BAT 4M Chapt 1 All Solutions

CHAPTER 1
Accounting in Action
ASSIGNMENT CLASSIFICATION TABLE
Study Objectives
Questions
1. Explain what accounting is.
1, 2
2. Identify the users and

explain the uses of
accounting.
3, 4, 5
3. Demonstrate an
understanding of why ethics
is a fundamental business
concept.
4. Explain the meaning of

generally accepted
accounting principles and
the cost principle.
5. Explain the meaning of the

going concern, monetary
unit, and economic entity
assumptions.
8, 9, 10, 11
6. State and utilize the basic

accounting equation and
explain the meaning of
assets, liabilities, and
owners equity.
Brief
Exercises
Problems
Set A
Exercises
Problems
Set B
1, 2
2,3
2,3
1, 2, 7
2, 3
2, 3
12, 13, 14,

15
3, 4, 5
3, 4, 7, 8, 9
4, 7
4, 7
7. Calculate the effect of

business transactions on the
basic accounting equation.
16, 17, 18
6, 7, 8
5, 6, 10
4, 5, 6, 8, 9,
10
4, 5, 6, 8, 9,
10
8. Understand what the four

financial statements are and
how they are prepared.
19, 20, 21,

22, 23
9, 10, 11,
12
7, 8, 9, 10,
11, 12, 13,
14, 15, 16
5, 6, 7, 8, 9,
10, 11
5, 6, 7, 8, 9,
10, 11
1-1
ASSIGNMENT CHARACTERISTICS TABLE

Problem
Number
Description
Difficulty
Level
Time
Allotted (min.)
1A
Identify users and uses of financial statements.
Simple
10-15
2A
Discuss accounting assumptions and GAAP related

to value.
Simple
10-15
3A
Identify assumption or principle violated.
Simple
15-20
4A
Analyse transactions and calculate net income.
Simple
35-45
5A
Analyse transactions and prepare financial

statements.
Analyse transactions and prepare balance sheet.
Simple
40-50
Moderate
40-50
6A
7A
Use financial statement relationships to determine

missing amounts.
Moderate
25-35
8A
Prepare financial statements.
Moderate
45-55
9A
Determine financial statement amounts, prepare a

statement of owners equity, and comment.
Moderate
45-55
10A
Moderate
35-45
11A
Prepare income statement and statement of owners

equity.
Simple
35-45
1B
Identify users and uses of financial statements.
Simple
10-15
2B
Discuss accounting assumptions and GAAP related

to value.
Simple
10-15
3B
Identify assumption or principle violated.
Simple
15-20
4B
Analyse transactions and calculate net income.
Simple
35-45
5B
Analyse transactions and prepare financial

statements.
Analyse transactions and prepare income statement
and balance sheet.
Simple
40-50
Moderate
40-50
6B
7B
Use financial statement relationships to determine

missing amounts.
Moderate
25-35
8B
Prepare financial statements.
Moderate
45-55
9B
Determine financial statement amounts, prepare a

statement of owners equity, and comment.
Moderate
45-55
10B
Moderate
35-45
1-2
11B
Prepare income statement and statement of owners

equity.
1-3
Simple
35-45
BLOOMS TAXONOMY TABLE

Correlation Chart between Blooms Taxonomy, Study Objectives and End-of-Chapter Material
Study Objective
Knowledg
e
Comprehensi
on
Q1-1
Q1-2
BE1-1
Q1-3
Q1-4
Q1-5
1. Explain what accounting

is.
2. Identify the users and
explain the uses of
accounting.
Application
Synthesi
s
P1-1A
P1-1B
3. Demonstrate an
understanding of why
ethics is a fundamental
business concept.
Q1-6

generally accepted
accounting principles
and the cost principle.
E1-1
E1-2
Q1-7
P1-3A
P1-3B
P1-2A
P1-2B
P1-3A
P1-3B
P1-2A
P1-2B

the going concern,
monetary unit, and
economic entity
assumptions.
Q1-9
E1-7
Q1-8
Q1-10
E1-1
E1-2
Q1-11
BE1-2
6. State and utilize the

basic accounting
equation and explain the
meaning of assets,
liabilities, and owners
equity.
Q1-12
Q1-14
E1-7
Q1-13
Q1-15
BE13
BE14
BE15
E1-3
Q1-16
Q117
BE1-6
BE1-7
BE1-8
E1-5
E1-10
P1-8A
Q1-19
Q1-21
Q1-22
BE1-9
BE1-11
BE1-12
E1-8
E1-9
E1-10
7. Calculate the effect of

