Larson Chap 1 Prob Set A

7/29/2019 Larson Chap 1 Prob Set A

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PROBLEM SET A

Problem 1-1A (40 minutes)

Part 1

Company A:

(a) Equity on December 31, 2004:

Assets.......................................................... $45,000Liabilities..................................................... (23,500)Equity.......................................................... $21,500

(b) Equity on December 31, 2005:

Equity, December 31, 2004........................ $21,500Plus owner investments............................ 5,000Plus net income.......................................... 7,500Less owners withdrawals......................... (2,500)Equity, December 31, 2005....................... $31,500

(c) Amount of liabilities on December 31, 2005:

Assets.......................................................... $48,000Equity.......................................................... (31,500)Liabilities..................................................... $16,500

Part 2

Company B:

(a) and (b)

Equity: 12/31/2004 12/31/2005

Assets................................... $35,000 $41,000Liabilities.............................. (22,500) (27,500)Equity................................... $12,500 $13,500


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Problem 1-1A (Continued)

(c) Net income for 2005:Equity, December 31, 2004..................... $12,500Plus owner investments......................... 1,500

Plus net income....................................... ?Less owners withdrawals...................... (3,000)Equity, December 31, 2005..................... $13,500

Therefore, net income must have been $2,500.

Part 3Company C:

First, calculate the beginning balance of equity:Dec. 31, 2004

Assets.......................................................... $29,000Liabilities..................................................... (14,000)Equity.......................................................... $15,000

Next, find the ending balance of equity by completing this table:

Equity, December 31, 2004........................ $15,000Plus owner investments............................ 7,750

Plus net income.......................................... 9,000Less owners withdrawals......................... (3,875)Equity, December 31, 2005........................ $27,875

Finally, find the ending amount of assets by adding the ending balance ofequity to the ending balance of liabilities:

Dec. 31, 2005

Liabilities..................................................... $19,000Equity.......................................................... 27,875Assets.......................................................... $46,875

Part 4Company D:

First, calculate the beginning and ending owners equity balances:12/31/2004 12/31/2005

Assets...................................... $80,000 $ 125,000


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Liabilities................................. (38,000) (64,000)Owners Equity....................... $42,000 $ 61,000

Problem 1-1A (Concluded)

Then, find the amount of owner investments during 2005:

Equity, December 31, 2004.......................... $42,000Plus owner investments............................... ?Plus net income............................................ 12,000Less owner withdrawals.............................. 0Equity, December 31, 2005.......................... $61,000

Thus, owner investments must have been: $7,000

Part 5Company E:

First, compute the balance of equity as of December 31, 2005:

Assets.......................................................... $112,500Liabilities.................................................... (75,000)Equity.......................................................... $ 37,500

Next, find the beginning balance of equity as follows:

Equity, December 31, 2004........................ $ ?Plus owner investments............................ 4,500Plus net income.......................................... 18,000Less owners withdrawals......................... (9,000)Equity, December 31, 2005....................... $37,500

Thus, the beginning balance of equity was $24,000.

Finally, find the beginning amount of liabilities by subtracting the

beginning balance of equity from the beginning balance of assets:Dec. 31, 2004

Assets.......................................................... $123,000Equity.......................................................... (24,000)Liabilities.................................................... $ 99,000


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Balance SheetIncome

StatementStatement ofCash Flows

TransactionTotal

AssetsTotalLiab.

TotalEquity

NetIncome

OperatingActivities

FinancingActivities

InvestingActivities

1 Owner investscash in business + + +

2 Receives cashfor servicesprovided

+ + + +

3 Pays cash foremployee wages

4 Incurs legalcosts on credit +

5 Borrows cash

by signing L-Tnote payable

+ + +

6 Owner with-draws cash

7 Buys land bysigning notepayable

+ +

8 Provides ser-vices on credit + + +

9 Buys office

equipmentfor cash

+/

10 Collects cashon receivablefrom (8)

+/ +


Valdez Energy CompanyIncome StatementFor Year Ended December 31, 2005

Revenues ................................................... $65,000Expenses.................................................. 50,000

Net income.................................................... $15,000


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AmicoBalance Sheet

December 31, 2005

Assets ........... $90,000Liabilities ....................................$34,000Equity...............................................

56,000Total assets................... $90,000 Total liabilities and equity.....

