practice problems for modules 1, 2, &...

Modules 1&2 Problems Gaber, Hayes & Porporato © 2011

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PRACTICE PROBLEMS for MODULES 1, 2, & 3 PROBLEM 01 – BALANCE SHEET EQUATION To illustrate the dual effects of various transactions on the balance sheet equation, consider the following selected transactions for a sole proprietorship owned by S. Moody:

1. On January 1, S. Moody invested $75,000 cash in the business. 2. Equipment costing $60,000 is purchased for cash on January 5. 3. Supplies costing $12,000 are purchased from a supplier on account on January

15. 4. The supplier in (3) is paid $8,000 of the amount due on January 18. 5. A one-year fire insurance premium of $600 for coverage beginning February 1

is paid in cash on January 21. 6. On January 22, a customer paid $10,000 in advance for services to be

provided the following week. 7. On January 31, Moody completed the services for the customer who had paid

in advance. 8. On January 31, S. Moody discovered that half the supplies were used up in the

course of providing the services to the customer. REQUIRED: Enter the transactions into a table with headings shown below, to demonstrate that

each transaction preserves the balance sheet equation equality. The first transaction is shown as an example:

PROBLEM 02 – GENERALLY ACCEPTED ACCOUNTING PRINCIPLES Identify the generally accepted accounting concept principle, assumption, or constraint violated in each of the following situations:

a) A business that prepares financial statements monthly, recorded revenue on July 10th when a customer paid for the goods sold to them on account on June 15th .

b) A company which expects to discontinue operations next month, records an equipment purchase as an increase in capital assets and plans to amortize the cost over the next ten years.

c) M.T. Careless, does not keep the books of his business, Careless Creations, separate from his personal records.

d) Guard It Ltd., provides security services to other businesses. Guard It Ltd. charges customers double the hourly rate that it pays its security guards. Guards are paid on the 15th of each month. Guard It records revenue at the time the guarding services are provided, records wage expenses at the time the guards are paid, and prepares financial statements at the end of each month.


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PROBLEM 03 – BALANCE SHEET EQUATION Some of the transactions carried out by Startup Dream-it, an architectural firm, during the first month of the firm's existence are listed below. You are to determine the effect of each transaction on the total assets, the total liabilities, and the owner's equity. Prepare your answer in columnar form, identifying each transaction by letter and using the symbols (+) for increase, (-) for decrease, and (NC) for no change. An answer is provided for the first transaction to serve as an example.

Total Assets

Total Liabilities

Total Owners’ Equity

A The owner invested cash in the business + NC +

B Obtained a loan from a bank

C Purchased office equipment on credit

D Paid a liability

E The owner withdrew cash from the business

F Bought land and a building at a total price of $400,000. Made a down payment of $80,000 cash and signed a note payable for the balance

G Bought adjoining lot for use as parking lot; paid cash in full

H Sold a portion of the land on credit at a price equal to its cost

I Collected part of amount owed to the business from customers

PROBLEM 04 – BALANCE SHEET EQUATION On June 30, 2004, the balance sheet of Zorab & Co. showed total assets of $400,000, total liabilities of $300,000, and owner's equity of $100,000. The following transactions occurred in July of 2004: 1. The owner invested an additional $70,000 cash in the business. 2. The business purchased equipment for $150,000, paying $60,000 cash and issuing

a note payable for $90,000. 3. The business paid off $40,000 of its accounts payable. Compute the following as of July 31, 2004: a. Total assets b. Total liabilities c. Owner's equity


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PROBLEM 05 - BALANCE SHEET EQUATION

Some of the transactions carried out by Nobel Company during the first month of the company's existence are listed below. You are to determine the effect of each transaction on the total assets, the total liabilities, and the owner's equity. Prepare your answer in columnar form, identifying each transaction by letter and using the symbols (+) for increase, (-) for decrease, and (NC) for no change. An answer is provided for the first transaction, to serve as an example.

Total Assets Total Liabilities Total Owners’ equity

A The owner invested $2,000 in the business

+$2,000 NC +$2,000

B Purchased a telephone answering machine for $250 cash

C Borrowed $5,000 from the bank

D Purchased office furnishings at a total price of $2,500; terms, $500 cash and balance payable in two installments

E Paid $1,000 of the balance due on the office furnishings.