business transactions
on the basic accounting
equation.
8. Understand what the

four financial statements
are and how they are
prepared.
Analysi
s
E1-7
Q1-20
Q1-23
BE1-10
1-4
E1-4
E1-8
E1-9
P1-4A
P1-7A
P1-4B
P1-7B
P1-9A
P1-10A
P1-5B
P1-6B
P1-8B
P1-9B
P1-10B
Q1-18
E1-7
P1-4A
P1-5A
P1-6A
P1-4B
E1-16
P1-8A
P1-9A
P1-10A
P1-11A
P1-5B
P1-6B
P1-8B
P1-9B
E1-13
E1-15
P1-5A
P1-6A
P1-7A
P1-7B
Evaluatio
n
Study Objective
Broadening Your
Perspective
Knowledg
e
BYP1-3
Comprehensi
on
BYP1-1
1-5
Application
E1-11 P1-10B
E1-12 P1-11B
E1-14
BYP1-4
Analysi
s
Synthesi
s
Evaluatio
n
BYP1-2
BYP1-5
BYP1-6
ANSWERS TO QUESTIONS
1.
Yes. Accounting is the financial information system that provides relevant financial information to
every person who owns and uses economic resources or otherwise engages in economic activity.
2.
Accounting is the process of identifying, recording, and communicating the economic events of an
organization to interested users of the information. The first step of the accounting process is to
identify events that are (a) considered evidence of economic activity and (b) relevant to a
particular business enterprise. Once identified and measured, the events are recorded to provide
a permanent history of the financial activities of the organization. Recording consists of keeping a
chronological diary of these measured events in an orderly and systematic manner. The
information is communicated through the preparation and distribution 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 to analyse and interpret the reported
information.
3.
(a)
4.
(a)
5.
Bookkeeping usually involves only the recording of economic events, and is just one part of the
entire accounting process. Accounting, on the other hand, involves the entire accounting process,
including identification, measurement, recording, communication, and analysis.
Internal users are those who manage the business, and therefore are officers and other
decision makers.
(b) To assist management, accounting provides internal reports. Examples include financial
comparisons of operating alternatives, projections of income from new sales campaigns,
and forecasts of cash needs for the next year.
Investors use the financial accounting information to evaluate a companys performance.
They would look for answers to questions such as Is the company earning satisfactory
income?
(b) Creditors use financial accounting information to evaluate a companys credit risk. They look
for answers to question like Can the company pay its debts as they come due?
1-6
Questions Chapter 1 (Continued)
6.
Ethics is a fundamental business concept. If accountants do not have a high ethical standard the
information they produce will not have any credibility.
7.
Ouellette Travel Agency should report the land at $75,000 on its December 31, 2002 balance
sheet. An important concept that accountants follow is the cost principle, which states that assets
should be recorded at their cost. Cost has important advantages over other valuations: it is
reliable, objective and verifiable. The answer would not change if the value of the land declined to
$65,000. In addition, the market value of the land is not relevant when a company is a going
concern. The going concern assumption assumes the company will continue in business
indefinitely using the land, not selling the land.
8.
The monetary unit assumption requires that only transaction data capable of being expressed in
terms of money be included in the accounting records of the economic entity. An important
corollary to the monetary unit assumption is the added assumption that the unit of measure
remains sufficiently constant over time. The assumption of a stable monetary unit has been
seriously challenged during periods of high inflation (rising prices). In such cases, dollars of
different purchasing power are added together without any adjustment for the effect of inflation.
9.
The economic entity assumption states that economic events can be identified with a particular
unit of accountability. This assumption requires that the activities of the entity be kept separate
and distinct from (1) the activities of its owners and (2) all other economic entities.
10.
The three basic forms of business organizations are (1) proprietorship, (2) partnership, and (3)
corporation.
1-7
11.
In a proprietorship, the business is owned by one person and the equity is termed owners
equity. Owners equity is increased by an owners investments and the revenues generated by
the business. Owners equity is decreased by an owners drawings and the expenses incurred by
the business.
In the corporate form of business organization, the owners are the shareholders and the
equity is termed shareholders equity. Shareholders equity is separated into two components:
share capital and retained earnings. The investments by the shareholders (owners) are called
share capital. Retained earnings represent the accumulated earnings of the company that have
not been distributed to shareholders. Withdrawals by the shareholders decrease retained
earnings and are called dividends.
12.
The basic accounting equation is Assets = Liabilities + Owner's Equity.
13.
(a)
(b)
Assets are economic resources owned by a business. Liabilities are creditors' claims
against the assets. Put more simply, liabilities are existing debts and obligations. Owner's
equity is the ownership claim on the assets.
The items affecting owner's equity are invested capital, drawings, revenues, and
expenses.
14.
The liabilities are (b) Accounts payable and (g) Salaries payable.
15.
Yes, a business can enter into a transaction in which only the left side of the accounting equation
is affected. An example would be a transaction where an increase in one asset is offset by a
decrease in another asset, such as when equipment is purchased for cash (resulting in an
increase in the equipment account which is offset by a decrease in the cash account).
1-8
16.
Business transactions are the economic events of the enterprise recorded by accountants
because they affect the basic equation.
(a)
(b)
(c)
(d)
17. (a)
(b)
(c)
(d)
The death of the owner of the company is not a business transaction, as it does not affect
the basic equation.
Supplies purchased on account is a business transaction, because it affects the basic
equation (+A; +L).
A terminated employee is not a business transaction, as it does not affect the basic
equation.
A withdrawal of cash from the business is a business transaction, because it affects the
basic equation (-A; -OE).
Decrease assets (cash) and decrease owner's equity (due to the expense incurred).
Increase assets (equipment) and decrease assets (cash).
Increase assets (cash) and increase owner's equity (due to the capital invested).
Decrease assets (cash) and decrease liabilities (accounts payable).
18.
No, this treatment is not proper. While the transaction does involve a receipt of cash, it does not
represent revenues. Revenues are the gross increase in owner's equity resulting from business
activities entered into for the purpose of earning income. This transaction is simply an additional
investment of capital in the business, made by the owner.
19.
Yes. Net income does appear on the income statementit is the result of subtracting expenses
from revenues. In addition, net income appears in the statement of owner's equityit is shown as
an addition to the beginning-of-period capital. Indirectly, the net income of a company is also
included in the balance sheet, as it is included in the capital account which appears in the owner's
equity section of the balance sheet.
20.
(a) Income statement.

(b) Balance sheet. (e)
(c) Income statement.
(d) Balance sheet.

Balance sheet and
statement of owner's equity.
(f) Balance sheet.
1-9
21.
22.
23.
(a)
Ending capital balance ...................................................................................

Beginning capital balance ................................................................................
Net income ......................................................................................................
$198,000
168,000
$ 30,000
(b) Ending capital balance .......................................................................................

Beginning capital balance...................................................................................
Increase in capital ..............................................................................................
Deduct: Portion of increase arising from investment ..........................................
Net income .........................................................................................................
$198,000
0168,000
30,000
18,000
$ 12,000
(a)
Total revenues ($35,000 + $70,000) ..............................................................
$105,000
(b)
Total expenses ($26,000 + $40,000) ..............................................................
$66,000
(c)
Total revenues ...............................................................................................

Total expenses...............................................................................................
Net income.....................................................................................................
$105,000
66,000
$ 39,000
The notes to the financial statements present explanatory information such as a description of the
accounting policies used and additional detail on the information in the financial statements. The
annual report includes information on financial and non-financial information, such as
management discussion of the companys plans.
1-10
SOLUTIONS TO BRIEF EXERCISES

BRIEF EXERCISE 1-1
5
3
2
4
1
(a) Owner
(b) Marketing managers
(c) Creditors
(d) Chief Financial Officer
(e) Canada Customs and Revenue Agency
BRIEF EXERCISE 1-2

P
PP
C
(a) Simple to set up, founder retains control.

(b) Shared control, increased skills and resources
(c) Easier to transfer ownership and raise funds, no personal liability.
BRIEF EXERCISE 1-3

(a)
$80,000 $50,000 = $30,000 (Owner's Equity).
(b)
$45,000 + $70,000 = $115,000 (Assets).
(c)
$94,000 $62,000 = $32,000 (Liabilities).
BRIEF EXERCISE 1-4

(a)
$90,000 + $240,000 = $330,000 (Total assets).
(b)
$170,000 $80,000 = $90,000 (Total liabilities).
(c)
$600,000 (2/3 x $600,000) = $200,000 (Owner's equity).
1-11
BRIEF EXERCISE 1-5

(a)
($700,000 + $150,000) ($500,000 $80,000) = $430,000 (Owner's equity).
(b)
($500,000 + $100,000) + ($200,000 $70,000) = $730,000 (Assets).
(c)
($700,000 $90,000) ($200,000 + $120,000) = $290,000 (Liabilities).
BRIEF EXERCISE 1-6

Assets
(a)
(b)
(c)
(d)
(e)
(f)
+
+
NE
(both + and
Liabilities
+
NE
NE
NE
NE
NE
Owner's Equity
NE
+ (Revenue earned)
(Expenses incurred)
+ (Capital)
(Drawings)
NE
BRIEF EXERCISE 1-7

R
NA
E
(a) Received cash for services performed

(b) Paid cash to purchase equipment
(c) Paid employee salaries
BRIEF EXERCISE 1-8

