Accounting 201 chapter 1 homework

Practice exercise

Chapter 1 and 2 practice exercise

Name

ACC: 201

Instructor:

Date

Exercise 1-2: Assume that Kennedy Company acquires $1,600 cash from creditors and $1,800 cash from investors. Required a. Explain the primary differences between investors and creditors.

Answer:

a) The primary difference between creditors and investors is a creditor you must pay back the money borrowed and most of the time there is interest. An investor is someone that is investing in the company and normally has stock from doing so. If the company does not make it and dissolves creditors get paid first, and if there is still money left, investors get it.

b. If Kennedy has a net loss of $1,600 cash and then liquidates, what amount of cash will the creditors receive? What amount of cash will the investors receive?

Answer:

b) The creditors will get $1,600, or all of their money, and the investors will get $200.

c. If Kennedy has net income of $1,600 and then liquidates, what amount of cash will the creditors receive? What amount of cash will the investors receive?

Answer:

c) The creditors will get all of their money ($1,600), and the investors will get all of the rest which is their original $1,800 + 1,600 = $3,400.

Exercise 1-4: Kenneth Chang recently started a business. During the first few days of operation, Mr. Chang transferred $30,000 from his personal account into a business account for a company he named Chang Enterprises. Chang Enterprises borrowed $40,000 from First Bank. Mr. Chang’s father-in-law, Jim Harwood, invested $64,000 into the business for which he received a 25 percent ownership interest. Chang Enterprises purchased a building from Morton Realty Company. The building cost $120,000 cash. Chang Enterprises earned $28,000 in revenue from the company's customers and paid its employees $25,000 for salaries expense.

Answer

1. $30,000 from Kenneth Changs personal account – goes into Assets under Cash and in the Statement of cash flows.

2. $40,000 Borrowed from First Bank – goes into Assets under Cash and in the Statement of cash flows.

3. $64,000 from Jim Harwood (father-in-law) He received 25% ownership interest – goes into Assets and Common Stock and then in the Statement of cash flows.

4. $120,000 went toward buying a building – this would be in the Land column

5. $28,000 Revenue – would be in the Income statement under Rev. and Net Inc., and back in the Balance sheet under Cash and Ret, Earn. Columns. This is also listed in the Statement of cash flows

6. $25,000 Employee salaries – is listed in Assets under Cash and Ret. Earn. Then in the Income Statement under Exp. And Net Inc., and then under the Statement of cash flows.

Required: Identify the entities that were mentioned in the scenario and explain what happened to the cash accounts of each entity that you identify.

Exercise 1-9: The December 31, 2012, balance sheet for Classic Company showed total stockholders’ equity of $82,500. Total stockholders’ equity increased by $53,400 between December 31, 2012, and December 31, 2013. During 2013 Classic Company acquired $13,000 cash from the issue of common stock. Classic Company paid an $8,000 cash dividend to the stockholders during 2013.

Answer: To determine the net income or loss Classic reported on its 2013 income statement you have to take 53,400 – 13,000 + 8,000 which gives you 48,400.

Exercise 1-12: Marcum Company was started in 2012 when it issued a note to borrow $6,200 cash. Required Write an accounting equation, and record the effects of the borrowing transaction under the appropriate general ledger account headings.

Answer:

Exercise 1-18: Davis Company was started on January 1, 2012. During the month of January, Davis earned $4,600 of revenue and incurred $3,000 of expense. Davis closes its books on December 31 of each year.

Answer:

a) 4600 revenue – 3000 expenses = $1600

b) Retained earnings are a component of stockholders’ equity which is an element of financial statements.

c) Nothing happens to the retained earnings account when the expenses are recognized. This is a closing process and will be changed at closing of the books.

Exercise 2-1: Valmont, Inc. experienced the following events in 2012, in its first year of operations.

1. Received $20,000 cash from the issue of common stock.

2. Performed services on account for $50,000.

3. Paid the utility expense of $12,500.

4. Collected $39,000 of the accounts receivable.

5. Recorded $9,000 of accrued salaries at the end of the year.

6. Paid a $5,000 cash dividend to the shareholders.

Required

a. Record the events in general ledger accounts under an accounting equation. In the last column of the table, provide appropriate account titles for the Retained Earnings amounts.

b. Prepare the income statement, statement of changes in stockholder's equity, balance sheet, and statement of cash flows for the 2012 accounting period.

c. Why is the amount of net income different from the amount of net cash flow from operating activities?

a) Answer

Valmont, Inc.

General Ledger Accounts

Event

Assets

=

Liabilities

+

Stockholders’ Equity

Acct. Titles

For RE

Cash

Accounts

Receivable

Salaries

Payable

Common

Stock

Retained

Earnings

1.

20,000

20,000

2.

50,000

50,000

Preformed services

3.

12,500

12,500

Utility expense

4.

39,000

39,000

5.

9,000

9,000

Salary expense

6.

5,000

5,000

Dividend

to shareholders

b) Answer

Valmont, Inc.

Financial Statements

Income Statement

For the Year Ended December 31, 2012

Services revenue $50,000

Salary expense (9,000 )

Utility expense (12,500)

Net income $28,500

Statement of Changes in Stockholders’ Equity

For the Year Ended December 31, 2012

Beginning common stock $ 0

Plus: Common stock issued 20,000

Ending common stock $20,000

Beginning retained earnings 0

Plus: Net income 39,000

Less Dividends 5,000

Ending retained earnings 34,000

Total stockholders’ equity $54,000

Balance Sheet

As of December 31,2012

Assets

Cash $20,000

Accounts receivable 39,000

Total assets $59,000

Liabilities

Salaries payable $ 9,000

Stockholders’ equity

Common stock $20,000

Retained earnings 34,000

Total stockholders’ equity 54,000

Total liabilities and stockholders’ equity $63,000

Statement of Cash Flows

For the Year Ended December 31, 2012

Cash flows from operating activities

Cash receipts from customers $39,000

Cash payments for salary expense (9,000)

Cash payments for utility expenses (12,500)

Net cash flow from operating activities $17,500

Cash flow from investing activities

Cash flows from financing activities

Cash receipt from issuing common stock $20,000

Net cash flow from financing activities 20,000

Net change in cash $37,500

Plus: Beginning cash balance 0

Ending cash balance $37,500

c) Answer:

The difference in net income and net cash flow is, not all the money has come in from everyone and things needed to be paid.

Exercise 2-3: The following events apply to 2012, the first year of operations of Sentry Services.

1. Acquired $45,000 cash from the issue of common stock.

2. Paid $18,000 cash in advance for one-year rental contract for office space.

3. Provided services for $36,000 cash.

4. Adjusted the records to recognize the use of the office space. The one-year contract started on May 1, 2012. The adjustment was made as of December 32, 2012.

Required

a. Write an accounting equation and record the effects of each accounting event under the appropriate general ledger account headings.

b. Prepare an income statement and statement of cash flows for the 2012 accounting period.

c. Explain the difference between the amount of net income and amount of net cash flow from operating activities.