Practice Multiple - Choice Questions

1. B 9. B
2. D 10. A
3. C 11. D
4. B 12. C
5. B 13. B
6. D 14. C
7. A 15. A
8. B
Brief Exercises
BE1.1
Assets = Liabilities + Equity
a. ¥88,000 ¥50,000 ¥38,000
b. ¥115,000 ¥45,000 ¥70,000
c. ¥94,000 ¥34,000 ¥60,000
BE1.2
a. Assets = Liabilities + Equity
£120,000 £232,000
Assets = £352,000

b. Assets = Liabilities + Equity

Liabilities = $190,000 - $80,000
Liabilities = $110,000
BE1.3
Assets = Liabilities + Equity
The equity would be
Equity = $800,000 - $300,000 = $500,000
a. Total assets = $800,000 + $150,000 = $950,000
Total liabilities = $300,000 - $60,000 = $240,000
Equity = $950,000 - $240,000 = $710,000
b. Total liabilities = $300,000 + $100,000 = $400,000
Owner equity = $500,000 - $70,000 = $430,000
The total assets is
Assets = $400,000 + $430,000 = $830,000
c. Total assets = $800,000 - $80,000 = $720,000
Total equity = $500,000 + $120,000 = $620,000
The total liabilities
Liabilities = $720,000 - $620,000 = $100,000
BE1.4
a. Assets = Liabilities + Equity ( Shared capital + Rev - Exp - Div)
Assets = 90,000 + 150,000 + 450,000 - 340,000 - 40,000
= 310,000
b. Assets = Liabilities + Equity ( Shared capital + Rev - Exp - Div)
Total liabilities is:
Liabilities = 57,000 - ( 35,000 + 52,000 - 35,000 - 7,000)
= 12,000

c. Liabilities = 660,000 x = 440,000

Equitity = 660,000 - 440,000 = 220,000
BE1.5
a. Accounts receivable. (A) d. Supplies. (A)
b. Salaries and wages payable. (L) e. Share capital - ordinary. (E)
c. Equipment. (A) f. Notes payable. (L)
BE1.6
a. Advertising expense. (E) e. Dividends. (D)
b. Service revenue. (R) f. Rent revenue. (E)
c. Insurance expense. (E) g. Utilities expense. (E)
d. Salaries and wages expense. (E)
BE1.7
Assets Liabilities Equitity
a Purchased supplies on + + NE
account
b Received cash for + NE +
performing a service
c Paid expenses in cash - NE -

BE1.8
Assets Liabilities Equitity
a Shareholders invested cash in the + NE +
business.
b Payment of dividends. NE NE -
c Received cash from a customer + - NE
who had previously been billed for
services performed.

BE1.9
a. Received cash for services performed. (R)
b. Paid cash to purchase equipment. (NE)
c. Paid employee salaries. €
BE1.10
 Balance Sheet
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Assets
Cash................................................................................................. $ 49,000
Accounts receivable....................................................................... 62,500
Total assets............................................................................. $111,500
Liabilities and Owner’s Equity
Liabilities
Accounts payable................................................................… $ 90,000
Owner’s equity
Owner’s capital....................................................................... 21,500
Total liabilities and owner’s equity................................ $11,500
BE1.11
a. Notes payable. (FP)
b. Advertising expense. (IS)
c. Share capital—ordinary. (FP)
d. Cash. (FP)
e. Service revenue. (IS)

Exercises
E1.1
Analyzing and interpreting information. Measuring events in dollars and cents.
(C) (R)
Classifying economic events. (R) Preparing accounting reports. (C)
Explaining uses, meaning, and Reporting information in a standard
limitations of data. (C) format. (C)
Keeping a systematic chronological Selecting economic activities relevant to
diary of events. (R) the company. (I)
Summarizing economic events. (R)
E1.2
a. The following are users of financial statements.
Customers - External Financial regulators - External
Tax authorities - External Store manager. - Internal
Labor unions. - External Suppliers. - External
Marketing manager. - Internal Vice president of finance. - Internal
Production supervisor. - Internal
b.
Can we afford to give our employees a pay raise? - Internal
Did the company earn a satisfactory income? - External
Do we need to borrow in the near future? - Internal
How does the company’s profitability compare to other companies? - External
What does it cost us to manufacture each unit produced? - Internal
Which product should we emphasize? - Internal
Will the company be able to pay its short-term debts? - External
E1.3
Angela Duffy, president of Duffy Company, instructed Jana Barth, the head of
the accounting department, to report the company’s land in its accounting reports at
its fair value of $170,000 instead of its cost of $100,000, in an effort to make the
company appear to be a better investment. The historical cost principle requires that
assets be recorded and reported at their cost, because cost is faithfully representative
and can be objectively measured and verified. In this case, the historical cost principle
should be used and Land reported at $100,000, not $170,000.