E
R
E
E
R
R
E
D
(a) Cost incurred for advertising

(b) Commission earnings
(c) Insurance paid
(d) Amounts paid to employees
(e) Services performed
(f) Rent received
(g) Utilities incurred
(h) Cash distributed to owner
1-12
BRIEF EXERCISE 1-9

YUNG COMPANY
Balance Sheet
December 31, 2002
Assets
Cash .................................................................................................................................
Accounts receivable ..........................................................................................................
Total assets.............................................................................................................
Liabilities and Owner's Equity
Liabilities
Accounts payable ....................................................................................................
Owner's Equity
Kim Yung, Capital ...................................................................................................
Total liabilities and owner's equity..................................................................
BRIEF EXERCISE 1-10

A
L
A
A
(a) Accounts receivable

(b) Salaries payable
(c) Equipment
(d) Office supplies
OE
L
OE
(e) Capital invested

(f) Notes payable
(g) Drawings
IS
BS
IS
OE
Fees earned
Interest receivable
Service revenue
Harrison, Drawings
BRIEF EXERCISE 1-11

BS
IS
OE, BS
BS
Notes payable
Advertising expense
Harrison, Capital
Cash
1-13
$040,500
0071,000
$111,500
$080,000
0031,500
$111,500
BRIEF EXERCISE 1-12

BS
BS
IS
BS
BS
IS
IS
BS
BS
IS
(a) Accounts receivable

(b) Inventories
(c) Food services expense
(d) Share capital
(e) Building
(f) Stampede revenue
(g) Horse racing revenue
(h) Accounts payable and accrued liabilities
(i) Cash and short-term deposits
(j) Administration, marketing and park services expenses
1-14
SOLUTIONS TO EXERCISES
EXERCISE 1-1
3
(a)
(b)
(c)
(d)
Is the rationale for why capital assets are not reported at liquidation value.
[Note: Do not use the cost principle.]
Indicates that personal and business record-keeping should be separately
maintained.
Assumes that the dollar is the measuring stick used to report on financial
performance.
Indicates that the market value changes after purchase are not recorded in the
accounts.
EXERCISE 1-2
(a)
This is a violation of the cost principle. Land was reported at its market value, when it should
have been recorded and reported at cost.
(b)
This is a violation of the economic entity assumption. An owners personal transactions should be
kept separate from those of the business.
(c)
This is a violation of the monetary unit assumption. An important part of the monetary unit
assumption is the stability of the monetary unit (the dollar) over time. Inflation is considered a
non-issue for accounting purposes in Canada and is ignored.
1-15
EXERCISE 1-3
(a)
A
A
OE
L
A
L
A
L
A
OE
L
(b)
Cash
Accounts receivable
Share capital
Notes payable
Other assets
Other liabilities
Inventories
Income taxes payable
Property, plant and equipment
Retained earnings
Accounts payable
$ 108.6
1,674.4
265.4
480.2
1,064.7
1,042.1
1,396.6
28.9
1,153.1
2,996.2
584.6
Assets = Liabilities + Shareholders Equity

$108.6 + $1,674.4 + $1,064.7 + $1,396.6 + $1,153.1 = ($480.2 + $1,042.1 + $28.9 + $584.6) +
($265.4 + $2,996.2)
$5,397.4 = $2,135.8 + $3,261.6
EXERCISE 1-4
Assets
(b) Cash
(c) Cleaning equipment
(d) Cleaning supplies
(e) Accounts receivable
Liabilities
(a) Accounts payable
(f) Notes payable
(g) Salaries payable
1-16
Owner's Equity
(h) Ace, Capital
EXERCISE 1-5
1.
2.
3.
4.
5.
6.
7.
8.
9.
Increase in assets (cash) and increase in owner's equity (capital).

Decrease in assets (cash) and decrease in owner's equity (rent expense).
Increase in assets (equipment) and increase in liabilities (accounts payable).
Increase in assets (accounts receivable) and increase in owner's equity (service revenue).
Decrease in assets (cash) and decrease in owner's equity (drawings).
Increase in assets (cash) and decrease in assets (accounts receivable).
Increase in liabilities (accounts payable) and decrease in owner's equity (advertising expense).
Increase in assets (equipment) and decrease in assets (cash).
Increase in assets (cash) and increase in owner's equity (service revenue).
EXERCISE 1-6
1.
2.
3.
4.
(c)
(d)
(a)
(b)
5.
6.
7.
8.
(d)
(b)
(e)
(f)
EXERCISE 1-7
8
(a)
5
6
(b)
(c)
1
7
2
3
(d)
(e)
(f)
(g)
(h)
An examination of financial statements to determine whether they are presented

in accordance with generally accepted accounting principles
A business enterprise that raises money by issuing shares
The portion of owners equity that results from receiving investments from the
owner
Obligations to suppliers of goods
Amounts due from customers
A party to whom a business owes money
A financial statement that reports assets, liabilities, and owners equity at a
specific date
A business that is owned by one individual
1-17
EXERCISE 1-8
(a)
Total assets (beginning of year) ...........................................................................

Total liabilities (beginning of year) ........................................................................
Total owner's equity (beginning of year) ...............................................................
$95,000
0 80,000
$15,000
(b)
Total owner's equity (end of year) ........................................................................

Increase in owner's equity ....................................................................................
$40,000
15,000
$25,000
Total revenues .....................................................................................................

Total expenses .....................................................................................................
Net income ...........................................................................................................
$215,000
175,000
$ 40,000
Increase in owner's equity ............................................................

Less: Net income ........................................................................
Add: Drawings ............................................................................
Investments..................................................................................
$025,000
$(40,000)
0 24,000
$
(16,000)
9,000
(c)
Total assets (beginning of year) ...........................................................................

Total liabilities (beginning of year) ........................................................................
$125,000
95,000
$ 30,000
(d)
Total owner's equity (end of year) ........................................................................

$130,000
95,000
$ 35,000
Total revenues .....................................................................................................

Total expenses .....................................................................................................
Net income ...........................................................................................................
$100,000
85,000
$ 15,000
Increase in owner's equity ............................................................

Less: Net income ........................................................................
Investments .....................................................................
Drawings ......................................................................................
$035,000
1-18
$(15,000)
(25,000)
(40,000)
$ 5,000
EXERCISE 1-9
(a)
Owner's equity12/31/01 ($400,000 $250,000) ..................................................

Owner's equity1/1/01 ...........................................................................................
Increase in owner's equity .......................................................................................
Less: Owners investment ......................................................................................
Add: Drawings ...................................................................................................... 0
Net income for 2001 ................................................................................................
$150,000
0
0
150,000
100,000
50,000
15,000
$ 65,000
(b)
Owner's equity12/31/02 ($460,000 $320,000) ..................................................

Owner's equity12/31/01see (a)......................................................................
Increase (decrease) in owner's equity ..................................................................
Less: Investment .................................................................................................
Net loss for 2002 ..................................................................................................
$140,000
150,000
(10,000)
0 50,000
$ 60,000
(c)
Owner's equity12/31/03 ($590,000 $400,000) ...............................................

