Horngren's Accounting, 12th Edition Solution Manual

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Horngren’s Accounting12thEditionTracie Miller-NoblesBrenda MattisonElla-Mae MatsumuraInstructor’sSolutionsManualWith QuestionsTracie Miller-NoblesAustin Community CollegeBrenda MattisonTri-County Technical College

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1-1Chapter 1Accounting and the Business EnvironmentReviewQuestions1.What is accounting?Accounting is the information system that measures business activities, processes the informationinto reports, and communicates the results to decision makers. Accounting is the language ofbusiness.2.Briefly describe the two major fields of accounting.Financial accounting provides information for external decision makers, such as outside investors,lenders, customers, and the federal government. Managerial accounting focuses on information forinternal decision makers, such as the company’s managers and employees.3.Describe the various types of individuals who use accounting information and how they use thatinformation to make important decisions.Individuals use accounting information to help them manage their money, evaluate a new job, andbetter decide whether they can afford to make a new purchase. Business owners use accountinginformation to set goals, measure progress toward those goals, and make adjustments when needed.Investors use accounting information to help them decide whether or not a company is a goodinvestment and once they have invested, they use a company’s financial statements to analyze howtheir investment is performing. Creditors use accounting information to decide whether to lendmoney to a business and to evaluate a company’s ability to make the loan payments. Taxingauthorities use accounting information to calculate the amount of income tax that a company has topay.4.What are two certifications available for accountants? Briefly explain each certification.Certified Public Accountants (CPAs) are licensed professional accountants who serve the generalpublic. They work for public accounting firms, businesses, government, or educational institutions.To be certified they must meet educational and/or experience requirements and pass an exam.Certified Management Accountants (CMAs) specialize in accounting and financial managementknowledge. They work for a single company.5.What is the role of the Financial Accounting Standards Board (FASB)?The FASB oversees the creation and governance of accounting standards. They work withgovernmental regulatory agencies, congressionally created groups, and private groups.

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1-26.Explain the purpose of Generally Accepted Accounting Principles (GAAP), including theorganization currently responsible for the creation and governance of these standards.The guidelines for accounting information are called GAAP. It is the main U.S. accounting rulebook and is currently created and governed by the FASB. Investors and lenders must haveinformation that is relevant and has faithful representation in order to make decisions and GAAPprovides the framework for this financial reporting.7.Describe the similarities and differences among the four different types of business entities discussedin the chapter.A sole proprietorship has a single owner, terminates upon the owner’s death or choice, the owner haspersonal liability for the business’s debts, and it is not a separate tax entity. A partnership has two ormore owners, terminates at partner’s choice or death, the partners have personal liability, and it isnot a separate tax entity. A corporation is a separate legal entity, has one or more owners, hasindefinite life, the stockholders are not personally liable for the business’s debts, and it is a separatetax entity. A limited-liability company has one or more members and each is only liable for his orher own actions, has an indefinite life, and is not a separate tax entity.8.A business purchases an acre of land for $5,000. The current market value is $5,550, and the landwas assessed for property tax purposes at $5,250. What value should the land be recorded at, andwhich accounting principle supports your answer?The land should be recorded at $5,000. The cost principle states that assets should be recorded attheir historical cost.9.What does the going concern assumption mean for a business?The going concern assumption assumes that the entity will remain in business for the foreseeablefuture and long enough touse existing resources for their intended purpose.10.Which concept states that accounting information should be complete, neutral, and free frommaterial error?The faithful representation concept states that accounting information should becomplete, neutral,and free from material error.11.Financial statements in the United States are reported in U.S. dollars. What assumption supports thisstatement?The monetary unit assumption states that items on the financial statements should be measured interms of a monetary unit.

