Solution Manual for Accounting Principles, 9th Edition

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Weygandt,Accounting Principles,9/e, Solutions Manual(ForUse Only)1-1CHAPTER 1Accounting in ActionANSWERS TO QUESTIONS1.Yes, this is correct. Virtually every organization and person in our society uses accountinginformation. Businesses, investors, creditors, government agencies, and not-for-profit organizationsmust use accounting information to operate effectively.2.Accounting is the process of identifying, recording, and communicating the economic events ofan organization to interested users of the information. The first step of the accounting process istherefore to identify economic events that are relevant to a particular business. Once identifiedand measured, the events are recorded to provide a history of the financial activities of theorganization. Recording consists of keeping a chronological diary of these measured events in anorderly and systematic manner. The information is communicated through the preparation anddistribution of accounting reports, the most common of which are called financial statements.A vital element in the communication process is the accountant’s ability and responsibility toanalyze and interpret the reported information.3.(a)Internal users are those who plan, organize, and run the business and therefore are officersand other decision makers.(b)To assist management, managerial accounting provides internal reports. Examples includefinancialcomparisonsofoperatingalternatives,projectionsofincomefromnewsalescampaigns, and forecasts of cash needs for the next year.4.(a)Investors (owners) use accounting information to make decisions to buy, hold, or sell owner-ship shares of a company.(b)Creditors use accounting information to evaluate the risks of granting credit or lending money.5.Bookkeeping usually involves only the recording of economic events and therefore is just one partof the entire accounting process. Accounting, on the other hand, involves the entire process ofidentifying, recording, and communicating economic events.6.Karen Sommers Travel Agency should report the land at $90,000 on its December 31, 2010balance sheet. An important concept that accountants follow is the cost principle. The costprinciple states that assets should be recorded at their cost. Cost has an important advantageover other valuations: it is reliable. Cost can be objectively measured and can be verified.7.The monetary unit assumption requires that only transaction data that can be expressed in termsof money be included in the accounting records. This assumption enables accounting to quantify(measure) economic events.8.The economic entity assumption requires that the activities of the entity be kept separate anddistinct from the activities of its owners and all other economic entities.

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1-2Weygandt,Accounting Principles,9/e, Solutions Manual(ForUse Only)Questions Chapter 1(Continued)9.The three basic forms of business organizations are: (1) proprietorship, (2) partnership, and(3) corporation.10.One of the advantages Maria Gonzalez would enjoy is that ownership of a corporation is repre-sented by transferable shares of stock. This would allow Maria to raise money easily by sellinga part of her ownership in the company. Another advantage is that because holders of the shares(stockholders) enjoy limited liability; they are not personally liable for the debts of the corporateentity. Also, because ownership can be transferred without dissolving the corporation, the corporationenjoys an unlimited life.11.The basic accounting equation is Assets = Liabilities + Owner’s Equity.12.(a)Assets are resources owned by a business. Liabilities are claims against assets. Put moresimply, liabilities are existing debts and obligations. Owner’s equity is the ownership claimon total assets.(b)Owner’s equity is affected by owner’s investments, drawings, revenues, and expenses.13.The liabilities are: (b) Accounts payable and (g) Salaries payable.14.Yes, a business can enter into a transaction in which only the left side of the accounting equationis affected. An example would be a transaction where an increase in one asset is offset bya decrease in another asset. An increase in the Equipment account which is offset by a decreasein the Cash account is a specific example.15.Business transactions are the economic events of the enterprise recorded by accountantsbecause they affect the basic equation.(a)The death of the owner of the company is not a business transaction as it does not affectthe basic equation.(b)Supplies purchased on account is a business transaction as it affects the basic equation.(c)An employee being fired is not a business transaction as it does not affect the basic equation.(d)A withdrawal of cash from the business is a business transaction as it affects the basic equation.16.(a)Decrease assets and decrease owner’s equity.(b)Increase assets and decrease assets.(c)Increase assets and increase owner’s equity.(d)Decrease assets and decrease liabilities.17.(a)Income statement.(d)Balance sheet.(b)Balance sheet.(e)Balance sheet and owner’s equity statement.(c)Income statement.(f)Balance sheet.18.No, this treatment is not proper. While the transaction does involve a receipt of cash, it does notrepresent revenues. Revenues are the gross increase in owner’s equity resulting from businessactivities entered into for the purpose of earning income. This transaction is simply an additionalinvestment made by the owner in the business.