Owner's equity12/31/02see (b)......................................................................
Less: Investment .................................................................................................
$190,000
0 140,000
50,000
0 10,000
40,000
20,000
$ 60,000
Add: Drawings ....................................................................................................

Net income for 2003 .............................................................................................
1-19
EXERCISE 1-10
(a)
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Owner invested $12,000 cash in the business.

Purchased office equipment for $5,000, paying $2,000 in cash with the balance of $3,000
on account.
Paid $750 cash for supplies.
Earned $6,000 in fees, receiving $2,600 cash with the remaining $3,400 on account.
Paid $1,500 cash on accounts payable.
Owner withdrew $2,000 cash for personal use.
Paid $650 cash for rent.
Collected $450 cash from customers on account.
Paid salaries of $2,900.
Incurred $500 of utilities expense on account.
(b)
Investment ..............................................................................................................
Fees earned ............................................................................................................
Drawings .................................................................................................................
Rent expense ..........................................................................................................
Salaries expense.....................................................................................................
Utilities expense ......................................................................................................
Increase in capital ...................................................................................................
$12,000
6,000
(2,000)
(650)
(2,900)
(500)
$11,950
(c)
Fees earned ............................................................................................................

Rent expense ..........................................................................................................
Salaries expense.....................................................................................................
Utilities expense ......................................................................................................
Net income ..............................................................................................................
$06,000
(650)
(2,900)
(500)
$ 1,950
1-20
EXERCISE 1-11
BOURQUE & CO.
Income Statement
For the Month Ended August 31, 2003
Revenues
Fees earned ........................................................................................
Expenses
Salaries expense.................................................................................
Rent expense ......................................................................................
Utilities expense ..................................................................................
Total expenses ..........................................................................
Net income ...................................................................................................
$6,000
$2,900
650
500
4,050
$1,950
BOURQUE & CO.

Statement of Owner's Equity
Bourque, Capital, August 1 .......................................................................
Add: Investments ....................................................................................
Net income...................................................................................
Less: Drawings ........................................................................................
Bourque, Capital, August 31 .....................................................................
1-21
$00,000
$12,000
1,950
13,950
13,950
2,000
$11,950
EXERCISE 1-11 (Continued)

BOURQUE & CO.
Balance Sheet
August 31, 2003
Assets
Cash .................................................................................................................................
Supplies ............................................................................................................................
Office equipment...............................................................................................................
Total assets.............................................................................................................
$ 5,250
2,950
750
5,000
$13,950

Liabilities
Owner's equity
Bourque, Capital .....................................................................................................
1-22
$02,000
11,950
$13,950
EXERCISE 1-12
SERG CO.
Income Statement
For the Year Ended December 31, 2002
Revenues
Service revenue ..............................................................................
Expenses
Salaries expense.............................................................................
Rent expense ..................................................................................
Utilities expense ..............................................................................
Advertising expense ........................................................................
Interest expense..............................................................................
Total expenses ......................................................................
Net income ...............................................................................................
$55,000
$28,000
10,400
3,100
1,800
0 1,700
45,000
$10,000
SERG CO.
Serg, Capital, January 1 ...................................................................................................
Add: Net income .............................................................................................................
Less: Drawings ................................................................................................................
Serg, Capital, December 31 ..............................................................................................
1-23
$48,000
10,000
58,000
5,000
$53,000
EXERCISE 1-13
OTAGO COMPANY
Balance Sheet
December 31, 2002
Assets
Cash .................................................................................................................................
Supplies ............................................................................................................................
Equipment ........................................................................................................................
Total assets.............................................................................................................
$20,500
10,000
8,000
46,000
$84,500

Liabilities
Owner's equity
Otago, Capital ($67,500 $3,000) ..........................................................................
1-24
$20,000
64,500
$84,500
EXERCISE 1-14
(a)
Camping fee revenue ..............................................................................................

General store revenue.............................................................................................
Total revenue ................................................................................................
Expenses ................................................................................................................
Net income ..............................................................................................................
$160,000
40,000
200,000
150,000
$ 50,000
(b)
DEER PARK
Balance Sheet
December 31, 2002
Assets
Cash .......................................................................................................................
Supplies ..................................................................................................................
Equipment ...............................................................................................................
Total assets ...................................................................................................

Liabilities
Notes payable ...............................................................................................
Accounts payable ..........................................................................................
Total liabilities ......................................................................................
Owner's equity
Judy Cumby, Capital ($17,000 + $50,000) ....................................................
Total liabilities and owner's equity ........................................................
1-25
$020,000
2,500
115,500
$138,000
$060,000
11,000
71,000
67,000
$138,000
EXERCISE 1-15
ATLANTIC CRUISE COMPANY
Income Statement
For the Month Ended October 31, 2003
Revenues
Ticket revenue ................................................................................
Expenses
Salaries expense.............................................................................
Maintenance expense .....................................................................
Food, fuel and other operating expenses ........................................
Property tax expense ......................................................................
Advertising expense ........................................................................
Total expenses ......................................................................
Net income ...............................................................................................
1-26
$325,000
$142,000
80,000
20,500
10,000
3,500
256,000
$ 69,000
EXERCISE 1-16
LORRAINE RING, LAWYER
For the Year Ended January 31, 2003
Lorraine Ring, Capital, February 1 ..........................................................................
Add: Net income ...................................................................................................
Less: Drawings ......................................................................................................
Lorraine Ring, Capital, January 31 ..........................................................................
$023,000 (a)
155,000 (b)
178,000
80,000*
$ 98,000 (c)
Supporting Calculations
(a)
Assets, February 1, 2002 ........................................................................................

Liabilities, February 1, 2002 ....................................................................................
Capital, February 1, 2002 ........................................................................................
$085,000
62,000
$ 23,000
(b)
Legal fees earned ...................................................................................................

Total expenses ........................................................................................................
Net income ..............................................................................................................
$360,000
205,000
$155,000
(c)
Assets, January 31, 2003 ........................................................................................