The stakeholders include stockholders and creditors of Duffy Company, potential

stockholders and creditors, other users of Duffy’s accounting reports, Angela Duffy,
and Jana Barth. All users of Duffy’s accounting reports could be harmed by relying
on information that may be unreliable. Angela Duffy could benefit if the company is
able to attract more investors, but would be harmed if the inappropriate reporting is
discovered. Similarly, Jana Barth could benefit by pleasing her boss, but would be
harmed if the inappropriate reporting is discovered.

Jana’s alternatives are to report the land at $100,000 or to report it at $170,000.

Reporting the land at $170,000 is not appropriate since it may mislead many people
who rely on Duffy’s accounting reports to make financial decisions. Jana should
report the land at its cost of $100,000. She should try to convince Angela Duffy that
this is the appropriate course of action, but be prepared to resign her position if Duffy
insists.
E1.4
1. Correct. The fair value principle allows companies to revalue property, plant
and equipment to fair value. However, most companies choose not to instead,
due to reliability concerns about valuation, and negative effects on net
income, most companies report property, plant and equipment at cost.
2. 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. 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.
E1.5

Assets Liabilities Equitity

 Cash Account payable Share capital - ordinary
Equipment Notes payable
Supplies Salaries and wages payable
Account receivable

E1.6
1. Received cash investment from shareholders to start business in exchange for
ordinary shares. (Increase in assets and increase in equity.)
2. Paid monthly rent. (Decrease in assets and decrease in equity.)
3. Purchased equipment on account. (Increase in assets and increase in liabilities.)
4. Billed customers for services performed. (Increase in assets and increase in equity.)
5. Paid dividends. (Decrease in assets and decrease in equity.)
6. Received cash from customers billed in (4). (Increase in assets and decrease in
assets.)
7. Incurred advertising expense on account. (Increase in liabilities and decrease in
equity. )
8. Purchased additional equipment for cash. (Increase in assets and decrease in
assets.)
9. Received cash from customers when service was performed (Increase in assets and
increase in equity.)
E1.7
1. (c) 5. (d)
2. (d) 6. (b)
3. (a) 7. (e)
4. (b) 8. (f)
E1.8
a.
1. Shareholders invested £15,000 cash in the business.
2. Purchased equipment for £5,000, paying £2,000 in cash and the balance
of £3,000 on account.
3. Paid £750 cash for supplies.
4. Earned £9,100 in revenue, receiving £4,600 cash and £4,500 on
account.
5. Paid £1,500 cash on accounts payable.
6. Paid £2,000 cash dividend.
7. Paid £650 cash for rent.
8. Collected £450 cash from customers on account.
9. Paid salaries and wages of £3,900.
10. Incurred £500 of utilities expense on account.
b.
The increase of equitity for the month is
15,000 + 9,100 - 650 - 2,000 - 500 - 3900 = 17,050
c.
The amount of net income for a month is
9,100 - 3,900 - 650 - 500 = 4,050
E1.9
 Income Statement
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Revenues
Service revenue.......................................................... $9,100
Expenses
Salaries and wages expense..................................... $3,900
Rent expense.............................................................. 650
Utilities expense......................................................... 500
Total expenses.................................................... 5,050
Net income.......................................................................... $4,050
Owner’s Equity Statement
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Owner’s capital, August 1............................................. $0
Add: Net income $ 4,050
Less: Devidents............................................................. 2,000
Owner’s capital, August 31........................................... $ 2,050

Balance Sheet
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Assets
Cash................................................................................................. $ 9,250
Accounts receivable....................................................................... 4,050
Supplies........................................................................................... 750
Equipment....................................................................................… 5,000
Total assets............................................................................. $ 19,050
Liabilities and Owner’s Equity
Liabilities
Accounts payable................................................................... $ 2,000
Owner’s equity
Owner’s capital....................................................................... 17,050
Total liabilities and owner’s equity................................ $19,050

