Chapter 2

Solutions

Ex. 2.3
1.7 i Financial accounting MERCER COMPANY
h Manage ment accounting Balance Sheet
b Financial reporting December 31, 2007
f Financial Assets
statements Liabilities & Owners' Equity
g ………………………….
Cash Ge neral purpose assumption
$36,300 Liabilities:
c Integrity
Accounts receivable …………. 56,700 Notes payable ……………………………….$207,000
e Internal
Land control
…………………………. 90,000 Accounts payable ………………………….. 43,800
d Public accounting
Building …………………….. 210,000 Total liabilities………………………….. $250,800
a Bookke
Office eping
equipment……………. 12,400 Owners’ equity:
Capital stock ………………………………. 75,000
Ex. 1.8 b Institute of Inte rnal Auditors Retained earnings …………………………. 79,600
a Se curities and Exchange
Total …………………………. $405,400 CommissionTotal………………………………………….. $405,400
g Ame rican Institute of CPAs
The
c amount of of
Institute retained earningsAccountants
Management is calculated as the difference between total assets and
liabilities plus capital
h Financial stock: $405,400
Accounting Standards– Board
($250,800 + $75,000) = $79,600
e Ame rican Accounting Association
d Public Company Accounting Ove rsight Board
f International Accounting Standards Board

Ex. 2.6 Transaction Assets = Liabilities + Owners’

a I I Equity
NE
b NE* NE NE
c D D NE
d D D NE
e I NE I
f I I NE
g I NE I
h NE* NE NE
i NE* NE NE
*Could be I/D offsetting
 Chapter 2
Solutions

Equity

………….$207,000
………….. 43,800
……….. $250,800

…………. 75,000
…………. 79,600
……….. $405,400

al assets and
Ex. 2.11 GARDIAL COMPANY
Statement of Cash Flows
For the Month Ended October 31, 2007
Cash flows from operating activities:
Cash received from revenues ………………………………… $ 10,000
Cash paid for expenses ……………………………………… (7,200)
Net cash provided by operating activities …………… 2,800

Cash flows from investing activities:

Cash paid for equipment ………………………………………………. (2,500)

Cash flows from financing activities:

Cash received from sale of capital stock …………………….. $ 6,000
Cash used to repay bank loans ………………………………… (2,000)
Net cash provided by financing activities …………………… 4,000

Increase in cash …………………………………………………… $ 4,300

Cash balance, October 1, 2007 …………………………………… 7,450
Cash balance, October 31, 2007 ……………………………… $ 11,750

Ex. 2.12 HERNANDEZ, INC.

Income Statement
For the Month Ended March 31, 2007
Revenues ………………………………………………………………………… $ 9,500
Expenses ……………………………………………………………………….. 5,465
Net income ……………………………………………………………………… $ 4,035

The cash received from bank loans is a positive cash flow—financing activity—in the
statement of cash flows, but is not included in the income statement. Dividends paid to
stockholders are a negative cash flow—financing activity—in the statement of cash flows,
but are not included in the income statement.

Ex. 2.13 YARNELL COMPANY

Income Statement
For the Month Ended August 31, 2007
Service revenues ………………………………………………………………… $ 15,000
Expenses …………………………………………………………………………… 7,500
Net income …………………………………………………………………………… $ 7,500
The following four items represent cash flows, but are not revenues or expenses that
should be included in the income statement:
·     Investment by stockholders
·     Loan from bank
·     Payments to long-term creditors
·     Purchase of land
Ex. 2.14 YARNELL COMPANY
Statement of Cash Flows
For the Month Ended August 31, 2007
Cash flows from operating activities:
Cash received from revenues ……………………………… $ 15,000
Cash paid for expenses …………………………………… (7,500)
Net cash provided by operating activities ……………… 7,500

Cash flows from investing activities:

Cash paid for purchase of land …………………………… (16,000)

Cash flows from financing activities:

Cash received from bank loan …………………………… $ 15,000
Cash received from investment by stockholders ……… 5,000
Cash paid to long-term creditors ………………………… (12,000)
8,000

Decrease in cash $ (500)

Cash balance, August 1, 2007 ……………………………… 7,200
Cash balance, August 31, 2007 ……………………………… 6,700
 SOLUTIONS TO PROBLEMS SET A
PROBLEM 2.1A
SMOKEY MOUNTAIN LODGE
a.
SMOKEY MOUNTAIN LODGE
Balance Sheet
December 31, 2007
Assets Liabilities & Owners' Equity
Cash $ 31,400 Liabilities:
Accounts receivable 10,600 Accounts payable $ 54,800
Land 425,000 Salaries payable 33,500
Buildings 450,000 Interest payable 12,000
Furnishings 58,700 Notes payable 620,000
Equipment 39,200 $ 720,300
Snowmobiles 15,400 Owners' equity:
Capital stock 135,000
Retained earnings (1) 175,000
Total $ 1,030,300 Total $ 1,030,300

(1) Computed as total assets, $1,030,300, less total liabilities, $720,300, less capital stock,
$ 135,000.

b. The balance sheet indicates that Smokey Mountain Lodge is in a weak financial position.
The highly liquid assets—cash and receivables—total only $42,000, but the company has
$100,300 of debts due in the near future (accounts payable, salaries payable, and interest
payable).

