Management Accounting I

Construction of Balance Sheet (PGP22: Section A, B & C)

Exercise 2.1:

A number of business transactions carried out by Smalling Manufacturing Company are as follows:
a.   Borrowed money from a bank.

b.   Sold land for cash at a price equal to its cost.

c.   Paid a liability.

d.   Returned for credit some of the office equipment previously purchased on credit but not yet
paid for. (Treat this the opposite of a transaction in which you purchased office equipment on
credit.)

e.   Sold land for cash at a price in excess of cost. (Hint: The difference between cost and sales
price represents a gain that will be in the company's income statement.)

f.   Purchased a computer on credit.

g.   The owner invested cash in the business.

h.   Purchased office equipment for cash.

i.    Collected an account receivable.

Indicate the effects of each of these transactions on the total amounts of the company's assets,
liabilities, and owners' equity. Organize your answer in tabular form, using the following column
headings and the code letters I for increase, D for decrease, and NE for no effect. The answer for
transaction a is provided as an example:

Solution 2.1:

Transaction Assets = Liabilities + Owners’

Equity
a I   I   NE
b NE NE NE
c D D NE
d D D NE
e I NE I
f I I NE
g I NE I
h NE NE NE
i NE NE NE

EXERCISE 2.2:For each of the following categories, state concisely a transaction that will have the
required effect on the elements of the accounting equation.

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a.   Increase an asset and increase a liability.

b.   Decrease an asset and decrease a liability.

c.   Increase one asset and decrease another asset.

d.   Increase an asset and increase owners' equity.

e.   Increase one asset, decrease another asset, and increase a liabiliy.

Solution 2.2:

a. Purchase of plant machines on cash

b. Payment done against liability or a loan

c. Sold land thorugh cash

d. Cash investment in business

e. Bought machine, Paid some margin money with cash and remaining is to be paid in instalments.

PROBLEM 2.3: Listed below in random order are the items to be included in the balance sheet of
Smokey Mountain Lodge at December 31, 2011:

Prepare a balance sheet at December 31, 2011 with proper heading and classification.

Solution 2.3:

a.      
Balance Sheet of SMOKEY MOUNTAIN LODGE as on Dec 31, 2011

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 Assets Liabilities & Owners' Equity  
Non-current Assets Equity
Land $425,000 Retained earnings $175,000
Buildings $450,000 Capital Stock $135,000
Furnishings $58,700 Total Equity $310,000
Equipment $39,200 Current Liabilities
Snow Mobiles $15,400 Accounts payable $54,800
Total Non-Current Assets $988,300 Notes payable $620,000
Current Assets Salaries payable $33,500
Cash $31,400 Interest Payable $12,000

$7,20,300
Account Receivables $10,600 Total Liabilities
Total Current Assets $177,000
TotalAsset
s 1,030,300 Total Equity & liabilities 1,030,300

Exercise 2.4:

The following six transactions of Ajax Moving Company, a corporation, are summarized in equation
form, with each of the six transactions identified by a letter. For each of the
transactions (a) through (f) write a separate statement explaining the nature of the transaction. For
example, the explanation of transaction (a) could be as follows: Purchased equipment for cash at a
cost of $3,200.

Solution 2.4:

Description of transaction:

a. Purchased equipment for cash at a cost of $3200

b. Received accounts or trade payables of $900

c. Purchased equipment of $13,500 with a loan/borrowing of $10,000 and cash in hand $3500

d. Repaid a loan of with the cash supply of $14,500

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e. Raised through cash an additional capital of $15,000

f. Purchased equipment worth $7,500 through loan/borrowings.

Exercise 2.5:

Goldstar Communications was organized on December 1 of the current year and had the following
account balances at December 31, listed in tabular form:

Early in January, the following transactions were carried out by Goldstar Communications:

1.  Sold capital stock to owners for $35,000.

2.  Purchased land and a small office building for a total price of $90,000, of which $35,000 was the
value of the land and $55,000 was the value of the building. Paid $22,500 in cash and signed a
note payable for the remaining $67,500.
3.  Bought several computer systems on credit for $9,500 (30-day open account).
4.  Obtained a loan from Capital Bank in the amount of $20,000. Signed a note payable.
5.  Paid the $28,250 account payable due as of December 31.