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1-312.Explain the role of the International Accounting Standards Board (IASB) in relation to InternationalFinancial Reporting Standards (IFRS).The IASB is the organization that develops and creates IFRS which are a set of global accountingstandards that would be used around the world.13.What is the accounting equation? Briefly explain each of the three parts.Assets = Liabilities + Equity. Assets are economic resources that are expected to benefit thebusiness in the future. They are things of value that a business owns or has control of. Liabilitiesare debts that are owed to creditors. They are one source of claims against assets. Equity is theother source of claims against assets. Equity is theowner’sclaims against assets and is the amountof assets that is left over after the company has paid its liabilities. It represents the net worth of thebusiness.14.What are two ways that equity increases? What are the two ways that equity decreases?Equityincreases withowner contributions andrevenues.Equitydecreases with expenses andowners withdrawals.15.How is net income calculated? Definerevenuesandexpenses.Revenues–Expenses = Net Income. Revenues are earnings resulting fromdelivering goods orservices to customers. Expenses are the cost of selling goods or service.16.What are the steps used when analyzing a business transaction?Step 1: Identify the accounts and the account type. Step 2: Decide if each account increases ordecreases. Step 3: Determine if the accounting equation is in balance.17.List the four financial statements. Briefly describe each statement.Income Statement–Shows the difference between an entity’s revenues and expenses and reports thenet income or net loss for a specific period.Statement ofOwner’s Equity–Shows the changes inowner’s capitalfor a specific period includingowner contributions,net income (loss) andowner withdrawals.Balance Sheet–Shows the assets, liabilities, andowner’sequity of the business as of a specific date.Statement of Cash Flows–Shows a business’s cash receipts and cash payments for a specific period.18.What is the calculation for ROA? Explain what ROA measures.Return on Assets = Net income / Average totalassets. ROA measures how profitably a companyuses its assets.

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1-4Short ExercisesS1-1Identifying users of accounting informationLearning Objective 1For each user of accounting information, identify if the user would use financial accounting ormanagerial accounting.a.investore.controllerb.bankerf.stockholderc.IRSg.human resources directord.manager of the businessh.creditorSOLUTIONa.FAe.MAb.FAf.FAc.FAg.MAd.MAh.FAS1-2Determiningorganizations that govern accountingLearning Objective 2Suppose you are starting a business, Wholly Shirts, to imprint logos on T-shirts. In organizing thebusiness and setting up its accounting records, you take your information to a CPA toprepare financialstatements for the bank. Name the organization that governs the majority of the guidelines that the CPAwill use to prepare financial statements for Wholly Shirts. What are those guidelines called?SOLUTIONThe Financial Accounting Standards Board governs the majority of guidelines, called GenerallyAccepted Accounting Principles (GAAP), that the CPA will use to prepare financial statements forWholly Shirts.S1-3Identifying types of business organizationsLearning Objective 2Chloe Michaels plans on opening Chloe Michaels Floral Designs. She is considering the various types ofbusiness organizations and wishes to organize her business with unlimited life and wants owners of thebusiness to not be held personally liable for the business’s debts. Additionally, Chloe wants the businessto be a separate taxable entity. Which type of business organization will meet Chloe’s needs best?

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1-5SOLUTIONChloe’s needswill best be met by organizing a corporation since acorporation hasan unlimited life andis a separate tax entity.In addition, the owners (stockholders) have limited liability. Chloe could alsoconsider a limited liability company (LLC) as an option.A LLC meets two of the three criteria. It hasanunlimited life and limited liability for the owner. However, a LLC is not a separate tax entity.S1-4Identifying types of business organizationsLearning Objective 2You would like to start a cellular telephone equipment service business. You areconsidering organizingthe business as a sole proprietorship. Identify the advantages and disadvantages of owning a soleproprietorship.SOLUTIONAdvantages:1.Easy to organize.2.Unification of ownership and management.3.Less government regulation.4. Owner has more control over business.Disadvantages:1.The owner pays taxesonthe entity’searningssince it is not a separate tax entity.2.No continuous life or transferability of ownership.3.Unlimited liability of ownerfor business’s debts.S1-5Applyingaccounting assumptions and principlesLearning Objective 2Michael McNamee is the proprietor of a property management company, ApartmentExchange, near thecampus of Pensacola State College. The business has cash of $8,000 and furniture that cost $9,000 andhas a market value of $13,000. The business debts include accounts payable of $6,000. Michael’spersonal home is valued at $400,000, and his personal bank account has a balance of $1,200. Considerthe accounting principles and assumptions discussed in the chapter, and identify the principle orassumption that best matches the situation:a.Michael’s personal assets are not recorded on the Apartment Exchange’s balance sheet.b.The Apartment Exchange records furniture at its cost of $9,000, not its market value of $13,000.c.The Apartment Exchange reports its financial statements in U.S. dollars.d.Michael expects the Apartment Exchange to remain in operation for the foreseeable future.SOLUTIONa.Theeconomicentityassumptionb. The costprinciple.c. The monetary unitassumption.d. The goingconcernassumption.

