Exercise 1–1A  Understanding markets

Free economies use open markets to allocate resources.

Required

Identify the three participants in a free business market. Write a brief memo explaining how these participants interact to ensure that goods and services are distributed in a manner that satisfies consumers.

Exercise 1–2A  Distributions in a business liquidation

Assume that Mallory Company acquires $700 cash from creditors and $900 cash from investors (stockholders). The company then has an operating loss of $1,000 cash and goes out of business.

Required

1. Define the term business liquidation.
2. What amount of cash will Mallory’s creditors receive?
3. What amount of cash will Mallory’s investors (stockholders) receive?

Exercise 1–3A  Identifying the reporting entities

Reza Pierno recently started a business. During the first few days of operation, Mr. Pierno transferred $15,000 from his personal account into a business account for a company he named Pierno Enterprises. Pierno Enterprises borrowed $20,000 from the State Bank of Renu. Mr. Pierno’s father-in-law, Edward Goebel, invested $32,000 into the business for which he received a 25 percent ownership interest. Pierno Enterprises purchased a building from Stokes Realty Company. The building cost $60,000 cash. Pierno Enterprises earned $28,000 in revenue from the company’s customers and paid its employees $17,000 for salaries expense.

Required

Identify the entities that were mentioned in the scenario and explain what happened to the cash accounts of each entity that you identify.

Exercise 1–4A  Financial statement elements and accounts

Required

Write a brief memo that distinguishes between the elements of financial statements and the accounts that appear on financial statements.

Exercise 1–5A  Titles and accounts appearing on financial statements

Annual reports normally include an income statement, a statement of changes in stockholders’ equity, a balance sheet, and a statement of cash flows.

Required

Identify the financial statements on which each of the following titles or accounts would appear. If a title or an account appears on more than one statement, list all statements that would include it.

1. Common Stock
2. Land
3. Ending Cash Balance
4. Beginning Cash Balance
5. Notes Payable
6. Retained Earnings
7. Revenue
8. Dividends
9. Financing Activities
10. Salary Expense

Exercise 1–6A  Components of the accounting equation

Required

The following three requirements are independent of each other.

1. James Auto Parts has assets of $9,100 and equity of $6,500. What is the amount of liabilities? What is the amount of claims?
2. Best Candy Inc. has liabilities of $2,400 and equity of $5,400. What is the amount of assets?
3. Sam’s Dive Shop has assets of $49,200 and liabilities of $21,600. What is the amount of its equity? What is the amount of the investors’ claims on assets?

Exercise 1–7A  Effect of events on the accounting equation

Sun Co. experienced the following events during 2006.

1. Acquired cash from the issue of common stock.
2. Provided services to clients for cash.
3. Borrowed cash.
4. Paid operating expenses with cash.
5. Paid a cash dividend to the stockholders.
6. Purchased land with cash.

Required

Explain how each of these events affects the accounting equation by writing the letter I for increase, the letter D for decrease, and NA for no effect under each of the components of the accounting equation. The first event is shown as an example.

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Exercise 1–8A  Effects of issuing stock

Jeter Company was started in 2009 when it acquired $18,000 cash by issuing common stock. The cash acquisition was the only event that affected the business in 2009.

Required

1. Write an accounting equation, and record the effects of the stock issue under the appropriate general ledger account headings.
2. What is the amount of net income appearing on the income statement?
3. Where would the stock issue be reported on the statement of cash flows?

Exercise 1–9A  Effects of borrowing

South Pacific Company was started in 2007 when it issued a note to borrow $8,400 cash. Assume this is the only accounting event that occurred during 2007.

Required

1. Write an accounting equation, and record the effects of the borrowing transaction under the appropriate general ledger account headings.
2. What is the amount of net income reported on the income statement? (Ignore any effects of interest.)
3. Where would the note issue appear on the statement of cash flows?

Exercise 1–10A  Effects of revenue, expense, and dividend events

Epps Company was started on January 1, 2005. During 2005, the company experienced the following three accounting events: (1) earned cash revenues of $13,500, (2) paid cash expenses of $8,600, and (3) paid a $1,000 cash dividend to stockholders. These were the only events that affected the company during 2005.

Required

1. Write an accounting equation, and record the effects of each accounting event under the appropriate general ledger account headings.
2. Prepare an income statement for the 2005 accounting period and a balance sheet at the end of 2005 for Epps Company.

Exercise 1–11A  Classifying items for the statement of cash flows

Required

Indicate whether each of the following would be classified on the statement of cash flows as operating activities (OA), investing activities (IA), financing activities (FA), or not applicable (NA).

1. Paid $4,000 cash for salary expense.
2. Borrowed $8,000 cash from First State Bank.
3. Received $30,000 cash from the issue of common stock.
4. Purchased land for $8,000 cash.
5. Performed services for $14,000 cash.
6. Paid $4,200 cash for utilities expense.
7. Sold land for $7,000 cash.
8. Paid a cash dividend of $1,000 to the stockholders.
9. Hired an accountant to keep the books.
10. Paid $3,000 cash on the loan from First State Bank.

