Chapter 2

Basic Financial Statements

Solutions:

Exercise 2.2
Preparing a Balance Sheet
Majestic Limo
Managers Report
8 P.m. Thursday
Assets
Cash
Accounts Receivable
$ 288,000
Supplies
26,000
Land
$ 314,000
Building
Automobiles
162,000
Total
476,000

Owners Equity
$ 69,000
78,000

Liabilities:
Notes Payable

14,000

Accounts Payable

70,000

Total Liabilities

80,000

Owners equity:
J.Snow, capital

165,000
$ 476,000

Total

Exercise 2.3
Preparing a Balance Sheet

PEREZ COMPANY
Balance Sheet
December 31, 2001
Assets
Cash
Accounts Receivable
$ 213,000
Land
43,800
Building
$ 257,400
Automobiles

90,000

145,800
Total
403,200

$ 403,200

$ 36,300
56,700

Liability &
Owners Equity
Liabilities:
Notes Payable
Accounts Payable

210,000

Total Liabilities
10,000

Owners equity:
Eduardo Perez, capital
Total

Exercise 2.5
Using the Accounting Equation

Assets
a. $ 558,000
?
b.
?
375,000
c. $ 307,500
142,500

Liabilities

+
$ 342,000

Owners Equity

$ 565,000
?

a. $ 216,000:
Assets $ 558,000 liabilities $ 342,000 = owners equity $ 216,000
b. $ 937,500:
Liabilities $ 565,500 + owners equity $ 375,000 = assets $ 937,500
c.

$ 165,000:
Assets $ 307,500 owners equity $ 142,500 = liabilities $ 165,000

$
$

Exercise 2.6
The Accounting Equation
A number of business transactions carried out by Green River Farms are as follows:
a.
b.
c.
d.
e.
f.
g.
h.
i.

Borrowed money from a Bank.

Sold land for cash at a price equal to its cost.
Paid a liability.
Returned for credit some of the office equipment previously purchased on credit but not yet paid for.
Sold land for cast at a price in excess of cost.
Purchased a computer on credit.
The owner invested cash in the business.
Purchased office equipment for cash.
Collected an account receivable.

Transactions
a
b
c
d
e
f
g
h
I

Assets
I
NE
D
D
I
I
I
NE
NE

Liabilities
I
NE
D
D
NE
I
NE
NE
NE

Owners equity
NE
NE
NE
NE
I
Ne
I
NE
Ne

Exercise 2.7
Effects of Business Transactions
For each of the following categories, state concisely a transaction that will have the required effect on the elements of the
accounting equation.
a.
b.
c.
d.
e.

Increase an asset and increase in liability.

Decrease an asset and decrease a liability.
Increase one asset and decrease another asset.
Increase an asset and increase owners equity.
Increase one asset, decrease another asset, and increase a liability.

Solutions:
a.
b.
c.
d.
e.

Purchase of office equipment on cash.

Payment against liability.
Sold land on cash.
Investment of cash in business.
Bought land, paid some cash in advance and the rest amount is A/P,N/P.

Exercise 2.12
Income Statement
Walter, Inc., had the following transactions during the month of march 2001. Prepare an income statement based on this
information, being careful to include only those items that should appear in that financial Statement.
1.
2.
3.
4.

Cash received from bank loans was $ 10,000.

Revenues earned and received in cash were $ 8,500.
The owner, Bev Walters, withdrew $ 4,000 in cash.
Expenses incurred and paid were $ 5,000.

Walters, Inc.
Income Statement
For the Month Ended March 31,2001
Revenues
Expenses
Net income

$ 8,500
5,000
$ 3,500

Exercise 2.13
Income Statement
Fowler Company
Income Statement
For the month ended August 31, 2001
Services provided to customers
Expenses required to provide servers to customers
Net income

$ 10,000
7,500
$ 2,500

Problems
Problem 2.1
Preparing and Evaluating a Balance Sheet

Mystery Mountain Lodge

Balance Sheet
December 31, 2001
Assets

Liabilities + Owners Equity

Cash
Accounts receivable
Land
Buildings
Furnishings
Equipment
Snowmobiles

$ 21,400
10,609
425,000
450,000
58,700
29,200
15,400

Total

$ 1,010,300

liabilities:
Notes Payable
Accounts Payable
Salaries Payable
Interest Payable
Total liabilities
Owners equity:
* Stanley Gardner, capital
Total

$ 620,000
54,800
33,500
12,000
$ 720,300
290,000
$ 1,010,900

* Stanley Gardner, Capital =?

