FINANCIAL ACCOUNTING (CHAPTER # 2)

EXERCISE 2.2 The right manager of Makks Metro Transport Service, who had no accounting background, prepared the following balance sheet for the company at February 28, 200 ! The "s! #mounts were taken directly from the company$s accounting records and are correct! %owever, the balance sheet contains a number of errors in its headings, format, and the classification of assets, liabilities, and owners$ e&uity! Makks Metro Tra s!ort Ser"#$e Manager$s "eport 8 '!M! Thursday
Assets (apital Stock "etained )arnings (ash *uilding #utomobiles (Rs.) 2,000 +2,000 + ,000 80,000 ,+-,000 O% ers& E'(#t) #ccounts "eceivable .otes 'ayable Supplies /and #ccounts 'ayable (Rs.) 00,000 288,000 ,1,000 00,000 2+,000

'repare a corrected balance sheet! 2nclude a proper heading!

EXERCISE 2.*
(ompute the missing amounts in the following table3 a! b! c! #ssets -08,000 8 700,-00 4 /iabilities 712,000 -+2,-00 8 5 6wners$ )&uity 8 -00,000 ,80,200

EXERCISE 2.+
# number of business transactions carried out by Smalling Manufacturing (ompany are as follows3 a! b! c! d! *orrowed money from a bank! Sold land for cash at a price e&ual to its cost! 'aid a liability! "eturned for credit some of the office e&uipment previously purchased on credit but not yet paid for! 9Treat this the opposite of a transaction in which you purchased office e&uipment on credit!: e! Sold land for cash at a price in e;cess of cost! 9%int3 The difference between cost and sales price represents a gain that will be in the company$s income statement!: f! 'urchased a computer on credit! g! The owner invested cash in the business! h! 'urchased office e&uipment for cash! i! (ollected an account receivable! 2ndicate the effects of each of these transactions on the total amounts of the company$s assets, liabilities, and owners$ e&uity! 6rgani<e your answer in tabular form, using the following column headings and the code letters 2 for increase, = for decrease, and .) for no effect! The answer for transaction is provided as an e;ample3 Transaction 9a: #ssets 4 , /iabilities , 5 6wners$ )&uity .)

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FINANCIAL ACCOUNTING (CHAPTER # 2)

Pro/0e1 2.+ Pre!ar# , a 2a0a $e S3eet A Se$o 4 Pro/0e1
Shown below in random order is a list of balance sheet items for Fire >alley Farms at September 70, 200-3 9"s!: 9"s!: /and!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 1 0,000 Fences and ?ates!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 77,-00 *arns and Sheds!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!08,700 2rrigation System!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!20,,2.otes 'ayable!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!770,000 (ash!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!,+,0,0 #ccounts "eceivable!!!!!!!!!!!!!!!!!!!!!!!!!!!22,7+/ivestock!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!,20,080 (itrus Trees!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!0+,+-0 Farm Machinery!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!12, 00 #ccounts 'ayable!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!00,0 "etained )arnings!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!8 'roperty Ta;es 'ayable!!!!!!!!!!!!!!!!!!!!!!!!! ,,7@ages 'ayable!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!-,820 (apital Stock!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!2 0,000 I str($t#o s a. 'repare a balance sheet by using these items and computing the amount for retained earnings! Ase a se&uence of assets similar to that illustrated in );hibit 2B,0! 9#fter C*arns and ShedsD you may list the remaining assets in any order!: 2nclude a proper heading for your balance sheet! /. #ssume that on September 70, immediately after this balance sheet was prepared, a tornado completely destroyed one of the barns! This barn had a cost of "s! ,7,000, and was not insured against this type of disaster! );plain what charges would be re&uired in your September 70 balance sheet to reflect the loss of this barn!

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FINANCIAL ACCOUNTING (CHAPTER # 2)

Pro/0e1 2.5 Pre!ar# , a 2a0a $e S3eet a 4 State1e t o. Cas3 F0o%6 E..e$ts o. 2(s# ess Tra sa$t#o s
The balance sheet items for The Town *akery 9arranged in alphabetical order: were as follows at #ugust ,, 200-! 9Eou are to compute the missing figure for retained earnings!: 9"s!: 9"s!: #ccounts 'ayable!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! ,+,200 (apital Stock!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!80,000 #ccounts "eceivable!!!!!!!!!!!!!!!!!!!!!!!!!!!,,,2+0 /and!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!+0,000 *uilding!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!81,000 .otes 'ayable!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!01, 00 (ash!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!+, 10 Salaries 'ayable!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!8, 00 )&uipment and Fi;tures !!!!!!!!!!!!!!!!!!!!!11,-00 Supplies!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!0,000 =uring the ne;t two days, the following transactions occurred3 A(,. 2 #dditional capital stock was sold for "s! 2-,000! The accounts payable were paid in full! 9.o payment was made on the notes payable or income ta;es payable!: A(,. 7 )&uipment was purchased at a cost of "s! 0,200 to be paid within ,0 days! Supplies were purchased for "s!,,2-0 cash from a restaurant supply center that was going out of business! These supplies would have cost "s!,,800 if purchased through normal channels! I str($t#o s a. 'repare a balance sheet at #ugust ,, 200-! /. 'repare a balance sheet at #ugust 7, 200-, and a statement of cash flows for #ugust ,B7! (lassify the payment of accounts payable and the purchase of supplies as operating activities! $. #ssume the note payable does not come for several years! 2s The Town *akery in a stronger financial position on #ugust , or on #ugust 78 );plain briefly!

