Financial Statements and Accounting Transactions: Solutions Manual For Chapter 2 9

Chapter 2
Financial Statements and

Accounting Transactions
Questions
1. The four financial statements are: the income statement, the balance sheet, the statement of
owners equity, and the cash flow statement.
2. An income statement shows whether the business earned a net income (also called profit). The
statement does not simply report the amount of net income or loss but lists the types and
amounts of the revenues and expenses.
3. A revenue is an inflow of assets received in exchange for goods or services provided to
customers as part of the major or central operations of the business. A revenue also may occur
as a decrease in liabilities as when a service or product is delivered having been paid for in
advance.
4. An income statement user must know what time period is covered to judge whether the
companys performance is satisfactory. For example, a statement user would not be able to
assess whether the amounts of revenue and net income are satisfactory without knowing
whether they were earned over a week, a month, or a year.
5. The dollar amounts in Leon Furnitures financial statements are rounded to the nearest $1,000.
The consolidated statement of income (income statement) relates to the year ended December
31, 2002, and also includes comparative statements for the previous year.
6. Owners equity is increased by investments by the owner and by net income. It is decreased by
withdrawals made by the owner and by a net loss, which is the excess of expenses over
revenues.
7. The balance sheet provides information that helps users understand a companys financial
status. It is often called the statement of financial position. The balance sheet lists the types and
dollar amounts of assets, liabilities, and equity of the business.
8. (a) Assets are probable future economic benefits obtained or controlled by a particular entity as
a result of past transactions or events. (b) Liabilities are probable future sacrifices of economic
benefits arising from present obligations of a particular entity to transfer assets or provide
services to other entities in the future as a result of past transactions or events. (c) Equity is the
residual interest in the assets of an entity that remains after deducting its liabilities. (d) The term
net assets means the same thing as equity, which is also determined as assets less liabilities.
9. Total assets on December 31, 2002 were reported as $784,205,000. The total assets of
$784,205,000 equals the total for liabilities and shareholders equity of $784,205,000.
10. The equity section of the balance sheet reports a Carol Finlay, Capital account. The presence
of the owners capital account indicates that Finlay Interiors has been organized as a sole
proprietorship.
11. The objectivity principle requires financial statement information to be supported by evidence
other than someones opinion or imagination. This principle increases the reliability of the
financial statements.
Copyright 2005 by McGraw-Hill Ryerson Limited. All rights reserved.
Solutions Manual for Chapter 2
12. This treatment is required by the cost and going-concern principles.

13. The revenue recognition principle provides guidance that managers and auditors need for
knowing when to recognize revenue. For example, if revenue is recognized too early, the
income statement reports income earlier than it should and the business looks more profitable
than it really is. On the other hand, if the revenue is not recognized on time, the income
statement shows lower amounts of revenue and net income than it should and the business
looks less profitable than it really is. Basically, this principle requires revenue to be recognized
when it is earned and can be measured reliably. The amount of revenue should equal the value
of the assets received from the customers.
*14. The CICA identifies generally accepted accounting principles in the CICA Handbook.

10
Fundamental Accounting Principles, Eleventh
Canadian Edition
QUICK STUDY
Quick Study 2-1
1.
2.
3.
4.
5.
6.
7.
SP
C
P
SP
C
C
P
Quick Study 2-2
a. Business entity principle
b. Revenue recognition principle
c. Cost principle
Quick Study 2-3
1.
2.
3.
4.
5.
Revenue Recognition
Objectivity and Cost
Business Entity
Going Concern
Monetary Unit
Quick Study 2-4
a. Owners equity
=$ 75,000
40,500
=$ 34,500
b. Liabilities =$300,000
$ 85,500
$214,500
c. Assets
=$187,500
+$ 95,400
$282,900
=
=
Quick Study 2-5

a. Owners equity
=$374,700
$252,450 =$122,250
b. Liabilities =$150,900
$126,000
24,900
c. Assets
=$ 37,650
+$112,500
$150,150

11
Quick Study 2-6

1.
2.
$20,000 = $15,000 = $5,000 beginning capital on January 1, 2004

$5,000 + $3,000 + $8,000 - $4,000 = $12,000 ending capital on
December 31, 2004
Quick Study 2-7
The source documents include:
c. Telephone bill
d. Invoice from supplier
g. Bank statement
h. Sales invoice
Quick Study 2-8
Assets
Liabilities
Equity
a.
Increase/Decrease
b. Increase
c. Decrease
d.
e.
Increase
Decreas
e
Increase
Decrease
Decrease
Decrease
Quick Study 2-9

1.
2.
3.
4.
Office supplies (c)

Office supplies expense (a)
Accounts receivable (c)
Accounts payable (c)
9.
10.
11.
12.
5.
6.
7.
8.
Net loss (a) and (b)

Office equipment (c)
Owner, withdrawals (b)
Notes payable (c)
13.
14.
15.
16.
Utilities expense (a)

Furniture (c)
Rent revenue (a)
Consulting fees earned
(a)
Service fees earned (a)
Salaries expense (a)
Owner, investments (b)
Net income (a) and (b)

12
Canadian Edition
Quick Study 2-10

1. Net loss
2. Office supplies
3. Accounts
payable
4. Accounts
receivable
5. Owners
investment
6. Furniture
7. Net income
8. Notes payable
9. Owners
withdrawals
1 Truck
0.
(d) A net loss would be presented on both the

income statement and the statement of
owners equity.
(a) Asset
(b) Liability
(a) Asset
(d) Owners investments are presented on the
statement of owners equity.
(a) Asset
(d) Net income is presented on both the
income statement and the statement of
owners equity.
(b) Liability
(d) Owners withdrawals are presented on the
statement of owners equity.
(a) Asset

13
EXERCISES
Exercise 2-1 (10 minutes)
a)
$80,000 $65,000 = $15,000 net income
b)
$92,000 $149,000 = $57,000 net loss
c) $10,000 + 0 0 + x = $86,000
x = $86,000 $10,000
x = $76,000 net income
d) $25,000 + $40,000 0 + x = $52,000
x = 52,000 25,000 40,000
x = $13,000 or a $13,000 Net loss
(a)
Answers
(b)
$) $72,000
(49,500
(c)
$24,000
(d)
$42,00
0
(e)
46,000
Proofs:
Owners equity, January
$ $
0
$
$ $46,000
1........................................
0
0
0
Owners investments
during the year......... 120,000
72,000
63,000 75,000 75,000
Owners withdrawals
during the year ........ (49,500) (54,000) (30,000) (31,500) (31,500)
Net income (loss) for
31,50
81,000
(9,000) 42,000
(4,000)
the year.............................
0
Owners equity,
$102,00 $99,000 $24,000 $85,50 $85,500
December 31.....................
0
0

14
Canadian Edition

THE GRAYSON GROUP
Income Statement
For Month Ended November 30, 2005
Revenues:
Consulting fees earned.................
Operating expenses:
Salaries expense..........................
Rent expense...............................
Utilities expenses.....................
Telephone expense...................
Total operating expenses...........
Net income........................................
$15,000
$6,000
2,550
680
660
9,890
$ 5,110

THE GRAYSON GROUP
Statement of Owners Equity
Joseph Grayson, capital, November 1
Add: Investments by owner ...........
84,000
Net income............................
5,110
Total .........................................
Less: Withdrawals by owner...........
Joseph Grayson, capital, November 30
$85,750
89,110
$89,110
3,360