Liabilities, January 31, 2003 ....................................................................................
Capital, January 31, 2003 .......................................................................................
$168,000
70,000
$ 98,000
* This is simply the amount required to account for the difference between $178,000 and $98,000.
1-27
SOLUTIONS TO PROBLEMS
PROBLEM 1-1A
(a)
In deciding to extend credit to a new customer, North Face would focus its attention on the
balance sheet. The terms of credit they are extending require repayment in a short period of
time. Funds to repay the credit would come from cash on hand. The balance sheet will show if
the company has enough cash to meet its obligations.
(b)
An investor purchasing common shares of WestJet Airlines that they intend to hold for a long
period of time, 5 years, should focus on the companys income statement. The income
statement reports the companys past performance in terms of revenues, expenses and net
income. This is generally regarded as a good indicator of the companys future performance.
(c)
In deciding whether to extend a loan, the Caisse Dconomie Base Montral is interested in two
thingsthe ability of the company to make interest payments on an annual basis for the next
five years and the ability to repay the principal amount at the end of five years. In order to
evaluate both of these factors the focus should be on the cash flow statement. This statement
provides information on the cash the company generates from its operations on an ongoing
basis. This will be the most important factor in determining if the company will survive and be
able to repay the loan.
1-28
PROBLEM 1-2A
MEMO
Date:
To:
President, Richelieu Motors
From: Controller
Re:
Change in Value of Company vs. Reported Income
The change in the value of the company includes items that are recognized by the basic accounting
model and items that are not.
This is primarily due to the cost principle. For accounting purposes, assets are recorded at the cost at
the time of purchase. There is no recognition of the increase in their value. The market value of the
company is not considered relevant, if the company intends to operate as a going concern. Additionally,
the monetary unit assumption only records transactions that are quantifiable in the accounting records.
Net income is not always indicative of what a company is worth. For example, the cost of long-lived
assets is amortized and allocated as an expense on the income statement, reducing net income. This
occurs even while assets (e.g., building) may be appreciating in value. Other items that may contribute
to increased earnings potential are not recorded in the accounting process. These include intellectual
property and knowledge assets of the people who work for the company. Many high-tech companies
report losses, but are worth much more to potential investors than is indicated by their financial
performance. Worth is a very subjective concept, reflecting future expectations and other qualitative
factors that are not reported in the financial statements.
1-29
PROBLEM 1-3A
1.
The cost principle has been violated. Dot.com did not purchase the employees. It cannot use an
estimated value to record them on the balance sheet. Also, by recording the value of its people,
Dot.com Company is violating the monetary unit assumption. They are estimating and recording
the value of the knowledge assets but at this present time, there is no method to measure this
value in monetary terms.
2.
Barton violated the cost principle, which states that assets are recorded at the amount that was
paid to acquire them. It does not permit writing them up in value.
3.
Wolfson violated the economic entity assumption. Assets for her personal use should be kept
separate from the company.
1-30
PROBLEM 1-4A
(a)
PEPER TRAVEL AGENCY
Cash
Apr. 1 +$15,000
15,000
2
400
14,600
2
2,500
12,100
7
000000
12,100
8
600
11,500
11
+1,000
12,500
15
200
12,300
25
300
12,000
30
2,200
9,800
30
+8,000
$17,800
Accounts
+ Receivable + Supplies +
Office
Equipment
Accounts
Merle Peper,
Payable +
Capital
=
=
+
+
+
+
+
+
+
+
+$8,000
8,000
0000 00
8,000
0000 00
8,000
0000 00
8,000
8,000
$
0
+
+
+
+
+
+$600
600
00 0
600
00 0
600
00 0
600
00 0
600
00 0
$600
+
+
+
+
+
+
+$2,500
2,500 =
00 0
+$300
2,500 =
300
00 0
00 0
2,500 =
300
00 0
00 0
2,500 =
300
00 0
00 0
2,500 =
300
00 0
300
2,500 =
0
00 0
00 0
2,500 =
0
00 0
00 0
$2,500 =
$ 0
$20,900 = $20,900
1-31
+
+
+
+
+
+
+
+$15,000
15,000
400
14,600
000000
14,600
300
14,300
000000
14,300
+9,000
23,300
200
23,100
000000
23,100
2,200
20,900
000000
$20,900
Investment
Rent Expense
Adv. Expense
Service Revenue
Drawings
Salaries Expense
PROBLEM 1-4A (Continued)
(b)
Ending capital .........................................................................................................

Add: Drawings ........................................................................................................
Deduct: Investments ..............................................................................................
Net income ..............................................................................................................
$20,900
200
21,100
15,000
$ 6,100
OR
PEPER TRAVEL AGENCY
Income Statement
For the Month Ended April 30
Service revenue ...............................................................................
Expenses
Salaries ..................................................................................
Rent ............................................................................... 400
Advertising..............................................................................
Net income........................................................................................
1-32
$9,000
$2,200
300
2,900
$6,100
PROBLEM 1-5A
(a)
JULIE SZO, BARRISTER & SOLICITOR
Cash
Bal
Aug.
4
7
8
12
15
20
26
29
$4,000
+1,400
5,400
2,700
2,700
+3,000
5,700
400
5,300
2,500
-900
-350
1,550
550
1,000
+2,000
3,000
00000
$3,000
Accounts
+
+
+
+
+
+
+
+
+
$1,500
1,400
100
00000
100
+3,400
3,500
00000
3,500
00000
3,500
00000
3,500
00000
3,500
00000
$3,500
+
+
+
+
+
+
+
+
+
$500
0000
500
0000
500
0000
500
0000
500
0000
500
0000
500
0000
500
0000
$500
+
+
+
+
+
+
+
+
+
Office
Equipment
$5,000
00000
5,000
00000
5,000
00000
5,000
+1,000
6,000
00000
6,000
00000
6,000
00000
6,000
00000
$6,000
Notes
Payable
$4,200
00000
4,200
2,700
1,500
00000
1,500
+600
2,100
=
=
=
=
=
=
=
=
+$2,000
2,000 +
00000
$2,000 +
$13,000 = $13,000
1-33
Accounts
Payable +
00000
2,100
00000
2,100
00000
2,100
+250
$2,350
+
+
+
+
+
+
+
+
+
Julie Szo,
Capital
$ 6,800
000000
6,800
000000
6,800
+6,400
13,200
000000
13,200
2,500
900
350
9,450
550
8,900
000000
8,900
250
$ 8,650
Fees Earned
Salaries Expense
Rent Expense
Advertising Exp.
Drawings
Utilities Expense

(b)

Income Statement
Revenues
Fees earned .................................................................................
Expenses
Salaries expense ..........................................................................
Rent expense ...............................................................................
Advertising expense .....................................................................
Utilities expense ...........................................................................
Total expenses ...................................................................
$6,400
$2,500
900
350
250
Net income .............................................................................................
4,000
$2,400

Julie Szo, Capital, August 1 .......................................................................................
Add: Net income ......................................................................................................
Less: Drawings..........................................................................................................
Julie Szo, Capital, August 31......................................................................................
1-34
$6,800
2,400
9,200
550
$8,650

Balance Sheet
August 31, 2003
Assets
Cash .......................................................................................................................
Accounts receivable ................................................................................................
Supplies on hand ....................................................................................................
Office equipment .....................................................................................................
$03,000
3,500
500
6,000
Total assets ...................................................................................................
$13,000

Liabilities
Notes payable ...............................................................................................
$02,000
2,350
4,350
Owner's Equity
Julie Szo, Capital ...........................................................................................
8,650
$13,000
1-35
PROBLEM 1-6A
(a)
JEANNIE LETOURNEAU, LAWYER
Transaction
Mar. 10
Cash
Damage
Deposit
Office
Supplies
Computer
Equipment
Office
Furniture
Notes
Payable
Accounts
Payable
+$75,000
16
-2,000
25
-3,000
+$2,000
+$7,000
+$4,000
+1,500
+$1,500
-5,000
$65,000
LeTourneau,
Capital
+$75,000
27
31
+5,000
$2,000
$1,500
$7,000
$5,000
$4,000
$80,500
$80,500
$1,500
$75,000
Note: Items 1 (March 4), 2 (March 7), and 4 (March 14) are not relevant to the business entity. They are personal transactions.
Item 6 (March 20) is not recorded, because the transaction has not yet been completed. There is no expense, nor liability, until
he begins working.
1-36

