Accounting, 7th Edition Solution Manual

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1Chapter 1The Role of Accounting in BusinessQuick CheckAnswers:1.a2.b3.b4.c5.b6.d7.b8.a9.a10.c

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2Starters(5 min.) S1-1Req. 1Revenuesareincreasesinequityfromdeliveringgoodsorservicestocustomers.Expensesare decreases in equity from using assets or increasing liabilities inthe course of delivering goods or services to customers.Profit:where total revenues exceed total expenses.Equity: the residual interest of the owners after deducting all liabilities.Req. 2No answer required.(5 min.) S1-2Accounting as practiced is based on accrual principles.Financial accountants prepare financial statements for external users.(5 min.) S1-3Req. 1The banker is anexternaluser of financial information.Req. 2The financial statement that would provide the best information to answer thebanker’s questions is thebalance sheet.(5-10 min.) S1-4Req. 1This organisation is theAustralian Accounting Standards Board (AASB).

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3(5-10 min.) S1-5Req. 1Chloe’sneeds will best be met byorganisingacorporation.(5-10 min.) S1-6Req. 1a.The Entity Conceptb.Accounting Period Conceptc.The Going Concern Assumptiond.The Conservatism Principle(5 min.) S1-7Req. 1Req. 2Michael McNamee has$11 000equity in the business.Assets=Liabilities+Owners’ equityAccountsCash + Furniture=Payable+Owners’ equity$8 000 + $9 000=$6 000+$11 000Assets=Liabilities+Owners’ equityType ofTransaction(a)Cash$320=(not affected)$0+Capital$320Revenues(b)Cash$(125)=(not affected)0+Capital$(125)Expenses(c)Accts receivable$440=(not affected)0+Capital$440Revenues(d)(not affected)0=Accts payable$65+Capital$(65)Expenses

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4(5 min.) S1-8Req. 1AccountAmountCash$ (26 000)Land$ 26 000(5 min.) S1-9Req. 1After this transaction (the first and only for the business), cash equals$0andthe total assets equal$2 800.Req. 2The business’ asset which was increased as a result of the transaction isaccounts receivable.(5 min.) S1-10Req. 1The business did not record any revenue when it collected cash on accountbecause the business recorded therevenueone month earlier, when it wasearned.Req. 2Assets=Liabilities+Owners’ EquityType of TransactionCash+Accountsreceivable=(not affected)+Martin, capital(a)$ 500+$0=$0+$500Revenues(b)500+(500)=0+0No effect on equity

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5(10 min.) S1-11Req. 1Smart Touch LearningBalance Sheet21 May 2014ASSETSLIABILITIESCash$11 900Accounts payable$200Accounts receivable3 000Office supplies500OWNERS’ EQUITYLand20 000Bright, capital35 200_______Total liabilities and_______Total assets$35 400owners’ equity$35 400(10 min.) S1-12Req. 1Elegant ArrangementsIncome StatementYear Ended December 31, 2012Revenue:Service revenue$74 000Expenses:Salary expense$42 000Rent expense13 000Insurance expense4 000Supplies expense1 100Total expenses60 100Profit$13 900(10 min.) S1-13Req. 1The operations of Elegant Arrangements in 2012 resulted in agoodyear.This can be measured by theprofit of $13 900.Req. 2Profit would belower by $14 800.Req. 3Profit would belower by $8 400.

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6Exercises(10-15 min.) E1-1Req. 11. E2. A3.I4. F5. J6. B7. D8. C9. G10. H11. K(15-20 min.) E1-2Req. 1Thebalancesheetispreparedbysummarisingtheassets,liabilitiesandowners’ equity of the entity at a particular date. Theassetsare the resourcesthe business has to work with.Liabilitiesare debts owed to creditors.Owners’equityis the portion of the business assets owned outright by the proprietor.Theincomestatementis preparedby summarisingtherevenues and theexpenses of a particular entity for a period such as a month or a year. Totalrevenuesminus totalexpensesequalsprofit(orloss).Req. 2TheAustralian Accounting Standards Board(AASB) is the self-regulating bodyofaccountantsthatdefinespronouncementsthatguidehowthefinancialstatements will be prepared.Req. 3Before lending money, the lender evaluates O’Brien’s ability to make the loanpayments. Lenders will use the reported profit and other information in thefinancial statements to predict future income of the O’Brien travel magazine.Therefore the bank requires the financial statements of the O’Brien travelmagazine to make a decision about lending money to O’Brien.