THE GRAYSON GROUP
Balance Sheet
November 30, 2005
Assets Liabilities
Cash................................ $12,000
Accounts receivable........ 15,000
Office supplies................. 2,250
Accounts payable........ $ 7,500

Owners Equity

15
Automobiles.................... 36,000
...................... 85,750
Office equipment............. 28,000
Total assets..................... $93,250
Joseph Grayson, capital

Total liabilities and
owners equity......... $93,250
TUTOR-RIGHT SERVICES
Income Statement
For Month Ended July 31, 2005
Revenues:
Tutoring fees earned....................
Textbook rental revenue...............
Total revenues...........................
Operating expenses:
Office rent expense......................
Tutors wages expense.................
Utilities expense......................
Net loss..............................................
60
$2,100
150
$ 2,250
$1,250
770
290
2,310
$

Leena Mahan, capital, July 1...........
Total .........................................
Net loss................................
Leena Mahan, capital, July 31.........
$ 3,700
600
$ 4,300
$ 500
60
560
$ 3,740

Balance Sheet
July 31, 2005
Assets Liabilities
Cash................................ $ 800
Accounts payable........ $
700

16
Canadian Edition

Supplies..........................
300
Furniture.........................
900
3,740
Computer equipment...... 1,100
Total assets..................... $4,440
Owners Equity
Leena Mahan, capital. .
owners equity.........
$4,440

Description
1. Requires every business to be accounted for separately from its
owner or owners.
D 2. Requires financial statement information to be supported by
evidence other than someones opinion or imagination.
A 3. Requires financial statement information to be based on costs
incurred in transactions.
E 4. Requires financial statements to reflect the assumption that the
business will continue operating instead of being closed or sold.
C 5. Requires revenue to be recorded only when the earnings
process is complete.
B

a.
Assets Liabilities =
Owners
Equity
Beginning of the year.........$ 75,000 $30,000 = $45,000
End of the year..................$120,000 $46,000 =
74,000
Net increase in owners equity................................... $29,000
Net income................................................................ $29,000
(Because there were no additional investments or withdrawals,
the net income for the year equals the net increase in owners
equity.)
b. Net increase in owners equity............... $29,000

Add: Withdrawals (12 months @ $1,750)
21,000
Net income............................................ $50,000
An alternative calculation:
$45,000 + x - $21,000 = $74,000; x = $50,000
c. Net increase in owners equity...............
Less: Additional investment...................
$29,000
32,500

17
Net loss..................................................
$ 3,500
$45,000 + $32,500 + x = $74,000; x = ($3,500) where the
negative represents a loss.
d. Net increase in owners equity............... $29,000
Add: Withdrawals (12 months @ $1,750)
21,000
Gross increase in owners equity............ $50,000
Less: Additional investment...................
25,000
Net income............................................ $25,000
$45,000 + $25,000 - $21,000 + x = $74,000; x = $25,000
If assets decreased by $5,000 during August, then
$20,000 + $5,000 = $25,000 Assets at August 1, 2005.
Therefore, Owners Equity at August 1, 2005 = $25,000 - $1,000 =
$24,000
If liabilities increased by $3,000 during August, then
$1,000 + $3,000 = $4,000 Liabilities at August 31, 2005.
Therefore, Owners Equity at August 31, 2005 = $20,000 - $4,000 =
$16,000
Assets
a)
Owners
Equity
Accounts
Bonnie
Receivab
Office
Accounts
Northrup,
Cash +
le
+ Supplies = Payable +
Capital
+
+ $5,000
$5,000
$5,000
$5,000
Total
s
b)
Total
$5,000
s
c) + $1,200
Liabilities +
+ $400
$400
+ $400
$400
$5,000
+ $1,200

18
Canadian Edition
Total
s
d)*
Total
s
e)
Total
s
f)
Total
s
$6,200
$400
$400
$6,200
$6,200
$400
$400
$6,200
$400
$3,000
$3,200
$3,000
$3,200
$3,200
$400
+
$2,500
$2,500
$6,100
+ $2,500
$400
$400
$5,700
$6,100
*Note: For (d), since no transaction has occurred, no entry is

required.

19

Assets
a)
b)
Totals
c)
Totals
d)
Totals
e)
Totals
f)*
Totals
g)
Totals
h)
Totals
i)
Totals
Cash
+ $7,000
- 2,500
$4,500
$4,500
$4,500
$ 950
$3,550
$3,550
$1,200
$2,350
+ $1,400
$3,750
$2,700
$1,050
Owners
Equity
Accounts
Parts
Janine
Receivabl
Supplie
Equipme
Accounts
Commry,
+
e
+
s
+
nt
= Payable +
Capital
+ $ 7,000
- 2,500
$ 4,500
+ $1,200
+ $1,200
$1,200
$1,200
$ 4,500
+ $3,400
+ $ 3,400
$3,400
$1,200
$1,200
$7,900
+ $950
$3,400
$1,200
$950
$1,200
$7,900
$3,400
$1,200
Liabilitie +
s
$950
$1,200
$1,200
$
0
$3,400
$1,200
$950
$3,400
$1,200
$950
$3,400
$1,200
$950
$6,600
$ 7,900
$7,900
+ $ 1,400
$9,300
$ 2,700
$6,600
$6,600
*Note: For (f), since no transaction has occurred, no entry is required.

Exercise 2-14: (15 minutes)
b.
c.
d.
e.
Office Supplies were purchased paying cash of $1,000.

Office Furniture was purchased paying cash of $8,000.
Completed work for a client on credit; $2,000.
Purchased office supplies on credit; $800.

a) The business purchased land paying $3,000.
b) Office supplies were purchased on credit (or on account).
c) Revenue on account (or on credit) was earned.
d) A creditor (or liability) was paid.
e) A credit customer made a payment on their account (or the
amount that was owing).
20
Canadian Edition

+ Accounts + Equip- = Accounts+ Linda Champion,
Explanation
Cash
Receivable
ment
Payable
Capital
of Change
a. $50,000
$10,000
b. 2,600
Expense
$47,400
$10,000
c.
$60,000
Investment
$2,600
Rent
$57,400
$47,400
+12,000
$22,000
+12,000
$12,000
$57,400
d. + 1,000
$48,400
$12,000
+ 1,000
$58,400
Revenue
$22,000
Revenue
e.
$48,400
+$2,000
$2,000
$22,000
$12,000
+ 2,000
$60,400
f. 8,000
$40,400
$2,000
+ 8,000
$30,000
$12,000
$60,400
g. 2,400
Expense
$38,000
$2,000
$30,000
$12,000
$58,000
h. +
500
$38,500
500
$1,500
$30,000
$12,000
$58,000
i. 12,000
$26,500
$1,500
$30,000
12,000
$
0
$58,000
j.
2,400
500
$26,000
$57,500
$1,500
$57,500
Revenue
($1,000 + $2,000)
$2,000
$30,000
500
Wages
Withdrawal
$57,500
Expenses
=
Net loss
($2,600 + $2,400)

21
Exercise 2-17 (15 minutes) (Answers may vary.)

Possible examples include:
a. The business purchases office supplies (or some other asset) for
cash.
b. The owner withdraws cash (or some other asset) from the
business; also, the business incurs an expense paid with cash.
c. The business incurs an expense on credit.
d. The business purchases equipment (or some other asset) on
credit.
e. The owner invests cash (or some other asset); or, the business
earns a revenue and accepts cash or an account receivable.
f.
The business pays an account payable (or some other liability)

with cash.

