Solution manual accounting 21e by warreni ch 01

The income statement and statement of owner’s equity cover a period of time and should be labeled “For the Month Ended July 31, 2006.”3.. The balance sheet assets should equal the sum of

CHAPTER 1 INTRODUCTION TO ACCOUNTING

AND BUSINESS

CLASS DISCUSSION QUESTIONS

1 The objective of most businesses is to

maximize profits Profit is the difference

between the amounts received from

customers for goods or services provided

and the amounts paid for the inputs used to

provide those goods or services.

2 A manufacturing business changes basic

inputs into products that are then sold to

customers A service business provides

services rather than products to customers.

A restaurant such as Applebee’s has

characteristics of both a manufacturing and

a service business in that Applebee’s takes

raw inputs such as cheese, fish, and beef

and processes them into products for

consumption by their customers At the

same time, Applebee’s provides services of

waiting on their customers as they dine.

3 The corporate form allows the company to

obtain large amounts of resources by

issuing stock For this reason, most

companies that require large investments

in property, plant, and equipment are

organized as corporations.

4 The business strategy of KIA is a low-cost

strategy In contrast, the business strategy

of Porche is a differentiation strategy The

difference in strategies is directly reflected

in the prices of the autos For example, you

can purchase a KIA for under $10,000

while the entry level Porche begins at over

$40,000.

5 Super Wal-Mart will compete for customers

using a low-cost strategy The size and

buying power of Wal-Mart Corporation

provides Wal-Mart a competitive advantage

over your friend in the ability to offer low

prices Thus, your friend should attempt to

compete using a differentiation strategy.

For example, your friend could offer

personalized service to customers such as

knowing customers’ names, friendly

atmosphere, home delivery of medicines,

help in filing insurance forms, 24-hour call

service, etc.

6 eBay offers value to its customers by

developing a Web-based community in

which buyers and sellers are brought together in an efficient format to browse, buy, and sell items such as collectibles, automobiles, high-end or premium art items, jewelry, consumer electronics, and a host of practical and miscellaneous items.

7 The   stakeholders   of   a   business   normally

include   owners,   managers,   employees, customers, creditors, and the government.

8 Simply put, the role of accounting is to

provide information for managers to use in operating the business In addition, accounting provides information to other stakeholders to use in assessing the economic performance and condition of the business.

9 No The business entity concept limits the

recording of economic data to transactions directly affecting the activities of the business The payment of the interest of

$3,600 is a personal transaction of Deana Moran and should not be recorded by First Delivery Service.

10 The land should be recorded at its cost of

$112,000 to Elrod Repair Service This is consistent with the cost concept.

11 a No The offer of $600,000 and the

increase in the assessed value should not be recognized in the accounting records.

b Cash would increase by $600,000, land

would decrease by $500,000, and owner’s equity would increase by

$100,000.

12 An account receivable is a claim against a

customer for goods or services sold An account payable is an amount owed to a creditor for goods or services purchased Therefore, an account receivable in the records of the seller is an account payable

in the records of the purchaser.

13 The business incurred a net loss of

Owner’s equity at the end of the period

Cash at the end of the period

2

Coca-Cola owners’ equity: $24,501 – $12,701 = $11,800

PepsiCo owners’ equity: $23,474 – $14,183 = $9,291

a Increases assets and increases owner’s equity.

b Increases assets and increases owner’s equity.

c Decreases assets and decreases owner’s equity.

d Increases assets and increases liabilities.

e Increases assets and decreases assets.

Ex 1–11

a (1) Total assets increased $80,000 (2) No change in liabilities.

(3) Owner’s equity increased $80,000.

b (1) Total assets decreased $30,000 (2) Total liabilities decreased $30,000 (3) No change in owner’s equity.

Ex 1–14

a (1) Sale of catering services for cash, $25,000.

(2) Purchase of land for cash, $10,000.

(3) Payment of expenses, $16,000.

(4) Purchase of supplies on account, $800.

(5) Withdrawal of cash by owner, $2,000.

(6) Payment of cash to creditors, $10,600.

(7) Recognition of cost of supplies used, $1,400.

Ex 1–16

Owner's equity at end of year

($1,200,000 – $650,000) $550,000 Owner's equity at beginning of year

($750,000 – $300,000) 450,000 Net income (increase in owner's equity) $100,000

Company N Increase in owner's equity (as determined for M) $100,000 Add withdrawals 60,000 Net income $160,000

Company O Increase in owner's equity (as determined for M) $100,000 Deduct additional investment 150,000 Net loss $ (50,000)

Company P Increase in owner's equity (as determined for M) $100,000 Deduct additional investment 150,000

$ (50,000) Add withdrawals 60,000 Net income $ 10,000

Ex 1–19

MADRAS COMPANY Statement of Owner’s Equity For the Month Ended April 30, 2006 Leo Perkins, capital, April 1, 2006 $297,200 Net income for the month $73,000

