larson chap 1 prob set a
TRANSCRIPT
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PROBLEM SET A
Problem 1-1A (40 minutes)
Part 1
Company A:
(a) Equity on December 31, 2004:
Assets.......................................................... $45,000Liabilities..................................................... (23,500)Equity.......................................................... $21,500
(b) Equity on December 31, 2005:
Equity, December 31, 2004........................ $21,500Plus owner investments............................ 5,000Plus net income.......................................... 7,500Less owners withdrawals......................... (2,500)Equity, December 31, 2005....................... $31,500
(c) Amount of liabilities on December 31, 2005:
Assets.......................................................... $48,000Equity.......................................................... (31,500)Liabilities..................................................... $16,500
Part 2
Company B:
(a) and (b)
Equity: 12/31/2004 12/31/2005
Assets................................... $35,000 $41,000Liabilities.............................. (22,500) (27,500)Equity................................... $12,500 $13,500
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Problem 1-1A (Continued)
(c) Net income for 2005:Equity, December 31, 2004..................... $12,500Plus owner investments......................... 1,500
Plus net income....................................... ?Less owners withdrawals...................... (3,000)Equity, December 31, 2005..................... $13,500
Therefore, net income must have been $2,500.
Part 3Company C:
First, calculate the beginning balance of equity:Dec. 31, 2004
Assets.......................................................... $29,000Liabilities..................................................... (14,000)Equity.......................................................... $15,000
Next, find the ending balance of equity by completing this table:
Equity, December 31, 2004........................ $15,000Plus owner investments............................ 7,750
Plus net income.......................................... 9,000Less owners withdrawals......................... (3,875)Equity, December 31, 2005........................ $27,875
Finally, find the ending amount of assets by adding the ending balance ofequity to the ending balance of liabilities:
Dec. 31, 2005
Liabilities..................................................... $19,000Equity.......................................................... 27,875Assets.......................................................... $46,875
Part 4Company D:
First, calculate the beginning and ending owners equity balances:12/31/2004 12/31/2005
Assets...................................... $80,000 $ 125,000
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Liabilities................................. (38,000) (64,000)Owners Equity....................... $42,000 $ 61,000
Problem 1-1A (Concluded)
Then, find the amount of owner investments during 2005:
Equity, December 31, 2004.......................... $42,000Plus owner investments............................... ?Plus net income............................................ 12,000Less owner withdrawals.............................. 0Equity, December 31, 2005.......................... $61,000
Thus, owner investments must have been: $7,000
Part 5Company E:
First, compute the balance of equity as of December 31, 2005:
Assets.......................................................... $112,500Liabilities.................................................... (75,000)Equity.......................................................... $ 37,500
Next, find the beginning balance of equity as follows:
Equity, December 31, 2004........................ $ ?Plus owner investments............................ 4,500Plus net income.......................................... 18,000Less owners withdrawals......................... (9,000)Equity, December 31, 2005....................... $37,500
Thus, the beginning balance of equity was $24,000.
Finally, find the beginning amount of liabilities by subtracting the
beginning balance of equity from the beginning balance of assets:Dec. 31, 2004
Assets.......................................................... $123,000Equity.......................................................... (24,000)Liabilities.................................................... $ 99,000
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Problem 1-2A (25 minutes)
Balance SheetIncome
StatementStatement ofCash Flows
TransactionTotal
AssetsTotalLiab.
TotalEquity
NetIncome
OperatingActivities
FinancingActivities
InvestingActivities
1 Owner investscash in business + + +
2 Receives cashfor servicesprovided
+ + + +
3 Pays cash foremployee wages
4 Incurs legalcosts on credit +
5 Borrows cash
by signing L-Tnote payable
+ + +
6 Owner with-draws cash
7 Buys land bysigning notepayable
+ +
8 Provides ser-vices on credit + + +
9 Buys office
equipmentfor cash
+/
10 Collects cashon receivablefrom (8)
+/ +
Problem 1-3A (15 minutes)
Valdez Energy CompanyIncome StatementFor Year Ended December 31, 2005
Revenues ................................................... $65,000Expenses.................................................. 50,000
Net income.................................................... $15,000
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Problem 1-4A (15 minutes)
AmicoBalance Sheet
December 31, 2005
Assets ........... $90,000Liabilities ....................................$34,000Equity...............................................
56,000Total assets................... $90,000 Total liabilities and equity.....
