Exercise 1–1B  Identifying resources

Resource owners provide three types of resources to conversion agents that transform the resources into products or services that satisfy consumer demands.

Required

Identify the three types of resources. Write a brief memo explaining how resource owners select the particular conversion agents to which they will provide resources.

Exercise 1–2B  Distributions in a business liquidation

Assume that Clark Company acquires $800 cash from creditors and $900 cash from investors. The company then has operating losses of $600 cash and goes out of business.

Required

1. Explain the primary differences between investors and creditors.
2. What amount of cash will Clark’s creditors receive?
3. What amount of cash will Clark’s investors (stockholders) receive?

Exercise 1–3B  Identifying the reporting entities

Wonda DeLeo helped organize a charity fund to help cover the medical expenses of a friend of hers who was seriously injured in a bicycle accident. The fund was named Gloria Novin Recovery Fund (GNRF). Wonda contributed $500 of her own money to the fund. The $500 was paid to WRCK, a local radio station that designed and played an advertising campaign to educate the public to the need for help. The campaign resulted in the collection of $12,000 cash. GNRF paid $10,000 to the Hillsboro Hospital to cover Gloria’s outstanding hospital cost. The remaining $2,000 was contributed to the National Cyclist Fund.

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 1–4B  Financial statement names

Accounting reports that are issued to the public normally contain four financial statements. The same statement may have more than one name.

Required

Provide two names that are commonly used for each statement. If a statement has only one name, indicate that this is the case.

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

Annual reports normally include an income statement, statement of changes in stockholders’ equity, balance sheet, and 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. Retained Earnings
2. Revenue
3. Common Stock
4. Financing Activities
5. Salaries Expense
6. Land
7. Ending Cash Balance
8. Beginning Cash Balance
9. Notes Payable
10. Dividends

Exercise 1–6B  Components of the accounting equation

Required

The following three requirements are independent of each other.

1. Jackson Camping Supplies has assets of $8,500 and equity of $3,200. What is the amount of liabilities? What is the amount of claims?
2. Betty’s Snow Cones has liabilities of $2,400 and equity of $4,400. What is the amount of its assets?
3. Petrello Company has assets of $98,300 and liabilities of $56,200. What is the amount of its equity? What is the amount of creditor claims on assets?

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

Olive Enterprises experienced the following events during 2007.

1. Acquired cash from the issue of common stock.
2. Paid cash to reduce the principal on a bank note.
3. Sold land for cash at an amount equal to its cost.
4. Provided services to clients for cash.
5. Paid utilities expense with cash.
6. Paid a cash dividend to the stockholders.

Required

Explain how each of the events would affect 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 1–8B  Effects of issuing stock

Lambena Company was started in 2006 when it acquired $24,000 cash by issuing common stock. The cash acquisition was the only event that affected the business in 2006.

Required

Which financial statements would be affected by this event?

Exercise 1–9B  Effects of borrowing

Southern Pacific Company was started in 2007 when it borrowed $19,500 from National Bank.

Required

Which financial statements would be affected by this event?

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

Kim Company was started on January 1, 2007. During 2007, the company completed three accounting events: (1) earned cash revenues of $12,500, (2) paid cash expenses of $8,600, and (3) paid a $1,000 cash dividend to the owner. These were the only events that affected the company during 2007.

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 2007 accounting period and a balance sheet at the end of 2007 for Kim Company.

Exercise 1–11B  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. Borrowed $8,000 cash from First State Bank.
2. Paid $5,000 cash for salary expense.
3. Signed a contract to provide services in the future.
4. Performed services for $25,000 cash.
5. Paid $9,000 cash to purchase land.
6. Paid $1,500 cash for utilities expense.
7. Sold land for $5,000 cash.
8. Paid $4,000 cash on the principal of a bank loan.
9. Paid a $2,000 cash dividend to the stockholders.
10. Received $30,000 cash from the issue of common stock.

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

At the beginning of 2008, Pete’s Pest Control’s accounting records had the following general ledger accounts and balances.

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Pete’s completed the following transactions during 2008.

1. Purchased additional land for $5,000 cash.
2. Acquired $25,000 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. Borrowed $10,000 cash from the bank.
6. Paid a $2,500 cash dividend to the stockholders.
7. Determined the market value of the land to be $30,000 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 net cash flow from financing activities.
3. What is the balance in the Retained Earnings account as of January 1, 2009?

Exercise 1–13B  Preparing financial statements

J & A Inc. experienced the following events during 2007.

1. Acquired $55,000 cash from the issue of common stock.
2. Paid $15,000 cash to purchase land.
3. Borrowed $5,000 cash from First Bank.
4. Provided services for $21,000 cash.
5. Paid $1,500 cash for utilities expense.
6. Paid $11,000 cash for other operating expenses.
7. Paid a $2,000 cash dividend to the stockholders.
8. Determined the market value of the land purchased in Event 2 to be $20,000.

Required

1. The January 1, 2007, 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.

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2. Prepare an income statement, statement of changes in stockholders’ equity, year-end balance sheet, and statement of cash flows for the 2007 accounting period.
3. Determine the percentage of assets that was provided by retained earnings. How much cash is in the Retained Earnings account?