F Sold an extra typewriter that had cost $150 for $175 on credit

G Collected $100 of amount receivable from the purchaser of the typewriter.

H Counted supplies on hand and discovered that $700 of supplies had been used up. [The purchase had originally been recorded as an increase in assets]

I Received an $7,000 advance from a customer for work to be done in the next accounting period.

J The owner withdrew $600 from the business for personal use

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PROBLEM 6 – TRUE /FALSE For each statement, place a T or an F in the space provided to indicate whether the statement is true or false. , __ 1 Current liabilities include liabilities that are expected to be paid within one year __ 2. "Generally accepted accounting principles" are the accounting methods and procedures used by firms in preparing their financial statements. __ 3. The income statement attempts to present an overall view of a firm's financial position at a given date. — 4. The terms net income, earnings, and profits are synonymous and are defined as the difference between revenues and expenses for a period __ 5. Financial reporting should provide useful information for making rational investment and credit decisions. __ 6. One of the objectives of accounting is to help investors and creditors assess the amount, timing, and uncertainty of cash flows to them. __ 7. Financial accounting is concerned with the preparation of reports that provide information to users external to the firm. __ 8. If, during the audit of a firm, the auditor discovers something of a material nature that indicates the client's financial statements are erroneous or misleading external readers should be warned of this in the auditors’ report. __9. The balance sheet presents the results of earnings activity over time. __ 10. Shareholders' equity is the owner's claim on the assets of the firm. —11. The two sources of any firm's assets are the firm's creditors and owners. __12. The cash flow statement provides information about the principal financing and investing activities of a firm. __ 13. Retained earnings represent the sum of all prior earnings of the firm in excess of dividends. — 14. A multiple-step income statement shows readers more detail than a single step income statement. __ 15. Noncurrent assets provide firms with long-term productive capacity. — 16. Acquisition of noncurrent assets is an activity that is typically a source of cash for

a firm.


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PROBLEM 7 - QUESTIONS TO TEST YOUR UNDERSTANDING

a) Distinguish between financial and managerial accounting b) Suggest why financial accounting reports need to be more standardized than

managerial accounting reports. c) What purpose is served by accounting having a broad set of objectives such as

those set out by the FASB? d) “Asset valuation and income measurement are closely related” …explain. e) “Operating activities can be a source of financing for the firm” …explain. f) Does an unreserved or clean audit opinion from an external auditor indicate that

the financial statements are free of error? g) How can you ascertain from the balance sheet whether a company is a

corporation, partnership or sole proprietorship? h) Conservatism is a principle in financial accounting. Indicate who might be hurt by

conservatively drawn up financial reports. i) One of the requirements for recognition of an asset or liability is that there must

be a transaction or exchange or resources. What justification can you see for this requirement?

j) Accounting does not recognize either assets or liabilities for mutually unexecuted contracts. What justification can you see for this treatment?

k) Cash discounts on merchandise purchased are recorded as a reduction in the asset cost. What justification can you see for this treatment?

PROBLEM 8 – ACCOUNT CLASSIFICATION Various items are classified on the balance sheet or income statement in one of the following ways: CA – current assets NCA – Non current assets CL – Current liabilities NCL – Non current liabilities RE – Retained Earnings. E – Equity source other than earnings IS – Income statement item X – item would not appear on the balance sheet or income statement

Using the preceding codes, indicate the classification of each of the following items: a) Factory b) Interest revenue c) Shares issued by a corporation d) Prepaid expenses e) Automobile used by sales staff’ f) Cash on hand g) Unsettled litigation (lawsuit) against the firm h) Commission earned by sales staff i) Supplies inventory j) Note payable due in 3 months k) Increase in market value of land owned l) Dividends paid m) Employee taxes payable n) Note payable due in six years


