it has been earned and collected.

2-3
EXERCISE 2-3B

a.
Talley Inc.
Effect of Events on the Year 1 Accounting Equation

Assets = Liabilities + Stockholders’

Equity
Accts. Salaries Commo Retained Acct. Title
Event Cash Rec. = Pay. + n Stock Earnings for RE
1. 20,000 NA = NA + 20,000 NA
2. NA 38,000 = NA + NA 38,000 Revenue
3. (2,500) NA = NA + NA (2,500) Util. Exp.
4. 21,000 (21,000) = NA + NA NA
5. NA NA = 15,000 + NA (15,000) Sal. Exp.
6. (2,000) NA = NA + NA (2,000) Dividends
Totals 36,500 17,000 = 15,000 + 20,000 18,500

b.
Talley Inc.
Income Statement
For the Year Ended December 31, Year 1

Revenue $38,000

Expenses
Utilities Expense $ 2,500
Salaries Expense 15,000
Total Expenses (17,500)

Net Income $20,500

2-4
EXERCISE 2-3B (cont.)

b.
Talley Inc.
Statement of Changes in Stockholders’ Equity
For the Year Ended December 31, Year 1

Beginning Common Stock $ -0-

Plus: Common Stock Issued 20,000
Ending Common Stock $20,000

Beginning Retained Earnings $ -0-

Plus: Net Income 20,500
Less: Dividends (2,000)
Ending Retained Earnings 18,500

Total Stockholders’ Equity $38,500

Talley Inc.
Balance Sheet
As of December 31, Year 1

Assets
Cash $36,500
Accounts Receivable 17,000
Total Assets $53,500

Liabilities
Salaries Payable $15,000
Total Liabilities $15,000

Stockholders’ Equity
Common Stock $20,000
Retained Earnings 18,500
Total Stockholders’ Equity 38,500

Total Liab. and Stockholders’ Equity $53,500

2-5
EXERCISE 2-3B (cont.)

b.
Talley Inc.
Statement of Cash Flows
For the Year Ended December 31, Year 1

Cash Flow From Operating Activities

Cash Receipts from Customers $21,000
Cash Paid for Expenses (2,500)
Net Cash Flow from Operating Act. $18,500

Cash Flow From Investing Activities -0-

Cash Flow From Financing Activities

Issue of Stock $20,000
Paid Dividends (2,000)
Net Cash Flow from Financing Act. 18,000

Net Change in Cash 36,500

Plus: Beginning Cash Balance -0-
Ending Cash Balance $36,500

c. Net income is based on income earned of $38,000 and expenses

incurred of $17,500 for a net income of $20,500. Net cash flow from
operating activities is based on cash collected from revenue, $21,000
and expenses paid, $2,500, for a net cash flow from operating activities
of $18,500. The difference of $2,000 is reflected in the Accounts
Receivable account ($17,000), revenues accrued but not yet collected,
and the Salaries Payable account ($15,000), expenses incurred but not
paid.

2-6
EXERCISE 2-4B

a.
Parker and Moates
Horizontal Statements Model
Year 1

Balance Sheet Income Statement Statement of

Event Assets = Liabilities + Stk. Equity Rev. – Exp. = Net Inc. Cash Flows
Accts. Acct. Sal. Retained
Cash + Rec. = Payable + Pay. + Earnings
1. NA + 96,000 = NA + NA + 96,000 96,000 – NA = 96,000 NA
2. 65,000 + NA = NA + NA + 65,000 65,000 – NA = 65,000 65,000 OA
3. NA + NA = 45,000 + NA + (45,000) NA – 45,000 = (45,000) NA
4. (26,000) + NA = NA + NA + (26,000) NA – 26,000 = (26,000) (26,000) OA
5. 70,000 + (70,000) = NA + NA + NA NA – NA = NA 70,000 OA
6. (38,000) + NA = (38,000) + NA + NA NA – NA = NA (38,000) OA
7. (10,000) + NA = NA + NA + (10,000) NA – NA = NA (10,000) FA
8. NA + NA = NA + 3,000 + (3,000) NA – 3,000 = (3,000) NA
Totals 61,000 + 26,000 = 7,000 + 3,000 + 77,000 161,000 – 74,000 = 87,000 61,000 NC

b. Total assets: $87,000 ($61,000 + $26,000)

c. $26,000

d. $7,000

e. Accounts Receivable (an asset) is an amount owed to Parker and Moates: $26,000; Accounts
Payable (a liability) is an amount that Parker and Moates owes: $7,000.
2-7
EXERCISE 2-4B (cont.)

f. $87,000

g. $71,000 ($65,000 – $26,000 + $70,000 – $38,000)

2-8
EXERCISE 2-5B

a.
Computation of Net Income
Revenue recognized on account $40,000
Less accrued salary expense (35,000)
Net Income $ 5,000

b.
Computation of Cash Collected from Accounts Receivable
Beginning balance of Accounts Receivable $ 2,000
Add revenue recognized on account 40,000
Less ending balance of Accounts Receivable (2,400)
Cash collected from accounts receivable $39,600

Computation of Cash Paid for Salaries Expense

Beginning balance of Salaries Payable $ 1,300
Add accrued salary expense recognized 35,000
Less ending balance of Salaries Payable (900)
Cash paid for salary expense $35,400

Cash Flow from Operating Activities

Cash from accounts receivable $39,600

Cash paid for salary expense (35,400)
Net Cash Flow from Operating Act. $ 4,200

2-9
EXERCISE 2-6B

a. & c.
Event Revenue Expense Statement of
Cash Flows
1. NA NA $50,000 FA
2. $67,000 NA NA
3. NA NA (5,000) FA
4. NA NA 45,000 OA
5. NA $49,000 (49,000) OA
6. 10,000 NA 10,000 OA
7. NA 2,000 NA

b.
Computation of Net Income

Revenue $77,000
Less: Expenses (51,000)
Net Income $26,000

d.
Cash Flow from Operating Activities

Cash from Revenue $55,000

Cash paid for expenses (49,000)
Net Cash Flow from Operating Act. $ 6,000

e. The before-closing balance in the Revenue account is $77,000. After

it is closed to Retained Earnings the balance will be zero. Other
accounts that would be closed are expenses and dividends.

f. The balance of Retained Earnings on the Year 1 Balance Sheet will be

the amount of Net Income: $26,000, less $5,000 of dividends paid since
there is no beginning balance in Retained Earnings.

