Problems PROBLEM 2.1 Preparing and Evaluating a Balance Sheet PROBLEM 2.2 Interpreting the Etfects of Business Transactions be Listed below in random order ate the items wo be included in the balance sheet f Mywery M4 tain Lodge at December 31, 2001 Equpment $2920 tsiergs unm, Lana AU) Gtarinry Gartrar, Carat Accounts Payable... Aun Cash nan Accounts Receivatie 1000 Fumnanegs arn\ Salaries Payatio 23,500 Seemrensies “n, Imerost Payatle 12000 tetas Paystia wn\ Instructions ‘ Prepare a balance sheet at December 31, 2001. Include a proper heading and organize your balance sheet similar to the illustration on page 42. (After “Buildings.” you may | maining assets in any order.) You will need to compute the amount to be shorwn f equity. b. Assume that no payment is due on the notes payable until 2003. Does this balance sheet 1s dicate that the company is in a strong financial position as of December 31, 20117 Expl: briefly, Six transactions of Horizon Moving Company are summarized belo in equat of the six transactions identified by a letter. For each of the transactions (3) through (f) you to write a separate statement explaining the nature of the transaction. For example, the tion of transaction a could be as follows: Purchased equipment for cash at a cost of $320) Owner's Assets Liabilities + Equity ‘Accounts ‘Accounts P. Youngblood, Cash + Receivable + Land + Building + Equipment = Payable + Capital Balances $26,000 $99,000 $45,000 $110,000 $96,000 42,00 ‘$214,000 @) _ =320, ___ 320 Balances $22,600 $39,000 $45,000 $110,000 $39,200 $42,000 $214,000 (b) +900 300 Balances $23,700 $38,100 $45,000 $110,000 $39,200 $42,000 $214,000 © 3.500 213.500 £10,000 - Balances $20.200 $38,100 $45,000 $110,000 $52,700 $52,000 $214,000 ( — -=14.500 214,500, Balances $5,700 $28,100 $45,000 $110,000 $52,700 $37,500 $214,000 (e) — +15,000 +15,000 Balances $20,700 $38,100 $45,000 $110,000 $52,700 $37,500 $228,000 0 - +2.100 Balances —-$20.700 $38.100 $45.00 $110,000 PROBLEM 2.3 ‘A Recording the Effects of Transactions Ba Nova Communications was organized on December 1 of the current year and had the following ‘acount balances at December 31, listed in tabular form:Poon ‘Owne Anwots =. Linbjiities + Equity Ollice Notes Accounts. neh + Land + Building + Equipment = Payable + Payable + Nalanwos $37,000 $08,000 $126,000 $51,250 $00,000 sane Vly in January, the following transactions were carried out by Nova Communications L fe Sara ‘owner, deposited $25,000 of personal funds into the business's bank account. {hath tnd wud ial fice Ik for a total price of $9000, of which $35,000 was he sat of the land at $53,000 as the value of the building, Paid $22,500 in cash and signed! w note payable for the remaining $67,500, 3. ought several computer systeris on eredit for $8,500 (30-day open account) 4. Obt9 » Capital Bank in the amount of $10,000, Signed a note payable. §.' Pail the $28,250 account payable owed as of December 31 Instruetlons. 1. List the December 31 b ices of assets, liabilities, and owner's equity in tabular form shown, b, Record the effects of euch of the five transactions in the format illustrated on page 53. Show the totals for all columns after each transaction. ey. ‘The items making up the balance sheet of tabular form similar to the ‘Truck Rental at December 31 are listed below in PROBLEM 2.4 lustration of the accounting equation on page 53. An Alternate Problem on Record= ing the Effects of Transactions ba Owner's As = Lisbiliies = + — Equity ‘Accounts Offic Notes Accounts Bill Foreman, Cash + Receivable + Trucks + Equipment = Payable + Payable + Capital Balances $9,500 $8,900 $58,000 $3,600 $20,000 $5,200 $55,000 During a short period after December 31, Triad Truck Rental had the following transactions: 1. Bought office equipment at a cost of $2,700. Paid cash. 2. Collected $4,000 of accounts receivable, 3. Paid $3,200 of accounts payable. 44. Borrowed $10,000 from a bank. Signed a note payable for that amount, 55, Purchased two trucks for $30,500. Paid $15,000 cash and signed a note payable for the bal- ance. 6. Bill Foreman, the owner, invested $20,000 cash in the business. Instructions - . . fa, List the December 31 balances of assets, liabilities, and owner's equity in tabular form as shown above. b. Record the effects of each of the six transactions in the tabular arrangement illustrated above. ‘Show the totals for all columns after each transaction. HERE COME THE CLOWNS! is the name of a taveling circus owned by Red Costello. The PROBLEM 2.6 Jedger accounts of the business at June 30, 2001, are listed here in alphabetical order: Prepating a Balance She; ‘of a Change in Assets a" PROBLEM 2.6 Preparing a Balance Sheet—a ‘second problem fey PROBLEM 2.7 Preparing a Balance Sheet and ‘Statement of Cash Flows; Etfects ‘of Business Transactions Tosa6 ra & CHAPTER’? Basic Financlal Statements Accounts Payabio Notos Payable Accounts Recoivable 7.450 Hotes Recoivatio Animas 109,000 Props and Equipment eis Cagos 24,030 fled Costa, Capital m2 Cash - 2 Galarios Payatia Costumes vee 91,600 Tots Trucks & Wagons Instructions 4. Prepare a balance sheet by using these items and computing the amount of Cash at June 2001. Organize your balance sheet similar to the one illustrated on page 42. (After “Ac. Receivable,” you may list the remaining assets in any order.) Include a proper balance vi... heading, 'b. Assume that late in the evening of June 30, after your balance sheet had been prepared, destroyed one of the tents, which had cost $14,300. The tent was not insured. Explain ‘changes would be required in your June 30 balance sheet t0 reflect the loss of this as. Ace Shown below in random order is a list of balance sheet items for Red River Farms at Se 30, 2001: Land eee eee vee $960,000 Barns and Sheds . Fonces and Gatos $3570 78,300 —Ittigation System 20,125 Notes Payable . 30,000 Cash... 16.710 ‘Accounts Receivable 22,965 Livestock : 120, Citrus Teees 76,850 Farm Machinory 2, ‘Accounts Payable 77,095 Hollis Roberts, Capital ...... ? Property Taxes Payable 9.195, Wages Payabio Instructions, ‘a. Prepare a balance sheet by using these items and computing the amount for Hollis Roberts Capital. Use @ sequence of assets similar to that illustrated on page 42. (After “Bums and Sheds” you may list the'remaining assets in any order.) Include a proper heading for your bal- ance sheet, 'b Assume that on September 30, immediately after this balance sheet was prepared, a torado completely destroyed one of the bams. This barn had a'cost of $23,800, and was not insured against this type of disaster. Explain what changes would be required in your September 30 balance sheet to reflect the loss of this bar. The balance sheet items for The Julian Bakery (arranged in alphabetical order) were as follows ‘at August I, 2001. (You are to compute the missing figure fort owner's equity.) ‘Accounts Payable... $16,200 Julian Lee, Capital «2... 2.00... 8 7 Accounts Receivable. 14,260 Land... 67.000 Bulging iets 184,000 Notes Payable 7490 cash. cesseestiss 6940 Salaries Payable. i < 8900 Equipment and Fixtures. 44500 Supplies vee sceeeeseeeseesss 7,000 During the next two days, the following transactions occurredAug. 2 Lee invested an aikitional $25,000 in the business. The accounts payable were paid in fel (No payment was made on the notes payable of income tates payable.) Aug. 3. Fauipment was purchased at a cost of $7.200 to be paid within 10 days. Supplies were pacha’ foe $1280 cash from a restaurant supply center that was going out of Reaness These supplies woul! have cost $1,890 if purchased through normal channels Isstrections a Prepare a balance sheet at August 1, 2001 bk Prepare a balance sheet at August 3, 2001, and a statement of cash flows for August 1-3. Classify the payment of accounts payable and the purchase of supplies as operating activities ‘g Ascume the note payable does not come dve for several years. [s The Julian Bakery in a stronger Financial position on August 1 or on August 37 Explain briefly, ‘The tulaace sheet items of The Original Malt Shop (arranged in alphabetical order) were as fol- PROBLEM 28 Jous at the close of business on September 30. 2001: Preparing Financial Statements Effects of Business Transactor $ 8500 1.250 45500 7,400. 20,000 ‘The transections occurring during the first week of October were: Och 3 Martin invested an additional $30,000 cash in the business. The accounts payable += were paid in full. (No payment was made on the notes payable.) Oct.6 More furniture was purchased on account ata cost of $18,000, to be paid within 30 Gays, Supplies were purchased for $1,000 cash from a restaurant supply center that seas going out of business. These supplies would have cost S1.875 if purchased un- der normal circumstances. Oct. 1-6 | Revenves of $5.500 were eamed and paid in cash, Expenses required to eam the + revenues of $4,000 were incurred and paid in cash. Instructions fa. Prepare a balance sheet at September 30, 2001. (You will need to compute the missing figure for Notes Payable.) . 2 bb Prepare a balance sheet at October 6, 2001. Also prepare an income statement and a statement of cash flows for the period October 16, 2001. In your statement of cash flows, treat the pur ‘chase of supplies and the payment of accounts payable as operating activities, e Assume the note payable dods not come due for several years. Is The Original Malt Shop in 4 stronger finsacial position on September 30 or.on Qctober 6? Explain briefly. Helen Berkeley is the founder and manager of Old Town Playhouse. The business needs to {PROBLEM 2.9 chuain a bank loan to finance the production of its next play. As part of the loan application, preparing a Balance‘ Berkeley was acked to prepare a balance sheet for the business. She prepared the following piseussion of Accou balance sheet, which is arranged correctly but which contains several errors with respect 0 Principles such concepts as the business entity and the valuation of assets, Tiabilities, and owner's BESS equity. ’wnat CHAPTEN 2 ftasic Financial Bu OLD TOWN