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7Req. 4Evan O’Brien is organised as aproprietorship.Req. 5Acorporationwould be the best option.(5-10 min.) E1-3Assets=Liabilities+Owners’ equityNew Rock Gas$?$24 000$50 000DJ Video Rentals75 000?32 000Corner Grocery100 00053 000?Req. 1New Rock Gas Assets=$24 000 + $50 000 = $74 000DJ Video Rentals Liabilities=$75 000–$32 000 = $43 000Corner Grocery Owners’ equity=$100 000–$53 000 = $47 000Req. 2The main characteristics of a proprietorship are:1. The life of theorganisationis limited by owner’s choice or death2. There is a single owner3. Unlimited liability of ownerReq. 3Theaccountingconceptorprinciplethattellsusthattheabovethreeproprietorships will continue to exist in the future is thegoing concern concept.(5-10 min.) E1-4Req. 1Under US GAAP, the land would be reported on the balance sheet at 3 January2014 at $50 000. On the 31 December 2014 balance sheet, the land could bereported at $50 000.

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8Req. 2Under IFRS, the land would be reported on the balance sheet at 3 January2014 at $50 000. On the 31 December 2014 balance sheet, the land would berecorded at $55 000.(5-10 min.) E1-5Req. 1a.b.c.Owners’ equity, 31 May 2014($177 000–$122 000)$55 000$55 000$55 000Owners’ investment6 000018 000Profit for the month8000240001600069 00079 00089 000Drawings0(10 000)(20 000)Owners’ equity, 30 June 2014($213,000–$144,000)$69 000$69 000$69 000(5-10 min.) E1-6Req. 1a.Purchase of asset for cashSale of asset for cashCollection of accounts receivableb.Pay an expenseDrawingsc.Pay an account payabled.Investment by ownerRevenue transactione.Purchase of asset on accountBorrow moneyNote: wording may vary.

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9(10-20 min.) E1-7Req. 1a.Increase asset (Cash)Increase capital (Capital)b.Increase asset (Accounts receivable)Increase capital (Capital)c.Increase asset (Office furniture)Increase liability (Accounts payable)d.Increase asset (Cash)Decrease asset (Accounts receivable)e.Decrease asset (Cash)Decrease liability (Accounts payable)f.Increase asset (Cash)Decrease asset (Land)g.Increase asset (Cash)Increase capital (Capital)h.Decrease asset (Cash)Decrease capital Capital)i.Increase asset (Supplies)Decrease asset (Cash)

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10(10-20 min.) E1-8Req. 1Analysis of TransactionsCaren Smith, GPASSETS=LIABILITIES +OWNERS’EQUITYDATECASH+MEDICALSUPPLIES +LAND=ACCOUNTSPAYABLE +SMITH,CAPITALTYPE OFOWNERS’ EQUITYTRANSACTIONJuly 655 00055 000Owners’ investmentBal.55 00000055 0009(46 000)46 000No effectBal.9 000046 000055 000121 8001 800No effectBal.9 0001 80046 0001 80055 00015No effectBal.9 0001 80046 0001 80055 00015-318 0008 000Service revenueBal.17 0001 80046 0001 80063 00029(1 600)(1 600)Salary expense(900)(900)Rent expense(100)(100)Electricity and gasexpenseBal.14 4001 80046 0001 80060 40030(700)(700)No effectBal.14 4001 10046 0001 10060 40031(1 100)(1 100)No effectBal.13 3001 10046 000060 400$60 400=$60 400Total assets=Total liabilities and owners’ equity

