Homework 1

Accounting in Action (Chapter 1)

Due by 28 March 2023 at 9:00 PM

E1-4
Instructions
For each of the three situations, say if the accounting method used is correct or incorrect.
If correct, identify which principle or assumption supports the method used. If incorrect, identify which principle or
assumption has been violated.

The following situations involve accounting principles and assumptions.

1. Piang Company owns buildings that are worth substantially more than they originally cost. In an effort to provide
more relevant information, Piang reports the buildings at fair value in its accounting reports.

Incorrect. The historical cost principle requires that assets (such as buildings) be recorded and reported at their
cost.

2. Delta Company includes in its accounting records only transaction data that can be expressed in terms of
money.

Correct. The monetary unit assumption requires that companies include in the accounting records only
transaction data that can be expressed in terms of money.

3. Luke Witte, owner of Luke’s Photography, records his personal living costs as expenses of the business.
Incorrect. The economic entity assumption requires that the activities of the entity be kept separate and
distinct from the activities of its owner and all other economic entities.
 P1-2A
Sue Kojima opened a law offi ce on July 1, 2014. On July 31, the balance sheet showed Cash $5,000, Accounts
Receivable $1,500, Supplies $500, Equipment $6,000, Accounts Payable $4,200, and Owner’s Capital $8,800.
During August, the following transactions occurred.
1. Collected $1,200 of accounts receivable.
2. Paid $2,800 cash on accounts payable.
3. Recognized revenue of $7,500 of which $3,000 is collected in cash and the balance is due in September.
4. Purchased additional equipment for $2,000, paying $400 in cash and the balance on account.
5. Paid salaries $2,500, rent for August $900, and advertising expenses $400.
6. Withdrew $700 in cash for personal use.
7. Received $2,000 from Standard Federal Bank—money borrowed on a note payable.
8. Incurred utility expenses for month on account $270.

Instructions
(a) Prepare a tabular analysis of the August transactions beginning with July 31 balances. The column headings
should be as follows: Cash 1 Accounts Receivable 1 Supplies 1 Equipment 5 Notes Payable 1 Accounts Payable 1
Owner’s Capital 2 Owner’s Drawings 1 Revenues 2 Expenses.
(b) Prepare an income statement for August, an owner’s equity statement for August, and a balance sheet at
August 31.
1-26
Copyright © 2013 John Wiley & Sons, Inc.

(a) SUE KOJIMA, ATTORNEY AT LAW

Owner’s Equity
Accounts Notes Accounts Owner’s Owner’s
Cash + Receivable + Supplies + Equipment = Payable + Payable + Capital – Drawings + Revenues – Expenses
Bal. $5,000 + $1,500 + $500 + $6,000 = $4,200 + $8,800
1. +1,200 –1,200 0000 00,000 00,000 000,000
6,200 + 300 + 500 + 6,000 = 4,200 + 8,800
2. –2,800 00,000 0000 00,000 –2,800 000,000
3,400 + 300 + 500 + 6,000 = 1,400 + 8,800

PROBLEM 1-2A
3. +3,000 +4,500 0000 00,000 00,000 +$7,500
Weygandt, Accounting Principles, 11/e, Solutions Manual

6,400 + 4,800 + 500 + 6,000 = 1,400 + 8,800 7,500

4. –400 00,000 0000 +2,000 +1,600 000,000
6,000 + 4,800 + 500 + 8,000 = 3,000 + 8,800 + 7,500
5. –3,800 –$2,500
–900
00,000 0000 00,000 00,000 –400
2,200 + 4,800 + 500 + 8,000 = 3,000 + 8,800 + 7,500 –3,800
6. –700 00,000 0000 00,000 00,000 –$700
1,500 + 4,800 + 500 + 8,000 = 3,000 + 8,800 –700 + 7,500 –3,800
7. +2,000 00,000 0000 00,000 +$2,000 00,000 000,000
3,500 + 4,800 + 500 + 8,000 = + 2,000 + 3,000 + 8,800 –700 + 7,500 –3,800
8. +270 –270
– –
(For Instructor Use Only)

$3,500 + $4,800 + $500 + $8,000 = +$2,000 + $3,270 + $8,800 $700 + $7,500 $4,070

$16,800 $16,800
PROBLEM 1-2A (Continued)

(b) SUE KOJIMA, ATTORNEY AT LAW

Income Statement
For the Month Ended August 31, 2014

Revenues
Service revenue ............................................. $7,500
Expenses
Salaries and wages expense ........................ $2,500
Rent expense ................................................. 900
Advertising expense ..................................... 400
Utilities expense ............................................ 270
Total expenses ....................................... 4,070
Net income ............................................................ $3,430

SUE KOJIMA, ATTORNEY AT LAW

Owner’s Equity Statement
For the Month Ended August 31, 2014

Owner’s capital, August 1 ...................................................... $ 8,800

Add: Net income ................................................................... 3,430
12,230
Less: Drawings ...................................................................... 700
Owner’s capital, August 31 .................................................... $11,530
PROBLEM 1-2A (Continued)

SUE KOJIMA, ATTORNEY AT LAW

Balance Sheet
August 31, 2014

Assets
Cash ........................................................................................ $ 3,500
Accounts receivable ............................................................... 4,800
Supplies .................................................................................. 500
Equipment ............................................................................... 8,000
Total assets ..................................................................... $16,800

Liabilities and Owner’s Equity

Liabilities
Notes payable .................................................................. $ 2,000
Accounts payable............................................................ 3,270
Total liabilities .......................................................... 5,270
Owner’s equity
Owner’s capital ................................................................ 11,530
Total liabilities and owner’s equity ......................... $16,800