E1.10
a.
Owner’s equity—12/31/19 ($400,000 – $250,000)................. $150,000
Owner’s equity—1/1/19........................................................... 100,000
Increase in owner’s equity..................................................... 50,000
Add: Drawings....................................................................... 15,000
Net income for 2019................................................................ $ 65,000
b.
Owner’s equity—12/31/20 ($460,000 – $300,000)................ $160,000
Owner’s equity—1/1/20—see (a).......................................... 150,000
Increase in owner’s equity.................................................... 10,000
Less: Additional investment................................................ 45,000
Net loss for 2020.................................................................... $ 35,000
c.
Owner’s equity—12/31/21 ($590,000 – $400,000)................ $190,000
Owner’s equity—1/1/21—see (b).......................................... 160,000
Increase in owner’s equity.................................................... 30,000
Less: Additional investment................................................ 15,000
15,000
Add: Drawings..................................................................... 25,000
Net income for 2021...........................................................… $ 40,000
E1.11
a.
Total assets (beginning of year)........................................... $110,000
Total liabilities (beginning of year)...................................... 85,000
Total owner’s equity (beginning of year)............................. $ 25,000
b.
Total owner’s equity (end of year)....................................... $ 40,000
Total owner’s equity (beginning of year)............................. 25,000
Increase in owner’s equity.................................................... $ 15,000

Total revenues....................................................................… $220,000

Total expenses....................................................................... 175,000
Net income............................................................................. $ 45,000

Increase in owner’s equity.............................. $ 15,000

Less: Net income............................................ $(45,000)
Add: Drawings................................................ 37,000)
ss8,000
Additional investment..................................... $ 7,000
c.
Total assets (beginning of year)........................................... $129,000
Total owner’s equity (beginning of year)............................. 80,000
Total liabilities (beginning of year)...................................... $ 49,000
d.
Total owner’s equity (end of year)....................................... $130,000
Total owner’s equity (beginning of year)............................. 80,000
Increase in owner’s equity.................................................... $ 50,000

Total revenues....................................................................... $100,000

Total expenses....................................................................... 60,000
Net income............................................................................. $ 40,000

Increase in owner’s equity.............................. $ 50,000

Less: Net income............................................ $(40,000)
Additional investment.......................... (25,000)
(65,000)
Drawings........................................................... $ 15,000
E1.12
Income Statement
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Revenues
Service revenue...................................................... $63,600
Expenses
Salaries and wages expense................................. $29,500
Rent expense.......................................................... 10,400
Utilities expense..................................................... 3,100
Advertising expense.............................................. 1,800
Total expenses................................................ 44,800
Net income..................................................................... $18,800
Owner’s Equity Statement
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Owner’s capital, January 1............................................................... $48,000
Add: Net income............................................................................. 18,800
66,800
Less: Drawings................................................................................ 6,000
Owner’s capital, December 31......................................................... $60,800
E1.13
Balance Sheet
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Assets
Cash....................................................................................… $14,000
Accounts receivable...............................................................… 8,500
Supplies................................................................................… 8,000
Equipment...............................................................................… 48,000
Total assets............................................................................. $78,500
Liabilities and Owner’s Equity
Liabilities
Accounts payable................................................................... $16,000
Owner’s equity
Owner’s capital ($50,000 + $12,500)...................................... 62,500
Total liabilities and owner’s equity................................ $78,500
E1.14
a.
Camping fee revenues............................................................ $140,000
General store revenues.......................................................... 47,000
Total revenue............................................................ 187,000
Expenses................................................................................. 150,000
Net income............................................................................... $ 37,000
b.
Balance Sheet
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Assets
Cash......................................................................................... $ 20,000
Accounts Receivable.............................................................. 2,500
Equipment............................................................................... 105,500
Total assets...................................................................... $128,000

Liabilities and Owner’s Equity

Liabilities
Notes payable.................................................................. $ 60,000
Accounts payable............................................................ 11,000
Total liabilities.......................................................... 71,000
Owner’s equity
Owner’s capital ……………………............................. 57,000
Total liabilities and owner’s equity........................ $128,000
E1.16
Net Income = Legal service revenue - Total expenses Net Income = $340,000 -
$211,000 Net Income = $129,000
Owner’s Equity Statement
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Owner’s capital, January 1..................................................... $ 23,000
Add: Net income..................................................................... 129,000
152,000
Less: Drawings........................................................................ 64,000
Owner’s capital, December 31................................................ $ 88,000

Problem
P1.2
P1.4