Chapter 2

The Accounting Equation

Exercises

Main lecturer: Hyungjin Cho

hcho@emp.uc3m.es
1-1
 EXERCISE 2-1
Compute the missing amount in the accounting
equation for each entity (amounts in million $):

Assets Liabilities Owners' Equity

Company A ? 67 19

Company B 3.3 ? 0.9

Company C 49 35 ?

1-2
 EXERCISE 2-2
Classify the following items as an Asset (A),
a Liability (L), or an Owners' Equity (E):

a) Accounts payable g) Cash

b) Common stock h) Long-term debt
c) Receivables i) Merchandise inventory
d) Retained earnings j) Notes payable
e) Land k) Accrued expenses
f) Prepaid expenses payable
l) Equipment 1-3
 EXERCISE 2-3
Calculate the Paid-in capital of the following
corporation contributed by the founders:

Number of shares
Shareholder A 20,000
Shareholder B 5,000
Shareholder C 25,000

Par value of shares: 6.00 €

1-4
 EXERCISE 2-4
• Miller Water Systems began the year 2014
with retained earnings of $60,000
• Revenues during the year were $600,000,
and expenses totaled $530,000
• Miller declared and paid dividends of
$30,000
• What was the company's ending balance
of retained earnings?
1-5
 EXERCISE 2-5
• Johnson & Johnson began the year with
total assets of $12.2 billion and total
liabilities of $6.7 billion
• Net income for the year was $2.0 billion
• Dividends totaled $0.4 billion
• How much is stockholders' equity at the
end of the year?
1-6
 EXERCISE 2-6
• Balances of the assets and liabilities of Home Depot,
Inc. as of January 31, 2014, are (in million $):

Sales revenue 30,219 Other expenses 1,650

Property & equipment 8,532 Cost of goods sold 21,614
Accounts receivable 469 Cash 62
Merchandise inventory 4,402 Operating expenses 5,341
Accounts payable 1,586 R.E., beginning 4,430
Other liabilities 3,139 R.E., ending ?
Common stock 2,864

• Prepare the income statement of Home Depot,

Inc., for the year ended January 31, 2014 1-7
 EXERCISE 2-7
• Kink's Copy Service, Inc., ended the month of July 2015, with
these data (in $):
Cash balance (July 1st) 950 Payments of cash:
Cash balance (July 31st) 6,200 Purchase of equipment 30,000
Cash receipts: Dividends 1,200
Collections from clients 1,900 Payments to suppliers 450
Issuance of stock 35,000 Rent expense 700
Common stock 35,000 R.E. (July 1st ) 100
Dividends 1,200 R.E. (July 31st) ?
Equipment 30,000 Service revenue 2,400
Office supplies 1,200 Utilities expense 200
Accounts payable 2,000
• Prepare the income statement and the statement of retained
earnings of Kink's Copy Service, Inc., for July 2015 1-8
 EXERCISE 2-8
• At December 31, 2014, Miller Water Systems has
cash of $13,000, receivables of $2,000, and
inventory of $25,000
• The company's land, buildings, and equipment total
$110,000, and other assets amount to $10,000
• Miller owes accounts payable of $8,000 and short-
term notes payable of $12,000 and also has a long-
term debt of $80,000
• Common stock is $15,000
• Prepare Miller Water Systems' balance sheet at
December 31, 2014 1-9
 EXERCISE 2-9
• Refer to the data in the preceding Exercise
2-7 regarding Kink’s Copy Service, Inc.
• Prepare the balance sheet of Kink's Copy
Service, Inc., at July 31, 2015

1-10
 EXERCISE 2-10
Identify each item with its appropriate financial statement:
Income statement (IS), Statement of retained earnings
(SRE), Balance sheet (BS), and Statement of cash flows
(SCF) (Four items appear on two financial statements)
1. Dividends 8. Cash
2. Depreciation expense 9. Cash flows from financing
3. Inventory activities
4. Sales revenue 10. Accounts payable
5. Retained earnings 11. Common stock
6. Operating cash flows 12. Interest revenue
7. Net income / net loss 13. Long-term debt
14. Increase/decrease in cash 1-11
 EXERCISE 2-11
• The assets and liabilities, and revenues and expenses of
Liberty Corporation for the year 2014 are (in million $):
Land 98,000 Salary expense 63,000
Accounts payable 19,000 Common stock 100,000
Notes payable 85,000 Salary payable 1,000
Accounts receivable 12,000 Furniture 20,000
Property tax expense 4,000 Service revenue 180,000
Advertising expense 13,000 Interest expense 9,000
Rent expense 23,000 Supplies 3,000
Building 110,000 R.E., beginning 50,000
Cash 10,000 Dividends 70,000
• Prepare the income statement, the statement of retained
earnings and the balance sheet of Liberty for the year 20141-12
 EXERCISE 2-12
On August 1, 2015, Sarah Brown invested $90, 000 in her new business Brown Construction.
During August, she withdrew $10, 000 from the business. The amounts of the various assets,
liabilities, revenues, and expenses are as follows:

Accounts payable $ 9, 000

Accounts receivable 26, 000
Cash 5, 400
Construction revenue 80, 000
Prepaid Insurance 2, 000
Land 75, 000
Miscellaneous expense 1, 400
Insurance expense 2, 000
Rent expense 7, 000
Salary expense 46, 000
Supplies 900
Supplies expense 300
Utilities expense 3, 000

Prepare each of the following for Brown Construction Company:

a. an income statement for August,
b. a statement of owner's equity for August, and
c. a balance sheet as of August 31.