$90,000


TrimarkStatement of Cash Flows

For Year Ended December 31, 2005

Cash from operating activities ........................ $ 7,000

Cash used by investing activities.................... (3,000)

Cash used by financing activities.................... (3,800)

Net increase in cash.......................................... 200

Cash, December 31, 2004................................. 3,300

Cash, December 31, 2005................................. $ 3,500


BoardwalkStatement of Owners Equity

For Year Ended December 31, 2005

B. Walk, Capital, Dec. 31, 2004 ........................ $ 8,000Add: Net income..................................................... 9,00017,000

Less: Owner withdrawals................................. (2,000)B. Walk, Capital, Dec. 31, 2005......................... $15,000


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Problem 1-7A (60 minutes) Parts 1 and 2

Assets = Liabilities + EquityDate Cash + Accounts

Receivable+ Office

Equipment= Accounts

Payable+ J.D. Simpson,

Capital- J.D. Simpson,

Withdrawals+ Revenues - Expenses

May 1 +$60,000 = + $60,000

1 - 3,200 = - $3,200

3 + $1,680 = + $1,680

5 - 800 = - 800

8 + 4,600 = + $4,600

12 + $3,000 = + 3,000

15 - 850 = - 850

20 + 3,000 - 3,000 =

22 + 2,800 = + 2,800

25 + 2,800 - 2,800 =

26 - 1,680 = - 1,680

27 = + 60 - 60

28 - 850 = - 850

30 - 200 = - 200

30 - 480 = - 480

31 - 1,200 = - $1,200

$61,140 + $ 0 + $1,680 = $ 60 + $60,000 - $1,200 + $10,400 - $6,440


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Problem 1-7A (Continued)Part 3

THE SIMPSON CO.Income Statement

For Month Ended May 31

RevenuesConsulting services revenue ............ $10,400

ExpensesRent expense....................................... $3,200Salaries expense................................. 1,700Advertising expense........................... 60Cleaning expense............................... 800Telephone expense............................ 200Utilities expense.................................. 480Total expenses.................................... 6,440

Net income.................................................. $ 3,960

THE SIMPSON CO.Statement of Owners Equity

For Month Ended May 31

J.D. Simpson, Capital, May1.................................... $ 0Plus: Owner Investments..................................... 60,000

Net Income....................................................... 3,96063,960

Less: Owner Withdrawals......................................... 1,200J.D. Simpson, Capital, May 31.................................. $62,760

THE SIMPSON CO.Balance Sheet

May 31

Assets LiabilitiesCash............................... $61,140 Accounts payable..................... $60Office equipment.......... 1,680 Equity

J.D. Simpson, Capital...............62,760


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Total assets................... $62,820 Total liabilities and equity........

..........................$62,820


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Part 3

THE SIMPSON CO.

Statement of Cash FlowsFor Month Ended May 31

Cash flows from operating activitiesCash received from customers................................ $10,400Cash paid for rent...................................................... (3,200)Cash paid for cleaning............................................... (800)Cash paid for telephone............................................ (200)Cash paid for utilities................................................. (480)Cash paid to employees............................................ (1,700)

Net cash provided by operating activities............... $ 4,020

Cash flows from investing activitiesPurchase of equipment............................................. (1,680)Net cash used by investing activities...................... (1,680)

Cash flows from financing activitiesInvestments by owner............................................... 60,000Withdrawals by owner............................................... (1,200)Net cash provided by financing activities............... 58,800

Net increase in cash.................................................. $61,140Cash balance, May 1.................................................. 0Cash balance, May 31................................................ $61,140


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Assets = Liabilities + Equity

Date Cash + AccountsReceivable

+ OfficeSupplies

+ OfficeEquipment

+ ElectricalEquipment

= AccountsPayable

+ C.Hamilton,Capital

- C.Hamilton,Withdrawals

+ Revenues - Expense

Dec. 1 +$56,000 = + $56,000

2 - 800 - $80Bal. 55,200 = 56,000 - 80

3 - 3,200 + $14,000 + $10,800Bal. 52,000 + 14,000 = 10,800 + 56,000 - 80

5 - 900 + $ 900Bal. 51,100 + 900 + 14,000 = 10,800 + 56,000 - 80

6 + 1,000 + $1,000

Bal. 52,100 + 900 + 14,000 = 10,800 + 56,000 + 1,000 - 808 + $3,800 + 3,800

Bal. 52,100 + 900 + 3,800 + 14,000 = 14,600 + 56,000 + 1,000 - 80

15 + $4,000 + 4,000

Bal. 52,100 + 4,000 + 900 + 3,800 + 14,000 = 14,600 + 56,000 + 5,000 - 8018 + 500 + 500