Total Assets= $ 1,010,300 total liabilities $ 720,300 = Capital = $ 290,000

B. The balance sheet indicates that Mystery Mountain Lodge is in a very weak financial position because liquid assets (cash and
accounts receivable) are only $ 32,000, and the company has liabilities in near future (A/P, S/P, I/P) are $ 100,300. So based on
this balance sheet the companys financial position is very weak.

Problem 2.2
Interpreting the Effects of Business Transactions

=
Cash +
P.YoungBlood,capital
Balances
$ 26,000
(a)
- 3,200

A/R

$ 39,000

Balances
$ 22,000
$ 214,000
(b)
-900
Balances
$ 42,000
(c)
Balances
$ 214,000
(d)
- 14,500
Balances
$ 214,000
(e)
+ 15,000
Balances
$ 229,000
(f)
Balances
$ 39,600

Assets
Liabilities
+
Land +

$ 23,700

$ 45,000

$ 39,000

Building + Equipment
$ 110,000 $ 36,000

$ 45,000

Owners Equity
A/P
+
$ 42,000
-3,200

$ 110,000

$ 39,200

$ 214,000

$ 42,000

-900
$ 38,100
$ 214,000

$ 45,000

-3,500
$ 20,200

+
=

$ 110,000
- 13,500

$ 38,100

$ 45,000

$ 110,000

$ 39,200
-10,000
$ 52,700

$ 52,000

- 14,500
$ 5,700

$ 38,100

$ 45,000

$ 110,000

$ 52,700

$ 37,500

+ 15,000
$ 20,700

$ 20,700
$ 229,000

$ 38,100

$ 38,100

$ 45,000

$ 45,000

a. Purchased equipment for cash at a cost of $ 3,200.

b. Received $ 900 cash from collection of accounts receivable.

$ 110,000

$ 110,000

$ 52,700
+ 2,100
$ 54,800

$ 37,500
+ 2,100

c. Purchased equipment at a cost of $ 13,500, paid $ 3,500 cash as down payment and incurred a liability for the remaining $
10,000.
d. Paid $ 14,500 of A/P.
e. Youngblood invested $ 15,000 in business.
f. Purchased equipment on account for $ 2,100.

Problem 2.3
Recording the effects of Transactions
1. C.Sagan, the owner, deposited $ 25,000 of personal funds into the businesss bank account.
2. Purchased land and a small office building for a total price of $ 90,000, of which $ 35,000 was the value of the land and $
55,000 was the value of the building. Paid @22,500 in cash and signed a note payable for the remaining $ 67,500.
3. Bought several computer systems on credit for $ 8,500 (30-day open account).
4. Obtained a loan from capital bank in the amount of @ 10,000. Signed a note payable.
5. Paid the @ 28,250 account payable owed as of December 31.

NOVA COMMUNICATIONS Transactions

Assets
+
Land +

Cash +
C.sagan,capital
Balances
$ 37,000
$ 95,000
200,000
1.
25,000
+ 25,000
Balances
$ 62,000
$ 95,000
225,000
2.
- 22,500
+
Balances
$ 39,500
$ 130,000
225,000
3.
+ 8,500
December 31 balances

Building

=
Owners Equity
+ Office Equipment =
N/P

Liabilities
+

A/P

$ 125,000 $ 51,250

$ 80,000

$ 28,250

$ 125,000

$ 80,000

$ 28,250

$ 147,500

+ 67,500
$ 28,250

35,000
$ 180,000

$ 51,250
+ 55,000
$ 51,250

+ 8,500

Balances
$ 39,500
$ 130,000
225,000
4.
+ 10,000
Balances
$ 49,500
$ 130,000
225,000
5.
- 28,250
- 28,250
Balances
$ 21,250
$ 130,000
225,000

$ 180,000

$ 59,750

$ 147,500

$ 36,750

$ 180,000

$ 59,750

$ 157,500

+ 10,000
$ 36,750

$ 180,000

$ 59,750

$ 157,500

$ 8,500

Problem 2.4
Recording the effects of Transactions
1.
2.
3.
4.
5.
6.

Bought office equipment at a cost of $ 2,700. Paid cash.