Assets
Liabiliti + Owners Equity

es
Cash + Accounts + Supplie + Equipme = Account + Bert
Explanatio
Receivab s
nt
s
Zimm,
n
le
Payable
Capital
Owner
Investmen
a)
+ $5,000
+$5,000 t
b) + $2,500
+$2,500 Revenue
Total
$2,500
$
0
$ 0
$5,000
$ 0
$7,500
s
c)
+ $300
+ $300
Total
$2,500
$
0
$300
$5,000
$300
$7,500
s
d)
$ 900
$ 900 Sal.
Expense
Total
$1,600
$
0
$300
$5,000
$300
$6,600
s
e)*
Total
$1,600
$
0
$300
$5,000
$300
$6,600
s
f)
$ 600
$ 600 Rent
Expense
Total
$1,000
$
0
$300
$5,000
$300
$6,000
s
g)
+ $1,000
+$1,000 Revenue
22
Canadian Edition
Total
s
$1,000
$1,000
$7,300
$300
$5,000
$300
=
$7,000
$7,300
*Note: For (e), since no transaction has occurred, no entry is

required.

23

Bert Zimm Freelance Writing
Income Statement
For Month Ended March 31, 2005
Revenues:
Freelance service revenue
Operating expenses:
Salaries expense
Rent expense
Total operating expenses
$3,500
$900
600
1,50
0
$2,0
00
Net income
Bert Zimm, capital, March 1
Add:
Investment by owner
Net income
$5,000
2,00
0
Bert Zimm, capital, March 31

Balance Sheet
March 31, 2005
Assets
Liabilities
Cash
$1,0
Accounts payable
00
Accounts 1,00
receivable
0
Supplies
300
Equipment
5,00
$7,0
00
$
300

24
Canadian Edition
0
Owners Equity
Bert Zimm, capital
Total assets
$7,3
00
7,00
0
Total liabilities and owners $7,3
equity
00

25
PROBLEMS
Problem 2-1A (20 minutes)
Year
Beginning
capital
+
Owner
investment
+ Net income
(loss)
Owner
withdrawals
= Ending capital
2007
288,0001
0
2006
152,0003
2005
0
100,000
214,000
69,0005
78,000
17,000
260,000
288,0002
152,0004
(28,000)
Note: The superscripts show the order in which the answers were
calculated.
Calculations:
1. $260,000 + 28,000 = $288,000
2. $288,000 (The beginning capital balance for one period is the
ending capital balance of the previous period)
3. $288,000 + $78,000 - $214,000 = $152,000
4. $152,000 (The beginning capital balance for one period is the
ending capital balance of the previous period)
5. $152,000 + $17,000 - $100,000 = $69,000
LITE-KARE
Income Statement
For Year Ended July 31, 2006
Revenues:
Service revenue............................
Repair revenue.............................
Total revenues...........................
Operating expenses:
Wages expense............................ $26,000
Rent expense...............................
12,000
Supplies expense..........................
5,700
$71,000
3,000
$74,000

26
Canadian Edition
Utilities expense...........................
Interest expense...........................
Net income........................................
4,900
250

48,850
$ 25,150
27
Problem 2-2A (continued)

LITE-KARE
For Year Ended July 31, 2006
Murray Clance, capital, August 1, 2005
Add: Investments by owner ........... $
-0Net income............................
25,150
Total .........................................
Murray Clance, capital, July 31, 2006
$47,800
$39,650
25,150
$64,800
17,000
LITE-KARE
Balance Sheet
July 31, 2006
Assets
Cash.............................
Accounts receivable......
Supplies........................
Prepaid rent..................
Office equipment..........
Furniture.......................
Total assets..................
$
5,
90
0
28,00
0
1,200
6,000
14,60
0
9,5
00
$65,2
00
Liabilities
Accounts payable.......
Notes payable............
Total liabilities .....
$
7,40
0
10,0
00
$17,40
0
Owners Equity
Murray Clance, capital
owners equity........
47,80
0
$65,20
0

28
Canadian Edition
Problem 2-3A (60 minutes) Part 1

GOODALL DELIVERY SERVICES
Balance Sheet
December 31, 2005
Assets
Liabilities
Cash........................$ 52,500
Accounts payable......... $ 7,500
Accounts receivable 28,500
Office supplies.........
4,500
Trucks..................... 54,000
Owners Equity
Office equipment..... 138,000
Travis Goodall, capital. . 270,0001
Total assets
$277,500
owners equity..........$277,500
_____________________
Calculations:
1. $277,500 $7,500 = $270,000

29
Problem 2-3A (continued) Part 1

GOODALL DELIVERY SERVICES
Balance Sheet
December 31, 2006
Assets
Cash........................ $ 18,750
Accounts receivable
22,350
3,300
Trucks.....................
54,000
Land........................
45,000
Building................... 180,000
Total liabilities
Total assets............. $470,400
Liabilities
Accounts payable......... $ 37,500
Notes payable............... 105,000
Total liabilities.......... $142,500
Owners Equity
Travis Goodall, capital. . 327,9002
and
owners equity.......... $470,400
Part 2
Calculation of net income for 2006:
Owners equity, December 31, 2006.............
Increase in owners equity during 2006........
Less: Additional investment..........................
Net increase in owners equity during 2006,
apart from new investment.......................
Add: Withdrawals ($3,000 12)...................
Net income earned in 2006..........................
_____________________
$327,900
270,000
$ 57,900
35,000
$ 22,900
36,000
$ 58,900
Calculations:
3. $470,400 $142,500 = $327,900
OR
$270,000 + $35,000 + x - $36,000 = $327,900; x = $58,900

30
Canadian Edition
Problem 2-4A (40 minutes) Part 1

Company A:
(a) Owners equity on December 31, 2005:
Assets............................................
Liabilities........................................
Owners equity...............................
$45,000
23,500
$21,500
(b) Owners equity on December 31, 2006:

Owners equity, December 31, 2005
.........................................$21,500
Add: Owner investments................
Net income..............................
Less: Owners withdrawals.............
.........................................$31,500
5,000
7,500
2,500
(c) Amount of liabilities on December 31, 2006:

Assets ............................................
Owners equity...............................
Liabilities........................................
$48,000
31,500
$16,500
Part 2
Company B:
(a) and (b)
Owners equity:
Assets............................................
Liabilities........................................
Owners equity...............................
Dec.
31,
Dec. 31, 2006
$35,000
$41,000
22,500
27,500
$12,500
$13,500
(c) Net income for 2006:

.........................................$12,500
Add: Owner investments................
Net income..............................
Less: Owner withdrawals................
.........................................$13,500
2005
1,500
?
3,000
Therefore, the net income must have been $2,500.

31

Company C:
First, calculate the beginning balance of equity:
Dec. 31, 2005
Assets...........................................
$29,000
Liabilities......................................
14,000
Owners equity.............................
$15,000
Next, find the ending balance of equity by completing this table:
Add:...............Owner investments
Net income............................
Less: Owner withdrawals..............
$15,000
7,750
9,000
3,875
$27,875
Finally, find the ending amount of assets by adding the ending

balance of equity to the ending balance of the liabilities:
Dec. 31, 2006
Liabilities......................................
$19,000
Owners equity.............................
27,875
Assets...........................................
$46,875
Part 4
Company D:
First, calculate the beginning and ending equity balances:
Dec. 31, 2005 Dec. 31, 2006
Assets...........................................
$80,000
$125,000
Liabilities......................................
38,000
64,000
Owners equity.............................
$42,000
$ 61,000
Then, find the amount of owner investments during 2006 by
completing this table:
........................................$42,000
Add: Owner investments..............
Net income............................
........................................$61,000
?
12,000
0

32
Canadian Edition
Therefore, the owner investments must have been $7,000.

33
Problem 2-4A (concluded) Part 5

Company E:
First, calculate the balance of equity as of December 31, 2006:
Assets...........................................
Liabilities......................................
Owners equity.............................
$112,500
75,000
$ 37,500
Next, find the beginning balance of equity by completing this table:

?
Add: ..............Owner investments
4,500
Net income............................
........................................$37,500
18,000
9,000
Therefore, the beginning balance of equity was $24,000.