Bal. 52,100 + 4,000 + 1,400 + 3,800 + 14,000 = 15,100 + 56,000 + 5,000 - 80

20 - 3,800 - 3,800Bal. 48,300 + 4,000 + 1,400 + 3,800 + 14,000 = 11,300 + 56,000 + 5,000 - 80

24 + 600 + 600

Bal. 48,300 + 4,600 + 1,400 + 3,800 + 14,000 = 11,300 + 56,000 + 5,600 - 80

28 + 4,000 - 4,000Bal. 52,300 + 600 + 1,400 + 3,800 + 14,000 = 11,300 + 56,000 + 5,600 - 80

29 - 1,200 - 1,20Bal. 51,100 + 600 + 1,400 + 3,800 + 14,000 = 11,300 + 56,000 + 5,600 - 2,00

30 - 440 - 44Bal. 50,660 + 600 + 1,400 + 3,800 + 14,000 = 11,300 + 56,000 + 5,600 - 2,44

31 - 700 - $700

Bal. $49,960 + $ 600 + $1,400 + $3,800 + $14,000 = $11,300 + $56,000 - $700 + $5,600 - $2,44


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Problem 1-8A (Continued)Part 3

HAMILTON ELECTRICIncome Statement

For Month Ended December 31

RevenuesElectrical fees earned...................... $5,600

ExpensesRent expense.................................... $ 800Salaries expense.............................. 1,200Utilities expense .............................. 440Total expenses................................. 2,440

Net income.................................................. $3,160

HAMILTON ELECTRICStatement of Owners Equity

For Month Ended December 31

C. Hamilton, Capital, December1............. $ 0Plus: Owner investments 56,000

Net income....................................... 3,16059,160

Less: Owner withdrawals.......................... 700C. Hamilton, Capital, December 31........... $58,460

HAMILTON ELECTRICBalance SheetDecember 31

Assets Liabilities

Cash................................. $49,960 Accounts payable.................... $11,300Accounts receivable....... 600Office supplies................ 1,400 EquityOffice equipment............. 3,800Electrical equipment....... 14,000 C. Hamilton, Capital................. 58,460Total assets..................... $69,760 Total liabilities and equity....... $69,760


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Part 3continued

HAMILTON ELECTRIC

Statement of Cash FlowsFor Month Ended December 31

Cash flows from operating activitiesCash received from customers................................... $ 5,000Cash paid for rent......................................................... (800)Cash paid for supplies................................................. (900)Cash paid for utilities................................................... (440)Cash paid to employees.............................................. (1,200)Net cash provided by operating activities................. $ 1,660

Cash flows from investing activitiesPurchase of electrical equipment............................... (3,200)Purchase of office equipment..................................... (3,800)Net cash used by investing activities........................ (7,000)

Cash flows from financing activitiesCash invested by owner.............................................. 56,000Cash withdrawals by owner........................................ (700)Net cash provided by financing activities................. 55,300

Net increase in cash..................................................... $49,960Cash balance, Dec. 1.................................................... 0Cash balance, Dec. 31.................................................. $49,960

Part 4

If the December 1 owner investment had been $40,000 cash instead of$56,000 and the $16,000 difference was borrowed by the company from abank, then:

(a) beginning and ending equity would be $16,000 less,

(b) total liabilities would be $16,000 greater, and

(c) total assets would remain the same.


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Assets = Liabilities + Equity

Cash + AccountsReceivable

+ OfficeSupplies

+ OfficeEquip-ment

+ Building = AccountsPayable

+ Notes

Payable

+ M.Right,

Capital

- M.Right,With-

drawals

+ Reve-nues

- Expen-ses

a. +$60,000 + $30,000 + $90,000

b. - 50,000 + $300,000 + $250,000

Bal. 10,000 + 30,000 + 300,000 = + 250,000 + 90,000

c. - 6,000 + 6,000

Bal. 4,000 + 36,000 + 300,000 = + 250,000 + 90,000

d. + $4,000 + 1,000 + $5,000

Bal. 4,000 + 4,000 + 37,000 + 300,000 = 5,000 + 250,000 + 90,000

e. - 1,000 - $1,000

Bal. 3,000 + 4,000 + 37,000 + 300,000 = 5,000 + 250,000 + 90,000 - 1,000

f. + $4,000 + $4,000

Bal. 3,000 + 4,000 + 4,000 + 37,000 + 300,000 = 5,000 + 250,000 + 90,000 + 4,000 - 1,000