Collected $ 4,000 of A/R.
Paid $ 3,200 of A/P.
Borrowed $ 10,000 from a bank. Signed a N/P for that amount.
Purchased two trucks for $ 30,500. Paid $ 15,000 cash and signed a N/P for the balance.
Bill Foreman, the owner, invested $ 20,000 cash in the business.

Triad-Truck Rental Transactions

Assets
Cash +
Bill Foreman,capital
Balances
$ 9,500
$ 55,000
1.
- 2,700
December 31 balances

+
A/R

$ 8,900

Trucks

=
Owners Equity
+ Office Equipment =
N/P

$ 58,000$ 3,800

Liabilities
+

$ 20,000
+ 2,700

A/P

+
$ 5,200

Balances

$ 6,800
$ 55,000
2.
+ 4,000
Balances
$ 10,800
$
$ 55,000
3.
- 3,200
- 3,200
Balances
$ 7,600
$
$ 55,000
4.
+ 10,000
Balances
$ 17,600
$
$ 55,000
5.
- 15,000
Balances
$ 2,600
$
$ 55,000
6.
+ 20,000
+ 20,000
Balances
$ 22,600
$
$ 75,000

$ 8,900

$ 58,000$ 6,500

$ 20,000

$ 5,200

- 4,000
4,900

$ 58,000$ 6,500

$ 20,000

$ 5,200

4,900

$ 58,000$ 6,500

$ 20,000

$ 2,000

4,900

$ 58,000$ 6,500

$ 30,000

+ 10,000
$ 2,000

4,900

+ 30,500
$ 88,000$ 6,500

$ 30,000

$ 2,000

4,900

$ 88,000$ 6,500

$ 30,000

$ 2,000

Problem 2.5
Preparing a Balance Sheet
HERE COME THE CLOWNS!
Balance Sheet
June 30, 2001
Assets
Owners Equity
Cash

Liability
$ 32,520

Liabilities:

&

Notes Receivable
$ 180,000
Accounts Receivable
26,100
Animals
9,750
Cages
$ 257,400
Costumes
Props and equipment
145,800
Tents
Trucks
Total
553,080

9,500

Notes Payable
7,450

Accounts Payable

189,060

Salaries Payable

24,630

Total Liabilities

31,500
89,580

Owners equity:
Red Costello, capital

63,000
105,840
$ 553,080

Total

After loss of tent worth of $ 14,300. Less $ 14,300 from Tent in assets and from capital in owners equity.
HERE COME THE CLOWNS!
Balance Sheet
June 30, 2001
Assets
Owners Equity
Cash
Notes Receivable
$ 180,000
Accounts Receivable
26,100
Animals
9,750
Cages
$ 257,400
Costumes
Props and equipment
131,500
Tents
Trucks
Total
538,780

Liability
$ 32,520
9,500

&

Liabilities:
Notes Payable
7,450

Accounts Payable

189,060

Salaries Payable

24,630

Total Liabilities

31,500
89,580

Owners equity:
Red Costello, capital

48,700
105,840
$ 538,780

Total

Problem 2.6
Preparing a Balance Sheet
RED RIVER FARMS
Balance Sheet
September 30, 2001
Assets
Owners Equity

Liability

Cash
$ 16,710
Accounts Receivable
22,365
$ 530,000
Land
550,000
Payable
77,095
Barns and Sheds
78,300
9,135
Citrus Trees
76,650
Salaries Payable 1,820
Livestock
120,780
$ 618,050
Irrigation System
20,125
Farm machinery
42,970
343,420
Fences and gates
33,570
Total
$ 961,470
961,470
After loss of barn and shed worth of $ 23,800. Less $ 23,800 from Barns and Sheds

&

Liabilities:
Notes Payable
Accounts
Property Taxes Payable

Total Liabilities
Owners equity:
Hollis Roberts, capital

Total

in assets and from owners equity.