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PROBLEM 9 (MATCHING) From the list of terms, select one term that is most closely associated with one descriptive phrase or statement that follows, and place the letter for that term in the space provided a. Assets i. Managerial accounting b. Balance sheet j. Net income c. Contributed capital k. Net loss d Accounts receivable I. Retained earnings e. Expenses m. Revenues f Financial accounting n. Shareholders' equity g. Income statement o. Cash flow statement h Liabilities p. Audit opinion __ a) Represent a measure of the assets provided by the original shareholder in exchange for an ownership interest in the firm __ b) This financial statement presents an overall view of a company's financial position at a given date. __ c) Economic resources that have the potential or ability to provide future services or benefits to the firm. __ d) Inflows of assets (or reductions in liabilities) from selling goods and providing services to customers. __ e) Outflows of assets (or increases in liabilities) used up in generating revenue. __ f) This segment of accounting is concerned with the preparation of reports that provide information to users external to the firm __ g) The excess of revenues over expense s for the period. __ h) This segment of accounting is concerned with the preparation of reports that provide information to users within the firm __ i) This item represents the earnings/ or profits, realized by the firm since its formation in excess of dividends distributed to shareholders. __ j) This financial statement reports the sources and uses of cash during a period of time. __ k) Creditors' claims on the resources of the company. __ l) This financial statement presents the results of earnings activity over time. __ m) States that a firm's financial statements "present fairly the financial position and the results of operations and the changes in financial position in accordance with generally accepted accounting principles applied on a basis consistent with that of the preceding period."


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__ n) The excess of expenses over revenues for a period. __ o) Owners' claim on the assets of the company. The owners' claim is called a residual interest. PROBLEM 10 (MULTIPLE CHOICE) Choose the best answer for each question or problem and enter the identifying letter in the space provided. 1. Which of these transactions of Corley Limited is not a use of cash ?

A. Purchased a tract of land B. Paid dividends to shareholders C. Reacquired some of the company's common shares D. Long-term debt was issued

2. Which of these financial statements provides information about sources and uses of cash ?

A. Income statement B. Balance sheet C. Cash flow statement D. All of the above

3. Which of these equations is incorrect?

A. Shareholders' Equity = Contributed Capital + Retained Earnings B. Revenues - Expenses = Net Income C. Assets = Liabilities + Shareholders' Equity D. All of the above equations are correct

4. Evans Corporation's retained earnings increased by $300,000 during the year Also during the year, dividends totaling $75,000 were declared and paid to shareholders. Evans Corporation's net income for the year was.

A. $75,000 B. $225,000 C. $300,000 D. $375,000

5. Which of the following does not describe an expense?

A. Payment of dividends to shareholders B. Cost of merchandise sold C. Salaries earned by employees but not yet paid D. Depreciation for the period on the firm's building


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6. Which one of these assets is not a current asset? A. Cash B. Land C. Merchandise inventory D. Accounts receivable

7. Which of these transactions of Fort Ltd is not a source of cash?

A. Additional common shares were issued B. Additional equipment was acquired C. A long-term note was issued D. A tract of land was sold

8. Which of these persons would be least likely to receive a firm's managerial accounting reports?

A. A creditor of the firm B. One of the firm's production supervisors C. One of the firm's vice-presidents D. One of the firm's salespeople

9. Revenues are a measure of the inflows of assets (or reductions in liabilities) from selling goods and providing services to customers. Which of the following is not a revenue transaction?

A. Sold merchandise for cash to a customer B. Sold merchandise on account to a customer C. Delivered weekly magazines to a subscriber, who had paid previously for a one-

year's subscription D. Went to the local bank and borrowed money to be used in the business

10. Which of the following would not appear on a balance sheet?

A. Retained earnings B. Bonds payable C. Cost of goods sold D. Accounts receivable

11. Coleman Inc. reports total assets and total liabilities of $225/000 and $100/000, respectively, at the conclusion of its first year of business. The company earned $75,000 during the first year and distributed $30/000 in dividends. What was the firm's contributed capital?

A. $125,000 B. $95/000 C. $80,000 D. $50,000

12. Which of the following is not a current asset?

A. Patent B. Inventory C. Accounts receivable D. Cash


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13. Which of these financial statements provides information about economic resources and claims on those resources?