(b)
JEANNIE LETOURNEAU, LAWYER
Balance Sheet
March 31, 2003
Assets
Cash .......................................................................................................................
Damage Deposit (Receivable).................................................................................
Office Supplies ........................................................................................................
Computer Equipment ..............................................................................................
Office Furniture .......................................................................................................
$65,000
2,000
1,500
7,000
5,000
Total assets ...................................................................................................
$80,500

Note Payable ...........................................................................................................
Accounts Payable ....................................................................................................
Total Liabilities ...............................................................................................
$ 4,000
1,500
5,500
Owners Equity
Jeannie LeTourneau, Capital .........................................................................
75,000
Total liabilities and owner's equity ..................................................................
$80,500
1-37
PROBLEM 1-7A
(a) Using the balance sheet equation:

Assets = Liabilities + Owners Equity
$1,235,000 = Liabilities + $250,000
Liabilities = $985,000
(b)
Using the income statement equation:

Revenues Expenses = Net Income
$749,000 Expenses = $59,000
Expenses = $690,000
(c) Using the statement of owner's equity equation:

$250,000
Beginning capital
+ 23,000
Additional investments
+ 59,000
Net income
- 64,000
Drawn by owner
$268,000 Ending capital
OR using the balance sheet equation:
$1,208,000 [from part (d)] = $940,000 + Owner's Equity
Owner's Equity = $268,000
(d) Using the balance sheet equation:

Assets = $940,000 + ($250,000 + $23,000 $64,000 + $59,000)
Assets = $1,208,000
1-38
PROBLEM 1-8A
(a)
NATURAL COSMETICS CO.

Income Statement
For the Month Ended June 30, 2003
Revenues
Service revenue.........................................................................
Expenses
Supplies expense ......................................................................
Gas and oil expense ..................................................................
Advertising expense ..................................................................
Utilities expense ........................................................................
Total expenses ................................................................
$6,500
$1,200
800
500
300
2,800
Net income ..........................................................................................
$3,700

Ann Okah, Capital, June 1 ..................................................................
Add:
Investments ...........................................................................
Net income ............................................................................
$00,000
$27,200
3,700
Drawings ...............................................................................
30,900
30,900
1,700
Ann Okah, Capital, June 30 ................................................................
$29,200
Less:
1-39

(a) (Continued)
Balance Sheet
June 30, 2003
Assets
Cash .......................................................................................................................
Supplies on hand ....................................................................................................
Equipment ...............................................................................................................
$12,000
4,000
2,400
25,000
Total assets ...................................................................................................
$43,400

Liabilities
Notes payable ...............................................................................................
$13,000
1,200
14,200
Owner's equity
Ann Okah, Capital .........................................................................................
29,200
$43,400
1-40
(b)
1.
The addition of $800 fees would increase revenue (service revenue) and net income $800
in the income statement. In the balance sheet, assets (accounts receivable) and the
owners capital would also be increased by $800.
2.
An additional $100 of gas and oil expense would increase expenses (gas and oil expense)
and decrease net income $100 in the income statement. In the balance sheet, liabilities
(accounts payable) would increase and owners capital would decrease by $100.
The revised financial statements, incorporating these two changes, follow:

Income Statement
Revenues
Service revenue ($6,500 + $800)............................................
Expenses
Supplies expense ...................................................................
Gas and oil expense ($800 + $100) ........................................
Advertising expense ...............................................................
Utilities expense .....................................................................
Total expenses .............................................................
Net income .......................................................................................
1-41
$7,300
$1,200
900
500
300
2,900
$4,400

Ann Okah, Capital, June 1 ...............................................................
Add: Investments ...........................................................................
Net income ..........................................................................
$00,000
$27,200
4,400
Deduct: Drawings ...........................................................................

Ann Okah, Capital, June 30 .............................................................
31,600
31,600
1,700
$29,900

Balance Sheet
June 30, 2003
Assets
Cash .......................................................................................................................
Accounts receivable ($4,000 + $800) ......................................................................
Supplies on hand ....................................................................................................
Equipment ...............................................................................................................
$12,000
4,800
2,400
25,000
Total assets ...................................................................................................
$44,200

Liabilities
Notes payable ...............................................................................................
Accounts payable ($1,200 + $100) ................................................................
Owner's equity
Ann Okah, Capital .........................................................................................
1-42
$13,000
1,300
14,300
29,900
$44,200
PROBLEM 1-9A
(a)
Baker Lake
Company
Georgian Bay
Company
Edmonton
Company
(a) $75,000 -$50,000

= $25,000
(d) $90,000 $60,000 = $30,000
(g) $75,000 +
$45,000 = $120,000
(j) $150,000 -$90,000

= $60,000
(b) $55,000 +
$45,000
= $100,000
(e) $120,000 $62,000 = $58,000
(h) $180,000 $110,000 = $70,000
(k) $80,000 + $140,000

= $220,000
(f) $60,000 + $8,000

- X + $400,000 $385,000 =
$58,000;
X = $25,000
(i) $45,000 +
$10,000 - $12,000 +
X - $360,000 =
$110,000;
X = $427,000
(l) $90,000 + $15,000

- $10,000 + $500,000
- X = $140,000;
X = $455,000
(c) $25,000 + X $10,000 + $350,000 $335,000 = $45,000;

X = $15,000
(b)
Come by Chance
Company
BAKER LAKE COMPANY

Capital, January 1 ........................................................................
Add: Investments ........................................................................
Net income .......................................................................
Less: Drawings............................................................................
Capital, December 31 ..................................................................
1-43
$25,000
$15,000
15,000
30,000
55,000
10,000
$45,000

(c)
MEMO
Date:
To:
From: Student
Re:
Preparation and Interrelationship of Financial Statements
The sequence of preparing financial statements is (1) income statement, (2) statement of owner's
equity, and (3) balance sheet. It should be noted that the balance sheet is usually presented first,
even though it is prepared last.
The interrelationship of the statement of owner's equity to the other financial statements results
from the fact that net income from the income statement is reported in the statement of owner's
equity. The ending capital calculated in the statement of owner's equity is the amount reported for
owner's equity on the balance sheet.
1-44
PROBLEM 1-10A
LOONIE BIN COIN SHOP
Balance Sheet
April 30, 2003
Assets
Cash ................................................................................................................... (a)
Office and store supplies .........................................................................................
Land ........................................................................................................................
Office equipment ................................................................................................. (b)
Store furnishings .....................................................................................................
Building ...................................................................................................................
$ 6,000
7,000
4,000
36,000
69,000
48,000
110,000
Total assets ...................................................................................................
$280,000

Liabilities
Notes payable .......................................................................................... (c)
Accounts payable ..................................................................................... (d)
Long-term debt payable ............................................................................ (e)
$ 36,000
007,000
100,000
Total liabilities ................................................................................................
143,000
Owner's equity:
Capital ...........................................................................................................
137,000
$280,000
1-45
PROBLEM 1-10A (CONTINUED)
Supporting calculations:
(a)
$12,000 (1) $3,000 (2) $1,000 + (4) $5,000 (5) $7,000 = $6,000
(b)
$59,000 + (2) $15,000 (4) $5,000 = $69,000
(c)
$22,000 + (2) $14,000 = $36,000
(d)
$10,000 (1) $3,000 = $7,000
(e)
$107,000 (5) $7,000 = $100,000
Note the following points:
Item 3 is not recorded, as there was no transaction.
The capital balance is unchanged because there were no transactions affecting owner's equity
on April 30.
1-46
PROBLEM 1-11A
(a)
MULTI-MEDIA CONSULTING CO.