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1-6S1-6Using the accounting equationLearning Objective 3Thompson Handyman Services has total assets for the year of $18,400 and total liabilities of $9,050.Requirements1.Use the accounting equation to solve for equity.2.If next year assets increased by $4,300 and equity decreased by $3,850, what would be the amount oftotal liabilities for Thompson Handyman Services?SOLUTIONRequirement 1ThompsonHandymanServices has equity of $9,350.Assets=Liabilities+Equity$18,400=$9,050+?$18,400=$9,050+$9,350Requirement 2ThompsonHandyman Services has liabilities of $17,200.Assets=Liabilities+Equity$18,400+ $4,300=?+$9,350–$3,850$22,700=$17,200+$5,500S1-7Using the accounting equationLearning Objective 3Roland’s Overhead Doors reports the following financial information:Assets$ 45,800Liabilities17,220Roland, Capital27,460Roland, Withdrawals6,500Revenues8,850Expenses?Requirements1.Use the accounting equation to solve for the missing information.2.Did Roland’s Overhead Doors report net income or net loss?

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1-7SOLUTIONRequirement 1ASSETS=LIABILITIES+EQUITY+Roland,Capital–Roland,Withdrawals+Revenues–Expenses$45,800$45,800==$17,220$17,220++$27,460$27,460––$6,500$6,500++$8,850$8,850––?$1,230Requirement 2Roland’sOverhead Doors reported net income of$7,620. Net Income = Revenues ($8,850)–Expenses($1,230)S1-8Identifying accountsLearning Objective 3Consider the following accounts:a.Accounts Payableb.Cashc.Owner, Capitald.AccountsReceivablee.Rent Expensef.Service Revenueg.Office Suppliesh.Owner, Withdrawalsi.Landj.Salaries ExpenseIdentify each account as Asset, Liability, or Equity.SOLUTIONa. Lf.Eb. Ag.Ac.Eh.Ed.Ai.Ae.Ej.E

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1-8S1-9Using theaccounting equation to analyze transactionsLearning Objective 4Tiny Town Kennel earns service revenue by caring for the pets of customers. Tiny Town Kennel isorganized as a sole proprietorship and owned by Earle Martin. During the past month, Tiny TownKennel has the following transactions:a.Received $520 cash for service revenue earned.b.Paid $325 cash for salaries expense.c.Martin contributed $1,000 to the business in exchange for capital.d.Earned $640 for service revenue, but the customer has not paid Tiny Town Kennel yet.e.Received utility bill of $85, which will be paid next month.f.Martin withdrew $100 cash.Indicate the effects of the business transactions on the accounting equation for Tiny Town Kennel.Transaction (a) is answered as a guide.a.Increase asset (Cash); Increase equity (Service Revenue)SOLUTIONa.Increase asset (Cash); Increase equity (Service Revenue)b.Decrease asset (Cash); Decrease equity (Salaries Expense)c.Increase asset (Cash); Increase Equity (Martin, Capital)d.Increase asset (Accounts Receivable); Increase equity (Service Revenue)e.Increase liability (Accounts Payable); Decrease equity (Utility Expense)f.Decrease asset (Cash); Decrease equity (Martin, Withdrawals)S1-10Using the accounting equation to analyze transactionsLearning Objective 4Elaine’sInflatablesearnsservicerevenuebyprovidingpartyplanningservicesandinflatableplayscapes. Elaine’s Inflatables is organized as a sole proprietorship and owned by Elaine Gibson.During the past month,Elaine’s Inflatables had the following transactions:a.Gibson contributed $10,000 to the business in exchange for capital.b.Purchased equipment for $5,000 on account.c.Paid $400 for office supplies.d.Earned and received $2,500 cash for service revenue.e.Paid $400 for wages to employees.f.Gibson withdrew $1,000 cash.g.Earned $1,000 for services provided. Customer has not yet paid.h.Paid $1,000 for rent.i.Received a bill for $250 for the monthly utilities. The bill has not yet been paid.