Finally, find the beginning amount of liabilities by subtracting the
beginning balance of equity from the beginning balance of the assets:
Assets...........................................
Owners equity.............................
Liabilities......................................
Dec. 31, 2005

$123,000
24,000
$ 99,000

34
Canadian Edition

30
Fundamental Accounting Principles, Eleventh Canadian Edition
Problem 2-5A (45 minutes) Parts 1 and 2

=
Assets
+ Accounts + Office + Office +
Cash
Receivable Supplies Equipment
Changes
(a) +$80,000
Investment
(b) 50,000
Bal. $30,000
(c) 4,000
Bal. $26,000
(d)
Bal. $26,000
(e)*
Bal. $26,000
(f)
Revenue
Bal. $26,000
(g) 1,000
Expense
Bal. $25,000
(h) + 2,000
Revenue
Bal. $27,000
(i) 2,000
Bal. $25,000
(j) + 500
Bal. $25,500
(k) 3,500
Bal. $22,000
(l) 1,800
Bal. $20,200
Liabilities
Owners Equity
George
= Accounts+ Notes + Hemphill, Explanation
Building Payable
Payable
Capital of
+$30,000
+$4,000
$4,000
+$110,000
+$300,000
$30,000 $300,000
+$250,000
$250,000 $ 110,000
$300,000
$250,000
+$36,000
$300,000 $36,000 $250,000
$110,000
$4,000
$30,000
+36,000
$66,000
$4,000
$66,000
$300,000
$36,000
$250,000
$110,000
+ 1,500 Service
$1,500
$4,000
$66,000
$300,000
$36,000
$250,000
$111,500
1,000 Advertising
$1,500
$4,000
$66,000
$300,000
$36,000
$250,000
$110,500
+ 2,000 Service
$1,500
$4,000
$66,000
$300,000
$250,000
$112,500
$1,500
500
$1,000
$4,000
$66,000
$300,000
$36,000
2,000
$34,000
$250,000
$112,500
$4,000
$66,000
$300,000
$34,000
$250,000
+$1,500
$ 110,000
$112,500
3,500 Wages Expense
$1,000
$4,000
$66,000 $300,000 $34,000 $250,000 $109,000
1,800 Withdrawal
+$1,000 +$4,000 +$66,000 +$300,000= $34,000 +$250,000 + $107,200

35
$391,200
*NOTE: For (e), since no transaction has occurred, no entry is required.
$391,200
Problem 2-5A (continued)

Part 3
Hemphill Enterprises
Income Statement
Revenues:
Service revenue
Operating expenses:
Wages expense
Advertising expense
$3,500
$3,500
1,00
0

Net loss
4,500
$1,000
George Hemphill, capital, March 1
Add: Investment by owner
Total
Less: Withdrawal by owner
Net loss
$ 1,800
1,00
0
George Hemphill, capital, March 31
Assets
Cash
Accounts
receivable
Balance Sheet
March 31, 2005
Liabilities
$
Accounts payable
20,200
1,000
Notes payable

0
110,0
00
$110,0
00
2,800
$107,2
00
$
34,000
250,00
0
37
Office supplies
Office
equipment
Building
4,000
Total liabilities
66,000
300,00
0
Owners Equity
George Hemphill, capital
Total assets
$284,0
00
$391,2
00
Total liabilities and owners

equity
$107,2
00
$391,2
00

38
Edition
Fundamental Accounting Principles, Tenth Canadian

32
Canadian Edition
Cash
Apr.1
1
3
5
Expense
8
Revenue
12
Revenue
15
20
22
Revenue
23
28
29
30
Expense
30
Expense
30
30
30
Assets
+ Accounts
+
Receivable
+$60,000
3,200
1,680
800
= Liabilities
Office
= Accounts +
Supplies
Payable
+ $1,680
+ 4,600
+$3,000
850
+ 3,000
3,000
+2,800
+ 2,800
1,000
+ 1,000
2,800
+$60,000
3,200
Investment
Rent Expense
Cleaning
+ 4,600
Consulting
+ 3,000
Consulting
Salaries Expense
1,000
+
60
$62,820
850
+ 2,800
Consulting
Advertising
+$
800
+ $1,000
200
480
850
1,200
$60,140
Owners Equity
Kelly Young,
Explanation
Capital
of Change
$2,680 =

60
60
200
480
850
1,200
$62,760
$62,820
39
Telephone
Utilities Expense
Salaries Expense
Withdrawal
Problem 2-6A (concluded) Part 3

ALERT CONSULTING
Income Statement
For Month Ended April 30, 2005
Revenues:
Consulting services revenue............
Operating expenses:
Rent expense..................................
Salaries expense.............................
Cleaning expense............................
Utilities expense..............................
Telephone expense.........................
Advertising expense........................
Net income...........................................
$10,400
$3,200
1,700
800
480
200
60
6,440
$ 3,960
ALERT CONSULTING
For Month Ended April 30, 2005
Kelly Young, capital, April 1.................
Add: ..................Investments by owner
Net income...................................
63,960
Total.................................................
Less: Withdrawals by owner..................
Kelly Young, capital, April 30................
$
0
$60,000
3,960
$63,960
1,200
$62,760
ALERT CONSULTING
Balance Sheet
April 30, 2005
Assets
Cash........................ $60,140
Office supplies......... 2,680
Total assets............ $62,820
Liabilities
Accounts payable...............$
Owners Equity
Kelly Young, capital.......... 62,760
owners equity............... $62,820

40
60
Fundamental Accounting Principles, Tenth Canadian Edition

34
Canadian Edition
Bal.
Oct. 31
Nov. 1
Bal.
3
3
Bal.
5
Bal.
6
Bal.
Cash
$40,00
0
-2,800
$37,20
0
+10,80
0
-10,800
$37,20
0
-900
$36,30
0
Accounts
Receivable
Office
Supplies
Office
Equip.
Electrical
Equip.
Accounts
Payable
Stan Frey,
Capital
Explanation
of Change
$3,500
$950
$14,000
$7,000
$9,000
$56,450
-2,800
Rent expense
$3,500
$950
$9,000
+$14,000
+ $3,200
$53,650
$3,500
$950
+900
$14,000
$21,000
$12,200
$64,450
$3,500
$1,850
$14,000
$21,000
$12,200
$64,450
+1,000
$37,30
0
$3,500
$1,850
$14,000
+3,800
$21,000
$12,200
+3,800
$65,450
$37,30
0
$3,500
$1,850
$17,800
$21,000
$16,000
$65,450
15
Bal.
$7,000
+10,800
+1,000
8
Bal.
$14,000
+3,000
+3,000
$37,30
0
$6,500
$1,850
$17,800
$21,000
$16,000
$68,450
$37,30
0
$6,500
$1,850
+500
$17,800
$21,000
$16,000
+500
$68,450
$6,500
$2,350
$17,800
$21,000
$16,500
-3,800
$68,450
$6,500
$2,350
$17,800
$21,000
$12,700
$68,450
Owner investment
Electrical fees
earned
Electrical fees
earned
*16
Bal.
18
Bal.
20
Bal.
$37,30
0
-3,800
$33,50
0
24
+600
+600