Note to instructor: Students were asked to base their answers to part b on the balance sheet alone.
Students may correctly point out that a balance sheet does not indicate the rate at which cash flows
into a business. Perhaps the company can generate enough cash from daily operations to pay its
debts. A recent statement of cash flows would be useful in making a more complete analysis of the
company's financial position.
 PR
GOLDSTAR COMM

Assets =
Office
Cash + Land + Building + Equipment =
December 31 balances $ 37,000 $ 95,000 $ 125,000 $ 51,250
(1) 35,000
Balances $ 72,000 $ 95,000 $ 125,000 $ 51,250
(2) (22,500) 35,000 55,000
Balances $ 49,500 $ 130,000 $ 180,000 $ 51,250
(3) 9,500
Balances $ 49,500 $ 130,000 $ 180,000 $ 60,750
(4) 20,000
Balances $ 69,500 $ 130,000 $ 180,000 $ 60,750
(5) (28,250)
Balances $ 41,250 $ 130,000 $ 180,000 $ 60,750
 PROBLEM 2.3A
GOLDSTAR COMMUNICATIONS
Owners'
Liabilities + Equity
Notes Accounts Capital
Payable + Payable + Stock
$ 80,000 $ 28,250 $ 200,000
35,000
$ 80,000 $ 28,250 $ 235,000
67,500
$ 147,500 $ 28,250 $ 235,000
9,500
$ 147,500 $ 37,750 $ 235,000
20,000
$ 167,500 $ 37,750 $ 235,000
$ (28,250)
$ 167,500 $ 9,500 $ 235,000
 P
RANKIN TR

Assets =
Accounts Office
Cash + Receivable + Trucks + Equipment =
December 31 balances $ 9,500 $ 13,900 $ 68,000 $ 3,800
(1) (2,700) 2,700
Balances $ 6,800 $ 13,900 $ 68,000 $ 6,500
(2) 4,000 (4,000)
Balances $ 10,800 $ 9,900 $ 68,000 $ 6,500
(3) (3,200)
Balances $ 7,600 $ 9,900 $ 68,000 $ 6,500
(4) 10,000
Balances $ 17,600 $ 9,900 $ 68,000 $ 6,500
(5) (15,000) 30,500
Balances $ 2,600 $ 9,900 $ 98,500 $ 6,500
(6) 75,000
Balances $ 77,600 $ 9,900 $ 98,500 $ 6,500
 PROBLEM 2.4A
RANKIN TRUCK RENTAL
Owners'
Liabilities + Equity
Notes Accounts Capital
Payable + Payable + Stock
$ 20,000 $ 10,200 $ 65,000

$ 20,000 $ 10,200 $ 65,000

$ 20,000 $ 10,200 $ 65,000

(3,200)
$ 20,000 $ 7,000 $ 65,000
10,000
$ 30,000 $ 7,000 $ 65,000
15,500
$ 45,500 $ 7,000 $ 65,000
75,000
$ 45,500 $ 7,000 $ 140,000
20 Minutes, Medium PROBLEM 2.5A
HERE COME THE CLOWNS!
a.
HERE COME THE CLOWNS!
Balance Sheet
June 30, 2007
Assets Liabilities & Owners' Equity
Cash * $ 32,520 Liabilities:
Notes receivable 9,500 Notes payable $ 180,000
Accounts receivable 7,450 Accounts payable 26,100
Animals 189,060 Salaries payable 9,750
Cages 24,630 Total liabilities $ 215,850
Costumes 31,500 Owners' equity:
Props and equipment 89,580 Capital stock 310,000
Tents 63,000 Retained earnings 27,230
Trucks & wagons 105,840
Total $ 553,080 Total $ 553,080

* Total liabilities and owners' equity, $553,080, minus total of all other assets, $520,560 ($9,500 + $7,450
+ $189,060 + $24,630 + $31,500 +$89,580 + $63,000 + $105,840).

b. The loss of an asset, Tents, from a fire would require a revised balance sheet that reflects a decrease in
total assets. When total assets are decreased, the other balance sheet total (that is, the total of liabilities
and owners’ equity) must also decrea
 PROBLEM 2.6A
WILSON FARMS, INC.
a.
WILSON FARMS INC.
Balance Sheet
September 30, 2007
Assets Liabilities & Owners' Equity
Cash $ 16,710 Liabilities:
Accounts receivable 22,365 Notes payable $ 330,000
Land 490,000 Accounts payable 77,095
Barns and sheds 78,300 Property taxes payable 9,135
Citrus trees 76,650 Wages payable 5,820
Livestock 120,780 Total liabilities $ 422,050
Irrigation system 20,125 Owners' equity:
Farm machinery 42,970 Capital stock 290,000
Fences & gates 33,570 Retained earnings * 189,420
Total $ 901,470 Total $ 901,470