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1-9Indicate the effects of the business transactions on the accounting equation for Elaine’s Inflatables.Transaction (a) is answered as a guide.a. Increase asset (Cash); Increase equity (Gibson, Capital)SOLUTIONa.Increase asset (Cash); Increase equity (Gibson, Capital)b.Increase asset (Equipment); Increase liability (Accounts Payable)c.Increase asset (Office Supplies); Decrease asset (Cash)d.Increase asset (Cash); Increase equity (Service Revenue)e.Decrease asset (Cash); Decrease equity (Wages Expense)f.Decrease asset (Cash); Decrease equity (Gibson, Withdrawals)g.Increase asset (Accounts Receivable); Increase equity (Service Revenue)h.Decrease asset (Cash); Decrease equity (Rent Expense)i.Increase liability (Accounts Payable); Decrease equity (Utilities Expense)S1-11Identifying accounts on the financial statementsLearning Objective 5Consider the following accounts:a.Accounts Payableb.Cashc.Owner, Capitald.AccountsReceivablee.Rent Expensef.Service Revenueg.Office Suppliesh.Owner, Withdrawalsi.Landj.Salaries ExpenseIdentify the financial statement (or statements) that each account would appear on. Use I for IncomeStatement, OE for Statement of Owner’s Equity, B for Balance Sheet, and C for Statement of CashFlows.SOLUTIONa. Bf.Ib.B, Cg.Bc.OE,Bh.OEd.Bi.Be.Ij.I

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1-10Use the following information to answer Short Exercises S1-12 through S1-14.Centerpiece Arrangements has justcompleted operations for the year ended December 31, 2018. This isthe third year of operations for the company. The following data have been assembled for the business:Insurance Expense$4,500Salaries Expense$ 46,000Service Revenue70,000Accounts Payable17,600Utilities Expense1,400Office Supplies1,700Rent Expense16,000Right, Withdrawals4,800Right, Capital, Jan. 1, 20189,000Accounts Receivable8,000Cash7,200Equipment12,100Owner contribution5,100S1-12Preparing the income statementLearning Objective 5Prepare the income statement of Centerpiece Arrangements for the year ended December 31, 2018.SOLUTIONCENTERPIECEARRANGEMENTSIncome StatementYear Ended December 31,2018Revenue:Service Revenue$70,000Expenses:Salaries Expense$46,000Rent Expense16,000Insurance Expense4,500Utilities Expense1,400Total Expenses67,900Net Income$2,100

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1-11S1-13Preparing the statement of owner’s equityLearning Objective 5Prepare the statement of owner’s equity of Centerpiece Arrangements for the year ended December 31,2018.SOLUTIONCENTERPIECEARRANGEMENTSStatement ofOwner’s EquityYear Ended December 31,2018Right, Capital, January 1,2018$9,000Ownercontribution5,100Net income for the year2,10016,200Owner withdrawal(4,800)Right, Capital, December 31,2018$11,400S1-14Preparing the balance sheetLearning Objective 5Prepare thebalance sheet of Centerpiece Arrangements as of December 31, 2018.SOLUTIONCENTERPIECEARRANGEMENTSBalance SheetDecember 31,2018AssetsLiabilitiesCash$7,200Accounts Payable$17,600Accounts Receivable8,000OfficeSupplies1,700Owner’sEquityEquipment12,100Right, Capital11,400Total Assets$29,000Total Liabilities andOwner’sEquity$29,000

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1-12S1-15Preparing the statement of cash flowsLearning Objective 5Polk Street Homes had thefollowing cash transactions for the month ended July 31, 2018.Cash receipts:Collections from customers$ 25,000Owner contribution13,000Cash payments:Rent500Utilities2,000Salaries1,500Purchase of equipment25,000Owner withdrawal4,000Cash balance, July 1, 201814,000Cash balance, July 31, 201819,000Prepare the statement of cash flows for Polk Street Homes for the month ended July 31, 2018.SOLUTIONPOLK STREETHOMESStatement of Cash FlowsMonth Ended July 31,2018Cash flows from operating activities:Receipts:Collections from customers$25,000Payments:To employees$(1,500)To suppliers(2,500)(4,000)Net cash provided by operating activities21,000Cash flows from investing activities:Purchase of equipment(25,000)Net cash used by investing activities(25,000)Cash flows from financing activities:Owner contribution13,000Owner withdrawal(4,000)Net cash provided by financing activities9,000Net increase in cash5,000Cash balance, July 1,201814,000Cash balance, July 31,2018$19,000

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1-13S1-16Calculating ROALearning Objective 6Matured WaterServices had net income for the month of October of $50,880. Assets as of the beginningand end of the month totaled $362,000, and $486,000, respectively. Calculate Matured Water Services’ROA for the month of October.SOLUTIONReturn on assets=Net income / Average total assets=$50,880/ (($362,000 + $486,000) / 2)=$50,880/ $424,000=12%