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

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

1. Acquired $8,000 cash from the issue of common stock.
2. Paid $3,500 cash for salary expense.
3. Borrowed $10,000 cash from New South Bank.
4. Paid $6,000 cash to purchase land.
5. Provided boarding services for $6,500 cash.
6. Acquired an additional $1,000 cash from the issue of common stock.
7. Paid $1,200 cash for utilities expense.
8. Paid a $1,500 cash dividend to the stockholders.
9. Provided additional services for $3,000 cash.
10. Purchased additional land for $2,500 cash.
11. Determined the market value of the land to be $12,000 at the end of the accounting period.

Required

Classify each event as an asset source, use, or exchange transaction.

Exercise 1–15B  Financial statement elements

Western Company was organized by issuing $550 of common stock and by borrowing $250. During the accounting period, the company earned and retained $200. Also during the accounting period, the company purchased land for $950.

Required

1. What asset accounts would appear on the company’s balance sheet? What are the balance sheet amounts in these accounts?
2. Determine the percentage of total assets that was provided by investors, creditors, and earnings.
3. How much cash is in the Retained Earnings account?

Exercise 1–16B  Historical cost versus market value

ACCO Inc. purchased land in January 2004 at a cost of $230,000. The estimated market value of the land is $270,000 as of December 31, 2006.

Required

1. Name the December 31, 2006, financial statement(s) on which the land will be reported.
2. At what dollar amount will the land be reported in the financial statement(s)?
3. Name the key concept that will be used in determining the dollar amount that will be reported for land that is shown in the financial statement(s).

Exercise 1–17B  Relating accounting events to entities

Jackling Company sold land for $50,000 cash to Power Company in 2007.

Required

1. Was this event an asset source, use, or exchange transaction for Jackling Company?
2. Was this event an asset source, use, or exchange transaction for Power Company?
3. Was the cash flow an operating, investing, or financing activity on Jackling Company’s 2007 statement of cash flows?
4. Was the cash flow an operating, investing, or financing activity on Power Company’s 2007 statement of cash flows?

Exercise 1–18B  Missing information in the accounting equation

Required

Calculate the missing amounts in the following table.

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Exercise 1–19B  Missing information in the accounting equation

As of December 31, 2004, Stone Company had total assets of $132,000, retained earnings of $74,300, and common stock of $45,000. During 2005 Stone earned $42,000 of cash revenue, paid $21,500 for cash expenses, and paid a $600 cash dividend to the stockholders. Stone also paid $5,000 to reduce its debt during 2005.

Required

1. Determine the amount of liabilities at December 31, 2004.
2. Determine the amount of net income earned in 2005.
3. Determine the amount of total assets as of December 31, 2005.
4. Determine the amount of total liabilities as of December 31, 2005.

Exercise 1–20B  Missing information for determining revenue

Total stockholders’ equity of Zullo Company increased by $46,500 between December 31, 2005, and December 31, 2006. During 2006 Zullo acquired $15,000 cash from the issue of common stock. The company paid a $5,000 cash dividend to the stockholders during 2006. Total expenses during 2006 amounted to $22,000.

Required

Determine the amount of revenue that Zullo reported on its 2006 income statement. (Hint: Remember that stock issues, net income, and dividends all change total stockholders’ equity.)

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

Lourens Auto Repair Inc. experienced the following events during 2007.

1. Purchased land for cash.
2. Issued common stock for cash.
3. Collected cash for providing auto repair services to customers.
4. Paid a cash dividend to the stockholders.
5. Paid cash for operating expenses.
6. Paid cash to reduce the principal balance on a liability.
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 1–22B  Record events in the horizontal statements model

Eaton Boat Repairs was started in 2006. During 2006, the company (1) acquired $9,000 cash from the issue of common stock, (2) earned cash revenue of $22,000, (3) paid cash expenses of $12,800, and (4) paid an $800 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. Why is the net income different from the net increase in cash for this business?

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

Joyce Higgins started Computer Software Services on January 1, 2006. The company experienced the following events during its first year of operation.

1. Acquired $20,000 cash by issuing common stock.
2. Paid $5,000 cash to purchase land.
3. Received $32,000 cash for providing computer consulting services to customers.
4. Paid $12,500 cash for salary expense.
5. Acquired $4,000 cash from the issue of additional common stock.
6. Borrowed $15,000 cash from the bank.
7. Purchased additional land for $15,000 cash.
8. Paid $14,000 cash for other operating expenses.
9. Paid a $2,500 cash dividend to the stockholders.
10. Determined the year-end 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 1–24B  Types of transactions and the horizontal statements model

Computer Parts experienced the following events during its first year of operations, 2007.

1. Acquired cash by issuing common stock.
2. Purchased land with cash.
3. Borrowed cash from a bank.
4. Signed a contract to provide services in the future.
5. Paid a cash dividend to the stockholders.
6. Paid cash for operating expenses.
7. Determined that the market value of the land is 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 1–25B  Private accounting career

Gail Gilmore is a private accountant with a professional designation.

Required

1. Name two professional designations that Gail may hold.
2. Describe some duties that Gail may perform in her job.

Exercise 1–26B  Factors associated with white collar crime

Donald Cressey’s research found three factors that were common among white collar criminals.

Required

Name the three factors identified by Cressey.