41
Electrical fees
earned
Bal.
28
Bal.
30
Bal.
30
Bal.
30
$33,50
0
+
3,000
$36,50
0
-2,200
$34,30
0
-700
$33,60
0
-700
$32,90
0
$7,100
$2,350
$17,800
$21,000
$12,700
$69,050
$2,350
$17,800
$21,000
$12,700
$69,050
-2,200
Salaries expense
$66,850
-700
Utilities expense
$66,150
-700
Owner withdrawals
-3,000
$4,100
$4,100
$4,100
$4,100
$2,350
$2,350
$2,350
$17,800
$17,800
$17,800
$21,000
$21,000
$21,000
$78,150
*Note: For November 16, since no transaction has occurred, no entry is required.
$12,700
$12,700
$12,700
$65,450
=
$78,150

FREY ELECTRICAL CO.
Income Statement
Revenues:
Electrical fees earned........................
Operating expenses:
Rent expense.....................................
Salaries expense................................
Utilities expense ................................
Total operating expenses................
Net loss...................................................
$1,100
$4,600
$2,800
2,200
700
5,700
FREY ELECTRICAL CO.

Stan Frey, capital, November 1...............
Add: Investments by owner.....................
Total ....................................................
$67,250
Less: Withdrawals by owner....................
Net loss.............................................
Stan Frey, capital, November 30.............
$56,450
10,800
$
700
1,100
1,800
$65,450
FREY ELECTRICAL CO.

Balance Sheet
November 30, 2005
Assets
Liabilities

43
Cash........................ $32,900
Accounts payable... $12,700
Accounts receivable
4,100
Office supplies......... 2,350
Owners Equity
Electrical equipment
21,000Stan Frey, capital
65,450
Total assets............. $78,150
owners equity.... $78,150

44

Incom
Balance
e
Sheet
Stmnt
Total Tota
Net
Asse
l
Equit Incom
ts Liab.
y
e
Owner invests cash.......... +
+
1
Sell services for cash........
2
Acquire services on credit
3
Pay wages with cash........
Owner withdraws cash.....
Borrow cash with note

6 payable............................
Sell services on credit.......
7
Buy office equipment for
8 cash.................................
Collect receivable from
9 (7)....................................
1 Buy asset with note
0 payable............................
4
5
+
+/
+/
+

45
Problem 2-1B (20 minutes)

Beginning
capital
+
Owner
investment
+ Net income
(loss)
Owner
withdrawals
= Ending capital
2007
146,0001
2006
35,0003
2005
183,000
163,000
69,000
52,000
260,000
146,0002
35,000
0
50,000
(15,000)5
Note: The superscripts show the order in which the answers were
calculated.
Calculations:
1. 260,000 + 69,000 183,000 = 146,000
2. The beginning capital of 146,000 for 2007 is the ending capital
from 2006.
3. 146,000 + 52,000 163,000 = 35,000
4. The beginning capital of 35,000 for 2006 is the ending capital
from 2005.
5. 35,000 50,000 = -15,000
FIREWORKS FANTASIA
Income Statement
For Year Ended December 31, 2005
Revenues:
Fees earned..................................
Rent revenue................................
Total revenues...........................
$ 70,000
33,000
$ 103,000
Operating expenses:
Wages expense........................
$46,000
Fireworks supplies expense.........
41,000
Utilities expense..........................
17,800
46
Advertising expense.....................
Office supplies expense...............
Net loss..............................................
8,100
4,500
1,800

111,100
$
47
Problem 2-2B (continued)

FIREWORKS FANTASIA
Wes Gandalf, capital, January 1......
Total .........................................
Less: Withdrawals by owner........... $26,000
Net loss ...............................
8,100
Wes Gandalf, capital, December 31
$168,500
$187,600
15,000
$202,600
34,100
FIREWORKS FANTASIA
Balance Sheet
December 31, 2005
Assets
Liabilities
Cash.........................$ 14,000 Accounts payable....$ 9,000
Accounts receivable.. 7,000
Fireworks supplies.... 16,000
Office supplies.......... 1,500
Tools......................... 9,000
Building.................... 62,000
Owners Equity
Land......................... 56,000 Wes Gandalf, capital
168,500
Office equipment...... 12,000 Total liabilities and
Total assets..............$177,500
owners equity.....$177,500

48
Problem 2-3B (60 minutes) Part 1

STILLER CO.
Balance Sheet
December 31, 2006
Assets
Cash........................ $ 14,000
Accounts receivable
Office equipment.....
Machinery...............
25,000
10,000
60,000
30,500
Total assets............. $139,500
Liabilities
Accounts payable............$
5,000
Owners Equity
Joseph Stiller, capital....... 134,5001
owners equity..............$139,500
STILLER CO.
Balance Sheet
December 31, 2007
Assets
Cash........................ $ 10,000
Liabilities
Accounts payable.......$ 15,000
Accounts receivable
Machinery...............
Building...................
Land.......................
Notes payable............ 260,000

Total liabilities......... 275,000
30,000
12,500
60,000
30,500
260,000
65,000
Owners Equity
Joseph Stiller, capital.. 193,0002
owners equity........$468,000
Total assets............. $468,000

_____________________
Calculations:
1. $139,500 $5,000 = $134,500
2. $468,000 $275,000 = $193,000

49
Problem 2-3B (concluded) Part 2

Calculation of net income for 2007:
Increase in owners equity during 2007........
Less: Additional investment..........................
Net increase in owners equity during 2007,
apart from new investment........................
Add: Withdrawals ($1,000 12)...................
Net income earned in 2007..........................
$193,000
134,500
$ 58,500
25,000
$ 33,500
12,000
$ 45,500
Problem 2-4B (40 minutes) Part 1

Company V:
(a) and (b)
Calculation of owners equity:
Assets....................................
Liabilities................................
Owners equity.......................
12/31/05
$45,000
30,000
$15,000
12/31/06
$49,000
26,000
$23,000
(c) Calculation of net income for 2006:

................................$15,000
Add: Owner investments........
Net income......................
Less: Owner withdrawals........
................................$23,000
6,000
?
4,500
Therefore, the net income must have been $6,500.

50

Part 2
Company W:
(a) Calculation of equity at December 31, 2005:
Assets.....................................
Liabilities.................................
Owners equity........................
$70,000
50,000
$20,000
(b) Calculation of equity at December 31, 2006:

..................................$20,000
Add: Owner investments.........
Net income.......................
Less: Owner withdrawals.........
..................................$58,000
10,000
30,000
2,000
(c) Calculation of the amount of liabilities at December 31, 2006:

Assets.....................................
Owners equity........................
Liabilities.................................
$90,000
58,000
$32,000
Part 3
Company X:
First, calculate the beginning and ending equity balances:
12/31/05
12/31/06
Assets.....................................$121,500
$136,500
Liabilities................................. 58,500
55,500
Owners equity........................$ 63,000
$ 81,000
Then, find the amount of owner investments during 2006 by
completing this table:
Add: Owner investments.........
?
Net income....................... 16,500
0
$63,000
$81,000
Therefore, the owner investments must have been $1,500.