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1-14ExercisesE1-17Identifying users of accounting informationLearning Objective 1For each of the users of accounting information, identifywhether the user is an external decision maker(E) or an internal decision maker (I):a.customerb.company managerc.Internal Revenue Serviced.lendere.investorf.controllerg.cost accountanth.SECSOLUTIONa.Ee.Eb.If.Ic.Eg.Id.Eh.EE1-18Using accounting vocabularyLearning Objective 2Consider the following accounting terms and definitions, and match each term to the definition:SOLUTION1.d6.f2.e7.b3.g8.c4.a9.j5.i10.hE1-19Using accounting vocabularyLearning Objectives 3, 5Consider the following accounting terms and definitions, and match each term to the definition:1.Accounting equationa.An economic resource that is expected to be of benefit in the future

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1-152.Asset3.Balance sheet4.Expense5.Income statementb.Debts that are owed to creditorsc.Excess of total expenses over total revenuesd.Excess of total revenues over total expensese.The basic tool of accounting, stated asAssetsLiabilitiesEquity=+6.Liability7.Net income8.Net loss9.Revenue10.Statement of cash flows11.Statementofowner’sequityf.Decreases in equity that occur in the course of selling goods or servicesg.Increases in equity that occur in the course of selling goods or servicesh.Reports on a business’s cash receipts and cash payments during a periodi.Reports on an entity’s assets, liabilities, and owner’s equity as of a specific datej.Reports on an entity’s revenues, expenses, and net income or loss for the periodk.Reports how the owner’s capital balance changed from the beginning to the endof the periodSOLUTION1.e7.d2.a8.c3.i9.g4.f10.h5.j11.k6.bE1-20Using the accounting equationLearning Objective 3Compute the missing amount in the accounting equation for each entity from the financialinformationpresented:AssetsLiabilitiesEquityHair Styles$?$ 36,000$ 36,000Style Cuts90,000?48,000Your Basket101,00068,000?SOLUTIONAssetsLiabilitiesEquityHair Styles$72,000$36,000$36,000Style Cuts90,00042,00048,000Your Basket101,00068,00033,000

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1-16E1-21Using the accounting equationLearning Objective 3Wizco Advertising’s balance sheet data at May 31, 2018, and June 30, 2018, follow:May 31, 2018June 30, 2018Total Assets$ 122,000$ 287,000Total Liabilities66,000144,000For each of the following situations that occurred in June, 2018 with regard to owner’s contributions andwithdrawals, compute the amount of net income or net loss during June 2018.a.The ownercontributed $10,000 to the business and made no withdrawals.b.The owner made no contributions. The owner withdrew cash of $3,000.c.The owner made contributions of $12,500 and withdrew cash of $30,000.SOLUTIONa.b.c.Owner’sequity, May 31,2018($122,000–$66,000)$56,000$56,000$56,000Owner contribution10,000012,500Net income for the month77,00090,000104,500143,000146,000173,000Owner withdrawal0(3,000)(30,000)Owner’sequity, June 30,2018($287,000–$144,000)$143,000$143,000$143,000

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1-17E1-22Using the accounting equationLearning Objective 3Mountain Drycleaners started 2018 with total assets of $19,000 and total liabilities of $14,000. At theend of2018, Mountain’s total assets stood at $12,000 and total liabilities were $9,000.Requirements1.Did the owner’s equity of Mountain Drycleaners increase or decrease during 2018? By how much?2.Identify the four possible reasons that owner’s equity canchange.SOLUTIONRequirement 1Assets=Liabilities+EquityBeginning of2018$19,000=$14,000+?$19,000=$14,000+$5,000End of2018$12,000=$9,000+?$12,000=$9,000+$3,000Owner’sequity decreased in2018by $2,000 ($5,000–$3,000).Requirement 2a. Increase throughowner’s contributions.b. Increase through net income.c. Decrease throughowner’s withdrawals.d. Decrease through net loss.