Income Statement
For the Month Ended March 31, 2003
Revenues
Fees earned ...................................................................
$9,650 (A)
Expenses
Salaries expense ............................................................
Advertising expense .......................................................
Rent expense .................................................................
Utilities expense .............................................................
Property tax expense ......................................................
Repair expense ..............................................................
Total expenses .....................................................
$1,900 (B)
1,400 (C)
750
400 (D)
150
150 (E)
Net income .............................................................................
$4,900
(A)
(B)
(C)
(D)
(E)
4,750
(6) $3,250 + (12) $2,100 + (20) $3,200 + (29) $1,100 = $9,650

(11) $1,000 + (32) $900 = $1,900
(8) $400 + (24) $1,000 = $1,400
(15) $250 + (36) $150 = $400
(22) $200 $50 = $150
1-47
PROBLEM 1-11A (CONTINUED)

(b)
MULTI-MEDIA CONSULTING CO.

For the Month Ended March 31, 2003
M. Carrier, Capital, March 1 ..........................................................
Add: Investments .........................................................................
Net income ........................................................................
Less: Drawings * ..........................................................................
M. Carrier, Capital, March 31 ........................................................
* (18) $500 + (22) $50 + (27) $300 + (34) $50 = $900
1-48
$00,000
$15,000
4,900
19,900
19,900
900
$19,000
PROBLEM 1-1B
(a)
In making an investment, the Ontario investor is becoming a partial owner of the company.
In this case the investment will be held for three years. The information that will be most
relevant to him will be on the income statement. The income statement reports the past
performance of the company in terms of its revenue, expenses and net income. This is the
best indicator of the companys future potential.
(b)
In deciding to extend credit to a new customer Bombardier would focus its attention on the
balance sheet. The terms of credit they are extending require repayment in a short period of
time. Funds to repay the credit would come from cash on hand. The balance sheet will show
if the company has enough cash to meet its obligations.
(c)
In deciding whether to extend a loan, the Laurentian Bank is interested in two things, the
ability of the company to make interest payments on an annual basis for the next five years
and the ability to repay the principal amount at the end of five years. In order to evaluate
both of these factors the focus should be on the cash flow statement. This statement
provides information on the cash the company generates from its operating activities on an
ongoing basis. This will be the most important factor in determining if the company will
survive and be able to repay the loan.
1-49
PROBLEM 1-2B
MEMO
Date:
To:
President, Montiero Company
From: Controller
Re:
Change in Value of Company vs. Reported Income
The change in the value of the company includes items that are recognized by the basic
accounting model and items that are not. This is primarily due to the cost principle. For accounting
purposes, assets are recorded at the cost at the time of purchase. There is no recognition of the
increase in their value. For example the companys land and buildings may be increasing in value,
but this increase is not recognized on the companys books. In defence of the cost principle, it
creates information that is reliable and verifiable, thus increasing the credibility of the financial
statements. In addition, the market value of the company is not relevant, if the company intends to
operate as a going concern.
1-50
PROBLEM 1-3B
1.
Recording the impact of the Presidents death violated the cost principle and monetary unit
assumption. Although the President may be very important to the company, his appointment
(and death) did not trigger an accounting transaction. Disclosure of the presidents death
could be made in the companys report but it should not be recorded in the accounting
records or on the financial statements.
2.
This violates the economic entity assumption. The portion of the asset and expense relating
to Paradiss family should not be recorded in the companys records. It would be best to treat
this as a personal asset. When it is used for business purposes, the Paradis family might
consider renting to the company, rather than having the company own it.
3.
Recording the equipment at $300,000 violated the cost principle, which states that assets
are recorded at the amount that was paid to acquire them. It does not permit writing them up
in value.
1-51
PROBLEM 1-4B
KUMARS REPAIR SHOP
(a)
Cash
May 1 +$15,000
15,000
2
5,000
10,000
5
400
9,600
7
000000
9,600
9
+4,100
13,700
15
500
13,200
15
1,000
12,200
23
140
12,060
28
000000
12,060
30
+120
$12,180
Accounts
Equipment
Accounts
Payable +
=
+
+
+
+
+
+
+$400 +
400
-120 +
$280
+$500
500
0000
500
0000
500
0000
500
0000
500
0000
500
0000
$500
+
+
+
+
+
+
+
+$5,000
5,000
00000
5,000
00000
5,000
00000
5,000
00000
5,000
00000
5,000
00000
5,000
00000
5,000
00000
$5,000
=
=
=
=
=
=
=
=
=
+$500
500
0000
500
0000
500
0000
500
0000
500
0000
500
0000
$500
$17,960 = $17,960
1-52
+
+
+
+
+
+
+
U. Kumar,
Capital
+$15,000
15,000
000000
15,000
-400
14,600
000000
14,600
+4,100
18,700
500
18,200
-1,000
17,200
140
17,060
+400
17,460
000000
$17,460
Investment
Rent Expense
Service Revenue
Drawings
Salaries Expense
Utilities Expense
Service Revenue
PROBLEM 1-4B (Continued)
(b)
Ending capital .........................................................................................................

Add: Drawings .......................................................................................................
Deduct: Investments .............................................................................................
Net income ..............................................................................................................
$17,460
500
17,960
15,000
$ 2,960
OR
KUMARS REPAIR SHOP
Income Statement
For the Month Ended May 31
Service revenue ...............................................................................
Expenses
Salaries ..................................................................................
Rent ............................................................................... 400
Utilities ....................................................................................
Net income........................................................................................
1-53
$4,500
$1,000
140
1,540
$2,960
PROBLEM 1-5B
(a)
SMITH VETERINARY CLINIC
Cash
Bal
Sept. 1
4
8
17
19
25
30
30
$9,000
-3,100
5,900
+1,300
7,200
-800
6,400
2,500
8,900
-600
8,300
+7,000
15,300
-700
-900
-300
13,400
000000
$13,400
Accounts
+
+
+
+
+
+
+
+
+
$1,700
00000
1,700
-1,300
400
00000
400
3,400
3,800
00000
3,800
00000
3,800
+
+
+
+
+
+
+
00000
3,800 +
00000
$3,800 +
$600
0000
600
0000
600
0000
600
0000
600
0000
600
0000
600
+
+
+
+
+
+
+
0000
600 +
0000
$600 +
Office
Equipment
$6,000
00000
6,000
00000
6,000
2,100
8,100
00000
8,100
00000
8,100
00000
8,100
Notes
Payable
=
=
=
=
=
=
=
00000
8,100 =
00000
$8,100 =
+$7,000
7,000 +
00000
7,000 +
00000
$7,000 +
$25,900 = $25,900
1-54
Accounts
Payable +
$3,600
-3,100
500
00000
500
1,300
1,800
00000
1,800
00000
1,800
00000
1,800
+
+
+
+
+
+
+
00000
1,800 +
+170
$1,970 +
B. Smith,
Capital
$13,700
000000
13,700
000000
13,700
000000
13,700
5,900
19,600
600
19,000
000000
19,000
-700
-900
300
17,100
-170
$16,930
Fees Earned
Drawings
Salaries Expense
Rent Expense
Advertising Exp
Utilities Expense