Exercise 1–12A  Effect of transactions on general ledger accounts

At the beginning of 2004, Quick Service Company’s accounting records had the following general ledger accounts and balances.

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Quick completed the following transactions during 2004:

1. Purchased additional land for $12,000 cash.
2. Acquired $20,000 cash from the issue of common stock.
3. Received $65,000 cash for providing services to customers.
4. Paid cash operating expenses of $42,000.
5. Paid $20,000 cash on notes payable.
6. Paid a $3,000 cash dividend to the stockholders.
7. Determined the market value of the land to be $72,000 at the end of the year.

Required

1. Record the transactions in the appropriate general ledger accounts. Record the amounts of revenue, expense, and dividends in the Retained Earnings column. Provide the appropriate titles for these accounts in the last column of the table.
2. Determine the amount of net income for the 2004 period.
3. What is the amount of total assets at the end of 2004? What is the amount of stockholders’ equity at the end of 2004?

Exercise 1–13A  Preparing financial statements

Dale Company experienced the following events during 2004.

1. Acquired $30,000 cash from the issue of common stock.
2. Paid $12,000 cash to purchase land.
3. Borrowed $8,000 cash.
4. Provided services for $20,000 cash.
5. Paid $1,000 cash for rent expense.
6. Paid $12,000 cash for other operating expenses.
7. Paid a $2,000 cash dividend to the stockholders.
8. Determined that the market value of the land purchased in Event 2 is now $12,700.

Required

1. The January 1, 2004, general ledger account balances are shown in the following accounting equation. Record the eight events in the appropriate general ledger accounts. Record the amounts of revenue, expense, and dividends in the Retained Earnings column. Provide the appropriate titles for these accounts in the last column of the table. The first event is shown as an example.
2. Prepare an income statement, statement of changes in stockholders’ equity, year-end balance sheet, and statement of cash flows for the 2004 accounting period.

3. Determine the percentage of assets that was provided by retained earnings. How much cash is in the retained earnings account?

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Exercise 1–14A  Classifying events as asset source, use, or exchange

Foster Company experienced the following events during its first year of operations.

1. Acquired $10,000 cash from the issue of common stock.
2. Borrowed $8,000 cash from First Bank.
3. Paid $4,000 cash to purchase land.
4. Received $5,000 cash for providing boarding services.
5. Acquired an additional $2,000 cash from the issue of common stock.
6. Purchased additional land for $3,500 cash.
7. Paid $2,500 cash for salary expense.
8. Signed a contract to provide additional services in the future.
9. Paid $1,000 cash for rent expense.
10. Paid a $1,000 cash dividend to the stockholders.
11. Determined the market value of the land to be $8,000 at the end of the accounting period.

Required

Classify each event as an asset source, use, or exchange transaction or as not applicable (NA).

Exercise 1–15A  Relationship between assets and retained earnings

Eastern Company was organized when it acquired $1,000 cash from the issue of common stock. During its first accounting period the company earned $800 of cash revenue and incurred $500 of cash expenses. Also, during the accounting period the company paid its owners a $100 cash dividend.

Required

1. Determine the ending amount of the retained earnings account.
2. As of the end of the accounting period, determine what percentage of total assets was provided by earnings.

Exercise 1–16A  Historical cost versus market value

Feloma Company purchased land in April 2001 at a cost of $520,000. The estimated market value of the land is $600,000 as of December 31, 2004. Feloma purchased marketable equity securities (bought the common stock of a company that is independent of Feloma) in May 2001 at a cost of $320,000. These securities have a market value of $360,000 as of December 31, 2004. Generally accepted accounting principles require that the land be shown on the December 31, 2004, balance sheet at $520,000, while the marketable equity securities are required to be reported at $360,000.

Required

Write a brief memo that explains the contradiction regarding why GAAP requires Feloma to report historical cost with respect to the land versus market value with respect to the marketable securities. This answer may require speculation on your part. Use your knowledge about the historical cost and reliability concepts to formulate a logical response.

Exercise 1–17A  Relating accounting events to entities

Hanson Company was started in 2004 when it acquired $50,000 cash by issuing common stock to Michael Hanson.

Required

1. Was this event an asset source, use, or exchange transaction for Hanson Company?
2. Was this event an asset source, use, or exchange transaction for Michael Hanson?
3. Was the cash flow an operating, investing, or financing activity on Hanson Company’s 2004 statement of cash flows?
4. Was the cash flow an operating, investing, or financing activity on Michael Hanson’s 2004 statement of cash flows?

Exercise 1–18A  Missing information in the accounting equation

Required

Calculate the missing amounts in the following table:

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Exercise 1–19A  Missing information in the accounting equation

As of December 31, 2006, Thomas Company had total assets of $156,000, total liabilities of $85,600, and common stock of $48,400. During 2007 Thomas earned $36,000 of cash revenue, paid $22,000 for cash expenses, and paid a $1,000 cash dividend to the stockholders.