51

Part 4
Company Y:
First, calculate the beginning balance of equity:
Assets.....................................
Liabilities.................................
Owners equity........................
Dec. 31, 2005

$82,500
61,500
$21,000
Next, find the ending balance of equity by completing this table:

...................................$21,000
Add:..........Owner investments
38,100
Net income......................
...................................$65,100
24,000
18,000
Finally, find the ending amount of assets by adding the ending

balance of equity to the ending balance of the liabilities:
Liabilities.................................
Owners equity........................
Assets.....................................
Dec. 31, 2006

$ 72,000
65,100
$137,100

52

Company Z:
First, calculate the balance of equity as of December 31, 2006:
Assets.....................................
Liabilities.................................
Owners equity........................
$160,000
52,000
$108,000
Next, find the beginning balance of equity by completing this table:

$
?
Add:..........Owner investments
40,000
Net income.......................
................................$108,000
32,000
6,000
Therefore, the beginning balance of equity was $42,000.

Finally, find the beginning amount of liabilities by subtracting the
beginning balance of equity from the beginning balance of the assets:
Assets.....................................
Owners equity........................
Liabilities.................................
Dec. 31, 2005

$124,000
42,000
$ 82,000

53

44
Canadian Edition
Problem 2-5B (45 minutes) Parts 1 and 2

Assets
Cash
(a)
+
$5,000
Bal. $40,00
0
(c)
9,000
Bal. $31,00
0
(d) _______
$5,000
Bal. $31,00
0
(e)
1,500
Bal. $29,50
0
(f) _______
Bal. $29,50
0
(g)
+
5,400
+ Account + Office + Office + Building = Account + Notes +

s
s
Receivab
Suppli
Equipme
Payable
Payable
le
es
nt
+
$50,00
0
10,000
(b)
Liabilities
+
$3,00
0
$3,00
0
______
Owners Equity
Judith
Grimm,
Capital
+
$55,000
+
$120,00
0
$120,00
0
________
+
$110,00
0
$110,00
0
________
$120,00
0
________
$110,00
0
________
$55,000
$110,00
0
________
$55,000
+$2,0
00
+
9,000
$14,00
0
+
3,200
$2,00
0
______
$17,20
0
_______
$120,00
0
________
+
$5,20
0
$5,20
0
______
$2,00
0
______
$17,20
0
_______
$120,00
0
________
$5,20
0
______
$110,00
0
________
$2,00
0
______
$17,20
0
_______
$120,00
0
________
$5,20
0
______
$110,00
0
________
Explanation of Changes
Investment
_______
$55,000
_______
_______
1,500
$53,500
+
3,000
Advertising Expense
Consulting
Revenue
Services
Consulting
Revenue
Services
$56,500
+
5,400
Bal. $34,90
0
(h)
2,750
Bal. $32,15
0
(i)* ______
Bal. $32,15
0
(j)
+
1,200
Bal. $33,35
0
(k)
900
Bal. $32,45
0
(l)
1,900
Bal. $30,55 +
0
$3,00
0
______
$2,00
0
______
$17,20
0
_______
$120,00
0
________
$5,20
0
______
$110,00
0
________
$3,00
0
______
$3,00
0
1,200
$1,80
0
______
$2,00
0
______
$2,00
0
______
$17,20
0
_______
$17,20
0
_______
$120,00
0
________
$120,00
0
________
$5,20
0
______
$5,20
0
______
$110,00
0
________
$110,00
0
________
$2,00
0
______
$17,20
0
_______
$120,00
0
________
$1,80
0
______
$2,00
0
______
$17,20
0
_______
$120,00
0
________
$5,20 $110,00
0
0
________
900
$4,30 $110,00
0
0
______ ________
$61,900
2,750
$59,150
_______
$59,150
_______
$59,150
_______
$59,150
1,900
$1,80 + $2,00 + $17,20 + $120,00 = $4,30 + $110,00 + $57,250
0
0
0
0
0
0
$171,550
$171,550
Note: For (i), since no transaction has occurred, no entry is required.

Withdrawal
55
Wages Expense

Part 3
Southwest Consulting
Income Statement
Revenues:
Consulting services revenue
Operating expenses:
Wages expense
Advertising expense
$8,400
$1,900
1,500
3,40
0
$5,0
00
Net income
Judith Grimm, capital, January 1
Add: Investment by owner
$55,000
Net income
5,00
0
Total
Less: Withdrawal by owner
Judith Grimm, capital, December 31
Balance Sheet
December 31, 2005
Assets
Liabilities
Cash
$
Accounts payable
30,550
Accounts 1,800
Notes payable
receivable
Office supplies
2,000
Total liabilities
60,00
0
$60,000
2,750
$57,2
50
$
4,300
110,00
0
$114,3
00
Office equipment 17,200

Building
120,00
0
Total assets
$171,5
50
Owners Equity
Judith Grimm, capital
57,250
Total liabilities and owners $171,5
equity
50

57

46
Canadian Edition
Cash
June
1
1
4
6
8
1
4
1
6
2
0
2
1
2
Assets
Account
Cleani
+
s
+
ng
Receiva
Suppli
ble
es
+
$120,00
0
4,500
2,400
Liabiliti
Owners
= es
+ Equity
Accoun
Andrew
= ts
+ Martin,
Payabl
Capital
e
+
$120,00
0
4,500
Investment
Rent Expense
+
$2,40
0
2,250
+
750
+
$5,300
1,900
+
5,300
Explanation of
Change
5,300
+
3,500
+
2,250
+
750
+
5,300
1,900
Advertising
Expense
Service Revenue
+
3,500
Service Revenue
Service Revenue
Salaries Expense
2
2
4
2
9
2
9
3
0
3
0
3
0
3
0
750
$750
+
825
3,500
+
3,500
375
120
525
1,900
2,000
$113,58 + $ 825 +
0
$117,555
+825
Service Revenue
120
525
1,900
2,000
$117,18
0
Telephone
Expense
Utilities Expense
375
$3,15 =
0
=

$375 +
$117,555
59
Salaries Expense
Withdrawal

UNIVERSAL MAINTENANCE CO.
Income Statement
For Month Ended June 30, 2005
Revenues:
Maintenance services revenue .......
Operating expenses:
Rent expense..................................
Salaries expense.............................
Advertising expense........................
Utilities expense..............................
Total operating expenses.............
Net loss.................................................
820
$10,375
$4,500
3,800
2,250
525
120
11,195
$

Andrew Martin, capital, June 1..............
Add: Investments by owner..................
Total .................................................
Less: Withdrawals by owner.................
Net loss......................................
Total .................................................
Andrew Martin, capital, June 30............
$
0
120,000
$120,000
$2,000
820
2,820
$117,180

Balance Sheet
June 30, 2005
Assets
Cash........................$113,580
Accounts receivable
825
Cleaning supplies....
3,150
Total assets.............$117,555
Liabilities
Accounts payable............$
375
Owners Equity
Andrew Martin, capital. . . . 117,180
owners equity..............$117,555

48
Canadian Edition

= Liabiliti + Owners Equity
es
+ Account + Office + Office + Excav = Account + Robert
Explanation
s
at.
s
Cantu,
Cash
Receiva
Suppli
Equip
Equip.
Payable
Capital
of Change
ble
es
.
$ +
$2,300 + $780 + $4,80 + $17,00 = $3,100 +
$27,780
6,000
0
0
60,000
60,000 Investment
$66,00
$87,780
0
500 Rent Expense