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Weygandt,Accounting Principles,9/e, Solutions Manual(ForUse Only)1-3Questions Chapter 1(Continued)19.Yes. Net income does appear on the income statement—it is the result of subtracting expensesfrom revenues. In addition, net income appears in the statement of owner’s equity—it is shownas an addition to the beginning-of-period capital. Indirectly, the net income of a company is alsoincluded in the balance sheet. It is included in the capital account which appears in the owner’sequity section of the balance sheet.20.(a)Ending capital balance ......................................................................................$198,000Beginning capital balance .................................................................................168,000Net income ........................................................................................................$ 30,000(b)Ending capital balance ......................................................................................$198,000Beginning capital balance .................................................................................168,00030,000Deduct: Investment ..........................................................................................13,000Net income ........................................................................................................$ 17,00021.(a)Total revenues ($20,000 + $70,000) .................................................................$90,000(b)Total expenses ($26,000 + $40,000).................................................................$66,000(c)Total revenues...................................................................................................$90,000Total expenses ..................................................................................................66,000Net income ........................................................................................................$24,00022.Coca-Cola’s accounting equation at December 31, 2007 was $43,269,000,000 = $21,525,000,000 +$21,744,000,000.

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1-4Weygandt,Accounting Principles,9/e, Solutions Manual(ForUse Only)SOLUTIONS TO BRIEF EXERCISESBRIEF EXERCISE 1-1(a)$120,000 + $232,000 = $352,000 (Total assets).(b)$190,000 – $80,000 = $110,000 (Total liabilities).(c)$800,000 – 0.5($800,000) = $400,000 (Owner’s equity).BRIEF EXERCISE 1-2(a)$90,000 – $50,000 = $40,000 (Owner’s Equity).(b)$40,000 + $70,000 = $110,000 (Assets).(c)$94,000 – $60,000 = $34,000 (Liabilities).BRIEF EXERCISE 1-3A(a)Accounts receivableA(d)Office suppliesL(b)Salaries payableOE(e)Owner’s investmentA(c)EquipmentL(f)Notes payableBRIEF EXERCISE 1-4Owner’s EquityAssets=Liabilities+Owner,Capital–OwnerDrawings + Revenues – Expenses(a)X=$90,000+$150,000–$40,000+$450,000–$320,000X=$90,000+$240,000X= $330,000(b)$57,000=X+$25,000–$7,000+$50,000–$35,000$57,000=X+$33,000X=$24,000 ($57,000 – $33,000)(c)$600,000 =($600,000 x 2/3)+ X (Owner’s equity)$600,000 =$400,000+ XX=$200,000

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Weygandt,Accounting Principles,9/e, Solutions Manual(ForUse Only)1-5BRIEF EXERCISE 1-5(a)($800,000 + $150,000) – ($500,000 – $80,000) = $530,000(Owner’s equity).(b)($500,000 + $100,000) + ($800,000 – $500,000 – $70,000) = $830,000(Assets).(c)($800,000 – $80,000) – ($800,000 – $500,000 + $120,000) = $300,000(Liabilities).BRIEF EXERCISE 1-6AssetsLiabilitiesOwner’s Equity(a)++NE(b)+NE+(c)–NE–BRIEF EXERCISE 1-7AssetsLiabilitiesOwner’s Equity(a)+NE+(b)–NE–(c)NENENEBRIEF EXERCISE 1-8E(a)Advertising expenseD(e)Bergman, DrawingR(b)Commission revenueR(f)Rent revenueE(c)Insurance expenseE(g)Utilities expenseE(d)Salaries expenseBRIEF EXERCISE 1-9R(a)Received cash for services performedNOE(b)Paid cash to purchase equipmentE(c)Paid employee salaries

