CHAPTER 1

THE NATURE AND PURPOSE OF ACCOUNTING

Problems
Problem 1-1

CHARLES COMPANY
BALANCE SHEET AS OF DECEMBER 31, ----.
Assets
Liabilities and Owners Equity
Cash..............................................................................................................................................
$
Bank loan.............................................................................
$
12,000
40,000

Inventory.......................................................................................................................................
95,000
Owners Equity

Other assets..................................................................................................................................
13,000
Owners equity..................................................................
80,000

Total liabilities and

owners equity.....................................................................
Total assets....................................................................................................................................
$120,00
$120,00
0
0

Problem 1-2
The missing numbers are:
Year 1

Noncurrent assets...............................................................................................................................................................
$410,976
Noncurrent liabilities..........................................................................................................................................................
240,518
Year 2

Current assets.....................................................................................................................................................................
$ 90,442
Total assets.........................................................................................................................................................................
288,456
Noncurrent liabilities..........................................................................................................................................................
78,585
Year 3

Total assets.........................................................................................................................................................................
$247,135
Current liabilities................................................................................................................................................................
15,583
Total liabilities and owners equity.....................................................................................................................................
247,135
Year 4

Current assets.....................................................................................................................................................................
$ 69,090
Current liabilities................................................................................................................................................................
17,539

Problem 1-3
The missing numbers are:
Year 1

Gross margin...........................................................................................................................................
$9,000

Tax expense.............................................................................................................................................
1,120
Year 2

Sales........................................................................................................................................................
$11,968

Profit before taxes...................................................................................................................................

2,547
Year 3

Cost of goods sold...................................................................................................................................

$2,886

Other expenses.......................................................................................................................................
6,296
In order to estimate Year 4, the key ratios to compute are:

Year 1
Year 2
Year 3
Average
Sales................................................................................................................................................................................................
100.0%
100.0%
100.0%
100.0%
Gross margin...................................................................................................................................................................................
75.0
75.0
75.0
75.0%
Profit before
taxes................................................................................................................................................................................................
23.3
21.3
20.5
21.7%
Net income......................................................................................................................................................................................
14.0
12.8
12.2
13.0%
Tax rate...........................................................................................................................................................................................
40.0
40.0
40.0
40.0
Year 4

Sales........................................................................................................................................................
$10,000

Cost of goods sold...................................................................................................................................

2,500

Gross margin (75% of sales)....................................................................................................................

$ 7,500

Other expenses.......................................................................................................................................
5,330

Profit before taxes (21.7% of

$ 2,170
sales).......................................................................................................................................................

Tax expense.............................................................................................................................................
870

Net income (13% of sales).......................................................................................................................

$ 1,300

Problem 1-4
The explanation of these 11 transactions is:
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
3

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

1.
2.
3.
4.
5.
6.
7.
8.
9.
10.

Cash
+ $25,000
500

Accounts
+ Receivable

Supplies
+ Inventory

+ Equipment
+

+
-

500
750
3,000
2,000
5,000

+
+

$8,000

Accounts
Payable
+

Owners
Equity
+ $25,000
500

Investment
Rent

750
3,000
10,000

Advertising
Salaries
Commissions

100
1,000

$8,000

$500

$8,000
-

5,000

1,000

100

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
Case 1-2: Kim Fuller

Assets
Liabilities and Owners Equity
Cash.......................................................................................................................................................................
$ 50,000
Mortgage.......................................................................................
$112,000
Equipment.............................................................................................................................................................
65,000
Total paid-in capital......................................................................
165,000
Building.................................................................................................................................................................
162,000
__ _____
$277,000
$277,000
Case 1- 3: Baron Coburg

BALANCE SHEET FOR PLOT WORKED BY IVAN

As of the Beginning of the Growing Season
Assets
Equities
Seed....................................................................................................................................................................................
20 bu.
Barons equity...........................................................................
162 bu.
Fertilizer.............................................................................................................................................................................
2
Ox......................................................................................................................................................................................
40
Land...................................................................................................................................................................................
100
Total..........................................................................................................................................................................
162 bu.
Total...................................................................................
162 bu.
BALANCE SHEET FOR PLOT WORKED BY FREDERICK
As of the Beginning of the Growing Season
5

Assets
Equities
Seed.................................................................................................................................................................................................
10bu.
Barons equity........................................................................................
101 bu.
Fertilizer..........................................................................................................................................................................................
1
Ox...................................................................................................................................................................................................
40
Land................................................................................................................................................................................................
50
Total...................................................................................................................................................................................
101 bu.
Total..........................................................................................
101 bu.

BALANCE SHEET FOR PLOT WORKED BY IVAN

As of the End of the Growing Season
Assets
Equities
Ox...................................................................................................................................................................................................
36 bu.
Payable to Feyador................................................................................
3 bu.
Land................................................................................................................................................................................................
100
Barons equity:
Wheat..............................................................................................................................................................................................
223
Contributed capital................................................................................
162
Plow................................................................................................................................................................................................
0
Retained earnings..................................................................................
194
Total................................................................................................................................................................................................
359 bu.
Total................................................................................................
359 bu.

BALANCE SHEET FOR PLOT WORKED BY FREDERICK

As of the End of the Growing Season
Assets
Equities
Ox...................................................................................................................................................................................................
36 bu.
Land................................................................................................................................................................................................
50
Barons equity:
Wheat..............................................................................................................................................................................................
105
Contributed capital................................................................................
101 bu.
Plow................................................................................................................................................................................................
2
Retained earnings..................................................................................
92
Total...................................................................................................................................................................................
193 bu.
Total..................................................................................................
193 bu.

INCOME STATEMENT FOR PLOT WORKED BY IVAN

FOR THE GROWING SEASON
Wheat produced.....................................................................................................................................................
243 bu.
Production expenses:
Seed..................................................................................................................................................................
20 bu.
Fertilizer...........................................................................................................................................................
2
Ox usage...........................................................................................................................................................
4
Plow usage........................................................................................................................................................
3
29
Earnings................................................................................................................................................................
214
Withdrawn by owner.............................................................................................................................................
20
Increase in retained earnings.................................................................................................................................
194 bu.

INCOME STATEMENT FOR PLOT WORKED BY FREDERICK

FOR THE GROWING SEASON
Wheat produced.....................................................................................................................................................
138 bu.
Production expenses:
Seed..................................................................................................................................................................
10 bu.

Fertilizer..............................................................................................................................................
1
Ox usage..............................................................................................................................................
4
Plow usage...........................................................................................................................................
1
16
Earnings....................................................................................................................................................
122
Withdrawn by owner................................................................................................................................
30
Increase in retained earnings....................................................................................................................
92 bu.