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FINANCIAL ACCOUNTING (CHAPTER # 2)

Pro/0e1 2.8 Pre!ar# , F# a $#a0 State1e ts6 E..e$ts o. 2(s# ess Tra sa$t#o s The balance sheet items of The Sweet Soda Shop 9arranged in alphabetical order: were as follows at the close of the business on September 70, 200-3 #ccounts 'ayable!!!!!!!!!!!!!!!!!!!!!!!!!! 8,-00 #ccounts "eceivable!!!!!!!!!!!!!!!!!!!!!!,,2-0 *uilding!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!1-,-00 (apital Stock!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!-0,000 (ash !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!0,100 Furniture and Fi;tures!!!!!!!!!!!!!!!!!!20,000 /and!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!--,000 .otes 'ayable!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!8 "etained )arnings!!!!!!!!!!!!!!!!!!!!!!!!!!1,0 0 Supplies!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!7,110

The transactions occurring during the first week of 6ctober were3 O$t. 7 #dditional capital stock was sold for "s! 70,000! The accounts payable were paid in full! 9.o payment was made on the notes payable!: O$t. + More furniture was purchased on account at a cost of "s! ,8,000, to be paid within 70 days! Supplies were purchased for "s! ,,000 cash from a restaurant supply center that was going out of business! These supplies would have cost "s! ,,80- if purchased under normal circumstances! O$t. -9+ "evenues of "s! -,-00 were earned and paid in cash! );penses re&uired to earn the revenues of "s! 1,000 were incurred and paid in cash! I str($t#o s a. 'repare a balance sheet at September 70, 200-! 9Eou will need to compute the missing figure for .otes 'ayable!: /. 'repare a balance sheet at 6ctober +, 200-! #lso prepare an income statement and a statement of cash flows for the period 6ctober ,B+, 200-! 2n your statement of cash flows, treat the purchase of supplies and the payment of accounts payable as operating activities! $. #ssume the note payable does not come due for several years! 2s The Soda Shop in a stronger financial position on September 70 or on 6ctober +8 );plain briefly!

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FINANCIAL ACCOUNTING (CHAPTER # 2)

Pro/0e1 2.; Pre!ar# , a 2a0a $e S3eet6 <#s$(ss#o o. A$$o( t# , Pr# $#!0es
%elan *erkeley is the founder and manager of *erkeley 'layhouse! The business needs to obtain a bank loan to finance the production of its ne;t play! #s part of the loan application, 'amona was asked to prepare a balance sheet for the business! She prepared the following balance sheet, which is arranged correctly but which contains several errors with respect to such concepts as the business entity and the valuation of assets, liabilities, and owner$s e&uity! BERKELEY PLAYHOUSE 2a0a $e S3eet Se!te1/er 7=> 2==* /iabilities F 6wner$s )&uity /iabilities3 #ccounts 'ayable!!!!!!!!!!!!!!!!!!!!!!!!!!!"s! +,000 Salaries 'ayable!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!2 ,200 Total /iabilities!!!!!!!!!!!!!!!!!!!!"s! 7-,200 6wner$s )&uity3 %elen *erkeley, (apital!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!-0,000 Total !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!"s! 8-,200

#ssets

(ash!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!"s! 2,, 00 #ccounts "eceivable!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!,72,200 'rops and (ostumes!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!7,000 Theater *uilding!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!20,000 /ighting )&uipment!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! ,100 #utomobile!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!,-,000 GGGGGGG Total!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!"s! 208,-00