$90,000
Problem 1-5A (15 minutes)
TrimarkStatement of Cash Flows
For Year Ended December 31, 2005
Cash from operating activities ........................ $ 7,000
Cash used by investing activities.................... (3,000)
Cash used by financing activities.................... (3,800)
Net increase in cash.......................................... 200
Cash, December 31, 2004................................. 3,300
Cash, December 31, 2005................................. $ 3,500
Problem 1-6A (15 minutes)
BoardwalkStatement of Owners Equity
For Year Ended December 31, 2005
B. Walk, Capital, Dec. 31, 2004 ........................ $ 8,000Add: Net income..................................................... 9,00017,000
Less: Owner withdrawals................................. (2,000)B. Walk, Capital, Dec. 31, 2005......................... $15,000
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Problem 1-7A (60 minutes) Parts 1 and 2
Assets = Liabilities + EquityDate Cash + Accounts
Receivable+ Office
Equipment= Accounts
Payable+ J.D. Simpson,
Capital- J.D. Simpson,
Withdrawals+ Revenues - Expenses
May 1 +$60,000 = + $60,000
1 - 3,200 = - $3,200
3 + $1,680 = + $1,680
5 - 800 = - 800
8 + 4,600 = + $4,600
12 + $3,000 = + 3,000
15 - 850 = - 850
20 + 3,000 - 3,000 =
22 + 2,800 = + 2,800
25 + 2,800 - 2,800 =
26 - 1,680 = - 1,680
27 = + 60 - 60
28 - 850 = - 850
30 - 200 = - 200
30 - 480 = - 480
31 - 1,200 = - $1,200
$61,140 + $ 0 + $1,680 = $ 60 + $60,000 - $1,200 + $10,400 - $6,440
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Problem 1-7A (Continued)Part 3
THE SIMPSON CO.Income Statement
For Month Ended May 31
RevenuesConsulting services revenue ............ $10,400
ExpensesRent expense....................................... $3,200Salaries expense................................. 1,700Advertising expense........................... 60Cleaning expense............................... 800Telephone expense............................ 200Utilities expense.................................. 480Total expenses.................................... 6,440
Net income.................................................. $ 3,960
THE SIMPSON CO.Statement of Owners Equity
For Month Ended May 31
J.D. Simpson, Capital, May1.................................... $ 0Plus: Owner Investments..................................... 60,000
Net Income....................................................... 3,96063,960
Less: Owner Withdrawals......................................... 1,200J.D. Simpson, Capital, May 31.................................. $62,760
THE SIMPSON CO.Balance Sheet
May 31
Assets LiabilitiesCash............................... $61,140 Accounts payable..................... $60Office equipment.......... 1,680 Equity
J.D. Simpson, Capital...............62,760
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Total assets................... $62,820 Total liabilities and equity........
..........................$62,820
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Problem 1-7A (Concluded)
Part 3
THE SIMPSON CO.
Statement of Cash FlowsFor Month Ended May 31
Cash flows from operating activitiesCash received from customers................................ $10,400Cash paid for rent...................................................... (3,200)Cash paid for cleaning............................................... (800)Cash paid for telephone............................................ (200)Cash paid for utilities................................................. (480)Cash paid to employees............................................ (1,700)
Net cash provided by operating activities............... $ 4,020
Cash flows from investing activitiesPurchase of equipment............................................. (1,680)Net cash used by investing activities...................... (1,680)
Cash flows from financing activitiesInvestments by owner............................................... 60,000Withdrawals by owner............................................... (1,200)Net cash provided by financing activities............... 58,800
Net increase in cash.................................................. $61,140Cash balance, May 1.................................................. 0Cash balance, May 31................................................ $61,140