2-10
EXERCISE 2-7B

Hall Inc.
Effect of Events on the Accounting Equation
Assets = Liabilities + Stockholders’ Equity
Accounts Accounts C. Stk. Retained
Event Cash Receivable Land = Payable + + Earnings
1. Sales
on Account NA 62,000 NA = NA + NA + 62,000
2. Coll. Accts.
Rec. 51,000 (51,000) NA = NA + NA + NA
3. Incurred
Expense NA NA NA = 39,000 + NA + (39,000)
4. Pd. Acc.
Pay. (31,000) NA NA = (31,000) + NA + NA
5. Issue of
Stock 40,000 NA NA = NA + 40,000 + NA
6. Purchase
Land (21,000) NA 21,000 = NA + NA + NA
Totals 39,000 11,000 21,000 = 8,000 + 40,000 + 23,000

a. Revenue recognized, $62,000.

b. Cash flow from revenue, $51,000.

c. Revenue, $62,000, less operating expenses, $39,000 = $23,000 net income.

d. Accounts receivable collected, $55,000, less cash paid for expenses, $34,000 =
$21,000 cash flow from operating activities.

e. Income of $62,000 was earned, but only $51,000 was collected (a difference of
$11,000); operating expenses incurred were $39,000 but only $31,000 was paid
during the period (a difference of $8,000). Consequently, net income is $3,000 more
than cash flow from operating activities.

f. $21,000 cash outflow for the purchase of land.

g. $40,000 cash inflow from the issue of common stock.

h. Total assets = $71,000 ($39,000 + $11,000 + $21,000)

Total liabilities = $8,000
Total equity = $63,000 ($40,000 + $23,000)

2-11
EXERCISE 2-8B

a. Retained Earnings is a permanent account, meaning that one period's

ending balance becomes the next period's beginning balance. Since
the December 31, Year 2 after-closing balance is $19,400, this will also
be the balance on January 1, Year 3.

b. The temporary accounts (Revenue, Expense, and Dividends) are closed

at the end of each accounting cycle. As a result, they will always have
a zero balance at the beginning of each accounting period.

c. The December 31, Year 1 balance in the Retained Earnings account is

the same balance as the January 1, Year 2 balance, computed as
follows:

Beginning Retained Earnings Balance, January 1, Year 2 $ ?

+ Net Income (Revenue $15,100 - Expenses 9,200) 5,900
– Dividends (1,500)
= Ending Retained Earnings Balance, December 31, Year 2 $19,400

Working backwards:
End. Retained Earnings + Dividends – Net Income = Beg. Retained
Earnings; and January 1, Year 2 = December 31, Year 1 = $19,400 +
$1,500 – $5,900 = $15,000 = January 1, Year 2 Retained Earnings
Therefore:
December 31, Year 1 Retained Earnings = $15,000

d. The revenue and expense data are recorded in Revenue and Expense
accounts and do not affect retained earnings at the time of recognition.
The balance in the Retained Earnings account on June 30, Year 2 is the
same as it was on January 1, Year 2 which is $15,000.

2-12
EXERCISE 2-9B

a.
Permanent Accounts
Cash
Notes Payable
Land
Common Stock
Retained Earnings

Temporary (Nominal)
Accounts
Revenue
Expenses
Dividends

b.
Beginning Retained Earnings $5,200
Add: Revenue 7,000
Less: Expenses (4,200)
Less: Dividends (1,000)
Ending Retained Earnings $7,000

c.
Computation of Net Income
Revenue $7,000
Less: Expenses (4,200)
Net Income $2,800

d. Net income is only the current year’s net income. Retained Earnings is
an accumulation of net income over the life of the business less any
dividends that have been paid over the years.

e. All revenue, expense, and dividends accounts will have a zero balance
because they have been closed to retained earnings.

2-13
EXERCISE 2-10B

a.
Account Classification
1. Service Revenue T
2. Dividends T
3. Common Stock P
4. Notes Payable P
5. Cash P
6. Rent Expense T
7. Accounts Receivable P
8. Utilities Expense T
9. Prepaid Insurance P
10. Retained Earnings P

b. The accounting cycle is divided into one-year accounting periods.

Using the accounting cycle rationale, experience is gained one year at a
time. But experience is like the balance sheet; it accumulates and one
year adds to another. You do not start over at the beginning of each
year when working at the same job.

2-14
EXERCISE 2-11B

a. Directly matched

b. Period expense

c. Period expense

d. Directly matched

2-15
EXERCISE 2-12B

a.
Handy Andy Inc.
Horizontal Statements Model for Year 2

Assets = Liab. + Stockholders’ Equity Income Statement Statement of

Event Accts. C. Retained Net Cash
Cash + Supplies = Pay. + Stk. + Earnings Rev. - Exp. = Income Flows

Beg. 9,000 + -0- = -0- + 5,000 + 4,000 -0- - -0- = -0- -0-
1. NA + 9,500 = 9,500 + NA + NA NA - NA = NA NA
2. 32,500 + NA = NA + NA + 32,500 32,500 - NA = 32,500 32,500 OA
3. (7,200) + NA = (7,200) + NA + NA NA - NA = NA (7,200) OA
4. NA + (7,800) = NA + NA + (7,800) NA - 7,800 = (7,800) NA
Totals 34,300 + 1,700 = 2,300 + 5,000 + 28,700 32,500 - 7,800 = 24,700 25,300 NC

b. The difference in net income and cash flow from operating activities of $600 ($24,700 - $25,300)
is attributed to recognizing supplies expense of $7,800 in the income statement, whereas the
cash payment on accounts payable (for supplies) was $7,200.

2-16
EXERCISE 2-13B
a.
Janitorial Professionals Inc.
Effect of Events on the Accounting Equation
Assets =
Liab. + Stk. Equity
Accounts Retained
Event Cash Supplies = Payable + Earnings
1. Provided Service 20,000 NA = NA + 20,000
2. Purchased NA 4,000 = 4,000 + NA
Supplies
3. Used Supplies NA (3,000) = NA + (3,000)
Totals 20,000 1,000 = 4,000 + 17,000

b.
Janitorial Professionals Inc.
Income Statement
For the Year Ended December 31, Year 1
Revenue $20,000
Expense (3,000)

Net Income $17,000

Janitorial Professionals Inc.

Balance Sheet
As of December 31, Year 1

Assets
Cash $20,000
Supplies 1,000
Total Assets $21,000

Liabilities
Accounts Payable $ 4,000
Total Liabilities $ 4,000

Stockholders’ Equity
Retained Earnings $17,000
Total Stockholders’ Equity 17,000

Total Liab. and Stockholders’ Equity $21,000

2-17
EXERCISE 2-13B (cont.)

b.
Janitorial Professionals Inc.
Statement of Cash Flows
For the Year Ended December 31, Year 1

Cash Flows From Operating Activities:

Cash Receipt from Revenue $20,000
Net Cash Flow from Operating Activities $20,000

Cash Flows From Investing Activities -0-

Cash Flows From Financing Activities: -0-

Net Change in Cash 20,000

Plus: Beginning Cash Balance -0-
Ending Cash Balance $20,000

c. The balance of the Supplies account on January 1, Year 2 is $1,000,

the same as the December 31, Year 1 balance.

d. The balance of the Supplies Expense account on January 1, Year 2 is

zero because the expense account was closed to Retained Earnings
at December 31, Year 1.