A. Income statement B. Balance sheet C. Cash flow statement D. All of the above

14. Which one of these liabilities is not a current liability?

A. Mortgage payable B. Accounts payable C. Salaries payable D. Taxes payable

15. Which of the following would not appear on an income statement?

A. Rent expense B. Salaries payable C. Sales revenue D. Cost of goods sold

PROBLEM 11 (DRAFTING FINANCIAL STATEMENTS) The accounting records of Digital Electronics Corporation reveal the following: 12/31/yr2 12/31/yr1 Balance Sheet Items Accounts Payable to Suppliers

$295,000 $250,000

Accounts Receivable from Customers

320,000 240,000

Bonds Payable

120,000 100,000

Buildings (net of accumulated depreciation)

140,000 150,000

Cash

50,000 30,000

Common Stock

100,000 100,000

Equipment (net of accumulated depreciation)

220,000 140,000

Income Taxes Payable

70,000 40,000

Land

70,000 60,000

Merchandise Inventory

400,000 380,000

Retained Earnings

600,000 500,000

Salaries Payable 15,000 10,000


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Income Statement Items for Year 2;

Cost of Merchandise Sold

$620,000

Depreciation Expense

40,000

Income Tax Expense

100,000

Insurance Expense

3,000

Interest Expense

10,000

Property Tax Expense

2,000

Rental Revenue (rental of part of building

30,000

Salary Expense

135,000

Sales Revenue

1,000,000

Dividend Information for Year 2:

Dividends Declared and Paid

$20,000

Required: a. Prepare a comparative balance sheet for Digital Electronics Corporation as of December 31, Year 1 and Year 2. Classify the balance sheet items into the following categories: (current assets, noncurrent assets, current liabilities, noncurrent liabilities, and shareholders' equity.) b. Prepare a multiple-step income statement for Digital Electronics Corp. for Year 2 c. Prepare a schedule explaining the changes in retained earnings during Year 2


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PROBLEM 12 (MATCHING) From the following list of terms, select one term that is most closely associated with one descriptive phrase or statement that follows and place the letter for that term in the space provided.

A. Accounts payable B. Accounts receivable C. Accumulated depreciation D. Bonds payable E. Cash F. Common shares G. Contributed surplus H. Future income taxes I. Finished goods inventory J. Goodwill K. Income taxes payable L. Interest payable M. Interest receivable N. Temporary investments O. Merchandise inventory P. Mortgage payable Q. Notes receivable R. Organization costs S. Patents T. Preferred shares U. Prepaid insurance V. Raw materials inventory W. Retained earnings X. Rent received in advance Y. Treasury shares Z. Withheld income taxes

1. The shares originally issued and outstanding that have been reacquired from the owners. 2. The financial obligation, which accrues with the passage of time, of the company to pay for the use of borrowed money. 3. A residual claim of owners having certain preferences relative to other owners' claims. 4. A type of liquid asset, an example of which is a demand deposit. 5. A right granted to exclude others from manufacturing, using, or selling a certain process or device. 6. The balance in this account is the amount owed to the company by its customers. 7. Usually debited when interest revenue is credited. 8. Goods on hand that have been purchased for resale.


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9. Amounts owed for goods or services acquired under an informal credit agreement.

10. Shares and bonds that can readily be converted into cash.

11. Type of inventory for a manufacturer

12. Recorded only when another business enterprise is acquired.

13. An example of long-term debt.

14. Insurance premiums paid for future coverage.

15. The amount subtracted from the cost of a capital asset to compute the net book

of the asset.

16. The amount of income taxes postponed for payment to future years.

17. Amounts due from customers, for which the claim is in the form of a written promise to pay.

18. The estimated and unpaid liability for current income taxes.

19. Amounts paid for various fees incurred in organizing a corporation.

20. Cumulative amount of net income earned by a business since its inception in

excess of dividends paid PROBLEM 13 (MATCHING) For the list of accounts below, select the balance sheet category in which that account should be classified. a. Current Assets b. Investments c. Property, Plant, and Equipment d. Intangible Assets e. Current Liabilities f. Long-Term Debt g. Other Long-Term Liabilities h. Share Capital i. Contributed Surplus j. Retained Earnings


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1. Furniture and Fixtures 2. Liability for Pensions 3. Accumulated Depreciation 4. Future Income Tax Obligation 5. Capitalized Lease Obligation 6. Land 7. Notes Payable (due in five years) 8. Common Stock 9. Withholding Taxes Payable 10. Cash 11. Convertible Bonds Payable (convertible into common or preferred shares) 12. Advances to Suppliers 13. Sinking Fund for Retirement of Bonds 14. Supplies 15. Prepaid Rent 16. Income Taxes Payable 17. Investment in Bonds (for a long-term purpose) 18. Interest Receivable 19. Accounts Receivable 20. Excess of Proceeds over Par Value on Issue of Preferred Shares 21. Rent Received in Advance 22. Treasury Shares 23. Temporary Investments 24. Accounts Payable 25. Organization Costs


