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ACC201 Chapter 1

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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?

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