Chapter 1 homework financial accounting

CHAPTER 1

Accounting in Action

ASSIGNMENT CLASSIFICATION TABLE

Learning Objectives

Questions

Brief

Exercises

Do It!

Exercises

A

Problems

B

Problems

1. Explain what accounting is.

1, 2, 5

1

1

2. Identify the users and uses of accounting.

3, 4

1

2

3. Understand why ethics is a fundamental business concept.

1

3

4. Explain generally accepted accounting principles.

6

1

3, 4

5. Explain the monetary unit assumption and the economic entity assumption.

7, 8, 9, 10

4

6. State the accounting equation, and define its components.

11, 12, 13, 22

1, 2, 3, 4, 5

2, 4

5, 6, 7, 10, 11, 16

1A, 2A 4A, 5A

1B, 2B 4B, 5B

7. Analyze the effects of business transactions on the accounting equation.

14, 15, 16, 18

6, 7, 8, 9

3

6, 7, 8, 10

1A, 2A, 4A

1B, 2B, 4B

8. Understand the four financial statements and how they are prepared.

17, 19, 20, 21

10, 11

4

9, 10, 11, 12, 13, 14, 15, 16

2A, 3A, 4A, 5A

2B, 3B, 4B, 5B

ASSIGNMENT CHARACTERISTICS TABLE

Problem

Number

Description

Difficulty

Level

Time Allotted (min.)

1A

Analyze transactions and compute net income.

Moderate

40–50

2A

Analyze transactions and prepare income statement, owner’s equity statement, and balance sheet.

Moderate

50–60

3A

Prepare income statement, owner’s equity statement, and balance sheet.

Moderate

50–60

4A

Analyze transactions and prepare financial statements.

Moderate

40–50

5A

Determine financial statement amounts and prepare owner’s equity statement.

Moderate

40–50

1B

Analyze transactions and compute net income.

Moderate

40–50

2B

Analyze transactions and prepare income statement, owner’s equity statement, and balance sheet.

Moderate

50–60

3B

Prepare income statement, owner’s equity statement, and balance sheet.

Moderate

50–60

4B

Analyze transactions and prepare financial statements.

Moderate

40–50

5B

Determine financial statement amounts and prepare owner’s equity statement.

Moderate

40–50

WEYGANDT ACCOUNTING PRINCIPLES 11E

CHAPTER 1

ACCOUNTING IN ACTION

Number

LO

BT

Difficulty

Time (min.)

BE1

6

AP

Simple

2–4

BE2

6

AP

Simple

3–5

BE3

6

AP

Moderate

4–6

BE4

6

AP

Moderate

4–6

BE5

6

C

Simple

2–4

BE6

7

C

Simple

2–4

BE7

7

C

Simple

2–4

BE8

7

C

Simple

2–4

BE9

7

C

Simple

1–2

BE10

8

AP

Simple

3–5

BE11

8

C

Simple

2–4

DI1

1, 2, 3, 4

K

Simple

2–4

DI2

6

K

Simple

2–4

DI3

7

AP

Simple

6–8

DI4

6, 8

AP

Moderate

8–10

EX1

1

C

Moderate

5–7

EX2

2

C

Simple

6–8

EX3

3, 4

C

Moderate

6–8

EX4

4, 5

C

Moderate

6–8

EX5

6

C

Simple

4–6

EX6

6, 7

C

Simple

6–8

EX7

6, 7

C

Simple

4–6

EX8

7

AP

Moderate

12–15

EX9

8

AP

Simple

12–15

EX10

6, 8

AP

Moderate

8–10

EX11

6, 8

AP

Moderate

6–8

EX12

8

AP

Simple

8–10

EX13

8

AN

Simple

8–10

EX14

8

AP

Simple

10–12

EX15

8

AP

Simple

6–8

EX16

6, 8

AP

Moderate

6–8

ACCOUNTING IN ACTION (Continued)

Number

LO

BT

Difficulty

Time (min.)