*Total assets, $901,470, minus total liabilities, $422,050, less capital stock, $290,000.

b. The loss of an asset, Barns and Sheds, from a tornado would cause a decrease in total assets. When total
assets are decreased, the balance sheet total of liabilities and owners’ equity must also decrease. Since
there is no change in liabilities as a resul
 PROBLEM 2.7A
THE OVEN BAKERY
a.
THE OVEN BAKERY
Balance Sheet
August 1, 2007
Assets Liabilities & Owners' Equity
Cash $ 6,940 Liabilities:
Accounts receivable 11,260 Notes payable $ 74,900
Supplies 7,000 Accounts payable 16,200
Land 67,000 Salaries payable 8,900
Building 84,000 Total liabilities $ 100,000
Equipment & fixtures 44,500 Owners' equity:
Capital stock 80,000
Retained earnings 40,700
Total $ 220,700 Total $ 220,700

*Retained earnings ($40,700) = Total assets ($220,700), less total liabilities ($100,000) and capital stock
($80,000).

b.
THE OVEN BAKERY
Balance Sheet
August 3, 2007
Assets Liabilities & Owners' Equity
Cash $ 14,490 Liabilities:
Accounts receivable 11,260 Notes payable $ 74,900
Supplies 8,250 Accounts payable 7,200
Land 67,000 Salaries payable 8,900
Building 84,000 Total liabilities $ 91,000
Equipment & fixtures 51,700 Owners' equity:
Capital stock 105,000
Retained earnings 40,700
Total $ 236,700 Total $ 236,700
 PROBLEM 2.7A
THE OVEN BAKERY (concluded)
THE OVEN BAKERY
Statement of Cash Flows
For the Period August 1-3, 2007
Cash flows from operating activities:
Cash payment of accounts payable $ (16,200)
Cash purchase of supplies (1,250)
Cash used in operating activities: $ (17,450)

Cash flows from investing activities:

None

Cash flows from financing activities:

Sale of capital stock $ 25,000

Increase in cash $ 7,550

Cash balance, August 1, 2005 6,940
Cash balance, August 3, 2005 $ 14,490

c. The Oven Bakery is in a stronger financial position on August 3 than it was on August 1.

On August 1, the highly liquid assets (cash and accounts receivable) total only $18,200, but the
company has $25,100 in debts due in the near future (accounts payable plus salaries payable).

On August 3, after additional infusion of cash from the sale of stock, the liquid assets total $25,750, and
debts due in the near future amount to $16,100.

Note to instructor: The analysis of financial position strength in part c is based solely upon the balance
sheets at August 1 and August 3. Hopefully, students will raise the issue regarding necessity of information
about operations, and the rate at which
 PROBLEM 2.8A
THE SWEET SODA SHOP
a.
THE SWEET SODA SHOP
Balance Sheet
September 30, 2007
Assets Liabilities & Owners' Equity
Cash $ 7,400 Liabilities:
Accounts receivable 1,250 Notes payable * $ 70,000
Supplies 3,440 Accounts payable 8,500
Land 55,000 Total liabilities $ 78,500
Building 45,500 Owners' equity:
Furniture and fixtures 20,000 Capital stock 50,000
Retained earnings 4,090
Total $ 132,590 Total $ 132,590

*Total assets, $132,590 less owners’ equity, $54,090 less accounts payable, $8,500, equals notes payable.
b.
THE SWEET SODA SHOP
Balance Sheet
October 6, 2007
Assets Liabilities & Owners' Equity
Cash $ 29,400 Liabilities:
Accounts receivable 1,250 Notes payable $ 70,000
Supplies 4,440 Accounts payable 18,000
Land 55,000 Total liabilities $ 88,000
Building 45,500 Owners' equity:
Furniture and fixtures 38,000 Capital stock 80,000
Retained earnings 5,590
Total $ 173,590 Total $ 173,590

THE SWEET SODA SHOP

Income Statement
For the Period October 1-6, 2007
Revenues $ 5,500
Expenses (4,000)
Net income $ 1,500
 PROBLEM 2.8A
THE SWEET SODA SHOP (concluded)
THE SWEET SODA SHOP
Statement of Cash Flows
For the Period October 1-6, 2007
Cash flows from operating activities:
Cash received from revenues $ 5,500
Cash paid for expenses (4,000)
Cash paid for accounts payable (8,500)
Cash paid for supplies (1,000)
Cash used in operating activities $ (8,000)

Cash flows from investing activities:

None

Cash flows from financing activities:

Cash received from sale of capital stock $ 30,000

Increase in cash $ 22,000

Cash balance, October 1, 2007 7,400
Cash balance, October 6, 2007 $ 29,400

c. The Sweet Soda Shop is in a stronger financial position on October 6 than on September 30. On
September 30, the company had highly liquid assets (cash and accounts receivable) of $8,650, which
barely exceeded the $8,500 in liabilities (accounts payable) d