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11(10-15 min.) E1-9Req. 1Transaction Description1.Investment by the owner2.Earned revenue on account3.Purchased equipment on account4.Collected cash on account5.Cash purchase of equipment6.Paid on account7.Earned revenue and received cash8.Paid cash for expensesReq. 2All-in-one Accounting Service’s profit =$3 090.(10 min.) E1-10Req. 1The owners’ equityincreasedduring the year by$4 000.Beginning owners’ equity: $19 000–$9 000 = $10 000Ending owners’ equity: $27 000–$13 000 = $14 000Change in owners’ equity: $14 000–$10 000 = $4 000Req. 2Owners’ equity can change three ways:•Owners’ equity canincreasethrough: Owner contributions and/orProfit•Owners’ equity candecrease through: Owner drawings

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12(10-15 min.) E1-11Req. 1Profit for American Express Services (AES) is$7 000 000.Revenues–Expenses = Profit$21 000 000–$14 000 000 = $7 000 000Req. 2The owners’ equityincreasedduring the year by$7 000 000.Req. 3The AES’s performance for 2012 isgood, because 2012 was aprofitableyearand this improves the firm’s ability to make repayments.(30-40 min.) E1-12Req. 1Assets–Liabilities=Owners’ equityBeginning$ 45 000–$29 000=$16 000Ending$ 55 000–$38 000=$17 000Owners’equityBeginning balance:$ 16 000Investment by the owner0Profit20 000$36 000Drawings(19 000)Ending balance$17 000Felixearned profit of $20 000.Revenue–Profit=Expenses$ 242 000–$20 000=$222 000Req. 2Felix’s performance for the year wasgoodbecause the businessearned a profit.

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13(10-15 min.) E1-13Req. 1Effects on total assetsAsset account(s) affecteda.Increased total assetsCashb.No effect on total assetsCash and landc.Decreased total assetsCashd.Increased total assetsEquipmente.Increased total assetsAccounts receivablef.No effect on total assetsNo asset account(s) affectedg.No effect on total assetsCash and Accounts receivableh.Increased total assetsCashi.Decreased total assetsCashj.No effect on total assetsNo asset account(s) affected(10-20 min.) E1-14Req. 1Wilson Towing ServiceBalance Sheet30 June 2014ASSETSLIABILITIESCash$ 2 900Accounts payable$ 3 000Accounts receivable6 200Loan payable6 900Supplies900Total liabilities9 900Equipment13 600OWNERS’ EQUITYWilson, capital13 700*______Total liabilities andTotal assets$23 600owners’ equity$23 600*Total assets–Total liabilities=Owners’ equity$23 600–$9 900=$13 700Req. 2The balance sheet reportsfinancial position.Req. 3Theincome statement.

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14(10-15 min.) E1-15Req. 1Davis Design StudioIncome StatementYear Ended 31 December 2012Revenue:Service revenue$158 300Expenses:Salary expense$65 000Rent expense23 000Electricity and gas expense6 900Supplies expense4 200Rates expense1 500Total expenses100 600Profit$ 57 700The result of operations is profit of$57 700.Req. 2The amount of owner drawings during the year was$39 400.

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15ProblemsGroup A(15-20 min.) P1-1Req. 11.D2.E3.G4.H5.A6.I7.B8.C9.F10.J(20-25 min.) P1-2Req. 1There is no proprietorship feature that limits Andrea’s personal liability. She ispersonally liable for the debts of the business.Req. 2Andrea Scarlett, Real EstateBalance Sheet30 September 2014ASSETSLIABILITIESCash$9 000Accounts payable$2 000Office supplies1 300Loan payable61 000Franchise23 000Total liabilities63 000Furniture15 000OWNERS’ EQUITYLand83 000Scarlett, capital68 300*________Total liabilities and______Total assets$131 300owners’ equity$131 300*Total assets–Total liabilities=Total owners’ equity$131 300–$63 000=$68 300

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