2-18
EXERCISE 2-14B

a. A cost that is an asset is the cost of resources that are given up in

acquiring some type of asset, such as an automobile, office equipment,
or land. A cost that is an expense is the use of assets (depreciation) or
the payment for an expense that is incurred in the current period
(utilities, salaries, etc.).

b. Examples of costs that are assets:

1. Purchased land
2. Purchased equipment
3. Purchased supplies for future use.

c. Examples of costs that are expenses:

1. Paid monthly salary expense.
2. Paid monthly utilities expense.
3. Used supplies that had been previously purchased.

2-19
EXERCISE 2-15B
a.
Forestry Services Inc.
Effect of Events on the Accounting Equation

Assets = Stockholders’ Equity

Prepaid
Event Cash Rent = Retained Earnings
1. Performed 18,000 NA = 18,000
Services
2. Prepaid Rent (12,000) 12,000 = NA
3. Used Rent NA (11,000)* = (11,000)
Totals 6,000 1,000 = 7,000

*$12,000 x 11/12 = $11,000

b.
Forestry Services Inc.
Income Statement
For the Year Ended December 31, Year 1

Revenue $18,000
Expense (11,000)

Net Income $ 7,000

Forestry Services Inc.

Balance Sheet
As of December 31, Year 1

Assets
Cash $6,000

Prepaid Rent 1,000

Total Assets $7,000

Liabilities $ -0-

Stockholders’ Equity
Retained Earnings $7,000

Total Stockholders’ Equity 7,000

2-20
Total Liab. and Stockholders’ Equity $7,000

2-21
EXERCISE 2-15B (cont.)

b.
Forestry Services Inc.
Statement of Cash Flows
For the Year Ended December 31, Year 1

Cash Flows From Operating Activities:

Cash Receipt from Revenue $18,000
Cash Payment for Rent (12,000)
Net Cash Flow from Operating Activities $6,000

Cash Flows From Investing Activities -0-

Cash Flows From Financing Activities: -0-

Net Change in Cash 6,000

Plus: Beginning Cash Balance -0-
Ending Cash Balance $6,000

c. The balance of the Prepaid Rent will be expensed in Year 2, $1,000.

2-22
EXERCISE 2-16B

a.
Ark Corporation
Accounting Equation Year 1

Assets = Stockholders’ Equity

Prepaid C. Retained
Event Cash Insurance = Stk. + Earnings
Pur. Insurance (8,400) 8,400 = NA + NA
Adj. Ins Exp. NA (2,450)* = NA + (2,450)
Totals (8,400) 5,950 = -0- + (2,450)

*$8,400 x 7/24 = $2,450

b. The required entry would decrease assets by $2,450 [($8,400 ÷ 24) x

7] and decrease stockholders’ equity by $2,450 (retained earnings).
If this entry is not made, assets and stockholders’ equity would
both be overstated on the balance sheet by $2,450. On the income
statement, expenses would be understated causing net income to
be overstated by $2,450.

2-23
EXERCISE 2-17B
a.
Interior Design Consultants Year 1
+ Stockholders’
Event Assets = Liabilities Equity
Cash = Unearned + Retained
Revenue Earnings
Coll. Unearned rev 24,000 = 24,000 + NA
Recog. revenue NA = (6,000)* + 6,000
earned
24,000 = 18,000 + 6,000
*$24,000 x 3/12 = $6,000
b.
Interior Design Consultants
Income Statement
For the Year Ended December 31, Year 1

Revenue $6,000
Expense -0-

Net Income $6,000

Interior Design Consultants

Balance Sheet
As of December 31, Year 1
Assets
Cash $24,000
Total Assets $24,000

Liabilities -0-
Unearned Revenue $18,000
Total Liabilities $18,000
Stockholders’ Equity
Retained Earnings $ 6,000
Total Stockholders’ Equity 6,000
Total Liab. and Stockholders’ Equity $24,000

2-24
2-25
EXERCISE 2-17B (cont.)

b.
Interior Design Consultants
Statement of Cash Flows
For the Year Ended December 31, Year 1

Cash Flows From Operating Activities:

Cash Receipt from Revenue $24,000
Net Cash Flow from Operating Activities $24,000

Cash Flows From Investing Activities -0-

Cash Flows From Financing Activities: -0-

Net Change in Cash 24,000

Plus: Beginning Cash Balance -0-
Ending Cash Balance $24,000

c. Nine months of unearned revenue from Year 1 will be recognized

in Year 2:
$24,000 x 9/12 = $18,000

2-26
EXERCISE 2-18B

Note: This exercise can be used to assess writing skills.

The tutoring fees of $800 received in advance by Jake Lewis from

Laura Dalton should be reported as a liability. Although Jake Lewis
has received the cash, it has not yet been earned. Lewis has an
obligation to either perform the services or refund the cash advance.
When the tutoring service is provided to Laura, the unearned revenue
should be recognized as revenue earned by Lewis.

2-27
EXERCISE 2-19B

Warren, Attorney At Law

Horizontal Statements Model for Year 1
Balance Sheet Income Statement Statement of
Assets = Liabilities + Stk. Rev. - Exp. = Net Inc. Cash Flows
Equity
Acct. Unearn. Retained
Event Cash + Supplies = Payable + Revenue + Earnings
1. NA + 1,500 = 1,500 + NA + NA NA - NA = NA NA
2. 36,000 + NA = NA + 36,000 + NA NA - NA = NA 36,000 OA
3. 84,000 + NA = NA + NA + 84,000 84,000 - NA = 84,000 84,000 OA
4. (32,000) + NA = NA + NA + (32,000) NA - 32,000 = (32,000) (32,000) OA
5. (8,000) + NA = NA + NA + (8,000) NA - NA = NA (8,000) FA
6. (1,200) + NA = (1,200) + NA + NA NA - NA = NA (1,200) OA
7. NA + (1,350) = NA + NA + (1,350) NA - 1,350 = (1,350) NA
8. NA + NA = NA + (33,000)* + 33,000 33,000 - NA = 33,000 NA
Totals 78,800 + 150 = 300 + 3,000 + 75,650 117,000 - 33,350 = 83,650 78,800 NC

*$36,000 x 11/12 = $33,000

2-28
EXERCISE 2-20B

a.
Brandon Baily Personal Financial Planning
Horizontal Statements Model for Year 1

Assets = Liabilities + Stk. Equity Income Statement Statement

Unearned Retained Net of
Event Cash = Revenue + Earnings Rev. - Exp. = Income Cash Flows
1. Advance Payment 120,000 = 120,000 + NA NA - NA = NA 120,000 OA
2. Revenue Earned NA = (80,000)* + 80,000 80,000 - NA = 80,000 NA
Totals 120,000 = 40,000 + 80,000 80,000 - -0- = 80,000 120,000 NC

*$120,000 x 8/12 = $80,000

b. Revenue that will be recognized in Year 2 is $40,000, the remainder of the Year 1 unearned
revenue.

c. $-0-, no cash is received. All cash was received in Year 1.