500
$65,50
$87,280
0
+
+ 3,200
_______
800
4,000
$64,70
$21,00
$6,300
$87,280
0
0
+
______
______
_______
500
500
$64,20
$1,280
$21,00
$6,300
$87,280
0
0
+
_____
______
______
+ 2,200 Excavating
Fees
2,200
Earned
$66,40
$1,280
$21,00
$6,300
$89,480
0
0
______
_____
+
______
+ 3,800
_______
3,800
$66,40
$1,280
$8,60
$21,00
$10,100
$89,480
0
0
0
______
+ 2,400
_____
______
______
______
+ 2,400 Excavating
Fees
Earned
$66,40
$4,700
$1,280
$8,60
$21,00
$10,100
$91,880
Assets
June 3
0
July 1
Bal.
1
Bal.
1
Bal.
6
Bal.
8
Bal.
Bal.
Bal.
1
0
1
5
Bal.
1
7
0
______
______
+
1,920
$3,200
$66,40
$4,700
0
2
______
______
3
3,800
Bal.
$62,60
$4,700
$3,200
0
2
______
+ 5,000
______
5
Bal.
$62,60
$9,700
$3,200
0
2
+
2,400
______
8
2,400
Bal.
$65,00
$7,300
$3,200
0
3
______
______
1
1,260
Bal.
$63,74
$7,300
$3,200
0
3
______
______
1
260
Bal.
$63,48
$7,300
$3,200
0
3
______
______
1
1,200
Bal.
$62,28 +
$7,300 + $3,200
0
$102,380
0
______
0
______
$8,60
0
______
+ 1,920
_______
$21,00
0
______
$12,020
$91,880
$8,60
0
______
$21,00
0
______
$8,220
$8,60
0
______
$21,00
0
______
$8,220
______
_______
$8,60
0
______
$21,00
0
______
$8,220
$96,880
$8,60
0
______
$21,00
0
______
$8,220
$8,60
0
______
$21,00
0
______
$8,220
3,800
______
______
______
$91,880
+
5,000 Excavating
Earned
$96,880
$8,220 +
1,260 Salaries Expense
$95,620
260 Utilities Expense
$95,360
+ $8,60 + $21,00 =
0
0
Fees
1,200 Withdrawal
$94,160
$102,380

CANTU EXCAVATING CO.
Income Statement
Revenues:
Excavating fees earned ...............
Operating expenses:
Salaries expense..........................
Rent expense................................
Utilities expense ..........................
Net income........................................
$9,600
$1,260
500
260
2,020
$7,580

Robert Cantu, capital, June 30............
Add: Investments by owner................
Net income..................................
Total................................................
Less: Withdrawals by owner...............
Robert Cantu, capital, July 31.............
$ 27,780
$60,000
7,580
67,580
$95,360
1,200
$94,160

Balance Sheet
July 31, 2005
Assets
Cash........................
$62,280
Accounts receivable
7,300
3,200
8,600
Excavating equipment
.................... 94,160
Total assets.............
$102,380
Liabilities
Accounts payable....... $ 8,220
Owners Equity
21,000Robert Cantu, capital
owners equity........ $102,380

63
1
2
3
4
5
6
7
8
9
10
Balance
Sheet
Total
Tot
Assets
al
Liab
.
Owner invests cash............
+
Pay wages with cash..........
Acquire services on credit. .

+
Buy store equipment for
+/
cash...................................
Borrow cash with note
+
+
payable..............................
Sell services for cash..........
+
Sell services on credit........
+
Pay rent with cash..............
Owner withdraws cash.......
Collect receivable from (7).

+/
Equi
ty
Inco
me
Stmn
t
Net
Inco
me
+
+
+
+

64
ANALYTICAL AND REVIEW PROBLEMS

A&R Problem 2-1
TASKER AUTO REPAIR SHOP
Balance Sheet
November 30, 2005
Assets
Cash........................
$
6,300
Accounts
47,25
receivable...............
0
Parts and supplies... 14,17
5
Equipment............... 22,05
0
Total assets............. $89,7

75
Liabilities
Accounts payable...
$34,650
Mortgage payable. .
28,350
Total liabilities.....
$63,000
Owners Equity
Jack Tasker, capital
26,775
owners equity.....
$89,775
Note to Instructors:
To reinforce students understanding of the nature of double-entry
bookkeeping and the accounting equation, it may be advantageous
to use this problem to demonstrate the importance of recording
transactions correctly because neither double-entry bookkeeping nor
the accounting equation guarantee the correctness of information;
they only prove arithmetic accuracy.
Accordingly, the best way to explain this seemingly impossible
situation to beginning students in accounting is to summarize both
incorrect and the correct balance sheets in detail.

65
A&R Problem 2-2

SUSAN HUANG, LAWYER
Income Statement
For Month Ended October 31, 2005
Revenues
Legal fees........................................
Operating expenses
Salaries expense............................. $2,940
Rent expense.................................. 2,100
Supplies expense............................
420
210
Total operating expenses.............
Net income...........................................
$11,550
5,670
$ 5,880
SUSAN HUANG, LAWYER

For Month Ended October 31, 2005
Susan Huang, capital, October 1...........
$
0
Add:......................................................Investment by owner
$10,500
Net income.................................... 5,880
Total..................................................
16,380
Susan Huang capital, October 31..........
$16,380
SUSAN HUANG, LAWYER
Balance Sheet
October 31, 2005
Assets
Cash........................
Accounts receivable
Supplies..................
Law library..............
Furniture.................
................... 16,380
Total assets.............
$ 3,780
2,100
1,050
8,400
2,100
$17,430
Liabilities
Accounts payable...$ 1,050
Owners Equity
Susan Huang, capital
owners equity. . . .$17,430

66

67
A&R Problem 2-3
Assets
Liabilities
Owner's equity
Dec
31/2006
414,0006
68,0005
346,000
Additional Information:
Net income (loss)
Owner investment
Owner withdrawals
Assets increased
Liabilities
increased
(decreased)
Dec
31/2005
294,000
94,0004
200,0003
During
2006
197,0002
0
51,000
120,000
(26,000)
Dec
31/2004
248,0001
164,0008
84,0007
During
2005
84,000
32,000
0
46,000
(70,000)9
Calculations:
Dec.
31/2004
Dec.
31/2005
Dec.
31/2006
1.
2.
3.
4.
Assets
= Liabilities +
1
$248,000
$164,0008
+46,000
70,0009
$294,000
$94,0004
+120,000
26,000
$414,0006
$68,0005
$294,000
$120,000
$346,000
$294,000
Equity
$84,0007
+84,000 Net income
+32,000 Owner
investment
0 Withdrawals
$200,0003
197,0002 Net income
0 Owner
investment
51,000 Withdrawals
$346,000
$46,000 = $248,000
+ $26,000 + $51,000 = $197,000
+ $51,000 $197,000 = $200,000
$200,000 = $94,000

68
5.
6.
7.
8.
9.
$94,000 $26,000 = $68,000

$346,000 + $68,000 = $414,000
$200,000 $32,000 $84,000 = $84,000
$248,000 $84,000 = $164,000
$164,000 $94,000 = $70,000

69
A&R Problem 2-4

Income Statement
Revenues Expense
s
1.
$14,
000
Balance Sheet
Assets
Liabilities
Owners
Equity
$14,
000
2.
$5,
000
3.
$25,
000
4.
$5
00
$14,
000
$25,0
00
5
00
5.
500
5
00
5
00
6.
10,0
00
10,0
00
7.
5,0
00
5,0
00
8.
2
00
2
00
9.
2,0
00
1
0.
12
,000
1
1.
45
45
45

70
1
2.
900
900

900
71
Ethics Challenge
1. The accounting principle most relevant to this situation is the
revenue recognition principle.
The revenue recognition
principle provides guidance on when revenue should be
recognized on the income statement. The principle states that
revenue should be recognized when earned. In this case, the
earliest the revenue could be considered earned is when the
product is shipped to customers.
2. If Sue is aware of the revenue recognition principle she faces a
dilemma of applying GAAP, which will result in different
revenue recognition than her supervisor is advocating. Sue
faces a dilemma of following the guidance of her profession or
following her supervisor. If Sue does not conform to her
supervisors wishes she may face the consequence of losing
her job. If Sue does what her supervisor requests she may
face internal anguish of doing something that she knows is not
professionally correct and which may negatively affect any
users of the financial statements that she is helping produce.
3. Students should support their decision with appropriate
reasons likely echoing the discussion in 2) above.
4. Sue may be able to discuss the situation she is facing with
someone else in the firm and find support for not following the
supervisors directive. If the intent to violate accounting
principles is a commonplace occurrence in the skateboard
company Sue may wish to seek employment elsewhere as the
problem will likely reoccur in the future.