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Problem 1-8A (60 minutes) Parts 1 and 2
Assets = Liabilities + Equity
Date Cash + AccountsReceivable
+ OfficeSupplies
+ OfficeEquipment
+ ElectricalEquipment
= AccountsPayable
+ C.Hamilton,Capital
- C.Hamilton,Withdrawals
+ Revenues - Expense
Dec. 1 +$56,000 = + $56,000
2 - 800 - $80Bal. 55,200 = 56,000 - 80
3 - 3,200 + $14,000 + $10,800Bal. 52,000 + 14,000 = 10,800 + 56,000 - 80
5 - 900 + $ 900Bal. 51,100 + 900 + 14,000 = 10,800 + 56,000 - 80
6 + 1,000 + $1,000
Bal. 52,100 + 900 + 14,000 = 10,800 + 56,000 + 1,000 - 808 + $3,800 + 3,800
Bal. 52,100 + 900 + 3,800 + 14,000 = 14,600 + 56,000 + 1,000 - 80
15 + $4,000 + 4,000
Bal. 52,100 + 4,000 + 900 + 3,800 + 14,000 = 14,600 + 56,000 + 5,000 - 8018 + 500 + 500
Bal. 52,100 + 4,000 + 1,400 + 3,800 + 14,000 = 15,100 + 56,000 + 5,000 - 80
20 - 3,800 - 3,800Bal. 48,300 + 4,000 + 1,400 + 3,800 + 14,000 = 11,300 + 56,000 + 5,000 - 80
24 + 600 + 600
Bal. 48,300 + 4,600 + 1,400 + 3,800 + 14,000 = 11,300 + 56,000 + 5,600 - 80
28 + 4,000 - 4,000Bal. 52,300 + 600 + 1,400 + 3,800 + 14,000 = 11,300 + 56,000 + 5,600 - 80
29 - 1,200 - 1,20Bal. 51,100 + 600 + 1,400 + 3,800 + 14,000 = 11,300 + 56,000 + 5,600 - 2,00
30 - 440 - 44Bal. 50,660 + 600 + 1,400 + 3,800 + 14,000 = 11,300 + 56,000 + 5,600 - 2,44
31 - 700 - $700
Bal. $49,960 + $ 600 + $1,400 + $3,800 + $14,000 = $11,300 + $56,000 - $700 + $5,600 - $2,44
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Problem 1-8A (Continued)Part 3
HAMILTON ELECTRICIncome Statement
For Month Ended December 31
RevenuesElectrical fees earned...................... $5,600
ExpensesRent expense.................................... $ 800Salaries expense.............................. 1,200Utilities expense .............................. 440Total expenses................................. 2,440
Net income.................................................. $3,160
HAMILTON ELECTRICStatement of Owners Equity
For Month Ended December 31
C. Hamilton, Capital, December1............. $ 0Plus: Owner investments 56,000
Net income....................................... 3,16059,160
Less: Owner withdrawals.......................... 700C. Hamilton, Capital, December 31........... $58,460
HAMILTON ELECTRICBalance SheetDecember 31
Assets Liabilities
Cash................................. $49,960 Accounts payable.................... $11,300Accounts receivable....... 600Office supplies................ 1,400 EquityOffice equipment............. 3,800Electrical equipment....... 14,000 C. Hamilton, Capital................. 58,460Total assets..................... $69,760 Total liabilities and equity....... $69,760
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Problem 1-8A (Concluded)
Part 3continued
HAMILTON ELECTRIC
Statement of Cash FlowsFor Month Ended December 31
Cash flows from operating activitiesCash received from customers................................... $ 5,000Cash paid for rent......................................................... (800)Cash paid for supplies................................................. (900)Cash paid for utilities................................................... (440)Cash paid to employees.............................................. (1,200)Net cash provided by operating activities................. $ 1,660
Cash flows from investing activitiesPurchase of electrical equipment............................... (3,200)Purchase of office equipment..................................... (3,800)Net cash used by investing activities........................ (7,000)
Cash flows from financing activitiesCash invested by owner.............................................. 56,000Cash withdrawals by owner........................................ (700)Net cash provided by financing activities................. 55,300
Net increase in cash..................................................... $49,960Cash balance, Dec. 1.................................................... 0Cash balance, Dec. 31.................................................. $49,960
Part 4
If the December 1 owner investment had been $40,000 cash instead of$56,000 and the $16,000 difference was borrowed by the company from abank, then:
(a) beginning and ending equity would be $16,000 less,
(b) total liabilities would be $16,000 greater, and
(c) total assets would remain the same.