2-29
EXERCISE 2-21B

a.
Stokes Company Accounting Equation - Year 1
Event Assets = Liab. + Stockholders’ Equity
Prepaid Common Retained
Cash Rent = + Stock + Earnings
Paid 12 months rent (4,800) 4,800 = NA + NA + NA
Adj. for 3 months used NA (1,200)* = NA + NA + (1,200)

*$4,800 x 3/12 = $1,200

b.
Eastport Rentals Accounting Equation - Year 1
Event Assets = Liabilities + Stockholders’ Equity
Unearned Common Retained
Cash = Revenue + Stock + Earnings
Recd. 12 months rent 4,800 = 4,800 + NA + NA
Earned 3 months rent NA = (1,200)* + NA + 1,200

*$4,800 x 3/12 = $1,200

2-30
EXERCISE 2-22B Commented [LM1]: Comment from AC SM file: “See my
comment in the text regarding accrued expenses vs Accounts
payable.”

a. accrual

b. accrual

c. neither

d. deferral

e. neither

f. accrual

g. neither

h. deferral

i. neither

j. deferral

k. accrual

2-31
EXERCISE 2-23B

Note: There are many examples of events that illustrate the required
effects. An example is given of each event.

a. Recognized revenue on account would cause an increase in Accounts

Receivable.

b. Recognized revenue where the cash had been received in advance. The
liability decreased is Unearned Revenue.

c. Recognized an expense on account. The liability account that increases

includes the word “Payable” or “Accrued” in the title.

d. Paid monthly rent expense. The asset decreased is Cash. Other

examples would include a transaction that causes a decrease to an
asset account that includes the word “Prepaid” or a long-lived asset
that is depreciated or amortized.

2-32
EXERCISE 2-24B

a.
Event Requires year-end
adjusting entry?
1. No
2. Yes
3. No
4. Yes
5. No
6. No
7. No
8. No
9. Yes
10. No

b. Adjusting entries are recorded before closing entries. Adjusting

entries are required to update the accounts so that the correct
amounts of income and expenses are recognized. After the
adjusting entries have been made, the adjusted balances of the
revenue and expense accounts are closed to retained earnings.

2-33
EXERCISE 2-25B
a.
Event Classification
1. FA
2. OA
3. OA
4. NA
5. OA
6. NA
7. NA
8. OA
9. FA
10. OA

b.
Blair Company
Statement of Cash Flows
For the Year Ended December 31, Year 1

Cash Flows From Operating Activities:

Cash from the collection of accts. rec. $51,000
Cash from service revenue 12,000
Cash from svc. to be performed in future 21,000
Cash payment on accounts payable (22,000)
Cash payment for rent (7,200)
Net Cash Flow from Operating Activities $54,800

Cash Flows From Investing Activities -0-

Cash Flows From Financing Activities:

Cash receipt from stock issue $30,000
Cash payment for dividends (5,000)
Net Cash Flow from Financing Activities 25,000

Net Change in Cash $79,800

Plus: Beginning Cash Balance -0-
Ending Cash Balance $79,800

2-34
EXERCISE 2-26B
Item/Account Statement Item/Account Statement

a. Consulting Revenue IS u. Rent Expense IS

b. Market Value of Land NA v. Delivery Expense IS
c. Supplies Expense IS w. Total Stockholders’ Equity BS/SE
d. Salaries Payable BS x. Unearned Revenue BS
y. Cash Flow from CF
e. Notes Payable BS Investing Activities
f. Ending Common Stock SE/BS z. Insurance Expense IS
g. Beginning Cash Balance CF aa. End. Retained Earn. BS/SE
h. Prepaid Rent BS bb. Interest Revenue IS
i. Net Change in Cash CF cc. Supplies BS
j. Land BS dd. Beg. Retained Earn. SE
k. Operating Expenses IS ee. Utilities Payable BS
ff. Cash Flow from CF
l. Total Liabilities BS Financing Activities
m. “As of” Date Notation BS gg. Accounts Receivable BS
n. Salaries Expense IS hh. Prepaid Insurance BS
o. Net Income IS/SE ii. Ending Cash Balance BS/CF
p. Service Revenue IS jj. Utilities Expense IS
q. Cash Flow from CF kk. Accounts Payable BS
Operating Activities
r. Operating Income IS ll. Beg. Common Stock SE
s. Interest Receivable BS mm. Dividends SE/CF
t. Interest Revenue IS nn. Total Assets BS

2-35
EXERCISE 2-27B

Cash Flow from

Net Income Operating Activities
Direction of Amount of Direction of Amount of
Event Change Change Change Change
a. NA NA NA NA

b. Increase $20,000 Increase $15,000

c. Decrease 1,2001 Decrease 4,800

d. Increase 5,0002 Increase 12,000

e. Decrease 5,000 NA NA

f. NA NA NA NA

g. Increase 9,200 Increase 9,200

h. Decrease 1,2003 Decrease 1,500

i. Decrease 2,200 Decrease 2,200

$4,800 x 3/12 = $1,200

1

$12,000 x 5/12 = $5,000

2

3
$2,000 - $800 = $1,200

2-36
EXERCISE 2-28B

Note: These are only sample transactions. Other similar transactions will
satisfy the requirements of this exercise.

a. The business invested cash by purchasing a building.

Collected accounts receivable.

b. Purchased land with a note (liability).

Purchased supplies on account.

c. Paid accounts payable.

Paid notes payable.

d. Paid a cash dividend to owners.

Paid an expense with cash.

e. Recorded accrued salaries.

Recorded the liability for the utility bill received, but not due until the
next period.

f. The business issued common stock to its owners.

Cash revenue is earned.

g. Unearned revenue is earned and recognized.

2-37
EXERCISE 2-29B

a. Asset Source

b. Asset Use

c. Asset Source

d. Claims Exchange

e. Asset Source

f. Asset Use

g. Asset Exchange

h. Asset Use

i. Asset Source

j. Asset Exchange

2-38
EXERCISE 2-30B

Note: These are only sample transactions. Other similar transactions will
satisfy the requirements of this exercise.

a. Payment of rent expense; payment of other operating expense.

b. Payment of accounts payable; payment of dividends.

c. Received a note receivable in exchange for the sale of a delivery van.

d. Collection of accounts receivable; purchase of land.

e. Proceeds of a loan; issue of common stock.