P1A

6, 7

AP

Moderate

40–50

P2A

6–8

AP

Moderate

50–60

P3A

8

AP

Moderate

50–60

P4A

6–8

AP

Moderate

40–50

P5A

6–8

AP

Moderate

40–50

P1B

6, 7

AP

Moderate

40–50

P2B

6–8

AP

Moderate

50–60

P3B

8

AP

Moderate

50–60

P4B

6–8

AP

Moderate

40–50

P5B

6–8

AP

Moderate

40–50

BYP1

8

AN

Simple

10–15

BYP2

8

AN, E

Simple

10–15

BYP3

BYP4

8

9

AN, E

C, AN

Simple

Simple

10–15

15–20

BYP5

7

E

Moderate

15–20

BYP6

8

E

Simple

12–15

BYP7

3

E

Simple

10–12

BYP8

BYP9

BYP10

3

–

–

E

AP

C

Moderate

Moderate

Simple

15–20

15–20

10–15

ANSWERS TO QUESTIONS

 1. Yes, this is correct. Virtually every organization and person in our society uses accounting information. Businesses, investors, creditors, government agencies, and not-for-profit organizations must use accounting information to operate effectively.

 2. Accounting is the process of identifying, recording, and communicating the economic events of an organization to interested users of the information. The first step of the accounting process is therefore to identify economic events that are relevant to a particular business. Once identified and measured, the events are recorded to provide a history of the financial activities of the organization. Recording consists of keeping a chronological diary of these measured events in an orderly and systematic manner. The information is communicated through the preparation and distribution of accounting reports, the most common of which are called financial statements. A vital element in the communication process is the accountant’s ability and responsibility to analyze and interpret the reported information.

 3. (a) Internal users are those who plan, organize, and run the business and therefore are officers and other decision makers.

(b) To assist management, managerial accounting provides internal reports. Examples include financial comparisons of operating alternatives, projections of income from new sales campaigns, and forecasts of cash needs for the next year.

 4. (a) Investors (owners) use accounting information to make decisions to buy, hold, or sell owner​ship shares of a company.

(b) Creditors use accounting information to evaluate the risks of granting credit or lending money.

 5. No, this is incorrect. Bookkeeping usually involves only the recording of economic events and therefore is just one part of the entire accounting process. Accounting, on the other hand, involves the entire process of identifying, recording, and communicating economic events.

 6. Trenton Travel Agency should report the land at $90,000 on its December 31, 2014 balance sheet. This is true not only at the time the land is purchased, but also over the time the land is held. In determining which measurement principle to use (cost or fair value) companies weigh the factual nature of cost figures versus the relevance of fair value. In general, companies use cost. Only in situations where assets are actively traded do companies apply the fair value principle. An important concept that accountants follow is the historical cost principle.

 7. The monetary unit assumption requires that only transaction data that can be expressed in terms of money be included in the accounting records. This assumption enables accounting to quantify (measure) economic events.

 8. The economic entity assumption requires that the activities of the entity be kept separate and distinct from the activities of its owners and all other economic entities.

 9. The three basic forms of business organizations are: (1) proprietorship, (2) partnership, and (3) corporation.

Questions Chapter 1 (Continued)

10. One of the advantages Rachel Hipp would enjoy is that ownership of a corporation is repre​sented by transferable shares of stock. This would allow Rachel to raise money easily by selling a part of her ownership in the company. Another advantage is that because holders of the shares (stockholders) enjoy limited liability; they are not personally liable for the debts of the corporate entity. Also, because ownership can be transferred without dissolving the corporation, the corporation enjoys an unlimited life.

11. The basic accounting equation is Assets = Liabilities + Owner’s Equity.

12. (a) Assets are resources owned by a business. Liabilities are claims against assets. Put more simply, liabilities are existing debts and obligations. Owner’s equity is the ownership claim on total assets.

(b) Owner’s equity is affected by owner’s investments, drawings, revenues, and expenses.

13. The liabilities are: (b) Accounts payable and (g) Salaries and wages payable.

14. Yes, a business can enter into a transaction in which only the left side of the accounting equation is affected. An example would be a transaction where an increase in one asset is offset by a decrease in another asset. An increase in the Equipment account which is offset by a decrease in the Cash account is a specific example.

15. Business transactions are the economic events of the enterprise recorded by accountants because they affect the basic accounting equation.

(a) The death of the owner of the company is not a business transaction as it does not affect the basic accounting equation.

(b) Supplies purchased on account is a business transaction as it affects the basic accounting equation.

(c) An employee being fired is not a business transaction as it does not affect the basic accounting equation.

(d) A withdrawal of cash from the business is a business transaction as it affects the basic accounting equation.

16. (a) Decrease assets and decrease owner’s equity.

(b) Increase assets and decrease assets.

(c) Increase assets and increase owner’s equity.

(d) Decrease assets and decrease liabilities.

17. (a) Income statement. (d) Balance sheet.

(b) Balance sheet. (e) Balance sheet and owner’s equity statement.

