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ACC201 Week 1 Ashford

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ACC201 Week 1 Exercises: 1-2, 1-4, 1-9, 1-12, 1-18, 2-1, 2-3, 2-19, 2-22, 2-25.
Survey of Accounting 3e

Exercise 1-2 Distributions in a business liquidation
Assume that Kennedy Company acquires $1,600 cash from creditors and $1,800 cash from investors.

Required
a. Explain the primary differences between investors and creditors.
b. If Kennedy has a net loss of $1,600 cash and then liquidates, what amount of cash will the
creditors receive? What amount of cash will the investors receive?
c. If Kennedy has net income of $1,600 and then liquidates, what amount of cash will the

creditors receive? What amount of cash will the investors receive?

Exercise 1-4 Identifying the reporting entities
Kenneth Chang recently started a business. During the first few days of operation, Mr. Chang
transferred $30,000 from his personal account into a business account for a company he named
Chang Enterprises. Chang Enterprises borrowed $40,000 from First Bank. Mr. Chang’s father in
law, Jim Harwood, invested $64,000 into the business for which he received a 25 percent ownership
interest. Chang Enterprises purchased a building from Morton Realty Company. The
building cost $120,000 cash. Chang Enterprises earned $28,000 in revenue from the company’s
customers and paid its employees $25,000 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- 9 Missing information for determining net income

The December 31, 2012, balance sheet for Classic Company showed total stockholders’ equity of $ 82,500. Total stockholders’ equity increased by $ 53,400 between December 31, 2012, and December 31, 2013. During 2013 Classic Company acquired $ 13,000 cash from the issue of common stock. Classic Company paid an $ 8,000 cash dividend to the stockholders during 2013.

Required

Determine the amount of net income or loss Classic reported on its 2013 income statement. ( Hint: Remember that stock issues, net income, and dividends all change total stockholders’ equity.)

Exercise 1-12 Effects of borrowing
Marcum Company was started in 2012 when it issued a note to borrow $6,200 cash.

Required
Write an accounting equation, and record the effects of the borrowing transaction under the

appropriate general ledger account headings.

Exercise 1-18 Retained earnings and the closing process

Davis Company was started on January 1, 2012. During the month of January, Davis earned
$4,600 of revenue and incurred $3,000 of expense. Davis closes its books on December 31 of
each year.

Required
a. Determine the balance in the Retained Earnings account as of January 31, 2012.
b. Comment on whether retained earnings is an element of financial statements or an account.
c. What happens to the Retained Earnings account at the time expenses are recognized?

Exercise 2-1 Effect of accruals on the financial statements
Valmont, Inc., experienced the following events in 2012, in its first year of operation.
1. Received $20,000 cash from the issue of common stock.
2. Performed services on account for $50,000.
3. Paid the utility expense of $12,500.
4. Collected $39,000 of the accounts receivable.
5. Recorded $9,000 of accrued salaries at the end of the year.
6. Paid a $5,000 cash dividend to the shareholders.

Required

a. Record the events in general ledger accounts under an accounting equation. In the last column of the table, provide appropriate account titles for the Retained Earnings amounts.
b. Prepare the income statement, statement of changes in stockholder's equity, balance sheet, and statement of cash flows for the 2012 accounting period.
c. Why is the amount of net income different from the amount of net cash flow from operating activities?

Exercise 2-3 Effect of prepaid rent on the accounting equation and financial statements.

The following events apply to 2012, the first year of operations of Sentry Services.

1. Acquired $45,000 cash from the issue of common stock.
2. Paid $18,000 cash in advance for one-year rental contract for office space.
3. Provided services for $36,000 cash.
4. Adjusted the records to recognize the use of the office space. The one-year contract started
on May 1, 2012. The adjustment was made as of December 31, 2012.

Required
a. Write an accounting equation and record the effects of each accounting event under the appropriate
general ledger account headings.
b. Prepare an income statement and statement of cash flows for the 2012 accounting period.
c. Explain the difference between the amount of net income and amount of net cash flow from
operating activities.

Exercise 2-19 Closing the accounts
The following information was drawn from the accounting records of Kwon Company as of December 31, 2012, before the temporary accounts had been closed. The Cash balance was $4,000, and Notes Payable amounted to $2,000. The company had revenues of $6,000 and expenses of $3,500. The company's Land account had a $9,000 balance. Dividends amounted to $500. There was $6,000 of common stock issued.

Required
a. Identify which accounts would be classified as permanent and which accounts would be classified as temporary.
b. Assuming that Kwon's beginning balance ( as of January 1, 2012) in the Retained Earnings account was $2,600, determine its balance after the nominal accounts were closed at the end of 2012.
c. What amount of net income would Kwon Company report on its 2012 income statement?
d. Explain why the amount of net income differs from the amount of the ending Retained Earnings balance.
e. What are the balances in the revenue, expense, and dividend accounts on January 1, 2013?

Exercise 2-22 Matching concept
Companies make sacrifices known as expenses to obtain benefits called revenues. The accurate
measurement of net income requires that expenses be matched with revenues. In some circumstances
matching a particular expense directly with revenue is difficult or impossible. In these
circumstances, the expense is matched with the period in which it is incurred.

Required
Distinguish the following items that could be matched directly with revenues from the items that
would be classified as period expenses.
a. Sales commissions paid to employees.
b. Utilities expense.
c. Rent expense.
d. The cost of land that has been sold.

Exercise 2-25 Relation of elements to financial statements
Required

Identify whether each of the following items would appear on the income statement (IS), statement of changes in stockholders' equity (SE), balance sheet (BS), or statement of cash flows (CF). Some items may appear on more than one statement; if so, identify all applicable statements. If an item would not appear on any financial statement, label it NA.

a. Prepaid rent
b. Net income
c. Utilities expense
d. Supplies
e. Cash flow from operating activities
f. Service revenue
g. Auditor’s opinion
h. Accounts receivable
i. Accounts payable
j. Unearned revenue
k. Dividends
l. Beginning cash balance
m. Ending retained earnings
n. Rent expense
o. Ending cash balance

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