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26. Building 27. Patent 28. Mortgage Payable (due in one year) 29. Work-in-Process Inventory 30. Prepaid Insurance 31. Advances from Customers 32. Bonds Payable PROBLEM 14 (MULTIPLE CHOICE) Choose the best answer for each question or problem. 1. Which equation does not represent an acceptable presentation of the balance sheet equation? a) Assets Liabilities = Owners' Equity b) Assets = Liabilities + Capital stock + Contributed Surplus + Retained Earnings c) Assets = Equities d) All of the above represent acceptable presentations of the balance sheet equation. 2. Which of these liabilities would be accounted for at the present value of future cash payments? a) Accounts payable b) Bonds payable c) Income taxes payable d) Withholding taxes payable 3. The Bonanza Co. Ltd. is interested in disposing of one of its subsidiaries and needs to decide on the minimum price it might be able to charge. Which valuation method would likely be used? a) Acquisition cost b) Net realizable value c) Present value d) Replacement cost 4. The balance in all assets accounts combined is $100,000 on December 1 During December, the following transactions took place: Purchase of $10,000 of inventory for cash. Purchase of $15,000 of machinery on account. Retirement of $20,000 in bonds with cash.


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What is the combined December 31 balance in the asset accounts? a) $95,000 b) $115,000 c) $105,000 d) $80,000 5. The balance sheet reflects the application of various valuation methods. Which of the methods listed may be used on a balance sheet that follows generally accepted accounting principles? a) Acquisition cost b) Current cash equivalent value c) Present value of future cash flows d) All of the above 6. From the following list of accounts, determine the amount that would be properly classified as Capital Assets (property, plant, and equipment). Land Used in Business $100,000 Machinery Leased from Others (no liability has been recorded) 60,000 Accumulated Depreciation (80,000) Inventories 124,000 Land Held for Future Plant Site 40,000 Building 200,000 Investment in Shares of Construction Co. Inc. 50,000 a) $220,000 b) $360,000 c) $260,000 d) $280,000 7. Which of the following would cause an imbalance in the accounting equation? a) Recording a purchase on account at the wrong amount b) Recording a 19X1 purchase in 19X2 instead c) Posting the credit for a cash purchase at the wrong amount d) All of the above 8. All of the following assets are nonmonetary, except one. Which one? a) accounts receivable b) land c) inventory d) patent 9. The concept of present value- a) can be simply defined as value today of a stream of future cash flows b) implies that the value of receiving cash today wil be less than the value of receiving it in the future


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c) is employed extensively in the valuation of assets under current generally accepted accounting principles d) determines the minimum amount that a buyer would be wiling to pay for an asset 10. Different balance sheet items employ different valuation methods. Which valuation application is not generally accepted? a) A major line of inventory has increased in value substantially above its cost and has been restated to its current replacement cost b) Machinery is stated at its historical cost less the estimated amount of benefits consumed to date c) Cash is received for goods to be delivered next month, the liability is stated at the amount of cash received and not the cost of foods to be delivered d) Common share capital is stated at the amount at which it was originally sold 11. Redondo Corp. has assets and liabilities of $30,000 and $24,000, respectively. If Redondo issues an additional $3,000 worth of shares for cash, what will be the balance in shareholders' equity following this transaction? a) $30,000 b) $27,000 c) $9,000 d) $33,000 12. Which of these statements concerning the rules of debit and credit is incorrect? a) Debits are always recorded on the left b) Debits reduce shareholders' equity c) Assets have debit balances d) Credits always mean decreases 13. From this list of selected account balances/ determine the total for the Shareholders' Equity section of the balance sheet for Cabbage Company Ltd. Investment in Shares of Rutabaga Limited $ 2,500 Retained Earnings 5,000 Cash (in special bank account for a payment of dividends) 3,000 Note Payable to Suppliers 2,000 Common Stock 10,000 8% Preferred Stock 7,500 a) $20,500 b) $22,500 c) $24,500 d) $25,500 14. What account would not be found on the balance sheet of a corporation? a) Contributed Surplus b) Retained Earnings