(c) Income statement. (f) Balance sheet.

18. No, this treatment is not proper. While the transaction does involve a receipt of cash, it does not represent revenues. Revenues are the gross increase in owner’s equity resulting from business activities entered into for the purpose of earning income. This transaction is simply an additional investment made by the owner in the business.

Questions Chapter 1 (Continued)

19. Yes. Net income does appear on the income statement—it is the result of subtracting expenses from revenues. In addition, net income appears in the owner’s equity statement—it is shown as an addition to the beginning-of-period capital. Indirectly, the net income of a company is also included in the balance sheet. It is included in the capital account which appears in the owner’s equity section of the balance sheet.

20. (a) Ending capital balance $198,000

Beginning capital balance 168,000

Net income $ 30,000

(b) Ending capital balance $198,000

Beginning capital balance 168,000

  30,000

Deduct: Investment 13,000

Net income $ 17,000

21. (a) Total revenues ($20,000 + $70,000) $90,000

(b) Total expenses ($26,000 + $40,000) $66,000

(c) Total revenues $90,000

Total expenses 66,000

Net income $24,000

22. Apple’s accounting equation at September 24, 2011 was $116,371,000,000 = $39,756,000,000 + $76,615,000,000.

SOLUTIONS TO BRIEF EXERCISES

BRIEF EXERCISE 1-1

(a) $90,000 – $50,000 = $40,000 (Owner’s Equity).

(b) $40,000 + $70,000 = $110,000 (Assets).

(c) $94,000 – $53,000 = $41,000 (Liabilities).

BRIEF EXERCISE 1-2

(a) $120,000 + $232,000 = $352,000 (Total assets).

(b) $190,000 – $91,000 = $99,000 (Total liabilities).

(c) $800,000 – 0.5 ADVANCE \r 1 ($800,000) = $400,000 (Owner’s equity).

BRIEF EXERCISE 1-3

(a) ($800,000 + $150,000) – ($300,000 – $80,000) = $730,000

(Owner’s equity).

(b) ($300,000 + $100,000) + ($800,000 – $300,000 – $70,000) = $830,000

(Assets).

(c) ($800,000 – $80,000) – ($800,000 – $300,000 + $120,000) = $100,000

(Liabilities).

BRIEF EXERCISE 1-4

Owner’s Equity

Assets

=

Liabilities

+

Owner’s Capital

–

Owner’s Drawings

+

Revenues

–

Expenses

(a)

X

=

$90,000

+

$150,000

–

$40,000

+

$450,000

–

$320,000

X

=

$90,000

+

$240,000

X

=

$330,000

(b)

$57,000

=

X

+

$25,000

–

$7,000

+

$52,000

–

$35,000

$57,000

=

X

+

$35,000

X

=

$22,000 ($57,000 – $35,000)

(c)

$600,000

=

($600,000 x 2/3)

+

X (Owner’s equity)

$600,000

=

$400,000

+

X

X

=

$200,000

BRIEF EXERCISE 1-5

A (a) Accounts receivable A (d) Supplies

L (b) Salaries and wages payable OE (e) Owner’s capital

A (c) Equipment L (f) Notes payable

BRIEF EXERCISE 1-6

Assets

Liabilities

Owner’s Equity

(a)

+

+

NE

(b)

+

NE

+

(c)

–

NE

–

BRIEF EXERCISE 1-7

Assets

Liabilities

Owner’s Equity

(a)

+

NE

+

(b)

–

NE

–

(c)

NE

NE

NE

BRIEF EXERCISE 1-8

E (a) Advertising expense D (e) Owner’s drawings

R (b) Service revenue R (f) Rent revenue

E (c) Insurance expense E (g) Utilities expense

E (d) Salaries and wages expense

BRIEF EXERCISE 1-9

R (a) Received cash for services performed

NOE (b) Paid cash to purchase equipment

E (c) Paid employee salaries

BRIEF EXERCISE 1-10

FRITZ COMPANY

Balance Sheet

December 31, 2014

Assets

Cash $ 49,000

Accounts receivable 72,500

Total assets $121,500

Liabilities and Owner’s Equity

Liabilities

Accounts payable $ 90,000

Owner’s equity

Owner’s capital 31,500

Total liabilities and owner’s equity $121,500

BRIEF EXERCISE 1-11

BS (a) Notes payable

IS (b) Advertising expense

OE, BS (c) Owner’s capital

BS (d) Cash

IS (e) Service revenue

SOLUTIONS FOR DO IT! REVIEW EXERCISES

DO IT! 1-1

1. False. The three steps in the accounting process are identification, recording, and communication.

2. True

3. False. Congress passed the Sarbanes-Oxley Act to reduce unethical behavior and decrease the likelihood of future corporate scandals.