g. + 8,000 + 8,000

Bal. 11,000 + 4,000 + 4,000 + 37,000 + 300,000 = 5,000 + 250,000 + 90,000 + 12,000 - 1000

h. - 1,800 - $1,800

Bal. 9,200 + 4,000 + 4,000 + 37,000 + 300,000 = 5,000 + 250,000 + 90,000 - 1,800 + 12,000 - 1,000

i. + 3,000 - 3,000

Bal. 12,200 + 1,000 + 4,000 + 37,000 + 300,000 = 5,000 + 250,000 + 90,000 - 1,800 + 12,000 - 1,000

j. - 500 - 500

Bal. 11,700 + 1,000 + 4,000 + 37,000 + 300,000 = 4,500 + 250,000 + 90,000 - 1,800 + 12,000 - 1,000

k. - 2,500 - 2,500

Bal. $9,200 + $1,000 + $4,000 + $37,000 + $300,000 = $4,500 + $250,000 + $90,000 - $1,800 + $12,000 - $3,500


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Part 3

Right Consultings net income = $12,000 - $3,500 = $8,500


1. Return on assets equals net income divided by average totalassets.

Coca-Cola return: $50 / $625 = 0.08 or 8%.

PepsiCo return: $37.5 / $312.5 = 0.12 or 12%.

2. On strictly amount of sales to consumers, Cokes sales of $400exceed PepsiCos sales of $250.

3. Success in returning net income from the average amountinvested is revealed by the return on assets. Part 1 showed thatPepsiCos 12% return is better than Coca-Colas 8% return.

4. Current performance figures suggest that PepsiCo yields a higher

return on assets than Coca-Cola. Based on this information alone,we would be better advised to invest in PepsiCo than Coca-Cola.

Nevertheless, we would look for additional information in financialstatements and other sources for further guidance. For example, ifCoca-Cola could expand its sales, it could be a more appealinginvestmentalternatively, if it could dispose of some assetswithout curtailing its sales level, it would look more attractive. Wewould also look for consumer trends, market expansion,competition, product development, and promotion plans.


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1. Return on assets is net income divided by the average amountinvested.

Zias return: $55,000 / $250,000 = 0.22 or 22%.

2. Return on assets seems satisfactory for the risk involved in themanufacturing, marketing, and selling of cellular telephones.Moreover, Zias 22% return is nearly double that of itscompetitors 12% return.

3. We know that sales less expenses equal net income. Taking thesales and net income numbers for Zia we obtain:

$455,000 - Expenses = $55,000 Expenses must equal $400,000.4. We know from the accounting equation that total financing

(liabilities plus equity) must equal the total for assets (investing).Since average total assets are $250,000, we know the averagetotal of liabilities plus equity (financing) must equal $250,000.

Problem 1-12AA (20 minutes)

Case 1 Return: 4% interest or $40/year.Risk: Very low; it is the risk of the financialinstitution not paying interest and principal.

Case 2 Return: Expected winnings from your bet.Risk: Depends on the probability of your team

covering the spread.

Case 3 Return: Expected return on your stock investment(both dividends and stock price changes).

Risk: Depends on the current and futureperformance of Yahoos stock price (anddividends).

Case 4 Return: Expected increase in career earnings andother rewards from an accounting degree.

Risk: Depends on your ability to successfully learnand apply accounting knowledge.


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Problem 1-13AB (15 minutes)

1. A 5. B2. B 6. C3. B 7. C

4. A 8. C

Problem 1-14AB (15 minutes)

An organization pursues three major business activities: financing,investing, and operating.

(1) Financingis the means used to pay for resources.

(2) Investingrefers to the buying and selling of resources (assets)

necessary to carry out the organizations plans.(3) Operating activities are the carrying out of an organizations

plans.

If financial statements are to be informative about an organizationsactivities, then they will need to report on these three major activities.Also note that planning is the glue that links and coordinates thesethree major activitiesit includes the ideas, goals, and strategies ofan organization.

Larson Chap 1 Prob Set A

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