2-39
EXERCISE 2-31B

Horizontal Statements Model

Stk. Equity Income Statement Statement of

Type of C. Ret. Net Cash
Event Event Assets = Liab. + Stk. + Earn. Rev. - Exp. = Inc. Flows
a. AE I/D NA NA NA NA NA NA D IA
b. AS I NA I NA NA NA NA I FA
c. AE I/D NA NA NA NA NA NA I OA
d. AU D NA NA D NA I D D OA
e. CE NA I NA D NA I D NA
f. AS I I NA NA NA NA NA NA
g. AS I NA NA I I NA I NA
h. AE I/D NA NA NA NA NA NA D OA
i. AU D NA NA D NA I D NA
j. AS I NA NA I I NA I I OA
k. AU D D NA NA NA NA NA D OA
l. AU D NA NA D NA NA NA D FA
m. AU D NA NA D NA I D NA
n. CE NA I NA D NA I D NA
o. AU D D NA NA NA NA NA D OA
p. AS I I NA NA NA NA NA I OA
q. AS I NA NA I I NA I NA

2-40
EXERCISE 2-32B

One provision of the Sarbanes-Oxley Act of 2002 clarifies the legal

responsibility of company management, including the CFO and controller.
This provision states that the company chief executive officer (CEO) and
the chief financial officer (CFO) must certify in writing that they have
reviewed the financial reports being issued, and that the reports present
fairly the company’s financial status. This provision would apply to the
CEO and CFO of Hewlett-Packard Company. CEOs and CFOs who make
intentional misrepresentations are subject to a fine of up to $5 million and
imprisonment of up to 20 years.

2-41
EXERCISE 2-33B (Appendix)

a.
Highland Grill
Accounting Equation for Year 1

Assets = Stockholders’ Equity

BV Com. Retained
Event Cash Stove = Stock + Earnings
1. Acq. Cap. 40,000 NA = 40,000 + NA
2. Pur. Stove (24,000) 24,000 = NA + NA
3. Rev. 21,000 NA = NA + 21,000
4. Paid Exp. (3,500) NA = NA + (3,500)
5. Depr. Exp. NA (5,000)* = NA + (5,000)
Totals 33,500 19,000 = 40,000 + 12,500

*(24,000 - $4,000) ÷ 4 = $5,000 depreciation per year

b.
Highland Grill
Balance Sheet
As of December 31, Year 1

Assets
Cash $33,500
Stove $24,000
Less: Accum. Depreciation (5,000) 19,000
Total Assets $52,500

Liabilities $ -0-

Stockholders’ Equity
Common Stock $40,000
Retained Earnings 12,500
Total Stockholders’ Equity 52,500

Total Liab. and Stockholders’ Equity $52,500

2-42
EXERCISE 2-33B (Appendix) (cont.)

b.
Highland Grill
Statement of Cash Flows
For the Year Ended December 31, Year 1

Cash Flows From Operating Activities:

Cash Receipts from Revenue $21,000
Cash Payment for Salaries (3,500)
Net Cash Flow from Operating Activities $17,500

Cash Flows From Investing Activities:

Cash Outflow for Stove (24,000)
Net Cash Flow from Investing Activities (24,000)

Cash Flows From Financing Activities:

Cash Receipts from Issue of Stock 40,000
Net Cash Flow from Financing Activities 40,000

Net Change in Cash 33,500

Plus: Beginning Cash Balance -0-
Ending Cash Balance $33,500

c. Net Income: $12,500 (see the Retained Earnings column in

requirement a. There were no dividends paid.)

d. Depreciation expense for Year 2: $5,000 (see computation in

requirement a; same as Year 1)

e. Accumulated Depreciation on December 31, Year 2: $10,000

($5,000 for Year 1 + $5,000 for Year 2)

f. No, depreciation is a noncash expense. Depreciation is the systematic

allocation of the cost of an asset to expense. The cash payment
occurred when the stove was purchased.

2-43
EXERCISE 2-34B (Appendix)

a. Compute the depreciation expense per year.

(Cost – Salvage) ÷ Useful Life = Depreciation expense per year.

($29,000 – $5,000) ÷ 4 = $6,000 per year

Depreciation expense for Year 1 = $6,000

Depreciation expense for Year 2 = $6,000

b. Accumulated Depreciation for Year 1 is $6,000.

Accumulated Depreciation for Year 2 is $12,000 ($6,000 depreciation
expense for Year 1 and $6,000 depreciation expense for Year 2.)

c. The statement of cash flows is only affected in Year 1 by the purchase

of the taxi cab. It would show an outflow of $29,000 as an investing
activity. There is no cash activity associated with the depreciation
expense.

2-44
EXERCISE 2-35B (Appendix)

a. $10,000 x 9% = $900; $900 x 4/12 = $300

b. $300

c. $-0-, No interest was paid in Year 1; $900 of interest will be paid in Year 2 when the note
matures.

d.
Connelly Company
Horizontal Statements Model for Year 1

Statement of
Balance Sheet Income Statement Cash Flows
Event Assets = Liabilities + Stockholders’ Equity Rev. - Exp. = Net Inc.
No. Notes Int. Common Ret. Earn.
Cash = Payable + Payable + Stock +
1. I = NA + NA + NA + I I - NA = I I OA
2. I = I + NA + NA + NA NA - NA = NA I FA
3. NA = NA + I + NA + D NA - I = D NA

2-45
EXERCISE 2-36B (Appendix)

a. Interest expense recognized for Year 1: $120,000 x 7% = $8,400;

$8,400 x 5/12 = $3,500

b.
California Company
Accounting Equation for Year 1
Assets = Liabilities + Stockholders’ Equity
Note Interest Common Retained
Event Cash = Payable + Payable + Stock + Earnings
Note 120,000 = 120,000 + NA + NA + NA
Adj. NA = NA + 3,500 + NA + (3,500)

See the adjusting entry in the accounting equation above (liabilities

increase, equity decreases).

c. $-0-. All interest will be paid at maturity, August 1, Year 2, for this
note payable.

d. $3,500

e. $8,400 ($120,000 x 7%). All interest will be paid when the note
payable matures.

f. $4,900 ($120,000 x 7% x 7/12)

g. $-0-

2-46
SOLUTIONS TO PROBLEMS - SERIES B - CHAPTER 2

PROBLEM 2-37B

The Accounting Equation

Total Assets = Liabilities + Stockholders’ Equity

Event/ Other Common Retained
Adjust. Cash + Assets = + Stock + Earnings

a. (6,000) +6,000 = NA + NA NA
a. Adj.1 NA (4,500) = NA + NA (4,500)

b. NA +2,400 = +2,400 + NA NA
b. Adj.2 NA (2,200) = NA + NA (2,200)
c. (7,200) +7,200 = NA + NA NA
c. Adj.3 NA (6,000) = NA + NA (6,000)

d. +18,000 NA = +18,000 + NA NA
d. Adj.4 NA NA = (6,000) + NA 6,000
1
$6,000 x 9/12 = $4,500
2
$2,400 - $200 = $2,200
3
$7,200 x 10/12 = $6,000
4
$18,000 x 4/12 = $6,000

2-47
PROBLEM 2-38B

a.
Wages Company
Income Statement
For the Year Ended December 31, Year 2

Revenue $18,000

Expenses
Salary Expense $13,000
Utility Expense 1,800
Rent Expense 1,600
Total Expense (16,400)

Net Income $ 1,600

b.
Accounts to be Closed:
1. Revenue
2. Salary Expense
3. Utility Expense
4. Rent Expense
5. Dividends

2-48
PROBLEM 2-38B (cont.)

c.
Computation of Retained Earnings:

Beginning Retained Earnings $19,700

Add: Net Income 1,600
Less: Dividends (1,000)
Ending Retained Earnings $20,300

Net income only includes revenues and expenses for the current
year. Retained earnings not only includes current year net
income, but also the balance from previous years and reductions
for dividends.

d. The balances are zero; they were closed to Retained Earnings on

December 31, Year 2. The December 31 closing balance of one year
is the opening balance on January 1 of the next year.