4. False. The primary accounting standard-setting body in the United States is the Financial Accounting Standards Board (FASB).

5. True.

DO IT! 1-2

1. Drawings is owner’s drawings (D); it decreases owner’s equity.

2. Rent Revenue is revenue (R); it increases owner’s equity.

3. Advertising Expense is an expense (E); it decreases owner’s equity.

4. When the owner puts personal assets into the business, it is investment by owner (I); it increases owner’s equity.

DO IT! 1-3

Assets

=

Liabilities

+

Owner’s Equity

Cash

+

Accounts Receivable

=

Accounts Payable

+

Owner’s Capital

–

Owner’s Drawings

+

Revenues

–

Expenses

(1)

+$20,000

+$20,000

(2)

+$20,000

–$20,000

(3)

+$2,300

–$2,300

(4)

–$ 3,600

–$3,600

DO IT! 1-4

(a) The total assets are $47,000, comprised of Cash $4,500, Accounts Receivable $13,500, and Equipment $29,000.

(b) Net income is $18,500, computed as follows:

Revenues

Service revenue $51,500

Expenses

Salaries and wages expense $16,500

Rent expense 10,500

Advertising expense 6,000

Total expenses 33,000

Net income $18,500

DO IT! 1-4 (Continued)

(c) The ending owner’s equity balance of Howard Company is $19,000. By rewriting the accounting equation, we can compute Owner’s Equity as Assets minus Liabilities, as follows:

Total assets [as computed in (a)] $47,000

Less: Liabilities

Notes payable $25,000

Accounts payable 3,000 28,000

Owner’s equity $19,000

Note that it is not possible to determine the company’s owner’s equity in any other way, because the beginning balance for owner’s equity is not provided.

SOLUTIONS TO EXERCISES

EXERCISE 1-1

C Analyzing and interpreting information.

R Classifying economic events.

C Explaining uses, meaning, and limitations of data.

R Keeping a systematic chronological diary of events.

R Measuring events in dollars and cents.

C Preparing accounting reports.

C Reporting information in a standard format.

I Selecting economic activities relevant to the company.

R Summarizing economic events.

EXERCISE 1-2

(a) Internal users

Marketing manager

Production supervisor

Store manager

Vice-president of finance

External users

Customers

Internal Revenue Service

Labor unions

Securities and Exchange Commission

Suppliers

(b) I Can we afford to give our employees a pay raise?

E Did the company earn a satisfactory income?

I Do we need to borrow in the near future?

E How does the company’s profitability compare to other companies?

I What does it cost us to manufacture each unit produced?

I Which product should we emphasize?

E Will the company be able to pay its short-term debts?

EXERCISE 1-3

Jill Motta, president of Motta Company, instructed Linda Berger, the head of the accounting department, to report the company’s land in their 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 Motta Company, potential stockholders and creditors, other users of Motta’s accounting reports, Jill Motta, and Linda Berger. All users of Motta’s accounting reports could be harmed by relying on information that may be unreliable. Jill Motta could benefit if the company is able to attract more investors, but would be harmed if the inappropriate reporting is discovered. Similarly, Linda Berger could benefit by pleasing her boss, but would be harmed if the inappropriate reporting is discovered.

Linda’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 Motta’s accounting reports to make finan​cial decisions. Linda should report the land at its cost of $100,000. She should try to convince Jill Motta that this is the appropriate course of action, but be prepared to resign her position if Motta insists.

EXERCISE 1-4

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

EXERCISE 1-5

Asset

Liability

Owner’s Equity

Cash

Accounts payable

Owner’s capital

Equipment

Notes payable

Supplies

Accounts receivable

Salaries and wages payable

EXERCISE 1-6

1. Increase in assets and increase in owner’s equity.

2. Decrease in assets and decrease in owner’s equity.

3. Increase in assets and increase in liabilities.

4. Increase in assets and increase in owner’s equity.

5. Decrease in assets and decrease in owner’s equity.

6. Increase in assets and decrease in assets.

7. Increase in liabilities and decrease in owner’s equity.

8. Increase in assets and decrease in assets.

9. Increase in assets and increase in owner’s equity.

EXERCISE 1-7

1. (c) 5. (d)

2. (d) 6. (b)

3. (a) 7. (e)

4. (b) 8. (f)

EXERCISE 1-8

(a) 1. Owner 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. Performed $8,500 of services, receiving $4,600 cash and $3,900 on account.

