Chapter 1: The Nature and purpose of Accounting

Solution Key:

Problem 1.1
CHARLES COMPANY
BALANCE SHEET AS OF DECEMBER 31, ----.
Assets Liabilities and Owners’ Equity
Cash ................................................................
$ 12,000 Bank loan................................................................
$ 40,000
Inventory................................ 95,000 Owners’ Equity
Other assets................................13,000 Owners’ equity ................................ 80,000
Total liabilities and owners’
Total assets ................................
$120,000 equity ................................................................
$120,000

Problem 1.2
Missing Figures:
Year 1
Noncurrent $410,976
assets
..........................................................
Noncurrent 240,518
liabilities
..........................................................

Year 2
Current $ 90,442
assets
..........................................................
Total 288,456
assets
..........................................................
Noncurrent 78,585
liabilities
..........................................................

Year 3
Total $247,135
assets
..........................................................
Current 15,583
liabilities
..........................................................
Total liabilities and owners’ 247,135
equity
..........................................................
Year 4
Current $ 69,090
assets
..........................................................
Current 17,539
liabilities
..........................................................

Problem 1.3
Missing Figures:
Year 1

Gross $9,000
margin
..........................................................
Tax 1,120
expense
..........................................................

Year 2
Sales $11,968
..........................................................
Profit before 2,547
taxes
..........................................................

Year 3
Cost of goods $2,886
sold
..........................................................
..........................................................
Other 6,296
expenses
..........................................................

Year 4
Sales $10,000
..........................................................
Cost of goods 2,500
sold
 ..........................................................
Gross margin (75% of $ 7,500
sales)
..........................................................
Other 5,330
expenses
..........................................................
Profit before taxes (21.7% of $ 2,170
sales)
..........................................................
Tax 870
expense
..........................................................
Net income (13% of
sales) $ 1,300
..........................................................

Problem 1.4 Explanation:

1. Owners invest $20,000 of equity capital in Acme Consulting.

2. Equipment costing $7,000 is purchased for $5,000 cash and an account payable of $2,000.

3. Supplies inventory costing $1,000 is bought for cash.

4. Salaries of $4,500 are paid in cash.

5. Revenues of $10,000 are earned, of which $5,000 has been recovered in cash. The remaining $5,000
is owed to the company by its customers.

6. Accounts payable of $1,500 are paid in cash.

7. Customers pay $1,000 of the $5,000 they owe the company.

8. Rent Expense of $750 is paid in cash.

9. Utilities of $500 are paid in cash.

10. A $200 travel expense has been incurred but not yet paid.

11. Supplies inventory costing $200 are consumed.

ACME CONSULTING
BALANCE SHEET AS OF JULY 31, ----.
Assets Liabilities and Owners’ Equity
Cash ................................................................
$12,750 Accounts payable ................................$ 700
Accounts receivable................................ 4,000
Supplies inventory ................................ 800 ______
Current assets ................................17,550 Current liabilities................................ 700
Equipment................................................................
7,000 Owners’ equity ................................ 23,850
Total liabilities
Total assets ................................................................
$24,550 and owners’ equity ................................$24,550
 ACME CONSULTING
INCOME STATEMENT JULY 1 - 31, ----.
Revenues ................................................................ $10,000
Expenses
Salaries ................................................................ 4,500
Rent................................................................ 750
Utilities ................................................................ 500
Travel ................................................................ 200
Supplies ................................................................ 200 6,150
Net income ................................................................ $ 3,850

ACME CONSULTING
CASH RECEIPTS AND DISBURSEMENTS, JULY 1 - 31, ----.
Receipts
Owners’ investment ................................................................ $20,000
Cash sales ................................................................ 5,000
Collection of accounts receivable ................................ 1,000
Total receipts ................................................................ $26,000
Disbursements
Equipment purchase ................................................................ $5,000
Supplies purchase ................................................................ 1,000
Salaries paid................................................................ 4,500
Payments to vendors ................................................................ 1,500
Rent paid................................................................ 750
Utilities paid ................................................................ 500
Total disbursements ................................................................ $13,250
Increase in cash ................................................................ $12,750

Problem 1.5 Explanation:

Accounts Supplies Accounts Owners’
Cash + Receivable + Inventory + Equipment = Payable + Equity
1. + $25,000 + $25,000 Investment
2. - 500 - 500 Rent
3. + $8,000 + $8,000
4. - 500 + $500
5. - 750 - 750 Advertising
6. - 3,000 - 3,000 Salaries
7. + 2,000 + $8,000 + 10,000 Commissions
8. - 5,000 - 5,000
9. - 100 - 100
10. + 1,000 - 1,000 Expenses

BON VOYAGE TRAVEL

BALANCE SHEET AS OF JUNE 30, ----.
Assets Liabilities and Owners’ Equity
Cash ................................................................
$17,250 Accounts payable................................
$ 4,000
Accounts receivable................................8,000 Current liabilities ................................
4,000
Supplies inventory ................................ 400 Owners’ equity ................................
29,650
Current assets................................ 25,650
Equipment................................ $ 8,000 ______
Total liabilities
Total Assets ................................
$33,650 and owners’ equity ................................
$33,650
 BON VOYAGE TRAVEL
INCOME STATEMENT JUNE 1-30, ----.
Commissions ................................................................$10,000
Expenses ................................................................
Rent................................................................
$500
Advertising ................................................................
750
Salaries ................................................................
3,000
Supplies ................................................................
100
Misc. Expenses ................................................................
1,000 5,350
Net Income ................................................................
$ 4,650

BON VOYAGE TRAVEL

CASH RECEIPTS AND DISBURSEMENTS JUNE 1-30, ----.
Receipts
Owners’ investment ................................................................
$25,000
Collection of commissions ................................................................
2,000
Total receipts ................................................................$27,000

Disbursements
Paid rent ................................................................................................
$ 500
Bought supplies ................................................................ 500
Bought advertising................................................................ 750
Paid salaries ................................................................................................
3,000
Paid vendors ................................................................................................
5,000
Total disbursements ................................................................
$ 9,750
Increase in cash ................................................................ $17,250