72

56
Canadian Edition
Focus on Financial Statements

Parts 1 and 2
June 2005
Assets
= Liabilitie + Owners
+ Accounts +
Office
Receivab
le
Equip.
Cash
June 1 +20,0
00
5
7 -1,500
9 +1,00
0
15 -5,000
17 +2,00
0
29
30 -1,500
Totals 15,000 +
= Account +
s
Payable
+6,000
+3,000
Equ
ity
Diane
Explanation of
Towbell,
Change
Capital
in Owners
Equity
+26,000 Owner
investment
+3,000 Service revenue
-1,500 Rent expense
-1,000
-5,000 Wages expense
+2,000 Service revenue
+300
2,000 +
6,000 =
23,000

300 +
-300 Utilities expense

-1,500 Wages expense
22,700
23,000
73

Focus on Financial Statements

Parts 1 and 2 (continued)
July 2005
Assets
Balance
June 30
July 5
8
9
12
14
15
17
25
31
+ Account +
s
Cash
Receiva
ble
15,00
2,000
0
+3,500
+2,0
-2,000
00
1,500
= Accoun +
ts
Equip.
Payabl
e
6,000
300
Office
Equi
ty
Diane
Towbell,
Capital
Explanation of
Change
in Owners
Equity
22,700
+3,500
+1,800
1,000
2,500
+4,8
00
-600
1,700
Liabilitie + Owners
Service revenue
-1,500
Rent expense
-2,500
Wages expense
+4,800
Service revenue
-300
-1,700
Utilities expense
Wages expense
+1,800
-1,000
-300
57
31
2,000
Totals 12,50 +
0
-2,000
3,500 +
23,800
7,800 =
800 +
23,800
23,000
Owner
withdrawals
Focus on Financial Statements (continued)

Part 3
GLENROSE SERVICING
Income Statement
Revenues:
Service revenue............................
Operating expenses:
Wages expense............................
Rent expense...............................
Net loss..............................................
$3,300
$5,000
$6,500
1,500
300
8,300
GLENROSE SERVICING
Diane Towbell, capital, June 1........
Total .........................................
Net loss ...............................
Diane Towbell, capital, June 30......
-026,000
$26,000
$ -03,300
3,300
$22,700
GLENROSE SERVICING
Balance Sheet
June 30, 2005
Assets Liabilities
Cash................................ $15,000
Diane Towbell, capital
Total assets..................... $23,000
300
Owners Equity
....................... 22,700

76
Focus on Financial Statements (continued)

Part 3
GLENROSE SERVICING
Income Statement
Revenues:
Service revenue............................
$8,300
Operating expenses:
Wages expense............................
Rent expense...............................
Net income........................................
$4,200
1,500
300
6,000
$2,300
GLENROSE SERVICING
Diane Towbell, capital, June 30......
Net income............................
Total .........................................
Diane Towbell, capital, July 31........
$22,700
$
-02,300
2,300
$25,000
2,000
$23,000
GLENROSE SERVICING
Balance Sheet
July 31, 2005
Assets Liabilities
Cash................................ $12,500
Diane Towbell, capital
Total assets..................... $23,800
800
Owners Equity
..................
23,000

78

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Chapter 2

Financial Statements and

12. This treatment is required by the cost and going-concern principles.

Copyright 2005 by McGraw-Hill Ryerson Limited. All rights reserved.

Quick Study 2-5

Copyright 2005 by McGraw-Hill Ryerson Limited. All rights reserved.

Quick Study 2-6

$20,000 = $15,000 = $5,000 beginning capital on January 1, 2004

Quick Study 2-9

Office supplies (c)

Net loss (a) and (b)

Utilities expense (a)

Copyright 2005 by McGraw-Hill Ryerson Limited. All rights reserved.

Quick Study 2-10

(d) A net loss would be presented on both the

Copyright 2005 by McGraw-Hill Ryerson Limited. All rights reserved.

$80,000 $65,000 = $15,000 net income

$92,000 $149,000 = $57,000 net loss

Copyright 2005 by McGraw-Hill Ryerson Limited. All rights reserved.

Exercise 2-3 (15 minutes)

Exercise 2-4 (15 minutes)

Exercise 2-5 (15 minutes)

Accounts payable........ $ 7,500

Copyright 2005 by McGraw-Hill Ryerson Limited. All rights reserved.

Joseph Grayson, capital

Exercise 2-7 (15 minutes)

Exercise 2-8 (15 minutes)

Copyright 2005 by McGraw-Hill Ryerson Limited. All rights reserved.

Accounts receivable........ 1,340

Exercise 2-9 (10 minutes)

Exercise 2-10 (20 minutes)

b. Net increase in owners equity............... $29,000

Copyright 2005 by McGraw-Hill Ryerson Limited. All rights reserved.

Copyright 2005 by McGraw-Hill Ryerson Limited. All rights reserved.

*Note: For (d), since no transaction has occurred, no entry is

Copyright 2005 by McGraw-Hill Ryerson Limited. All rights reserved.

Exercise 2-13 (20 minutes)

*Note: For (f), since no transaction has occurred, no entry is required.

Office Supplies were purchased paying cash of $1,000.

Exercise 2-15 (10 minutes)

Exercise 2-16 (30 minutes)

Copyright 2005 by McGraw-Hill Ryerson Limited. All rights reserved.

Exercise 2-17 (15 minutes) (Answers may vary.)

The business pays an account payable (or some other liability)

Exercise 2-18 (20 minutes)

Liabiliti + Owners Equity

*Note: For (e), since no transaction has occurred, no entry is

Copyright 2005 by McGraw-Hill Ryerson Limited. All rights reserved.

Exercise 2-19 (25 minutes)

Bert Zimm, capital, March 31

Copyright 2005 by McGraw-Hill Ryerson Limited. All rights reserved.

Copyright 2005 by McGraw-Hill Ryerson Limited. All rights reserved.

Copyright 2005 by McGraw-Hill Ryerson Limited. All rights reserved.

Copyright 2005 by McGraw-Hill Ryerson Limited. All rights reserved.

Problem 2-2A (continued)

Copyright 2005 by McGraw-Hill Ryerson Limited. All rights reserved.

Problem 2-3A (60 minutes) Part 1

Copyright 2005 by McGraw-Hill Ryerson Limited. All rights reserved.

Problem 2-3A (continued) Part 1

Copyright 2005 by McGraw-Hill Ryerson Limited. All rights reserved.

Problem 2-4A (40 minutes) Part 1

(b) Owners equity on December 31, 2006: