34 1 Accounting in Action

Liz Cooke, recorded this receipt as an increase in cash 21. Summarized operations for Lakeview Co. for the
and revenues. Is this treatment appropriate? Why or month of July are as follows.
why not? Revenues recognized: for cash $30,000; on account
19. “A company’s net income appears directly on the in- $70,000.
come statement and the retained earnings statement, Expenses incurred: for cash $26,000; on account
and it is included indirectly in the company’s balance $38,000.
sheet.” Do you agree? Explain. Indicate for Lakeview Co. (a) the total revenues, (b)
20. Monique Enterprises had a stockholders’ equity bal- the total expenses, and (c) net income for the month
ance of $158,000 at the beginning of the period. At the of July.
end of the accounting period, the stockholders’ equity 22. The basic accounting equation is Assets 5 Liabilities 1
balance was $198,000. Stockholders’ Equity. Replacing the words in that
(a) Assuming no additional investment or distribu- equation with dollar amounts, what is Apple’s ac-
tions during the period, what is the net income counting equation at September 24, 2011?
for the period?
(b) Assuming an additional investment of $16,000
but no distributions during the period, what is
the net income for the period?

BRIEF EXERCISES

Use basic accounting BE1-1 Presented below is the basic accounting equation. Determine the missing amounts.
equation.
Assets 5 Liabilities 1 Stockholders’ Equity
(LO 6)
(a) $78,000 $50,000 ?
(b) ? $45,000 $70,000
(c) $94,000 ? $60,000
Use basic accounting BE1-2 Given the accounting equation, answer each of the following questions.
equation. (a) The liabilities of Holland Company are $120,000 and its stockholders’ equity is
(LO 6) $232,000. What is the amount of Holland Company’s total assets?
(b) The total assets of Holland Company are $190,000 and its stockholders’ equity is
$86,000. What is the amount of its total liabilities?
(c) The total assets of Holland Company are $600,000 and its liabilities are equal to one-
half of its total assets. What is the amount of Holland Company’s stockholders’ equity?
Use basic accounting BE1-3 At the beginning of the year, Canon Company had total assets of $870,000 and total
equation. liabilities of $500,000. Answer the following questions.
(LO 6) (a) If total assets increased $150,000 during the year and total liabilities decreased
$80,000, what is the amount of stockholders’ equity at the end of the year?
(b) During the year, total liabilities increased $100,000 and stockholders’ equity decreased
$66,000. What is the amount of total assets at the end of the year?
(c) If total assets decreased $80,000 and stockholders’ equity increased $120,000 during
the year, what is the amount of total liabilities at the end of the year?
Solve accounting equation. BE1-4 Use the accounting equation to answer each of the following questions.
(LO 6) (a) The liabilities of Olga Company are $90,000. Common stock account is $150,000; divi-
dends are $40,000; revenues, $450,000; and expenses, $320,000. What is the amount
of Olga Company’s total assets?
(b) The total assets of Lafayette Company are $57,000. Common stock account is $23,000;
dividends are $7,000; revenues, $50,000; and expenses, $35,000. What is the amount
of the company’s total liabilities?
(c) The total assets of Dierdorf Co. are $600,000 and its liabilities are equal to two-thirds
of its total assets. What is the amount of Dierdorf Co.’s stockholders’ equity?
Identify assets, liabilities, BE1-5 Indicate whether each of the following items is an asset (A), liability (L), or part of
and stockholders’ equity. stockholders’ equity (SE).
(LO 6) _______ (a) Accounts receivable _______ (d) Supplies
Determine effect of _______ (b) Salaries and wages payable _______ (e) Owner’s investment
transactions on basic _______ (c) Equipment _______ (f) Notes payable
accounting equation. BE1-6 Presented on the next page are three business transactions. On a sheet of paper, list
(LO 7) the letters (a), (b), and (c) with columns for assets, liabilities, and stockholders’ equity. For
 DO IT! Review 35

each column, indicate whether the transactions increased (1), decreased (2), or had no
effect (NE) on assets, liabilities, and stockholders’ equity.
(a) Purchased supplies on account.
(b) Received cash for performing a service.
(c) Paid expenses in cash.
BE1-7 Follow the same format as BE1-6 above. Determine the effect on assets, liabilities, Determine effect of
and stockholders’ equity of the following three transactions. transactions on
(a) Stockholders invested cash in the business for common stock. accounting equation.
(b) Paid a cash dividend. (LO 7)
(c) Received cash from a customer who had previously been billed for services performed.
BE1-8 Classify each of the following items as dividends (D), revenue (R), or expense (E). Classify items affecting
_______ (a) Advertising expense _______ (e) Dividends stockholders’ equity.
_______ (b) Service revenue _______ (f) Rent revenue (LO 6)
_______ (c) Insurance expense _______ (g) Utilities expense
_______ (d) Salaries and wages expense
BE1-9 Presented below are three transactions. Mark each transaction as affecting Determine effect of
common stock (C), dividends (D), revenue (R), expense (E), or not affecting stockholders’ transactions on
equity (NSE). stockholders’ equity.
_______ (a) Received cash for services performed. (LO 6)
_______ (b) Paid cash to purchase equipment.
_______ (c) Paid employee salaries.
BE1-10 In alphabetical order below are balance sheet items for Ellerby Company at Prepare a balance sheet.
December 31, 2015. Prepare a balance sheet, following the format of Illustration 1-10. (LO 8)
Accounts payable $85,000
Accounts receivable $72,500
Cash $44,000
Common stock $31,500
BE1-11 Indicate whether the following items would appear on the income statement (IS), Determine where items appear
balance sheet (BS), or retained earnings statement (RE). on financial statements.
_______ (a) Notes payable _______ (d) Cash (LO 8)
_______ (b) Advertising expense _______ (e) Service revenue
_______ (c) Common stock _______ (f) Dividends

> DO IT! Review

DO IT! 1-1 Indicate whether each of the five statements presented below is true or false. If Review basic concepts.
false, indicate how to correct the statement. (LO 1, 2, 4)
1. The three steps in the accounting process are identification, recording, and examination.
2. The two most common types of external users are investors and creditors.
3. Congress passed the Sarbanes-Oxley Act to ensure that investors invest only in compa-
nies that will be profitable.
4. The primary accounting standard-setting body in the United States is the Securities
and Exchange Commission (SEC).
5. The historical cost principle dictates that companies record assets at their cost and
continue to report them at their cost over the time the asset is held.
DO IT! 1-2 Classify the following items as issuance of stock (I), dividends (D), revenues Evaluate effects of
(R), or expenses (E). Then indicate whether each item increases or decreases stockholders’ transactions on
equity. stockholders’ equity.

1. Dividends. 3. Advertising expense. (LO 6)

2. Rent revenue. 4. Stockholders invest cash in the business.
DO IT! 1-3 Transactions made by Morlan and Co., a law firm, for the month of March are Prepare tabular analysis.
shown on the next page. Prepare a tabular analysis which shows the effects of these trans- (LO 7)
actions on the accounting equation, similar to that shown in Illustration 1-9 (page 21).
36 1 Accounting in Action

1. The company performed $23,000 of services for customers, on credit.

2. The company received $23,000 in cash from customers who had been billed for services
(in transaction 1).
3. The company received a bill for $1,800 of advertising, but will not pay it until a later
date.
4. The company paid a dividend of $5,000 in cash to stockholders.
Calculate effects of DO IT! 1-4 Presented below is selected information related to Garryowen Company at
transactions on financial December 31, 2015. Garryowen reports financial information monthly.
statement items.
Accounts Payable $ 3,000 Salaries and Wages Expense $16,500
(LO 8) Cash 9,000 Notes Payable 25,000
Advertising Expense 6,000 Rent Expense 9,800
Service Revenue 54,000 Accounts Receivable 13,500
Equipment 29,000 Dividends 7,500
(a) Determine the total assets of Garryowen Company at December 31, 2015.
(b) Determine the net income that Garryowen Company reported for December 2015.
(c) Determine the stockholders’ equity of Garryowen Company at December 31, 2015.

EXERCISES

Classify the three activities of E1-1 Callison Company performs the following accounting tasks during the year.
accounting.
______Analyzing and interpreting information.
(LO 1)
______Classifying economic events.
______Explaining uses, meaning, and limitations of data.
______Keeping a systematic chronological diary of events.
______Measuring events in dollars and cents.
______Preparing accounting reports.
______Reporting information in a standard format.
______Selecting economic activities relevant to the company.
______Summarizing economic events.
Accounting is “an information system that identifies, records, and communicates the
economic events of an organization to interested users.”
Instructions
Categorize the accounting tasks performed by Callison as relating to either the identifica-
tion (I), recording (R), or communication (C) aspects of accounting.
Identify users of accounting E1-2 (a) The following are users of financial statements.
information.
______Customers ______Securities and Exchange Commission
(LO 2) ______Internal Revenue Service ______Store manager
______Labor unions ______Suppliers
______Marketing manager ______Vice president of finance
______Production supervisor
Instructions
Identify the users as being either external users (E) or internal users (I).
(b) The following questions could be asked by an internal user or an external user.
______ Can we afford to give our employees a pay raise?
______ Did the company earn a satisfactory income?
______ Do we need to borrow in the near future?
______ How does the company’s profitability compare to other companies?
______ What does it cost us to manufacture each unit produced?
______ Which product should we emphasize?
______ Will the company be able to pay its short-term debts?
 Exercises 37

Instructions
Identify each of the questions as being more likely asked by an internal user (I) or an
external user (E).

E1-3 Sam Cresco, president of Cresco Company, has instructed Sharon Gross, the head Discuss ethics and the
of the accounting department for Cresco Company, to report the company’s land in the historical cost principle.
company’s accounting reports at its fair value of $170,000 instead of its cost of $100,000. (LO 3)
Cresco says, “Showing the land at $170,000 will make our company look like a better
investment when we try to attract new investors next month.”
Instructions
Explain the ethical situation involved for Sharon Gross, identifying the stakeholders and
the alternatives.

E1-4 The following situations involve accounting principles and assumptions. Use accounting concepts.
1. Tina Company owns buildings that are worth substantially more than they originally (LO 4, 5)
cost. In an effort to provide more relevant information, Tina reports the buildings at
fair value in its accounting reports.
2. Fayette Company includes in its accounting records only transaction data that can be
expressed in terms of money.
3. Omar Shariff, president of Omar’s Oasis, records his personal living costs as expenses
of Oasis.
Instructions
For each of the three situations, state if the accounting method used is correct or incorrect.
If correct, identify which principle or assumption supports the method used. If incorrect,
identify which principle or assumption has been violated.

E1-5 Bailey Cleaners has the following balance sheet items. Classify accounts as assets,
liabilities, and stockholders’
Accounts payable Accounts receivable
equity.
Cash Notes payable
Equipment Salaries and wages payable (LO 6)
Supplies Common stock
Instructions
Classify each item as an asset, liability, or stockholders’ equity.

E1-6 Selected transactions for Verdent Lawn Care Company are listed below. Analyze the effect of
transactions.
1. Sold common stock for cash to start business.
2. Paid monthly rent. (LO 6, 7)
3. Purchased equipment on account.
4. Billed customers for services performed.
5. Paid dividends.
6. Received cash from customers billed in (4).
7. Incurred advertising expense on account.
8. Purchased additional equipment for cash.
9. Received cash from customers when service was performed.
Instructions
List the numbers of the above transactions and describe the effect of each transaction on
assets, liabilities, and stockholders’ equity. For example, the first answer is (1) Increase in
assets and increase in stockholders’ equity.

E1-7 Keystone Computer Timeshare Company entered into the following transactions Analyze the effect of
during May 2015. transactions on assets,
liabilities, and stockholders’
1. Purchased computer terminals for $20,000 from Data Equipment on account.
equity.
2. Paid $3,000 cash for May rent on storage space.
3. Received $15,000 cash from customers for contracts billed in April. (LO 6, 7)
4. Performed computer services for Ryan Construction Company for $2,700 cash.
5. Paid Midland Power Co. $11,000 cash for energy usage in May.
6. Stockholders invested an additional $32,000 in the business.
7. Paid Data Equipment for the terminals purchased in (1) above.
8. Incurred advertising expense for May of $840 on account.
38 1 Accounting in Action

Instructions
Indicate with the appropriate letter whether each of the transactions results in:
(a) An increase in assets and a decrease in assets.
(b) An increase in assets and an increase in stockholders’ equity.
(c) An increase in assets and an increase in liabilities.
(d) A decrease in assets and a decrease in stockholders’ equity.
(e) A decrease in assets and a decrease in liabilities.
(f) An increase in liabilities and a decrease in stockholders’ equity.
(g) An increase in stockholders’ equity and a decrease in liabilities.

Analyze transactions and E1-8 An analysis of the transactions made by Foley & Co., a certified public accounting
compute net income. firm, for the month of August is shown below. Each increase and decrease in stockholders’
(LO 7, 8) equity is explained.

Assets 5 Liabilities 1 Stockholders’ Equity

Accounts Accounts Common Retained Earnings
Cash 1 1 Supplies 1 Equipment 5 1 1
Receivable Payable Stock Rev. 2 Exp. 2 Div.
1. 1$15,000 1$15,000
2. 22,000 1$5,000 1$3,000
3. 2750 1$750
4. 14,900 1$4,500 1$9,400 Service Revenue
5. 21,500 21,500
6. 22,000 2$2,000
7. 2850 2$850 Rent Expense
8. 1450 2450
9. 23,900 23,900 Sal./Wages Expense
10. 1500 2500 Utilities Expense

Instructions
(a) Describe each transaction that occurred for the month.
(b) Determine how much stockholders’ equity increased for the month.
(c) Compute the amount of net income for the month.

Prepare financial statements. E1-9 An analysis of transactions for Foley & Co. was presented in E1–8. Assume that
(LO 8) August is the company’s first month of business.
Instructions
Prepare an income statement and a retained earnings statement for August and a balance
sheet at August 31, 2015.

Determine net income E1-10 Toth Company had the following assets and liabilities on the dates indicated.
(or loss).
December 31 Total Assets Total Liabilities
(LO 7)
2014 $400,000 $260,000
2015 $480,000 $300,000
2016 $590,000 $400,000
Toth began business on January 1, 2014, with an investment of $100,000 from stockholders.
Instructions
From an analysis of the change in stockholders’ equity during the year, compute the net
income (or loss) for:
(a) 2014, assuming Toth paid $15,000 in dividends for the year.
(b) 2015, assuming stockholders made an additional investment of $50,000 and Toth paid
no dividends in 2015.
(c) 2016, assuming stockholders made an additional investment of $15,000 and Toth paid
dividends of $30,000 in 2016.

Analyze financial statement E1-11 Two items are omitted from each of the following summaries of balance sheet and
items. income statement data for two corporations for the year 2015, Plunkett Co. and Herring
(LO 6, 7, 8) Enterprises.
 Exercises 39

Plunkett Herring
Co. Enterprises
Beginning of year:
Total assets $ 97,000 $122,000
Total liabilities 85,000 (c)
Total stockholders’ equity (a) 75,000
End of year:
Total assets 160,000 180,000
Total liabilities 120,000 50,000
Total stockholders’ equity 40,000 130,000
Changes during year in stockholders’ equity:
Additional investment (b) 25,000
Dividends 15,000 (d)
Total revenues 215,000 100,000
Total expenses 175,000 55,000

Instructions
Determine the missing amounts.

E1-12 The following information relates to La Greca Co. for the year 2015. Prepare income statement
and retained earnings
Retained earnings, January 1, 2015 $48,000 Advertising expense $ 1,800 statement.
Dividends during 2015 5,000 Rent expense 10,400
(LO 8)
Service revenue 62,500 Utilities expense 3,100
Salaries and wages expense 28,000

Instructions
After analyzing the data, prepare an income statement and a retained earnings statement
for the year ending December 31, 2015.

E1-13 Robyn Howser is the bookkeeper for Madison Company. Robyn has been trying to Correct an incorrectly
get the balance sheet of Madison Company to balance. Madison’s balance sheet is shown prepared balance sheet.
below. (LO 8)

MADISON COMPANY
Balance Sheet
December 31, 2015
Assets Liabilities
Cash $14,000 Accounts payable $15,000
Supplies 3,000 Accounts receivable (8,500)
Equipment 48,000 Common stock 50,000
Dividends 9,000 Retained earnings 17,500
Total assets $74,000 Total liabilities and
stockholders’ equity $74,000

Instructions
Prepare a correct balance sheet.

E1-14 Wyco Park, a public camping ground near the Four Corners National Recreation Compute net income and
Area, has compiled the following financial information as of December 31, 2015. prepare a balance sheet.
(LO 8)
Revenues during 2015—camping fees $140,000 Notes payable $ 60,000
Revenues during 2015—general store 47,000 Expenses during 2015 150,000
Accounts payable 11,000 Supplies on hand 2,500
Cash on hand 20,000 Common stock 20,000
Original cost of equipment 105,500 Retained earnings ?
Fair value of equipment 140,000

Instructions
(a) Determine Wyco Park’s net income for 2015.
(b) Prepare a balance sheet for Wyco Park as of December 31, 2015.
40 1 Accounting in Action

Prepare an income statement. E1-15 Presented below is financial information related to the 2015 operations of Louisa
(LO 8) Cruise Company.
Maintenance and repairs expense $ 92,000
Utilities expense 10,000
Salaries and wages expense 142,000
Advertising expense 3,500
Ticket revenue 328,000
Instructions
Prepare the 2015 income statement for Louisa Cruise Company.
Prepare a retained earnings E1-16 Presented below is information related to Alexis and Ryans, Attorneys at Law.
statement.
Retained earnings, January 1, 2015 $ 23,000
(LO 8)
Legal service revenue—2015 340,000
Total expenses—2015 211,000
Assets, January 1, 2015 85,000
Liabilities, January 1, 2015 62,000
Assets, December 31, 2015 168,000
Liabilities, December 31, 2015 80,000
Dividends—2015 64,000
Instructions
Prepare the 2015 retained earnings statement for Alexis and Ryans, Attorneys at Law.
Prepare a cash flow E1-17 This information is for Paulo Company for the year ended December 31, 2015.
statement.
Cash received from revenues from customers $600,000
(LO 8)
Cash received for issuance of common stock 280,000
Cash paid for new equipment 115,000
Cash dividends paid 18,000
Cash paid for expenses 430,000
Cash balance 1/1/15 30,000
Instructions
Prepare the 2015 statement of cash flows for Paulo Company.

EXERCISES: SET B AND CHALLENGE EXERCISES

Visit the book’s companion website, at www.wiley.com/college/weygandt, and choose

the Student Companion site to access Exercise Set B and Challenge Exercises.

PROBLEMS: SET A

Analyze transactions and P1-1A Fredonia Repair Inc. was started on May 1. A summary of May transactions is
compute net income. presented below.
(LO 6, 7) 1. Stockholders invested $10,000 cash in the business in exchange for common stock.
2. Purchased equipment for $5,000 cash.
3. Paid $400 cash for May office rent.
4. Paid $300 cash for supplies.
5. Incurred $250 of advertising costs in the Beacon News on account.
6. Received $4,700 in cash from customers for repair service.
7. Declared and paid a $700 cash dividend.
8. Paid part-time employee salaries $1,000.
9. Paid utility bills $140.
10. Performed repair services worth $1,100 on account.
11. Collected cash of $120 for services billed in transaction (10).
 Problems: Set A 41

Instructions
(a) Prepare a tabular analysis of the transactions using the following column headings: (a) Total assets $13,560
Cash, Accounts Receivable, Supplies, Equipment, Accounts Payable, Common Stock, Check figures let you
and Retained Earnings (with separate columns for Revenues, Expenses, and Divi- know if you are on the
dends). Include margin explanations for any changes in Retained Earnings. Revenue right track with your
is called Service Revenue. solution.
(b) From an analysis of the Retained Earnings columns, compute the net income or net
loss for May. (b) Net income $4,010

P1-2A On August 31, the balance sheet of La Brava Veterinary Clinic showed Cash $9,000, Analyze transactions and
Accounts Receivable $1,700, Supplies $600, Equipment $6,000, Accounts Payable $3,600, prepare income statement,
Common Stock $13,000, and Retained Earnings $700. During September, the following retained earnings statement,
transactions occurred. and balance sheet.

1. Paid $2,900 cash for accounts payable due. (LO 6, 7, 8)

2. Collected $1,300 of accounts receivable.
3. Purchased additional equipment for $2,100, paying $800 in cash and the balance on
account.
4. Recognized revenue of $7,300, of which $2,500 is collected in cash and the balance is
due in October.
5. Declared and paid a $400 cash dividend.
6. Paid salaries $1,700, rent for September $900, and advertising expense $200.
7. Incurred utilities expense for month on account $170.
8. Received $10,000 from Capital Bank on a 6-month note payable.
Instructions
(a) Prepare a tabular analysis of the September transactions beginning with August 31 (a) Ending cash $15,900
balances. The column headings should be as follows: Cash 1 Accounts Receivable 1
Supplies 1 Equipment 5 Notes Payable 1 Accounts Payable 1 Common Stock 1
Retained Earnings 1 Revenues 2 Expenses 2 Dividends.
(b) Prepare an income statement for September, a retained earnings statement for (b) Net income $4,330
September, and a balance sheet at September 30. Total assets $29,800
P1-3A On May 1, Nimbus Flying School, a company that provides flying lessons, was Prepare income statement,
started with an investment of $45,000 cash in the business. Following are the assets and retained earnings statement,
liabilities of the company on May 31, 2015, and the revenues and expenses for the month and balance sheet.
of May. (LO 8)
Cash $ 4,650 Notes Payable $28,000
Accounts Receivable 7,400 Rent Expense 900
Equipment 64,000 Maintenance and
Service Revenue 6,800 Repairs Expense 350
Advertising Expense 500 Gasoline Expense 2,500
Accounts Payable 1,400 Utilities Expense 400
No additional investments were made in May, but the company paid dividends of $500
during the month.
Instructions
(a) Prepare an income statement and a retained earnings statement for the month of May (a) Net income $2,150
and a balance sheet at May 31. Total assets $76,050
(b) Prepare an income statement and a retained earnings statement for May assuming (b) Net income $1,550
the following data are not included above: (1) $900 worth of services were performed
and billed but not collected at May 31, and (2) $1,500 of gasoline expense was in-
curred but not paid.
P1-4A Nancy Tercek started a delivery service, Tercek Deliveries, on June 1, 2015. The Analyze transactions and
following transactions occurred during the month of June. prepare financial statements.
June 1 Stockholders invested $10,000 cash in the business in exchange for common (LO 6, 7, 8)
stock.
2 Purchased a used van for deliveries for $14,000. Nancy paid $2,000 cash and
signed a note payable for the remaining balance.
3 Paid $500 for office rent for the month.
5 Performed $4,800 of services on account.
42 1 Accounting in Action

June 9 Declared and paid $300 in cash dividends.

12 Purchased supplies for $150 on account.
15 Received a cash payment of $1,250 for services performed on June 5.
17 Purchased gasoline for $100 on account.
20 Received a cash payment of $1,500 for services performed.
23 Made a cash payment of $500 on the note payable.
26 Paid $250 for utilities.
29 Paid for the gasoline purchased on account on June 17.
30 Paid $1,000 for employee salaries.
Instructions
(a) Total assets $25,800 (a) Show the effects of the previous transactions on the accounting equation using the
following format.

Assets 5 Liabilities 1 Stockholders’ Equity

Accounts Notes Accounts Common Retained Earnings
Date Cash 1 1 Supplies 1 Equipment 5 1 1 1
Receivable Payable Payable Stock Rev. 2 Exp. 2 Div.

Include margin explanations for any changes in the Retained Earnings account in
your analysis.
(b) Net income $4,450 (b) Prepare an income statement for the month of June.
(c) Cash $8,100 (c) Prepare a balance sheet at June 30, 2015.
Determine financial state- P1-5A Financial statement information about four different companies is as follows.
ment amounts and prepare
retained earnings statement. Donatello Leonardo Michelangelo Raphael
Company Company Company Company
(LO 7, 8)
January 1, 2015
Assets $ 75,000 $110,000 (g) $150,000
Liabilities 48,000 (d) $ 75,000 (j)
Stockholders’ equity (a) 60,000 45,000 100,000
December 31, 2015
Assets (b) 137,000 200,000 (k)
Liabilities 55,000 75,000 (h) 80,000
Stockholders’ equity 40,000 (e) 130,000 140,000
Stockholders’ equity changes in year
Additional investment (c) 15,000 10,000 15,000
Dividends 6,000 (f) 14,000 10,000
Total revenues 350,000 420,000 (i) 500,000
Total expenses 335,000 382,000 342,000 (l)
Instructions
(a) Determine the missing amounts. (Hint: For example, to solve for (a), Assets 2 Liabili-
ties 5 Stockholders’ Equity 5 $27,000.)
(b) Prepare the retained earnings statement for Leonardo Company. Assume beginning
retained earnings was $20,000.
(c) Write a memorandum explaining the sequence for preparing financial state-
ments and the interrelationship of the retained earnings statement to the income
statement and balance sheet.

PROBLEMS: SET B

Analyze transactions and P1-1B On April 1, Bill Taylor established Taylor Made Travel Agency. The following trans-
compute net income. actions were completed during the month.
(LO 6, 7) 1. Stockholders invested $8,000 cash in the business in exchange for common stock.
2. Paid $400 cash for April office rent.
3. Purchased office equipment for $2,500 cash.
4. Incurred $300 of advertising costs in the Chicago Tribune, on account.
 Problems: Set B 43

5. Paid $500 cash for office supplies.

6. Performed services worth $8,500: $2,000 cash is received from customers, and the
balance of $6,500 is billed to customers on account.
7. Declared and paid a $200 cash dividend.
8. Paid Chicago Tribune amount due in transaction (4).
9. Paid employees’ salaries $2,000.
10. Received $5,700 in cash from customers billed previously in transaction (6).
Instructions
(a) Prepare a tabular analysis of the transactions using the following column headings: (a) Ending cash $9,800
Cash, Accounts Receivable, Supplies, Equipment, Accounts Payable, Common Stock,
and Retained Earnings (with separate columns for Revenues, Expenses, and Divi-
dends). Include margin explanation for any changes in Retained Earnings.
(b) From an analysis of the Retained Earnings columns, compute the net income or net (b) Net income $5,800
loss for April.

P1-2B Randy Coburn opened a law office, Randy Coburn, Attorney at Law, on July 1, Analyze transactions and
2015. On July 31, the balance sheet showed Cash $4,000, Accounts Receivable $1,500, prepare income statement,
Supplies $400, Equipment $5,000, Accounts Payable $4,200, Common Stock $6,000, and retained earnings statement,
Retained Earnings $700. During August, the following transactions occurred. and balance sheet.

1. Collected $1,400 of accounts receivable due from clients. (LO 6, 7, 8)

2. Paid $2,700 cash for accounts payable due.
3. Recognized revenue of $7,900 of which $3,000 is collected in cash and the balance is
due in September.
4. Purchased additional equipment for $1,000, paying $400 in cash and the balance on
account.
5. Paid salaries $3,000, rent for August $900, and advertising expenses $250.
6. Declared and paid a $450 cash dividend.
7. Received $2,000 from Standard Federal Bank; the money was borrowed on a 4-month
note payable.
8. Incurred utility expenses for month on account $180.
Instructions
(a) Prepare a tabular analysis of the August transactions beginning with July 31 balances. (a) Ending expenses $4,330
The column headings should be as follows: Cash 1 Accounts Receivable 1 Supplies 1
Equipment 5 Notes Payable 1 Accounts Payable 1 Common Stock 1 Retained Earn-
ings 1 Revenues 2 Expenses 2 Dividends.
(b) Prepare an income statement for August, a retained earnings statement for August, (b) Net income $3,570
and a balance sheet at August 31. Total assets $14,100

P1-3B Blushe Cosmetics Co., a company that provides individual skin care treatment, Prepare income statement,
was started on June 1 with an investment of $22,000 cash. Following are the assets and retained earnings statement,
liabilities of the company at June 30 and the revenues and expenses for the month of and balance sheet.
June. (LO 8)

Cash $ 8,000 Notes Payable $13,000

Accounts Receivable 4,000 Accounts Payable 1,400
Service Revenue 5,300 Rent Expense 1,200
Supplies 1,300 Gasoline Expense 600
Advertising Expense 500 Utilities Expense 300
Equipment 25,000

Stockholders made no additional investments in June. The company paid a cash dividend
of $800 during the month.
Instructions
(a) Prepare an income statement and a retained earnings statement for the month of June (a) Net income $1,900
and a balance sheet at June 30, 2015. Total assets $38,300
(b) Prepare an income statement and a retained earnings statement for June assuming (b) Net income $3,400
the following data are not included above: (1) $800 worth of services were performed
and billed but not collected at June 30, and (2) $100 of gasoline expense was incurred
but not paid.
44 1 Accounting in Action

Analyze transactions and P1-4B Gloria Rodd started a consulting firm, Rodd Consulting, on May 1, 2015. The
prepare financial statements. following transactions occurred during the month of May.
(LO 6, 7, 8)
May 1 Rodd invested $8,000 cash in the business in exchange for stock.
2 Paid $800 for office rent for the month.
3 Purchased $500 of supplies on account.
5 Paid $90 to advertise in the County News.
9 Received $3,000 cash for services performed.
12 Declared and paid a $700 cash dividend.
15 Performed $3,500 of services on account.
17 Paid $2,100 for employee salaries.
20 Paid for the supplies purchased on account on May 3.
23 Received a cash payment of $2,500 for services performed on account on
May 15.
26 Borrowed $5,000 from the bank on a note payable.
29 Purchased equipment for $2,600 on account.
30 Paid $150 for utilities.
Instructions
(a) Total assets $18,260 (a) Show the effects of the previous transactions on the accounting equation using the
following format.

Assets 5 Liabilities 1 Stockholders’ Equity

Accounts Notes Accounts Common Retained Earnings
Date Cash 1 1 Supplies 1 Equipment 5 1 1 1
Receivable Payable Payable Stock Rev. 2 Exp. 2 Div.

Include margin explanations for any changes in the Retained Earnings account in
your analysis.
(b) Net income $3,360 (b) Prepare an income statement for the month of May.
(c) Cash $14,160 (c) Prepare a balance sheet at May 31, 2015.

Determine financial statement P1-5B Financial statement information about four different companies is shown below.
amounts and prepare retained
earnings statement. Chico Harpo Groucho Zeppo
(LO 7, 8) Company Company Company Company
January 1, 2015
Assets $ 78,000 $ 90,000 (g) $150,000
Liabilities 50,000 (d) $ 75,000 (j)
Stockholders’ equity (a) 46,000 54,000 100,000
December 31, 2015
Assets (b) 117,000 180,000 (k)
Liabilities 55,000 79,000 (h) 80,000
Stockholders’ equity 40,000 (e) 100,000 160,000
Stockholders’ equity changes in year
Additional investment (c) 8,000 10,000 15,000
Dividends 10,000 (f) 12,000 10,000
Total revenues 350,000 390,000 (i) 500,000
Total expenses 335,000 400,000 360,000 (l)

Instructions
(a) Determine the missing amounts. (Hint: For example, to solve for (a), Assets 2 Liabilities 5
Stockholders’ Equity 5 $28,000.)
(b) Prepare the retained earnings statement for Chico Company. Assume beginning
retained earnings was $0.
(c) Write a memorandum explaining the sequence for preparing financial state-
ments and the interrelationship of the retained earnings statement to the income
statement and balance sheet.