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1-18E1-23Using the accounting equationLearning Objective 3During2018, Flowing Rivers Spa reported revenue of $30,000. Total expenses for the year were$15,000. Flowing Rivers Spa ended the year with total assets of $43,000, and it owed debts totaling$14,000. At year-end 2017, the business reported total assets of $28,000 and total liabilities of $14,000.Requirements1.Compute Flowing Rivers Spa’s net income for 2018.2.Did Flowing Rivers Spa’s owner’s equity increase or decrease during 2018? By how much?SOLUTIONRequirement 1Revenues–Expenses=NetIncome$30,000–$15,000=$15,000Requirement 2Flowing RiversSpa’s equity increased by $15,000 ($29,000-$14,000) or the amount of the net income.Assets=Liabilities+EquityBeginningof2018$28,000=$14,000+?$28,000=$14,000+$14,000Endingof2018$43,000=$14,000+?$43,000=$14,000+$29,000E1-24 Using the accounting equationLearning Objective 3The records of Felix Company show the following at December 31, 2018:Assets & Liabilities:Equity:Beginning:Owner contribution$11,000Assets$ 67,000Owner withdrawal8,000Liabilities11,000Revenues205,000Ending:Expenses?Assets$ 46,000Liabilities34,000

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1-19Requirements1.Compute the missing amount for FelixCompany. You will need to work through owner’s equity.2.Did Felix earn a net income or suffer a net loss for the year? Compute the amount.SOLUTIONRequirement 1Assets−Liabilities=EquityBeginningof2018$67,000−$11,000=$56,000Endingof2018$46,000−$34,000=$12,000Owner’s Equity:Capital,Jan. 1,2018$56,000Plus: Owner contributions11,000Plus: Revenues205,000Less: Expenses(252,000)Less:Owner withdrawals(8,000)Capital,Dec. 31,2018$12,000Requirement 2FelixCompanysuffered(or reported)anetlossof($47,000).Revenue−Expenses=Net Income(Loss)$205,000−$252,000=($47,000)E1-25 Using the accounting equation to analyze transactionsLearning Objective 4As the manager of a Papa Sean’s restaurant, you must deal with a variety of business transactions. Givean example of a transaction that has each of the following effects on the accounting equation:a.Increase one asset and decrease another asset.b.Decrease an asset and decrease equity.c.Decrease an asset and decrease a liability.d.Increase an asset and increase equity.e.Increase an asset and increase a liability.

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1-20SOLUTIONStudent responses will vary. Examplesinclude:a.Cash purchase of office supplies.b.Cashwithdrawal by owner.c.Paid cash on accounts payable.d.Received cash for services provided.e.Borrowedcashfrom the bank.E1-26Using the accounting equation to analyze business transactionsLearningObjective 4Indicate the effects of the following business transactions on the accounting equation of Vivian’s OnlineVideo store. Transaction (a) is answered as a guide.a.Received cash of $10,000 from owner and gave capital.Answer: Increase asset (Cash); Increase equity (Vivian, Capital)b.Earned video rental revenue on account, $2,800.c.Purchased office furniture on account, $300.d.Received cash on account, $400.e.Paid cash on account, $100.f.Rented videos and received cash of $200.g.Paid monthly office rent of $1,000.h.Paid $100 cash to purchase office supplies.SOLUTIONa. Increase asset (Cash); Increase equity (Vivian, Capital)b. Increase asset (Accounts Receivable); Increase equity (Rental Revenue)c. Increase asset (OfficeFurniture); Increase liability (Accounts Payable)d. Increase asset (Cash); Decrease asset (Accounts Receivable)e. Decrease asset (Cash); Decrease liability (Accounts Payable)f. Increase asset (Cash); Increase equity (Rental Revenue)g. Decrease asset (Cash); Decrease equity (Rent Expense)h.Decrease asset (Cash); Increase asset (Office Supplies).

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1-21E1-27Using the accounting equation to analyze business transactionsLearning Objective 4Indicate the effects of the following business transactions on the accounting equation for Sam’s SnackFoods, a supplier of snack foods. Transaction (a) is answered as a guide.a.Sam’s Snack Foods received cash from owner and gave capital.Answer:Increaseasset (Cash); Increase equity (Sam, Capital)b.Cashpurchase of land for a building site.c.Paid cash on accounts payable.d.Purchased equipment; signed a note payable.e.Performed service for a customer on account.f.Employees worked for the week but will be paid next Tuesday.g.Received cash from acustomer on accounts receivable.h.Borrowed money from the bank.i.Owner withdrew cash.j.Incurred utilities expense on account.SOLUTIONa. Increase asset (Cash); Increase equity (Sam, Capital)b. Increase asset (Land); Decrease asset (Cash)c. Decrease asset (Cash); Decrease liability (Accounts Payable)d. Increase asset (Equipment); Increase liability (Notes Payable)e. Increase asset (Accounts Receivable); Increase equity (Service Revenue)f. Increase liability (Salaries Payable); Decrease equity (Salaries Expense)g. Increase asset (Cash); Decrease asset (Accounts Receivable)h. Increase asset (Cash); Increase liability (Notes Payable)i. Decrease asset (Cash); Decrease equity (Sam, Withdrawals)j. Increase liability (Accounts Payable); Decrease equity (Utility Expense)