Required

1. Determine the amount of retained earnings as of December 31, 2006.
2. Determine the amount of net income earned in 2007.
3. Determine the amount of retained earnings as of December 31, 2007.
4. Determine the amount of cash that is in the retained earnings account as of December 31, 2007.

Exercise 1–20A  Missing information for determining net income

The December 31, 2006, balance sheet for Kerr Company showed total stockholders’ equity of $62,500. Total stockholders’ equity increased by $53,400 between December 31, 2006, and December 31, 2007. During 2007 Kerr Company acquired $11,000 cash from the issue of common stock. Kerr Company paid an $8,000 cash dividend to the stockholders during 2007.

Required

Determine the amount of net income or loss Kerr reported on its 2007 income statement. (Hint: Remember that stock issues, net income, and dividends all change total stockholders’ equity.)

Exercise 1–21A  Effect of events on a horizontal financial statements model

Hayes Consulting Services experienced the following events during 2006.

1. Acquired cash by issuing common stock.
2. Collected cash for providing tutoring services to clients.
3. Borrowed cash from a local government small business foundation.
4. Purchased land for cash.
5. Paid cash for operating expenses.
6. Paid a cash dividend to the stockholders.
7. Determined the year-end market value of the land to be higher than its historical cost.

Required

Use a horizontal statements model to show how each event affects the balance sheet, income statement, and statement of cash flows. Indicate whether the event increases (I), decreases (D), or does not affect (NA) each element of the financial statements. Also, in the Cash Flows column, classify the cash flows as operating activities (OA), investing activities (IA), or financing activities (FA). The first transaction is shown as an example.

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Exercise 1–22A  Record events in the horizontal statements model

Marshall Co. was started in 2006. During 2006, the company (1) acquired $9,000 cash from the issue of common stock, (2) earned cash revenue of $18,000, (3) paid cash expenses of $12,500, and (4) paid a $1,000 cash dividend to the stockholders.

Required

1. Record these four events in a horizontal statements model. Also, in the Cash Flows column, classify the cash flows as operating activities (OA), investing activities (IA), or financing activities (FA). The first event is shown as an example.

2. What does the income statement tell you about the assets of this business?

Exercise 1–23A  Effect of events on a horizontal statements model

Tax Help Inc. was started on January 1, 2006. The company experienced the following events during its first year of operation.

1. Acquired $30,000 cash from the issue of common stock.
2. Paid $12,000 cash to purchase land.
3. Received $30,000 cash for providing tax services to customers.
4. Paid $9,500 cash for salary expense.
5. Acquired $5,000 cash from the issue of additional common stock.
6. Borrowed $10,000 cash from the bank.
7. Purchased additional land for $5,000 cash.
8. Paid $6,000 cash for other operating expenses.
9. Paid a $2,800 cash dividend to the stockholders.
10. Determined the market value of the land to be $18,000.

Required

1. Record these events in a horizontal statements model. Also, in the Cash Flows column, classify the cash flows as operating activities (OA), investing activities (IA), or financing activities (FA). The first event is shown as an example.

2. What is the net income earned in 2006?
3. What is the amount of total assets at the end of 2006?
4. What is the net cash flow from operating activities for 2006?
5. What is the net cash flow from investing activities for 2006?
6. What is the net cash flow from financing activities for 2006?
7. What is the cash balance at the end of 2006?
8. As of the end of the year 2006, what percentage of total assets was provided by creditors, investors, and earnings?

Exercise 1–24A  Types of transactions and the horizontal statements model

The Shoe Shop experienced the following events during its first year of operations, 2008.

1. Acquired cash by issuing common stock.
2. Provided services and collected cash.
3. Borrowed cash from a bank.
4. Paid cash for operating expenses.
5. Purchased land with cash.
6. Paid a cash dividend to the stockholders.
7. Determined the market value of the land to be higher than the historical cost.

Required

1. Indicate whether each event is an asset source, use, or exchange transaction.

2. Use a horizontal statements model to show how each event affects the balance sheet, income statement, and statement of cash flows. Indicate whether the event increases (I), decreases (D), or does not affect (NA) each element of the financial statements. Also, in the Cash Flows column, classify the cash flows as operating activities (OA), investing activities (IA), or financing activities (FA). The first transaction is shown as an example.

Exercise 1–25A  Public accounting career

Sam Shelton is a public accountant with a professional designation.

Required

1. What professional designation does Sam most likely hold?
2. Identify three services that Sam may perform for his clients.

Exercise 1–26A  Code of Professional Conduct

Jane Wong is a certified public accountant (CPA). She follows a code of professional conduct in the performance of her duties.

Required

1. Name the organization that established the code of conduct that Jane follows.
2. Name the six principles in the code of conduct that Jane follows.