Ex 1–21

In each case, solve for a single unknown, using the following equation:

Owner’s equity (beginning) + Investments – Withdrawals + Revenues

– Expenses = Owner’s equity (ending)

A Owner's equity at end of year ($894,000 – $390,000) $504,000 Owner's equity at beginning of year ($720,000 – $432,000) 288,000 Increase in owner's equity $216,000 Deduct increase due to net income ($237,300 – $129,600) 107,700

$108,300 Add withdrawals 48,000 Additional investment in the business (a) $156,300

B Owner's equity at end of year ($175,000 – $55,000) $120,000 Owner's equity at beginning of year ($125,000 – $65,000) 60,000 Increase in owner's equity $ 60,000 Add withdrawals 8,000

$ 68,000 Deduct additional investment 25,000 Increase due to net income $ 43,000 Add expenses 32,000 Revenue (b) $ 75,000

C Owner's equity at end of year ($144,000 – $128,000) $ 16,000 Owner's equity at beginning of year ($160,000 – $121,600) 38,400 Decrease in owner's equity $ (22,400) Deduct decrease due to net loss ($184,000 – $196,000) (12,000)

$ (10,400) Deduct additional investment 16,000 Withdrawals from the business (c) $ (26,400)

D Owner's equity at end of year ($310,000 – $170,000) $140,000 Add decrease due to net loss ($140,000 – $160,000) 20,000

$160,000 Add withdrawals 75,000

$235,000 Deduct additional investment 50,000

$185,000 Add liabilities at beginning of year 150,000 Assets at beginning of year (d) $335,000

Ex 1–22

a.

DERBY INTERIORS Balance Sheet October 31, 2006

Assets Liabilities

Cash $48,000 Accounts payable $12,320 Accounts receivable 27,200

Supplies 2,400 Owner’s Equity

Mary Lou Reily, capital 65,280 Total liabilities and

Total assets $77,600 owner’s equity $77,600

DERBY INTERIORS Balance Sheet November 30, 2006

Assets Liabilities

Cash $ 81,600 Accounts payable $ 13,280 Accounts receivable 31,300

Supplies 2,000 Owner’s Equity

Mary Lou Reily, capital 101,620 Total liabilities and

Total assets $114,900 owner’s equity $114,900

b Owner's equity, November 30 $101,620 Owner's equity, October 31 65,280 Net income $ 36,340

c Owner's equity, November 30 $101,620 Owner's equity, October 31 65,280 Increase in owner's equity $ 36,340 Add withdrawal 10,000 Net income $ 46,340

2 The income statement and statement of owner’s equity cover a period of time and should be labeled “For the Month Ended July 31, 2006.”

3 The year in the heading for the statement of owner’s equity should be 2006 rather than 2005.

4 The balance sheet should be labeled as of “July 31, 2006,” rather than “For the Month Ended July 31, 2006.”

5 In the income statement, the miscellaneous expense amount should be listed as the last operating expense.

6 In the income statement, the total operating expenses are incorrectly subtracted from the sales commissions, resulting in an incorrect net income amount The correct net income should be $4,900 This also affects the statement of owner’s equity and the amount of Jerry Maris, capital, that appears on the balance sheet.

7 In the statement of owner’s equity, the additional investment should be added first to Jerry Maris, capital, as of July 1, 2006 The net income should be presented next, followed by the amount of withdrawals, which is subtracted from the net income to yield a net increase in owner’s equity.

8 Accounts payable should be listed as a liability on the balance sheet.

9 Accounts receivable and supplies should be listed as assets on the balance sheet.

10 The balance sheet assets should equal the sum of the liabilities and owner’s equity.

Ex 1–25 Concluded

Corrected financial statements appear as follows:

CADDIS REALTY Income Statement For the Month Ended July 31, 2006 Sales commissions $51,900 Operating expenses:

Office salaries expense $32,400

Net income for July 4,900

$ 7,400 Less withdrawals during July 2,000

Increase in owner’s equity 5,400 Jerry Maris, capital, July 31, 2006 $15,800

CADDIS REALTY Balance Sheet July 31, 2006

Assets Liabilities

Cash $ 3,300 Accounts payable $ 3,800 Accounts receivable 14,300

Supplies 2,000 Owner’s Equity

Jerry Maris, capital 15,800 Total liabilities and

Total assets $19,600 owner’s equity $19,600

c The margin of safety for creditors has remained approximately the same from

2002 to 2003 In both years, creditors have more at stake in Lowe’s than do stockholders, since the ratio exceeds one.

d Lowe’s ratio of liabilities to stockholders’ equity (1.06) is much higher than that of The Home Depot (0.52 and 0.46), indicating that creditors of Lowe’s are more at risk than creditors of The Home Depot.

PROBLEMS Prob 1–1A

1.

Owner’s

Cash + Receivable + Supplies = Payable + Capital

2 Owner's equity is the right of owners to the assets of the business These rights are increased by owner’s investments and revenues and decreased by owner's withdrawals and expenses.