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1-22E1-28Using the accounting equation to analyze business transactionsLearning Objective 4The analysis of the first eight transactions of Advanced Accounting Service follows. Describe eachtransaction.SOLUTIONTransaction Descriptions:1.Cash contribution by owner2.Earned revenue on account3.Purchased equipment on account4.Collected cash on account5.Cash purchase of equipment6.Paid cash on account7.Earned revenue and received cash8.Paid cash for salaries

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1-23E1-29Using the accounting equation to analyze businesstransactionsLearning Objective 4Ashley Stamper opened a medical practice. During July, the first month of operation, the business, titled Ashley Stamper, MD,experiencedthe following events:Jul. 6Stamper contributed $68,000 in the business by opening a bank account inthe name of A. Stamper, MD. The business gave capital to Stamper.9Paid $56,000 cash for land.12Purchased medical supplies for $1,500 on account.15Officially opened for business.20Paidcashexpenses:employees’salaries,$1,300;officerent,$1,500;utilities, $100.31Earned service revenue for the month, $13,000, receiving cash.31Paid $1,050 on account.Analyze the effects of these events on the accounting equation of the medicalpractice of Ashley Stamper, MD, using the following format:

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1-24SOLUTIONASSETS=LIABILITIES+EQUITYDateCash+MedicalSupplies+Land=AccountsPayable+Stamper,Capital–Stamper,Withdrawals+ServiceRevenue–SalariesExpense–RentExpense–UtilitiesExpenseJuly 6+68,000+68,000Bal.$68,000=+$68,0009–56,000+56,000=Bal.$12,000+$56,000=+$68,00012++1,500=+1,500Bal.$12,000+$1,500+$56,000=$1,500+$68,00015Bal.$12,000+$1,500+$56,000=$1,500+$68,00020–2,900=–1,300–1,500–100Bal.$9,100+$1,500+$56,000=$1,500+$68,000–$1,300–$1,500–$10031+13,000=+13,000Bal.$22,100+$1,500+$56,000=$1,500+$68,000+$13,000–$1,300–$1,500–$10031–1,050=–1,050Bal.$21,050+$1,500+$56,000=$450+$68,000+$13,000–$1,300–$1,500–$100

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1-25E1-30Preparing the financial statementsLearning Objective 5Estella Osage publishes an online travel magazine. In need of cash, the business applies for a loan withNational Bank. The bank requires borrowers to submitfinancial statements. With little knowledge ofaccounting, Estella Osage, the owner, does not know how to proceed.Requirements1What are the four financial statements that the business will need to prepare?2.Is there a specific order in which the financial statements must be prepared?3.Explain how to prepare each statement.Use the following information to answer Exercises E1-31 through E1-33.The account balances of Wilson Towing Service at June 30, 2018, follow:Equipment$25,850ServiceRevenue$ 15,000Office Supplies1,000Accounts Receivable9,000Notes Payable6,800Accounts Payable8,000Rent Expense900Wilson, Capital, June 1, 20183,250Cash1,400Salaries Expense2,400Wilson, Withdrawals3,500SOLUTIONRequirement 1a.Income statementb.Statement ofowner’s equityc.Balance sheetd.Statement of cash flowsRequirement 2Yes, thefinancial statementsshould be prepared in the order listed above in Requirement 1.Requirement 3Income Statement:a.The header includes the name of the business, the title of the statement, and the timeperiod. An income statement always represents a period of time, forexample, a month ora year.b.The revenue accounts are always listed first and then subtotaled if necessary.c.Each expense account is listed separately from largest to smallest and then subtotaled ifnecessary.d.Net income is calculated as total revenues minus total expenses.