2n discussions with *erkeley and by reviewing the accounting records of *erkeley 'layhouse, you discover the following facts3 -. The amount of cash, "s! 2,, 00, includes "s! ,-,000 in the company$s bank account, "s! ,, 00 on hand in the company$s safe, and "s! -,000 in *erkeley$s personal savings account! 2. The accounts receivable, listed as "s! ,72,200, include "s! 0,200 owed to the business by #rtistic Tours! The remaining "s! ,2-,000 is *erkeley$s estimate of future ticket sales from September 70 through the end of the year 9=ecember 7,:! 7. *erkeley e;plains to you that the props and costumes were purchased several days ago for "s! ,8,000! The business paid "s! 7,000 of this amount in cash and issued a note payable to #ctor$s Supply (o! for the remainder of the purchase price 9"s! ,-,000:! #s this note is note due until Hanuary of ne;t year, it was not included among the company$s liabilities! :. *erkeley 'layhouse rents the theater building from Iievits 2nternational at a rate of "s! 7,000 a month! The "s! 20,000 shown in the balance sheet represents the rent paid through September 70 of the current year! Iievits 2nternational ac&uired the building seven years ago at a cost of "s! ,7-,000! *. The lighting e&uipment was purchased on September 2+ at a cost of "s! ,100, but the stage manager says that it isn$t worth a dime! +. The automobile is *erkeley$s classic , 08 Haguar, which he purchased two years ago for "s! ,000! She recently saw a similar car advertised for sale at "s! ,-,000! She does not use the car in the business, but it has a personali<ed license plate that reads C'/#%6AS!D 5. The accounts payable include business debts of "s! 7, 00 and the "s! 2,,00 balance of *erkeley$s personal >2S# card! 8. Salaries payable include "s! 2-,000 offered to Sue *arnes to play the lead role in a new play opening ne;t =ecember and "s! 1,200 still owed to stagehands for work done through September 70! ;. @hen 'amona founded .ew (ity 'layhouse several years ago, he invested "s! 20,000 in the business! %owever, /ive Theatre, 2nc!, recently offered to buy her business for "s! -0,000! Therefore, she listed this amount as his e&uity in the above balance sheet! I str($t#o s a. 'repare a corrected balance sheet for *erkeley 'layhouse at September 70, 200-! /. For each of the nine numbered items above, e;plain your reasoning in decided whether or not to include the items in the balance sheet and in determining the proper dollar valuation!

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FINANCIAL ACCOUNTING (CHAPTER # 2)

Pro/0e1 2.-= Pre!ar# , a 2a0a $e S3eet6 <#s$(ss#o o. A$$o( t# , Pr# $#!0es
*ig Scripts is a serviceBtype enterprise in the entertainment field, and its manager, @illiam 'ippin, has only a limited knowledge of accounting! 'ippin prepared the following balance sheet, which, although arranged satisfactorily, contains certain errors with respect to such concepts as the business e&uity and the asset valuation! 'ippin owns all of the corporation$s outstanding stock! BIG SCREEN SCRIPTS
2a0a $e S3eet No"e1/er 7=> 2==2 /iabilities F 6wner$s )&uity /iabilities3 .otes 'ayable!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!"s! +0,000 #ccounts 'ayable!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!7-,80Total /iabilities!!!!!!!!!!!!!!!!!!"s! ,02,806wner$s )&uity3 (apital Stock!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!-,000 "etained )arnings!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!-8,0+Total !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!"s!,+-,800

#ssets

(ash!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!"s! -,,-0 .otes "eceivable!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!2,000 #ccounts "eceivable!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!2,1-0 /and!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!00,000 *uilding!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!-1,720 6ffice Furniture!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!8,8-0 6ther #ssets!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!22,100 Total!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!"s! ,+-,800

2n discussion with 'ippin and by inspection of the accounting records, you discover the following facts3 -. The amount of cash, "s! -,,-0, includes "s! 7,100 in the company$s bank account, "s! -10 on hand in the company$s safe, and "s! ,,2,0 in 'ippin$s personal savings account! 2. 6ne of the notes receivable in the amount of "s! -00 is an 26A that 'ippin received in a poker game several years ago! The 26A is signed by C*!I!,D whom 'ippin met at the game but has not heard from since! 7. 6ffice furniture includes "s! 2, 00 for a 'ersian rug for the office purchased on .ovember 20! The total cost of the rug was "s! ,100! The business paid "s! 2, 00 in cash and issued a note payable to Joltan (arpet for the balance due 9"s! +,-00:! #s no payment on the note is due until Hanuary, this debt is not included in the liabilities above! :. #lso included in the amount for office furniture is a computer that cost "s! 2,-2- but is not on hand because 'ippin donated it to a local charity! *. The C6ther #ssetsD of "s! 22,100 represent the total amount of income ta;es 'ippin has paid the federal government over a period of years! 'ippin believes the income ta; law to be unconstitutional, and a friend who attends law school has promised to help 'ippin recover the ta;es paid as soon as he passes the bar e;am! +. The asset C/andD was ac&uired at a cost of "s! 7 ,000 but was increased to a valuation of "s! 00,000 when a friend of 'ippin offered to pay that much for it if 'ippin would move the building off the lot! 5. The accounts payable include business debts of "s! 72,000 and the "s! 7,,0- balance owed on 'ippin$s personal Master(ard! I str($t#o s a. 'repare a corrected balance sheet at .ovember 70, 200-! /. For each of the seven numbered items above, use a separate numbered paragraph to e;plain whether the treatment followed by 'ippin is in accordance with generally accepted accounting principles!

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