2-49
 PROBLEM 2-39B

Weaver Cleaning Company

Horizontal Statements Model

Balance Sheet Income Statement Stmt. of

Assets = Liabilities + Stk. Equity Rev. - Exp. = Net Cash Flows
Inc.
Even Accts Accts. Unearn C. Stk. Ret.
t Cash + Rec. + Supp. = Pay. + Rev. + + Earn.
1. 15,000 + NA + NA = NA + NA + 15,000 + NA NA - NA = NA 15,000 FA
2. 6,000 + NA + NA = NA + NA + NA + 6,000 6,000 - NA = 6,000 6,000 OA
3. NA + 18,000 + NA = NA + NA + NA + 18,000 18,000 - NA = 18,000 NA
4. 11,000 + (11,000) + NA = NA + NA + NA + NA NA - NA = NA 11,000 OA
5. (1,400) + NA + 1,400 = NA + NA + NA + NA NA - NA = NA (1,400) OA
6. NA + NA + (1,300) = NA + NA + NA + (1,300) NA - 1,300 = (1,300) NA
7. 3,600 + NA + NA = NA + 3,600 + NA + NA NA - NA = NA 3,600 OA
8. NA + NA + NA = NA + (1,800) + NA + 1,800 1,800 - NA = 1,800 NA
9. (6,500) + NA + NA = NA + NA + NA + (6,500) NA - 6,500 = (6,500) (6,500) OA
10. NA + NA + NA = 2,800 + NA + NA + (2,800) NA - 2,800 = (2,800) NA
11. (2,100) + NA + NA = (2,100) + NA + NA + NA NA - NA = NA (2,100) OA
12. (1,000) + NA + NA = NA + NA + NA + (1,000) NA - NA = NA (1,000) FA
Bal. 24,600 + 7,000 + 100 = 700 + 1,800 + 15,000 + 14,200 25,800 - 10,600 = 15,200 24,600 NC

2-50
 PROBLEM 2-40B

(Prepared for Instructor's Use)

Accounting Equation
Assets Liabilities Stk. Equity
Acc. Sal. Pay. Unear. C. Stk. Ret. Earn.
Date Cash Rec. Pp. Rent Supp. Land Acc. Pay. Rev.
Bal. 60,000 45,000 35,000 32,000 60,000 48,000
1/1 30,000 30,000
4/1 (7,200) 7,200
6/1 (5,000) (5,000)
7/1 (40,000) 40,000
8/1 (21,000) (21,000)
9/1 9,600 9,600
9/30 20,000 (20,000)
10/1 1,200 1,200
12/31 75,000 75,000
12/31 62,000 (62,000)
12/31 27,000 (27,000)
12/31 18,000 (18,000)
12/31 (1,100) (1,100)
12/311
12/31a (5,400)2 (5,400)
12/31a (4,800)3 4,800
Bal. 108,400 58,000 1,800 100 55,000 39,200 18,000 4,800 90,000 71,300

1
No entry for the change in value of the land.
2
12/31a Expired Rent ($7,200 x 9/12 = $5,400)
3
12/31a Unearned Revenue Earned ($9,600 x 4/8 = $4,800)

2-51
PROBLEM 2-40B (cont.)

a. $35,000 + $40,000 - $20,000 = $55,000

b. $62,000 + $9,600 - $7,200 - $21,000 = $43,400

c. $7,200 x 9/12 = $5,400

d. $39,200 + $18,000 + $4,800 =$62,000

e. $1,200 - $100 = $1,100

f. $9,600 - $4,800 ($9,600 x 4/8) = $4,800

g. $20,000 - $40,000 = $(20,000)

h. Total expenses: $27,000 + $18,000 + $1,100 + $5,400 = $51,500

i. $75,000 + $4,800 = $79,800

j. $30,000 - $5,000 = $25,000

k. (i) $79,800 - (h) $51,500 = $28,300

l. Beg. RE $48,000 + NI $28,300 - Div. $5,000 = Ending retained earnings

$71,300

2-52
PROBLEM 2-41B

Shearer Company
Financial Statements
For the Year Ended December 31, Year 2

Income Statement

Revenue
Service Revenue $86,000
Total Revenue $86,000

Expenses
Other Operating Expenses $59,000
Supplies Expense 1,000
Rent Expense 3,500
Insurance Expense 2,500
Total Expenses (66,000)

Net Income $20,000

Statement of Changes in Stockholders’ Equity

Beginning Common Stock $ 5,500

Plus: Stock Issued 9,000*
Ending Common Stock $14,500

Beginning Retained Earnings $47,200

Plus: Net Income 20,000
Less: Dividends (5,000)
Ending Retained Earnings 62,200

Total Stockholders’ Equity $76,700

*Not given in the problem.

Ending Common Stock - Beginning Common Stock = Stock Issued
$14,500 - $5,500 = $9,000

2-53
PROBLEM 2-41B (cont.)

Shearer Company
Balance Sheet
As of December 31, Year 2

Assets
Cash $22,100
Accounts Receivable 21,000
Supplies 2,100
Prepaid Insurance 3,500
Land 43,000
Total Assets $91,700

Liabilities
Accounts Payable $15,000
Total Liabilities $15,000

Stockholders’ Equity
Common Stock $14,500
Retained Earnings 62,200
Total Stockholders’ Equity 76,700

Total Liab. and Stockholders’ Equity $91,700

2-54
PROBLEM 2-41B (cont.)

Shearer Company
Statement of Cash Flows
For the Year Ended December 31, Year 2

Cash Flow From Operating Activities $ 8,600

Cash Flow From Investing Activities (6,000)

Cash Flow From Financing Activities 9,000

Net Change in Cash 11,600

Plus: Beginning Cash Balance 10,500*
Ending Cash Balance $22,100

*Not given in the problem.