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1-26Statement ofOwner’s Equity:a.The header includes the name of the business, the title of the statement, and the timeperiod. A statement ofowner’s equityalways represents a period of time, for example, amonth or a year.b.The beginningcapitalis listed first and will always be the endingcapitalfrom theprevious time period.c.Theowner contributions andnet incomeareadded to the beginningcapital.d.Theowner withdrawalsare subtracted fromcapital. If there had been a net loss,thiswould also be subtracted.BalanceSheet:a.The header includes the name of the business and the title of the statement but the date isdifferent. The balance sheet shows the date as a specific date and not a period of time.b.Each asset account is listed separately and then totaled. Cash is always listed first.c.Liabilities are listed separately and then totaled. Liabilities that are to be paid first arelisted first.d.Theowner’sequity section includesthe ending capitalfrom the statement ofowner’sequity.e.The balance sheet must always balance: Assets = Liabilities + Equity.Statement of Cash Flows:a.The header includes the name of the business, the title of the statement, and the timeperiod. A statement of cash flows always represents a period oftime, for example, amonth or a year.b.Each dollar amount is calculated by evaluating the cash column on the transaction detail.c.Operating activities involve cash receipts for services provided and cash payments forexpenses paid.d.Investing activities include the purchase and sale of land and equipment for cash.e.Financing activities include cash fromowner contributionsand payment of cashforowner withdrawals.f.The ending cash balance must match the cash balance on the balance sheet.

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1-27E1-31Preparing the income statementLearning Objective 5Net Income $11,700Requirements1.Prepare the income statement for Wilson Towing Service for the month ending June 30, 2018.2.What does the income statement report?SOLUTIONRequirement 1WILSONTOWINGSERVICEIncome StatementMonth Ended June 30,2018Revenue:Service Revenue$15,000Expenses:SalariesExpense$2,400Rent Expense900Total Expenses3,300Net Income$11,700Requirement 2The incomestatement reports revenues and expenses for a period of time.E1-32Preparing the statement of owner’s equityLearning Objective 5Ending Capital $22,450Requirements1.Prepare the statement of owner’s equity for Wilson Towing Service for themonth ending June30, 2018. Assume Wilson contributed $11,000 during June.2.What does the statement of owner’s equity report?

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1-28SOLUTIONRequirement 1WILSONTOWING SERVICEStatement ofOwner’s EquityMonthEndedJune 30,2018Wilson,Capital, June1,2018$3,250Owner contribution11,000Net incomefor the month11,70025,950Owner withdrawals(3,500)Wilson, Capital, June 30,2018$22,450Requirement 2The statement ofowner’s equityreports the changes inowner’s capitalduring a time period.E1-33Preparing the balance sheetLearning Objective 5Total Assets $37,250Requirements1.Prepare the balance sheet for Wilson Towing Service as of June 30, 2018.2.What does thebalance sheet report?Use the following information to answer Exercises E1-34 through E1-36.The assets, liabilities, and equities of Damon Design Studio have the following balances at December31, 2018. The owner, Eric Damon, began the year with a $39,000 capital balance, contributed $13,000,and withdrew $57,000 during the year.Notes Payable$ 14,000Office Furniture$48,400Rent Expense23,000Utilities Expense7,200Cash3,200Accounts Payable3,600Office Supplies5,100Service Revenue154,600Salaries Expense65,000Accounts Receivable9,300PropertyTaxExpense2,200MiscellaneousExpense3,800

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1-29SOLUTIONRequirement 1WILSONTOWING SERVICEBalance SheetJune 30,2018AssetsLiabilitiesCash$ 1,400AccountsPayable$8,000Accounts Receivable9,000Notes Payable6,800Office Supplies1,000Total Liabilities14,800Equipment25,850Owner’sEquityWilson, Capital22,450Total Assets$37,250Total LiabilitiesandOwner’sEquity$37,250Requirement2The balance sheet reports an entity’s assets, liabilities, andowner’sequity as of a specific date.E1-34Preparing the income statementLearning Objective 5Net Income $53,400Prepare the income statement forDamon Design Studio for the year ending December 31, 2018.SOLUTIONDAMONDESIGN STUDIOIncome StatementYear Ended December 31,2018Revenue:Service Revenue$154,600Expenses:SalariesExpense$65,000Rent Expense23,000Utilities Expense7,200Miscellaneous Expense3,800Property Tax Expense2,200Total Expenses101,200Net Income$53,400

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