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c) Investment n Smith Ltd. Shares d) Keith, Capital 15. Which of these journal entries is incorrectly recorded? a) Jan. 1 Cash 33,000

Investment in X Co Ltd Shares 33,000 (Sale of an investment for cash)

b) Jan. 2. Prepaid Insurance 750

Cash 750 (Paid in advance for a one-year insurance policy)

c) Jan 3: Accounts Receivable 1,200

Merchandise Inventory 1,200

(Returned defective merchandise for credit. The merchandise has not yet been paid for)

d) Jan 4: Machinery 30,500

Notes Payable 30,500 (Gave a one-year note to acquire machinery.)

16. The following entry was made on June 15 for Cindy Inc. Jun. 15 Machinery 17,000

Accounts Payable 17,000 This entry was made for which of these transactions? a) Payment for purchase .of machinery b) Sale of machinery c) Depreciation of machinery d) Purchase of machinery 17. The Pay Pac Corporation failed to record the purchase of inventory on account at the end of 19X1 In which of the following ways is the balance sheet misstated? a) Assets and liabilities are both understated b) Assets are understated and liabilities are overstated c) Assets and shareholders' equity are both understated d) Assets, liabilities, and shareholders' equity are all correctly stated


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PROBLEM 15 (BALANCE SHEET EQUATION) Indicate the effect of each of the stated transactions on the balance sheet equation in the example. After each transaction is properly recorded, compute new subtotals for the Assets, Liabilities, and Owners' Equity, being sure to maintain the equality of the equation. Use the following format: Transaction Letter Assets = Liabilities + Owners' Equity (Example) +300,000 +300,000 Subtotal $300,000 $300,000 (Example: Issued 1/500 common shares of $100 par value for $300/000 cash) a. Purchased for $250/000 cash a building to be used for office space. b. Received $1,000 for a magazine subscription to be delivered to customers over the next year. c. Paid $2/100 in advance for one year of rent. d. Paid $750 to an advertising agency for a promotional campaign that will start in one month e. Bought $30,000 of merchandise inventory on account. f. Paid $12,000 to the supplier for inventory purchases in (e) and gave a note for the remaining $18,000. g. Loaned $3/500 to an officer and accepted his 90-day note. h. Bought $5/500 of merchandise for cash i. Borrowed $5/000 from the bank. PROBLEM 16 (ACCOUNT TITLES) These balance sheet account titles may be needed in recording the ten transactions that follow. For each transaction, select those accounts that would be used in journalizing and place the letters accompanying the account title in the appropriate columns for debit and credit. a. Cash b. Notes Receivable c. Merchandise Inventory j d Supplies Inventory k. e. Prepaid Insurance I f. Machinery and Equipment m g. Organization Costs h. Accounts Payable i. Notes Payable j. Rent Received in Advance k. Capital Stock l. Contributed Surplus m. Retained Earnings


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Transaction Account Account

Debited Credited (Example) Bought Inventory for cash. c a 1. Paid the lawyers in company shares for the legal work performed in organizing the company. 2. Advanced money to an officer, and received a 90-day note as recognition of the debt. 3. A 120-day note was given to the bank for a loan 4. Acquired supplies for cash. 5. Purchased merchandise on open account. 6. Purchased for cash a one-year insurance policy for $300. 7. Received a one-year advance from tenants for rental property. 8. Owners invested $20,000 cash n the company in exchange for 2,000 shares having a par value of $5 9. Machinery and equipment were bought on open account. 10. Paid off the creditors for inventory purchases. PROBLEM 17 (TRANSACTION ANALYSIS) In T-account form, set up the balances for the following account for Watson Limited at January1 19X1 For each transaction (a - g), make the appropriate journal entry and post each entry to the proper T-accounts. Following these two steps, prepare an unadjusted trial balance at month-end. Cash $120/000 Notes Receivable 40,000 Merchandise Inventory 200,000 Land 60,000 Building 280,000 Accounts Payable 80,000 Notes Payable 64,000 Interest Payable 3,200 Bonds Payable 80,000 Common Shares, No Par Value 400,000 Retained Earnings 72,800