Ending Cash Bal. - Increase in Cash = Beg. Cash Balance
$22,100 - $11,600 = $10,500

2-55
PROBLEM 2-42B

FOR THE YEARS Year 1 Year 2 Year 3

Income Statements
Revenue (cash) $ 400 $ 500 $ 800
Expense (cash) (250) (l) (400) (425)
Net income (a) $ 150 $ 100 $ 375

Statements of Changes in Stockholders’ Equity

Beginning common stock $ -0- (m) $8,000 $9,100
Plus: Common stock issued (b) 8,000 1,100 310
Ending common stock 8,000 9,100 (s) 9,410

Beginning retained earnings -0- 25 75

Plus: Net income (c) 150 100 375
Less: Dividends (d) (125) (50) (150)
Ending retained earnings 25 (n) 75 300
Total stockholders’ equity (e) $8,025 $9,175 (t) $9,710

Balance Sheets
Assets
Cash (f) $11,000 (o) $ 6,650 (u)$ 8,050
Land -0- (p) 5,000 2,500
Total assets $11,000 $11,650 $10,550

Liabilities (g) $ 2,975 (q) $ 2,475 $ 840

Stockholders’ equity
Common stock (h) 8,000 (r) 9,100 9,410
Retained earnings (i) 25 75 300
Total stockholders’ equity 8,025 9,175 9,710
Total liabilities and stk. equity $11,000 $11,650 $10,550

2-56
PROBLEM 2-42B (cont.)

FOR THE YEARS Year 1 Year 2 Year 3

Statements of Cash Flows

Cash flows from oper. activities:

Cash receipts from revenue (j)$ 400 $ 500 (v) $ 800
Cash payments for expenses (k) (250) (400) (w) (425)
Net cash flows from oper. Act. 150 100 375

Cash flows from invest. activities:

Cash payments for land -0- (5,000) -0-
Cash receipt from sale of land -0- -0- 2,500
Net cash flows from invest. act. -0- (5,000) 2,500

Cash flows from fin. activities:

Cash rec. from borrowed funds 2,975 -0- -0-
Cash payments to reduce debt -0- (500) (x) (1,635)
Cash receipts from stock issue 8,000 1,100 (y) 310
Cash payments for dividends (125) (50) (z) (150)
Net cash flows from fin. activities 10,850 550 (1,475)

Net change in cash 11,000 (4,350) 1,400

Plus: beginning cash balance -0- 11,000 6,650
Ending cash balance $11,000 $ 6,650 $ 8,050

2-57
PROBLEM 2-42B (cont.)

Computations of amounts:
a. $150 Net Income = $400 Revenue - $250 Expenses.
b. $8,000 Common Stock Issued = $8,000 Ending Common Stock - $-0-
Beginning Common Stock.
c. $150 Net Income = $150 Net Income from Income Statement.
d. $125 Dividends = $-0- Beginning Retained Earnings + $150 Net Income -
$25 Ending Retained Earnings.
e. $8,025 Total Stockholders’ Equity = $8,000 Ending Common Stock + $25
Ending Retained Earnings.
f. $11,000 Cash = $11,000 Total Assets - $-0- Land.
g. $2,975 Liabilities = $11,000 Total Liabilities and Stockholders’ Equity -
$8,025 Total Stockholders’ Equity.
h. $8,000 Common Stock = $8,000 Ending Common Stock from Statement
of Changes in Stockholders’ Equity.
i. $25 Retained Earnings = $25 Ending Retained Earnings from Statement
of Changes in Stockholders’ Equity.
j. $400 Cash Receipts from Revenue = $400 Revenue from Income
Statement.
k. $250 Cash Payments for Expenses = $250 Expenses from Income
Statement.
l. $400 Expenses = $500 Revenue - $100 Net Income.
m. $8,000 Beginning Common Stock = $8,000 Ending Common Stock for
Year 1.
n. $75 Ending Retained Earnings = $25 Beginning Retained Earnings + $100
Net Income - $50 Dividends.
o. $6,650 Cash = $6,650 Ending Cash Balance from the Statement of Cash
Flows.
p. $5,000 Land = $11,650 Total Assets - $6,650 Cash.
q. $2,475 Liabilities = $11,650 Total Liabilities and Stockholders’ Equity -
$9,175 Total Stockholders’ Equity.

2-58
PROBLEM 2-42B (cont.)

r. $9,100 Common Stock = $9,100 Ending Common Stock from Statement

of Changes in Stockholders’ Equity.
s. $9,410 Ending Common Stock = $9,100 Beginning Common Stock + $310
Stock issued.
t. $9,710 Total Stockholders’ Equity = $9,410 Ending Common Stock + $300
Ending Retained Earnings.
u. $8,050 Cash = $10,550 Total Assets - $2,500 Land.
v. $800 Cash Receipts from Revenue = $800 Revenue from Income
Statement.
w. $425 Cash Payments for Expenses = $425 Expenses from Income
Statement.
x. $1,635 Cash Payments to Reduce Debt = $2,475 Liabilities Balance, Year
2 - $840 Liabilities Balance, Year 3.
y. $310 Cash Receipts from Stock Issue = $310 Common Stock Issued
from Statement of Changes in Stockholders’ Equity.
z. $150 Cash Payments for Dividends = $150 Dividends from Statement of
Changes in Stockholders’ Equity.

2-59
 PROBLEM 2-43B

a.
Iowa Service Company
Accounting Equation for Year 1

Assets = Liabilities + Stk. Equity

Type of Accts. Rec. Prepd. Accts. Salaries Unearn. C. Retained
Event Event Cash Supp. Rent Land = Pay. Payable Rev. + Stk. Earnings
1. AS 60,000 NA NA NA NA = NA NA NA + 60,000 NA
2. AS NA NA 1,200 NA NA = 1,200 NA NA + NA NA
3. AE (18,000) NA NA NA 18,000 = NA NA NA + NA NA
4. AU (800) NA NA NA NA = (800) NA NA + NA NA
5. AS NA 42,000 NA NA NA = NA NA NA + NA 42,000
6. AU (21,000) NA NA NA NA = NA NA NA + NA (21,000)
7. AE 38,000 (38,000) NA NA NA = NA NA NA + NA NA
8. CE NA NA NA NA NA = NA 3,200 NA + NA (3,200)
9. AU NA NA (1,000) NA NA = NA NA NA + NA (1,000)
Totals 58,200 4,000 200 -0- 18,000 = 400 3,200 -0- + 60,000 16,800

2-60
 PROBLEM 2-43B (cont.)

a.
Iowa Service Company
Accounting Equation for Year 2

Assets = Liabilities + Stk. Equity

Type of Accts. Rec. Prepd. Accts. Salaries Unearn. C. Retained
Event Event Cash Supp. Rent Land = Pay. Payable Revenue + Stk. Earnings
Bal. 58,200 4,000 200 -0- 18,000 = 400 3,200 -0- + 60,000 16,800
1. AS 20,000 NA NA NA NA = NA NA NA + 20,000 NA
2. AU (3,200) NA NA NA NA = NA (3,200) NA + NA NA
3. AE (3,600) NA NA 3,600 NA = NA NA NA + NA NA
4. AE 15,000 NA NA NA (15,000) = NA NA NA + NA NA
5. AS 4,800 NA NA NA NA = NA NA 4,800 + NA NA
6. AS NA NA 1,000 NA NA = 1,000 NA NA + NA NA
7. AS NA 32,000 NA NA NA = NA NA NA + NA 32,000
8. AE 33,000 (33,000) NA NA NA = NA NA NA + NA NA
9. AU (5,000) NA NA NA NA = NA NA NA + NA (5,000)
10. AU (19,500) NA NA NA NA = NA NA NA + NA (19,500)
11. AU NA NA NA (3,000)1 NA = NA NA NA + NA (3,000)
12. CE NA NA NA NA NA = NA NA (1,200)2 + NA 1,200
13. AU NA NA (900) NA NA = NA NA NA + NA (900)
14. CE NA NA NA NA NA = NA 3,900 NA + NA (3,900)
Totals 99,700 3,000 300 600 3,000 = 1,400 3,900 3,600 + 80,000 17,700