RED RIVER FARMS

Balance Sheet
September 30, 2001
Assets
Owners Equity
Cash
Accounts Receivable

Liability
$ 16,710
22,365

Liabilities:
Notes Payable

&

$ 530,000
Land
Payable
77,095
Barns and Sheds
9,135
Citrus Trees
Salaries Payable 1,820
Livestock
$ 618,050
Irrigation System
Farm machinery
319,620
Fences and gates
Total
937,670

550,000
54,500

Accounts
Property Taxes Payable

76,650
120,780

Total Liabilities

20,125
42,970

Owners equity:
Hollis Roberts, capital

33,570
$ 937,670

Total

Problem 2.7
Preparing a Balance Sheet
THE JULIAN BAKERY
Balance Sheet
August 1, 2001
Assets
Owners Equity
Cash
Accounts Receivable
$ 74,900
Suppliers
Payable
Land
Payable
8,900
Building
$ 100,000
Equipment and fixtures

Total
220,700

Liability
$

6,940
11,260

&

Liabilities:
Notes Payable
7,000

Accounts

16,200
67,000

Salaries

84,000

Total Liabilities
44,500

120,700
$ 220,700

Owners equity:
Julian Lee, capital
Total

Aug 2. Lee invested an addition $ 25,000 in the business. The accounts payable were paid in full. (No payment was made on the
notes payable or income taxes payable).
Aug 3. Equipment was purchased at a cost of $ 7,200 to be paid within 10 days. Supplies were purchased for $ 1,250 cash from a
restaurant supply center that was going out of business. These supplies would have cost $ 1,890 if purchased through normal
channels.

THE JULIAN BAKERY

Balance Sheet
August 3, 2001
Assets
Owners Equity
Cash
Accounts Receivable
$ 74,900
Suppliers
Payable
Land
Payable
8,900
Building
$ 91,000
Equipment and fixtures

Total
236,700

Liability
$ 14,490
11,260

&

Liabilities:
Notes Payable
8,250

Accounts

7,200
67,000

Salaries

84,000

Total Liabilities
51,700

145,700
$ 236,700

Owners equity:
Julian Lee, capital
Total

On Aug 1. The liquid assets cash and A/R are $ 18,200 and liabilities A/P, S/P are $ 25,100, so from this balance sheet its financial
position is weak.
Aug 3, the liquid assets cash and A/R are $ 25,750 while liabilities are A/P, S/P are equal to $ 10100 so its financial position is
stronger on aug 3 than aug 1.

Problem 2.8
Preparing Financial Statements:
Effects of Business Transactions
THE ORGINAL MALT SHOP
Balance Sheet
September 30, 2001
Assets
Owners Equity
Cash

Liability
$

7,400

Liabilities:

&

Accounts Receivable
1,250
*Notes Payable
$ 70,000
Supplies
3,440
Accounts
Payable
8,500
Land
45,500
Total Liabilities
$ 78,500
Building
55,000
Owners equity:
Equipment and fixtures
20,000
Julian
Lee, capital 54,090
Total
$ 132,590
Total
$
132,590
Oct 3. Martin invested an addition $ 30,000 in the business. The accounts payable were paid in full. (No payment was made on
the notes payable or income taxes payable).
Oct 6. Equipment was purchased at a cost of $ 18,000 to be paid within 30 days. Supplies were purchased for $ 1,000 cash from
a restaurant supply center that was going out of business. These supplies would have cost $ 1,875 if purchased through normal
channels.
Oct 1-6. Revenues of $ 5,500 were earned and paid in cash. Expenses required to earn the revenues of $ 4,000 were incurred and
paid in cash.
THE ORGINAL MALT SHOP
Balance Sheet
October 6, 2001
Assets
Owners Equity
Cash
$ 27,900
Accounts Receivable
1,250
$ 70,000
Supplies
4,440
Payable
8,500
Land
45,500
$ 78,500
Building
55,000
Equipment and fixtures
38,000
Lee, capital 84,090
Total
$ 172,090
172,090

Liability

&

Liabilities:
*Notes Payable
Accounts
Total Liabilities
Owners equity:
Julian
Total

Oct 1-6. Revenues of $ 5,500 were earned and paid in cash. Expenses required to earn the revenues of $ 4,000 were incurred and
paid in cash.
THE ORGINAL MALT SHOP
Income Statement
October 1-6, 2001
Revenues
5,500
Expenses
(4,000)
Net income
1,500

C. The original Mark has a liquid assets (cash and A/R) are $ 8,650 and liabilities in near future are (A/R) $ 8,500, so its in a
stronger financial position though the difference is very little but still its in a stronger financial position by looking at the balance
sheet of September 30.
while the liquid assets (cash and A/R) on October 6 are $ 29,150 because of addition investment by the owner and liabilities in
the near future are $ 8,500, so the companys financial position is more stronger than that on 30 th September because the there
is more excess amount of cash with the company on October 6 than September 30 th.