PLAYHOUSE “Balance Bhoot Boghombor 90, 2001 Labiiitien & Owner's t'quity ‘Aavete Cash 471,00 Unbinies 192,20) hexrunte Pazatto Vins Galarios Payatia i Aussie Hacairalde Horne ani Costumes 3.00) Theater Busing... vives 2100 ToAn! wntatiow Ughting Equipment. GAD Ounor's eqaty ‘Aaonatie 16,000 Holon Borkole, : Capital a DYN, 208,00 Tahal... Teast Jn discussions with Herbeley and by reviewing, the accounting records of Old Town Play you discover the follerwing Facts 1. The sunount of cash, $24,14N, includes $15,000 in the company’s bank account, $1,564) oy hand in the company's sale, ans $5,000 in Berkeley's personal savings account 2. ‘The accounts receivable, listed as $192,200, include $7,200 owed to the business by Anvy Sours. ‘The remaining $425,000 is Herkeley’s estimate of future ticket sales from Sepien sy 30 through the end of the year (December 31). 3. Herkeley explaing to yom that the props and costumes were purchased several days sp for S140, The business paid $3,000 of this amount in cash and issued a note payable a. 4 tore Supply Co. for the remainder of the purchase price ($15,040). As this note is not dus sg UI January of next year, it was not included among the company’s liabilities 4, O14 Town Playhouse rents the theater building, from Kievits International at a rate of $4,000 Syiih. The $27.0) shown in the balance sheet represents the rent paid through Septenic, fief the current year. Kievits International acquired the building seven years aro ot cccrat $135,000, ‘The lighting equipment was purchased on September 26 at a cost of $9,400, but the stage man ‘ager says that it isn't worth a dime, & The automobile is Herkeley's classic 1978 Jaguar, which she purchased two years ago for $9000, She recently saw a similar car advertised for sale a1 $1300), She dont rea Use the ear {nthe business, but it has a personalized license plate that reads “PLAHOUS 7. The accounts payable include business debts of $3,908) and the $2,100 balance of Berkeley's personal Visa card, 9. When Berkeley founded Old Town business. However, Live ‘Theatre, Inc., fore, she listed this amount as her equ ayhouse several years ago, she invested $20,000 in the recently offered to buy her business for $50,000. There ity in the above balance sheet Instructions '% Prepare a corrected balance sheet for Old Town Playhouse atProblems Hollywood Scripts is» service-type enterprve tn il its comer, William PROMLEM 2.10 Pippin, has only a init knowledge of necting Datunce sheet Helton, — preparing a alanca 6 which. although arranged satisfactorily, contains certain ertons wath respect t such cumcepsts AS fheryaunn of rem the busines entity and asset salut ae Ltd tee in of Aeron HOLLYWOOD SCRIPTS Balance St.eot November 90, 2001 Liabilities & Owner's Equity cesses $6,150 Linbiltion: 2,700 Noto Payablo . . Casn . Notes Receivable ++ $ 67,000 Accounts Receivable. . 2,450 Accounts Payablo.......... 95,805 Land eye ees 70000 Tolal liablitios 6... +... $102,005 Building 54,920 Ownor's equity: seees 8,850 William Pippin, 22,400 Capital... eee evee ess 63,065, $165,870 Total . Office Furniture Other Assets . . Total In discussion with Pippin and by inspection of the accounting records, you discover the fol- lowing facts: 1k The amount of cash, $5,150, includes $3,400 in the company's bank account, $540 on hand in the company’s safe, and $1,210 in Pippin's personal savings account, 2. One of the notes receivable in the amount of $500 is an IOU that Pippin received in a poker game several years ago. The IOU is signed by “B.K.,” whom Pippin met at the game but has not heard from since. 3. Office furniture includes $2,900 for a Persian rug for the office purchased on November 20. ‘The total cost of the rug was $9,400, The business paid $2,900 in cash and issued a note payable to Zoltan Carpet for the balance due ($6,500). As no payment on the note is due until Janu- ary, this debt is not included in the liabilities above. 4. Also included in the amount for office furniture is a computer that cost $2,525 but is not on hand because Pippin gave it to his daughter to use at the university. 5, The “Other Assets” of $22,400 represent the total amount of income taxes Pippin has paid the federal government over a period of years. Pippin believes the income tax law to be uncon- stitutional, and a friend who attends law school has promised to help Pippin recover the taxes paid as soon as he passes the bar exam. 6. The asset “Land” was acquired at a cost of $39,000 but was increased to a valuation of $70,000 when a friend of Pippin offered to pay that much for it if Pippin would move the building off the lot. 7. The accounts payable include business debts of $32,700 and the $3,105 balance owed on Pip- pin’s personal MasterCard. Instructions . a. Prepare a corrected balance sheet at November 30, 2001. . For each of the seven numbered items above, use a separate numbered paragraph to explain whether the treatment followed by Pippin is in accordance with generally accepted account- ing principles.