$3,600 x 10/12 = $3,000

1

$4,800 x 3/12 = $1,200

2

2-61
PROBLEM 2-43B (cont.)

b.
Iowa Service Company
Financial Statements
For the Years Ended December 31, Year 1 and Year 2

Income Statements

Year 1 Year 2

Service Revenue $ 42,000 $ 33,200

42,000 33,200

Expenses
Operating Expenses (21,000) (19,500)
Supplies Expense (1,000) (900)
Salaries Expense (3,200) (3,900)
Rent Expense -0- (3,000)
Total Expenses (25,200) (27,300)
Net Income $16,800 $ 5,900

Statements of Changes in Stockholders’ Equity

Beginning Common Stock $ -0- $60,000

Plus: Stock Issued 60,000 20,000
Ending Common Stock 60,000 80,000

Beginning Retained Earnings -0- 16,800

Plus: Net Income 16,800 5,900
Less: Dividends -0- (5,000)
Ending Retained Earnings 16,800 17,700

Total Stockholders’ Equity $76,800 $97,700

2-62
PROBLEM 2-43B (cont.)

b.
Iowa Service Company
Balance Sheets
As of December 31, Year 1 and Year 2

Year 1 Year 2
Assets
Cash $58,200 $99,700
Accounts Receivable 4,000 3,000
Supplies 200 300
Prepaid Rent -0- 600
Land 18,000 3,000
Total Assets $80,400 $106,600

Liabilities
Accounts Payable $ 400 $ 1,400
Salaries Payable 3,200 3,900
Unearned Revenue -0- 3,600
Total Liabilities 3,600 8,900

Stockholders’ Equity
Common Stock 60,000 80,000
Retained Earnings 16,800 17,700
Total Stockholders’ Equity 76,800 97,700

Total Liab. and Stockholders’ Equity $80,400 $106,600

2-63
PROBLEM 2-43B (cont.)

b.
Iowa Service Company
Statements of Cash Flows
For the Years Ended December 31, Year 1 and Year 2

Year 1 Year 2

Cash Flows From Operating Activities:

Cash Received from Customers $38,000 $37,800
Cash Payment for Expenses1 (21,800) (26,300)
Net Cash Flow from Operating Activities 16,200 11,500

Cash Flows From Investing Activities:

Cash Payment for Land (18,000) -0-
Cash Proceeds from Sale of Land 15,000
Net Cash Flow From Investing Activities (18,000) 15,000

Cash Flows From Financing Activities:

Cash Receipts from Stock Issue 60,000 20,000
Cash Payment for Dividends -0- (5,000)
Net Cash Flow From Financing Activities 60,000 15,000

Net Change in Cash 58,200 41,500

Plus: Beginning Cash Balance -0- 58,200
Ending Cash Balance $58,200 $99,700
1
Year 1: $800 + $21,000 = $21,800
Year 2: $3,200 + $3,600 + $19,500 = $26,300

2-64
PROBLEM 2-44B

a. Several of the principles should be mentioned in the memo.

Responsibilities Principle
As a professional, Kato should exercise professional and moral
judgment in his position.

Integrity Principle
Kato should perform his duties with the highest sense of integrity.

Due Care Principle

Members are required be competent in their areas of responsibility
and to perform professional duties to the best of his/her ability.

b. Pleading ignorance would not relieve Kato of responsibility. The due

care principle requires that members of the profession be competent
and provide quality services.

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 PROBLEM 2-45B

(Prepared for Instructor's Use)

Accounting Equation
Assets Liabilities Stk. Equity
Acc. Pp. BV Acc. Sal. Note Int. Unear. C. Stk. Ret.
Date Cash Rec. Rent Supp Van Land Pay. Pay. Pay. Pay. Rev. Earn.
Bal. 61,000 45,000 27,000 25,000 90,000 18,000
1/1 70,000 70,000
1/1 (26,000) 26,000
3/1 21,000 21,000
4/1 (6,600) 6,600
6/1 (3,000) (3,000)
7/1 (25,000) 25,000
8/1 (13,000) (13,000)
9/1 8,400 8,400
10/1 900 900
12/31 80,000 80,000
12/31 56,000 (56,000)
12/31 16,000 (16,000)
12/31 5,000 (5,000)
12/31 (650) (650)
12/31a1 (3,800)1 (3,800)
12/31a2 1,4002 (1,400)
12/31a3 (4,950)3 (4,950)
12/31a4 (4,200)4 4,200
Bal. 142,800 69,000 1,650 250 22,200 52,000 28,900 5,000 21,000 1,400 4,200 160,000 67,400

(1) 12/31a Depreciation Expense ($26,000 - $7,000 = $19,000; $19,000 ÷ 5 = $3,800 per year)
(2) 12/31a Interest Expense ($21,000 x 8% = $1,680; $1,680 x 10/12 = $1,400)
(3) 12/31a Expired Rent ($6,600 x 9/12 = $4,950)
(4) 12/31a Unearned Revenue Earned ($8,400 x 4/8 = $4,200)

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PROBLEM 2-45B (cont.)

a. The four transactions that need adjusting entries are as follows:

1. January 1, Purchase of the van, depreciation expense.
2. March 1, note payable issued. Interest expense is recorded.
3. April 1, prepaid rent. Expired rent is recorded.
4. Sept. 1, unearned revenue; cash was received in advance. Earned
revenue is recorded.

b. $21,000 x 8% x 10/12 = $1,400.

c. $56,000 + $8,400 - $6,600 - $13,000 = $44,800

d. $6,600 x 9/12 = $4,950

e. $60,500 (see total of liabilities columns; $28,900 + $5,000 + $21,000 +

$1,400 + $4,200).

f. $900 - $250 = $650

g. $4,200 = $8,400 - $4,200 ($8,400 x 4/8)

h. $(51,000) = [$(26,000) + $(25,000)]

i. $21,000 x 8% x 10/12 = $1,400

j. Total expenses, $31,800

($5,000 + $16,000 + $650 + $4,950 + $3,800 + $1,400)

k. Ending retained earnings = $67,400 (Beg. RE $18,000 + NI $52,400 -

Div. $3,000)

l. All service revenues $84,200 = $80,000 + $4,200

m. $88,000 = $70,000 + $21,000 - $3,000

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n. $52,400 = (l) $84,200 - (j) $31,800

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