5. Paid $1,500 cash on accounts payable.

EXERCISE 1-8 (Continued)

6. Owner withdrew $2,000 cash for personal use.

7. Paid $650 cash for rent.

8. Collected $450 cash from customers on account.

9. Paid salaries and wages of $4,800.

10. Incurred $500 of utilities expense on account.

(b) Investment $15,000

Service revenue 8,500

Drawings (2,000 )

Rent expense (650 )

Salaries and wages expense (4,800 )

Utilities expense (500 )

Increase in owner’s equity $15,550

(c) Service revenue $8,500

Rent expense (650 )

Salaries and wages expense (4,800)

Utilities expense (500 )

Net income $2,550

EXERCISE 1-9

LIAM AGLER & CO.

Income Statement

For the Month Ended August 31, 2014

Revenues

Service revenue $8,500

Expenses

Salaries and wages expense $4,800

Rent expense 650

Utilities expense 500

Total expenses 5,950

Net income $2,550

EXERCISE 1-9 (Continued)

LIAM AGLER & CO.

Owner’s Equity Statement

For the Month Ended August 31, 2014

Owner’s capital, August 1 $ 0

Add: Investments $15,000

Net income 2,550 17,550

17,550

Less: Drawings 2,000

Owner’s capital, August 31 $15,550

LIAM AGLER & CO.

Balance Sheet

August 31, 2014

Assets

Cash $ 8,350

Accounts receivable 3,450

Supplies 750

Equipment 5,000

Total assets $17,550

Liabilities and Owner’s Equity

Liabilities

Accounts payable $ 2,000

Owner’s equity

Owner’s capital 15,550

Total liabilities and owner’s equity $17,550

EXERCISE 1-10

(a) Owner’s equity—12/31/13 ($400,000 – $250,000) $150,000

Owner’s equity—1/1/13 100,000

Increase in owner’s equity 50,000

Add: Drawings 15,000

Net income for 2013 $ 65,000

EXERCISE 1-10 (Continued)

(b) Owner’s equity—12/31/14 ($460,000 – $300,000) $160,000

Owner’s equity—1/1/14—see (a) 150,000

Increase in owner’s equity 10,000

Less: Additional investment 45,000

Net loss for 2014 $ 35,000

(c) Owner’s equity—12/31/15 ($590,000 – $400,000) $190,000

Owner’s equity—1/1/15—see (b) 160,000

Increase in owner’s equity 30,000

Less: Additional investment 15,000

15,000

Add: ADVANCE \r 1 Drawings 25,000

Net income for 2015 $ 40,000

EXERCISE 1-11

(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 $215,000

Total expenses 175,000

Net income $ 40,000

Increase in owner’s equity $ 15,000

Less: Net income $(40,000)

Add: ADVANCE \r 1 Drawings 29,000) (11,000 )

Additional investment $ 4,000

(c) Total assets (beginning of year) $129,000

Total owner’s equity (beginning of year) 80,000

Total liabilities (beginning of year) $ 49,000

EXERCISE 1-11 (Continued)

(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

EXERCISE 1-12

DAVID PANDE CO.

Income Statement

For the Year Ended December 31, 2014

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

DAVID PANDE CO.

Owner’s Equity Statement

For the Year Ended December 31, 2014

Owner’s capital, January 1 $48,000

Add: ADVANCE \r 1 Net income 18,800

66,800

Less: Drawings 6,000

Owner’s capital, December 31 $60,800

EXERCISE 1-13

TAYLOR COMPANY

Balance Sheet

December 31, 2014

Assets

Cash $15,000

Accounts receivable 9,500

Supplies 8,000

Equipment 46,000

Total assets $78,500

Liabilities and Owner’s Equity

Liabilities

Accounts payable $21,000

Owner’s equity

Owner’s capital ($67,500 – $10,000) 57,500

Total liabilities and owner’s equity $78,500

EXERCISE 1-14

(a) Camping fee revenues $140,000

General store revenues 65,000

Total revenue 205,000

Expenses 150,000

Net income $ 55,000

(b) DEER PARK

Balance Sheet

December 31, 2014

Assets

Cash $ 23,000

Accounts Receivable 17,500

Equipment 105,500

Total assets $146,000

EXERCISE 1-14 (Continued)