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1-6Weygandt,Accounting Principles,9/e, Solutions Manual(ForUse Only)BRIEF EXERCISE 1-10LOPEZ COMPANYBalance SheetDecember 31, 2010AssetsCash ................................................................................................$ 49,000Accounts receivable ......................................................................72,500Total assets ............................................................................$121,500Liabilities and Owner’s EquityLiabilitiesAccounts payable ..................................................................$ 90,000Owner’s equityKim Lopez, Capital .................................................................31,500Total liabilities and owner’s equity ...............................$121,500BRIEF EXERCISE 1-11BS(a)Notes payableIS(b)Advertising expenseOE, BS(c)Trent Buchanan, CapitalBS(d)CashIS(e)Service revenue

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Weygandt,Accounting Principles,9/e, Solutions Manual(ForUse Only)1-7SOLUTIONS FOR DO IT! REVIEW EXERCISESDO IT! 1-11.False.The three steps in the accounting process are identification,recording, and communication.2.True3.False.Congress passed the Sarbanes-Oxley Act of 2002 to reduceunethicalbehavioranddecreasethelikelihoodoffuturecorporatescandals.4.False.The primary accounting standard-setting body in the UnitedStates is the Financial Accounting Standards Board (FASB).5.True.DO IT! 1-21.Drawings is owner’s drawings (D); it decreases owner’s equity.2.Rent Revenue is revenue (R); it increases owner’s equity.3.Advertising Expense is an expense (E); it decreases owner’s equity.4.When the owner puts personal assets into the business, it is investmentby owner (I); it increases owner’s equity.DO IT! 1-3AssetsLiabilitiesOwner’s EquityCash+AccountsReceivable =AccountsPayable+O. Cabrera,Capital–O. Cabrera,Drawings+ Revenues – Expenses(1)+$20,000+$20,000(2) +$20,000–$20,000(3)+$2,000–$2,000(4) –$ 5,000–$5,000

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1-8Weygandt,Accounting Principles,9/e, Solutions Manual(ForUse Only)DO IT! 1-4(a)The total assets are $49,500, comprised of Cash $7,000, AccountsReceivable $13,500, and Equipment $29,000.(b)Net income is $21,000, computed as follows:RevenuesService revenue ..................................................$54,000ExpensesRent expense ......................................................$10,500Salaries expense ................................................$16,500Advertising expense ..........................................6,000Total expenses ...........................................33,000Net income..................................................................$21,000(c)The ending owner’s equity balance of Broadway Company is $21,500.By rewriting the accounting equation, we can compute Owner’s Equityas Assets minus Liabilities, as follows:Total assets [as computed in (a)] .............................$49,500Less: LiabilitiesNotes payable .....................................................$25,000Accounts payable...............................................3,00028,000Owner’s equity ...........................................................$21,500Note that it is not possible to determine the company’s owner’s equity inany other way, because the beginning balance for owner’s equity is notprovided.

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Weygandt,Accounting Principles,9/e, Solutions Manual(ForUse Only)1-9SOLUTIONS TO EXERCISESEXERCISE 1-1RSummarizing economic events.ISelecting economic activities relevant to the company.CReporting information in a standard format.CPreparing accounting reports.RMeasuring events in dollars and cents.RKeeping a systematic chronological diary of events.CExplaining uses, meaning, and limitations of data.RClassifying economic events.CAnalyzing and interpreting information.EXERCISE 1-2(a)Internal usersMarketing managerProduction supervisorStore managerVice-president of financeExternal usersCustomersInternal Revenue ServiceLabor unionsSecurities and Exchange CommissionSuppliers(b)ICan we afford to give our employees a pay raise?EDid the company earn a satisfactory income?IDo we need to borrow in the near future?EHow does the company’s profitability compare to other companies?IWhat does it cost us to manufacture each unit produced?IWhich product should we emphasize?EWill the company be able to pay its short-term debts?