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a. The note receivable of $40,000 was collected b. The note for $64,000 and related accrued interest of $3,200 were paid on January 2 c. The January 1 balance in Accounts Payable was paid during the month of January. d. Bonds in the amount of $32,000 were issued at face value and the proceeds were used to pay for an addition to the building. e. Merchandise inventory costing $120,000 was acquired with payment of $64,000 in cash and the remainder due in 30 days on open account. f. The plot of land costing $60,000 was sold for $60,000. g. An additional 800 common shares were sold for $125 per share. PROBLEM18 (ASSET RECOGNITION) Indicate whether or not each of the following items should be recognized as an asset. 1. A union collective agreement that promises a higher quality of performance in the upcoming year. 2. A piece of machinery worth $1,000, originally purchased for use, but subsequently retired from use and awaiting sale. 3.The company's own shares purchased back from the original shareholders. 4. Cash held in a fund by a firm's trustee, to be used to retire bonds in five years. 5. Cash received from subscribers for publications to be shipped next year 6. Costs incurred to develop a new patent. 7. Interest to be received for the previous six months, on a long-term note receivable. 8. The value to be derived by the firm from having a key location for selling its product. 9. The benefit to the firm of its employees receiving advanced college degrees. 10. The goodwill paid for when acquiring another business enterprise. PROBLEM 19 (LIABILITY RECOGNITION) Indicate whether or not each of the following items should be recognized as a liability for the organization: 1. The obligation to pay interest next year on bonds that were issued on the balance sheet date. 2 The obligation to pay workers for services already rendered. 3 An agreement to purchase inventory in the following year


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4. An agreement to publish and ship magazines next year for cash already received. 5. The obligation to pay dividends from income earned next year 6. Unpaid income taxes from the current year 7 The burden of having a senile president. 8. The obligation of the president to pay for his son's traffic fines. 9 The expectation of replacing worn-out equipment. 10. The obligation to repay a loan made in the current year and due in five years. PROBLEM 20 (BALANCE SHEET PRESENTATION) From this list of account balances, prepare in proper form a balance sheet for Tommy's Memorial Park Inc. Trial Balance December 31,19X1

Dr. Cr. Cash $5,000 Temporary Investments 15,000 Accounts Receivable 40,000 Building Notes Payable (due in 1 year) $22,000 Patent 8,000 Building — Accumulated Depreciation 10,000 Property Taxes Payable 6,000 Accounts Payable 31,000 Retained Earnings 77,800 Common Shares 50,000 Bonds Payable 80,000 Inventory 30,000 Land 100,000 Investment in Trizec Corp. Shares 28,000 Investment in Canadian Utilities Ltd. Bonds 12,000 Prepaid Insurance 1,000 Withheld Income Tax 2,200 Contributed Surplus 25,000 Goodwill 15,000

$304,000 $304,000


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PROBLEM 21 (ACCOUNTING CYCLE) The Electronics Appliance Corporation was organized on September 1 The following transactions occurred during the month of September: (1) The firm issues 4/000 no-par-value common shares for $12 cash per share on

September 1

(2) The firm's lawyer is given 600 no-par-value common shares on September 2 in payment for legal services rendered in the organization of the corporation. The bill for the services is $7,200. (3) A factory building is leased for the three years beginning October 1. Monthly rental payments are $5,000. Two months' rent is paid in advance on September 5. (4) Raw materials are purchased on account for $6,100 on September 12. (5) A cheque for S900 is received on September 15 from a customer as a deposit on a special order for equipment that Electronics plans to manufacture. The contract price is $4,800. (6) Office equipment with a list price of $950 is acquired on September 20. After deducting a discount of $25 for prompt payment, a cheque is issued in full payment.

(7) The company hires three employees to begin work on October 1. A cash advance of $200 is given to one of the employees on September 28.

(8) Factory equipment costing $27,500 is purchased on September 30. A cheque for $5,000 is issued, and a long-term mortgage liability is assumed for the balance.

(9) The labour costs of installing the new equipment in (8) are $450 and are paid in cash on September 30.

Required:

a) Prepare journal entries for each of the nine transactions b) Set up T accounts and post the journal entries c) Prepare a Balance Sheet for Electronics Appliance Corporation as at Sept. 30

practice problems for modules 1, 2, &...

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