Instructions

a.   List the December 31 balances of assets, liabilities, and owners' equity in tabular form as shown
above.
b.  Record the effects of each of the five transactions in the preceding tabular arrangement and
show the totals for all columns after each transaction.

Solution 2.5:

              Owners'

    Assets   = Liabilities + Equity

        Office Notes Accounts Capital

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   Cash + Land + Building + Equipment = Payable + Payable + Stock
$ 37,000 $ 95,000 $ 125,000 $ 51,250 $ 80,000 $ 28,250 $ 200,000
(1) $ 35,000.00 $  35,000.00
$ 22,500.00 $ 35,000.00 $ 55,000.00 $ 67,500.00
(2)
$   9,500.00 $    9,500.00
(3)
(4) $ 20,000.00 $ 20,000.00
(5) $ 28,250.00 $ 28,250.00

Exercise 2.6:
The items making up the balance sheet of Rankin Truck Rental at December 31 are listed below in
tabular form.

During a short period after December 31, Rankin Truck Rental had the following transactions:
1.  Bought office equipment at a cost of $2,700. Paid cash.

2.  Collected $4,000 of accounts receivable.

3.  Paid $3,200 of accounts payable.

4.  Borrowed $10,000 from a bank. Signed a note payable for that amount.

5.  Purchased two trucks for $30,500. Paid $15,000 cash and signed a note payable for the
balance.

6.    Sold additional stock to investors for $75,000.

Instructions
a.   List the December 31 balances of assets, liabilities, and owners' equity in tabular form as
shown above.
b.   Record the effects of each of the six transactions in the preceding tabular arrangement. Show
the totals for all columns after each transaction.

Solution 2.6:
              Owners'

    Assets   = Liabilities + Equity

    Accounts   Office Notes Accounts Capital

Equipment
  Cash + Receivable + Trucks + = Payable + Payable + Stock
$ 9,500 $ 13,900 $ 68,000 $ 3,800 $ 20,000 $ 10,200 $ 65,000

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 $ 9500 $ 3800
-$ 2700 $ 2700
(1) $ 6800 $ 13,900 $ 68,000 $ 6500 $ 20,000 $ 10,200 $ 65,000
$ 6800 $ 13,900
$ 4000 $ - 4,000
(2) $ 10800 $ 9,900 $ 68,000 $ 6500 $ 20,000 $ 10,200 $ 65,000
$ 10800 $ 10,200
$ -3200 $ -3,200
(3) $ 7600 $ 9,900 $ 68,000 $ 6500 $ 20,000 $ 7,000 $ 65,000
$ 7600 $ 20,000
$ 10000 $10,000
(4) $ 17600 $ 9,900 $ 68,000 $ 6500 $ 30,000 $ 7,000 $ 65,000
$ 17600 $ 68,000 $ 30,000
$ -15000 $ 30,500 $ 15,000
(5) $ 2600 $ 9,900 $ 98,500 $ 6500 $ 45,000 $ 7,000 $ 65,000
$ 2600 $ 65,000
$ 75000 $ 75000
(6) $ 77600 $ 9,900 $ 98,500 $ 6500 $ 45,000 $ 7,000 $140,000
$ 77600 $ 9,900 $ 98,500 $ 6500 $ 45,000 $ 7,000 $140,000

Exercise 2.7:HERE COME THE CLOWNS! is the name of a traveling circus. The ledger accounts of the
business at June 30, 2011, are listed here in alphabetical order:

Prepare a balance sheet by using these items and computing the amount of Cash at June 30,
2011.

Solution 2.7:

Balance Sheet of HERE COME THE CLOWNS! As on June 30, 2011

Assets     Liabilities & Owners' Equity
Non-current Assets   Equity
Props & Equipment $89,580   Retained Earnings $27,230
Animals $189,060   Capital Stock $310,000
Cages $24,630 Total Equity $337,230

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Tents $63,000   Current Liabilities
Trucks & Wagons 105,840   Notes payable $180,000
Costumes $31,500   Accounts payable $26,100
Total Non-current Assets $503,610   Salaries payable $9,750
Current Assets Total Liabilities 215,850
Notes Receivable $9,500
Accounts Receivable $7,450
Cash $32,520
Total Current Assets $49,470
Total Assets $553,080   Total Equity & Liabilities $553,080