Prob 1–2A

1.

CHICKADEE TRAVEL SERVICE

Income Statement For the Year Ended April 30, 2006 Fees earned $263,200 Operating expenses:

CHICKADEE TRAVEL SERVICE Statement of Owner’s Equity For the Year Ended April 30, 2006 Adam Cellini, capital, May 1, 2005 $50,000 Net income for the year $55,550

Less withdrawals 30,000

Increase in owner’s equity 25,550 Adam Cellini, capital, April 30, 2006 $75,550 3.

CHICKADEE TRAVEL SERVICE

Balance Sheet April 30, 2006

Assets Liabilities

Cash $ 53,050 Accounts payable $ 12,200 Accounts receivable 31,350

Supplies 3,350 Owner's Equity

Adam Cellini, capital 75,550 Total liabilities and

Total assets $ 87,750 owner’s equity $87,750

Prob 1–3A

1.

LINCHPIN COMPUTER SERVICES

Income Statement For the Month Ended August 31, 2006 Fees earned $16,500 Operating expenses:

LINCHPIN COMPUTER SERVICES Statement of Owner’s Equity For the Month Ended August 31, 2006 Jeanine Sykes, capital, August 1, 2006 $ 0 Investment on August 1, 2006 $10,000

Net income for August 5,950

$15,950 Less withdrawals 2,000

Increase in owner’s equity 13,950 Jeanine Sykes, capital, August 31, 2006 $13,950 3.

LINCHPIN COMPUTER SERVICES

Balance Sheet August 31, 2006

Assets Liabilities

Cash $ 6,600 Accounts payable $ 940 Accounts receivable 7,500

Supplies 790 Owner’s Equity

Jeanine Sykes, capital 13,950 Total liabilities and

Total assets $14,890 owner’s equity $14,890

CENTILLION REALTY Income Statement For the Month Ended August 31, 2006 Sales commissions $17,350 Operating expenses:

Office salaries expense $3,600

Prob 1–4A Concluded

CENTILLION REALTY Statement of Owner’s Equity For the Month Ended August 31, 2006 Shad Menard, capital, August 1, 2006 $ 0 Investment on August 1, 2006 $15,000

Net income for August 9,545

$24,545 Less withdrawals 1,500

Increase in owner’s equity 23,045 Shad Menard, capital, August 31, 2006 $23,045

CENTILLION REALTY Balance Sheet August 31, 2006

Prob 1–5A Continued

Cash + Receivable + Supplies + Land = Payable + Capital

Prob 1–5A Concluded

3 a.

EUREKA DRY CLEANERS Income Statement For the Month Ended June 30, 2006 Dry cleaning sales $25,750 Operating expenses:

Dry cleaning expense $7,400

EUREKA DRY CLEANERS Statement of Owner’s Equity For the Month Ended June 30, 2006 Vince Fry, capital, June 1, 2006 $30,875 Net income for June $7,850

Less withdrawals 3,500

Increase in owner’s equity 4,350 Vince Fry, capital, June 30, 2006 $35,225 c.

EUREKA DRY CLEANERS Balance Sheet June 30, 2006

Assets Liabilities

Cash $19,745 Accounts payable $10,320 Accounts receivable 9,200

Supplies 1,600 Owner’s Equity

Land 15,000 Vince Fry, capital 35,225

Total liabilities and Total assets $45,545 owner’s equity $45,545

h Increase in owner’s equity, $40,440 ($45,240 – $4,800)

i Terry Garcia, capital, June 30, 2006, $40,440

j Land, $28,800 ($41,400 – $11,800 – $800)

k Total assets, $41,400

l Terry Garcia, capital, $40,440

m Total liabilities and owner’s equity, $41,400 ($960 + $40,440)

n Cash received from customers, $18,800 ($9,400 + $9,400)

o Net cash flow from operating activities, $9,400 ($11,800 – $31,200 + $28,800)

p Net cash flow from financing activities, $31,200 ($36,000 – $4,800)

q Net cash flow and June 30, 2006 cash balance, $11,800

Cash + Receivable + Supplies = Payable + Capital

2 Owner's equity is the right of owners to the assets of the business These rights are increased by owner’s investments and revenues and decreased by owner's withdrawals and expenses.

Prob 1–2B

1.

GRECO TRAVEL AGENCY Income Statement For the Year Ended December 31, 2006 Fees earned $ 188,000 Operating expenses:

GRECO TRAVEL AGENCY Statement of Owner’s Equity For the Year Ended December 31, 2006 Petrea Kraft, capital, January 1, 2006 $16,200 Net income for the year $71,400

Assets Liabilities

Cash $ 11,520 Accounts payable $ 5,120 Accounts receivable 31,200

Supplies 3,000 Owner’s Equity

Petrea Kraft, capital 40,600 Total liabilities and

Total assets $ 45,720 owner’s equity $ 45,720