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1-10Weygandt,Accounting Principles,9/e, Solutions Manual(ForUse Only)EXERCISE 1-3John Sturm, president of Lions Company, instructed Jon Kitna, the head ofthe accounting department, to report the company’s land in their accountingreports at its market value of $225,000 instead of its cost of $125,000, in aneffort to make the company appear to be a better investment. The cost prin-ciple requires that assets be recorded and reported at their cost, becausecost is reliable and can be objectively measured and verified.The stakeholders include stockholders and creditors of Lions Company,potential stockholders and creditors, other users of Lion’s accounting reports,John Sturm, and Jon Kitna. All users of Lion’s accounting reports could beharmed by relying on information which violates accounting principles. JohnSturm could benefit if the company is able to attract more investors, butwould be harmed if the fraudulent reporting is discovered. Similarly, Jon Kitnacould benefit by pleasing his boss, but would be harmed if the fraudulentreporting is discovered.Jon’s alternatives are to report the land at $125,000 or to report it at $225,000.Reporting the land at $225,000 is not appropriate since it would misleadmanypeoplewhorelyonLion’saccountingreportstomakefinancialdecisions. Jon’s should report the land at its cost of $125,000. He should tryto convince John Sturm that this is the appropriate course of action, but beprepared to resign his position if Sturm insists.EXERCISE 1-4AssetLiabilityOwner’s EquityCashAccounts payableKarin Meredith, CapitalCleaning equipmentNotes payableCleaning suppliesSalaries payableAccounts receivable

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Weygandt,Accounting Principles,9/e, Solutions Manual(ForUse Only)1-11EXERCISE 1-51.Incorrect. Thecost principlerequires that assets be recorded and reportedat their cost.2.Correct. Themonetary unit assumptionrequires that companies includein the accounting records only transaction data that can be expressedin terms of money.3.Incorrect. Theeconomic entity assumptionrequires that the activities ofthe entity be kept separate and distinct from the activities of its ownerand all other economic entities.EXERCISE 1-61.(c)5.(d)2.(d)6.(b)3.(a)7.(e)4.(b)8.(f)EXERCISE 1-71.Increase in assets and increase in owner’s equity.2.Increase in assets and increase in liabilities.3.Decrease in assets and decrease in owner’s equity.4.Increase in assets and increase in owner’s equity.5.Increase in assets and decrease in assets.6.Decrease in assets and decrease in owner’s equity.7.Increase in liabilities and decrease in owner’s equity.8.Increase in assets and decrease in assets.9.Increase in assets and increase in owner’s equity.EXERCISE 1-8(a)1.Owner invested $15,000 cash in the business.2.Purchased office equipment for $5,000, paying $2,000 in cash andthe balance of $3,000 on account.3.Paid $750 cash for supplies.4.Earned $8,300 in revenue, receiving $4,600 cash and $3,700 onaccount.

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1-12Weygandt,Accounting Principles,9/e, Solutions Manual(ForUse Only)EXERCISE 1-8 (Continued)5.Paid $1,500 cash on accounts payable.6.Owner withdrew $2,000 cash for personal use.7.Paid $650 cash for rent.8.Collected $450 cash from customers on account.9.Paid salaries of $4,900.10.Incurred $500 of utilities expense on account.(b)Investment ................................................................................$15,000Service revenue........................................................................8,300Drawings ...................................................................................(2,000)Rent expense............................................................................(650)Salaries expense ......................................................................(4,900)Utilities expense.......................................................................(500)Increase in capital ....................................................................$15,250(c)Service revenue........................................................................$8,300Rent expense............................................................................(650)Salaries expense ......................................................................(4,900)Utilities expense.......................................................................(500)Net income................................................................................$2,250EXERCISE 1-9S. MOSES & CO.Income StatementFor the Month Ended August 31, 2010RevenuesService revenue..........................................................$8,300ExpensesSalaries expense ........................................................$4,900Rent expense..............................................................650Utilities expense.........................................................500Total expenses....................................................6,050Net income..........................................................................$2,250