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Problem 1-9A (60 minutes) Parts 1 and 2
Assets = Liabilities + Equity
Cash + AccountsReceivable
+ OfficeSupplies
+ OfficeEquip-ment
+ Building = AccountsPayable
+ Notes
Payable
+ M.Right,
Capital
- M.Right,With-
drawals
+ Reve-nues
- Expen-ses
a. +$60,000 + $30,000 + $90,000
b. - 50,000 + $300,000 + $250,000
Bal. 10,000 + 30,000 + 300,000 = + 250,000 + 90,000
c. - 6,000 + 6,000
Bal. 4,000 + 36,000 + 300,000 = + 250,000 + 90,000
d. + $4,000 + 1,000 + $5,000
Bal. 4,000 + 4,000 + 37,000 + 300,000 = 5,000 + 250,000 + 90,000
e. - 1,000 - $1,000
Bal. 3,000 + 4,000 + 37,000 + 300,000 = 5,000 + 250,000 + 90,000 - 1,000
f. + $4,000 + $4,000
Bal. 3,000 + 4,000 + 4,000 + 37,000 + 300,000 = 5,000 + 250,000 + 90,000 + 4,000 - 1,000
g. + 8,000 + 8,000
Bal. 11,000 + 4,000 + 4,000 + 37,000 + 300,000 = 5,000 + 250,000 + 90,000 + 12,000 - 1000
h. - 1,800 - $1,800
Bal. 9,200 + 4,000 + 4,000 + 37,000 + 300,000 = 5,000 + 250,000 + 90,000 - 1,800 + 12,000 - 1,000
i. + 3,000 - 3,000
Bal. 12,200 + 1,000 + 4,000 + 37,000 + 300,000 = 5,000 + 250,000 + 90,000 - 1,800 + 12,000 - 1,000
j. - 500 - 500
Bal. 11,700 + 1,000 + 4,000 + 37,000 + 300,000 = 4,500 + 250,000 + 90,000 - 1,800 + 12,000 - 1,000
k. - 2,500 - 2,500
Bal. $9,200 + $1,000 + $4,000 + $37,000 + $300,000 = $4,500 + $250,000 + $90,000 - $1,800 + $12,000 - $3,500
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Problem 1-9A (Concluded)
Part 3
Right Consultings net income = $12,000 - $3,500 = $8,500
Problem 1-10A (20 minutes)
1. Return on assets equals net income divided by average totalassets.
Coca-Cola return: $50 / $625 = 0.08 or 8%.
PepsiCo return: $37.5 / $312.5 = 0.12 or 12%.
2. On strictly amount of sales to consumers, Cokes sales of $400exceed PepsiCos sales of $250.
3. Success in returning net income from the average amountinvested is revealed by the return on assets. Part 1 showed thatPepsiCos 12% return is better than Coca-Colas 8% return.
4. Current performance figures suggest that PepsiCo yields a higher
return on assets than Coca-Cola. Based on this information alone,we would be better advised to invest in PepsiCo than Coca-Cola.
Nevertheless, we would look for additional information in financialstatements and other sources for further guidance. For example, ifCoca-Cola could expand its sales, it could be a more appealinginvestmentalternatively, if it could dispose of some assetswithout curtailing its sales level, it would look more attractive. Wewould also look for consumer trends, market expansion,competition, product development, and promotion plans.
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Problem 1-11A (15 minutes)
1. Return on assets is net income divided by the average amountinvested.
Zias return: $55,000 / $250,000 = 0.22 or 22%.
2. Return on assets seems satisfactory for the risk involved in themanufacturing, marketing, and selling of cellular telephones.Moreover, Zias 22% return is nearly double that of itscompetitors 12% return.
3. We know that sales less expenses equal net income. Taking thesales and net income numbers for Zia we obtain:
$455,000 - Expenses = $55,000 Expenses must equal $400,000.4. We know from the accounting equation that total financing
(liabilities plus equity) must equal the total for assets (investing).Since average total assets are $250,000, we know the averagetotal of liabilities plus equity (financing) must equal $250,000.
Problem 1-12AA (20 minutes)
Case 1 Return: 4% interest or $40/year.Risk: Very low; it is the risk of the financialinstitution not paying interest and principal.
Case 2 Return: Expected winnings from your bet.Risk: Depends on the probability of your team
covering the spread.
Case 3 Return: Expected return on your stock investment(both dividends and stock price changes).
Risk: Depends on the current and futureperformance of Yahoos stock price (anddividends).
Case 4 Return: Expected increase in career earnings andother rewards from an accounting degree.
Risk: Depends on your ability to successfully learnand apply accounting knowledge.
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Problem 1-13AB (15 minutes)
1. A 5. B2. B 6. C3. B 7. C
4. A 8. C
Problem 1-14AB (15 minutes)
An organization pursues three major business activities: financing,investing, and operating.
(1) Financingis the means used to pay for resources.
(2) Investingrefers to the buying and selling of resources (assets)
necessary to carry out the organizations plans.(3) Operating activities are the carrying out of an organizations
plans.
If financial statements are to be informative about an organizationsactivities, then they will need to report on these three major activities.Also note that planning is the glue that links and coordinates thesethree major activitiesit includes the ideas, goals, and strategies ofan organization.