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Weygandt,Accounting Principles,9/e, Solutions Manual(ForUse Only)1-13EXERCISE 1-9 (Continued)S. MOSES & CO.Owner’s Equity StatementFor the Month Ended August 31, 2010S. Moses, Capital, August 1..........................................$0Add:Investments ........................................................$15,000Net income..........................................................2,25017,25017,250Less:Drawings.............................................................2,000S. Moses, Capital, August 31........................................$15,250S. MOSES & CO.Balance SheetAugust 31, 2010AssetsCash.................................................................................................$ 8,250Accounts receivable.......................................................................3,250Supplies ..........................................................................................750Office equipment ............................................................................5,000Total assets .............................................................................$17,250Liabilities and Owner’s EquityLiabilitiesAccounts payable ...................................................................$ 2,000Owner’s equityS. Moses, Capital ....................................................................15,250Total liabilities and owner’s equity................................$17,250EXERCISE 1-10(a)Owner’s equity—12/31/09 ($400,000 – $250,000) .................$150,000Owner’s equity—1/1/09 ..........................................................100,000Increase in owner’s equity.....................................................50,000Add:Drawings ......................................................................15,000Net income for 2009................................................................$ 65,000

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1-14Weygandt,Accounting Principles,9/e, Solutions Manual(ForUse Only)EXERCISE 1-10 (Continued)(b)Owner’s equity—12/31/10 ($460,000 – $300,000)................$160,000Owner’s equity—1/1/10—see (a) ..........................................150,000Increase in owner’s equity ...................................................10,000Less: Additional investment ...............................................50,000Net loss for 2010 ...................................................................$ 40,000(c)Owner’s equity—12/31/11 ($590,000 – $400,000)................$190,000Owner’s equity—1/1/11—see (b)..........................................160,000Increase in owner’s equity ...................................................30,000Less: Additional investment ...............................................15,00015,000Add:Drawings.....................................................................30,000Net income for 2011 ..............................................................$ 45,000EXERCISE 1-11(a)Total assets (beginning of year) ..........................................$ 95,000Total liabilities (beginning of year) ......................................85,000Total owner’s equity (beginning of year) ............................$ 10,000(b)Total owner’s equity (end of year) .......................................$ 40,000Total owner’s equity (beginning of year) ............................10,000Increase in owner’s equity ...................................................$ 30,000Total revenues .......................................................................$215,000Total expenses ......................................................................175,000Net income.............................................................................$ 40,000Increase in owner’s equity .............................$ 30,000Less: Net income ...........................................$(40,000)Add:Drawings...............................................24,000)(16,000)Additional investment.....................................$ 14,000(c)Total assets (beginning of year) ..........................................$129,000Total owner’s equity (beginning of year) ............................80,000Total liabilities (beginning of year) ......................................$ 49,000

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Weygandt,Accounting Principles,9/e, Solutions Manual(ForUse Only)1-15EXERCISE 1-11 (Continued)(d)Total owner’s equity (end of year) ......................................$130,000Total owner’s equity (beginning of year)............................80,000Increase in owner’s equity...................................................$ 50,000Total revenues ......................................................................$100,000Total expenses......................................................................55,000Net income ............................................................................$ 45,000Increase in owner’s equity..............................$ 50,000Less: Net income ............................................$(45,000)Additional investment ..........................(25,000)(70,000)Drawings...........................................................$ 20,000EXERCISE 1-12OLGA CO.Income StatementFor the Year Ended December 31, 2010RevenuesService revenue .....................................................$67,000ExpensesSalaries expense....................................................$30,000Rent expense .........................................................12,000Utilities expense ....................................................3,100Advertising expense..............................................1,800Total expenses ...............................................46,900Net income .....................................................................$20,100OLGA CO.Owner’s Equity StatementFor the Year Ended December 31, 2010Olga Gutieraez, Capital, January 1 .................................................$48,000Add:Net income.............................................................................20,10068,100Less: Drawings ................................................................................7,000Olga Gutieraez, Capital, December 31............................................$61,100

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