(b)

Income Statement
For the Month Ended September 30, 2003
Revenues
Fees earned ..................................................................................................
$5,900
Expenses
Salaries expense ......................................................................
$700
Rent expense ...........................................................................
900
Advertising expense .................................................................
300
Utilities expense .......................................................................
170
Total expenses ....................................................................................
2,070
Net income ..............................................................................................................
$3,830

Bruce Smith, Capital, September 1 .........................................................................
Add: Net income ....................................................................................................
Less: Drawings.......................................................................................................
Bruce Smith, Capital, September 30 .......................................................................
1-55
$13,700
3,830
17,530
600
$16,930

(b) (Continued)
Balance Sheet
September 30, 2003
Assets
Cash .......................................................................................................................
Supplies on hand ....................................................................................................
$13,400
3,800
600
8,100
Total assets ...................................................................................................
$25,900

Liabilities
Notes payable ...............................................................................................
$07,000
1,970
8,970
Owner's Equity
Bruce Smith, Capital .................................................................................... 0
16,930
$25,900
1-56
PROBLEM 1-6B
(a)
BELL CONSULTING
Transaction
Cash
May 1 +$4,000
2
-800
3
5
-50
9 +1,000
12
-700
15
17
-2,500
20
-500
23 +2,000
26 +5,000
29
-2,400
30
-150
$4,900 +
Accounts
Receivabl
e
Office
Supplies
Office
=
Equipment
Notes
Payable
Accounts
Payable
Bell,
Capital
+$4,000
-800
+$500
+$500
-50
+1,000
-700
+3,000
-2,500
+$3,000
-500
-2,000
+$5,000
+$2,400
-150
$1,000 +
$500 +
$2,400 =
$5,000
$8,800 = $8,800
1-57
$ 0 +
$3,800

(b)
BELL CONSULTING
Income Statement
For the Month Ended May 31, 2003
Revenues
Fees earned ..................................................................................................
$4,000
Expenses
Salaries expense ......................................................................
$ 2,500
Rent expense ...........................................................................
800
Advertising expense .................................................................
50
Utilities expense .......................................................................
150
Total expenses ....................................................................................
3,500
Net income ..............................................................................................................
$ 500
1-58

(c)
BELL CONSULTING
Balance Sheet
May 31, 2003
Assets
Cash .......................................................................................................................
Office supplies ........................................................................................................
$4,900
1,000
500
2,400
Total assets ...................................................................................................
$8,800

Liabilities
Note payable ..................................................................................................
Owners equity
Jessica Bell, Capital .......................................................................................
*Capital = $4,000 investment $700 withdrawal + $500 net income = $3,800
1-59
$5,000
3,800*
$8,800
PROBLEM 1-7B
(a)
Using the balance sheet equation:

$1,265,000 = Liabilities + $245,000
Liabilities = $1,020,000
(b)
Using the income statement equation:

Revenues Expenses = Net Income
$687,000 Expenses = $56,000
Expenses = $631,000
(c) Using the statement of owner's equity equation:

$245,000
Beginning capital
+ 30,000
Investments
+ 56,000
Net income
- 74,000
Drawn by owner
$257,000 Ending capital
OR using the balance sheet equation:
$1,167,000 [from part (d)] = $910,000 + Owner's Equity
Owner's Equity = $257,000
(d) Using the balance sheet equation:

Assets =$ 910,000 + $257,000
Assets = $1,167,000
1-60
PROBLEM 1-8B
(a)
SPECIALTY COSMETICS CO.

Income Statement
Revenues
Service revenue.........................................................................
Expenses
Total expenses ................................................................
$5,900
$1,500
600
1,300
3,400
Net income ..........................................................................................
$2,500

Emily Jackson, Capital, September 1 ..................................................
Add: Investments ...............................................................................
Net income...........................................................................
Less:
$00,000
$20,000
2,500
22,500
22,500
Drawings ..............................................................................
2,600
Emily Jackson, Capital, September 30 ................................................
$19,900
1-61

(a) (Continued)

Balance Sheet
September 30, 2003
Assets
Cash .......................................................................................................................
Supplies on hand ....................................................................................................
Equipment ...............................................................................................................
$ 9,000
5,000
2,700
20,000
Total assets ...................................................................................................
$36,700

Liabilities
Notes payable ...............................................................................................
$15,000
1,800
16,800
Owner's equity
Emily Jackson, Capital...................................................................................
19,900
$36,700
1-62

(b) 1. The addition of $900 fees would increase revenue (service revenue) and net income $900 in the
income statement. In the balance sheet, assets (accounts receivable) and the owners
capital would also be increased by $900.
2.
An additional $300 of gas and oil expense would increase expenses (gas and oil expense)
and decrease net income $300 in the income statement. In the balance sheet, liabilities
(accounts payable) would increase and owners capital would decrease by $300.
The revised financial statements, incorporating these two changes, follow:

Income Statement
Revenues
Service revenue ($5,900 + $900)...............................................
Expenses
Gas and oil expense ..................................................................
Total expenses ................................................................
Net income ..........................................................................................
1-63
$6,800
$1,500
600
300
1,300
3,700
$3,100

(b) (Continued)

Emily Jackson, Capital, September 1 ..................................................
Add:
Investments ..........................................................................
Net income ...........................................................................
$00,000
$20,000
3,100
Less:
Drawings ..............................................................................
Emily Jackson, Capital, September 30 ................................................
23,100
23,100
2,600
$20,500

Balance Sheet
September 30, 2003
Assets
Cash .......................................................................................................................
Accounts receivable ($5,000 + $900) ......................................................................
Supplies on hand ....................................................................................................
Equipment ...............................................................................................................
Total assets ...................................................................................................
$ 9,000
5,900
2,700
20,000
$37,600

Liabilities
Notes payable ...............................................................................................
Accounts payable ($1,800 + $300) ................................................................
$15,000
2,100
17,100
Owner's equity
Emily Jackson, Capital...................................................................................
20,500
$37,600
1-64
PROBLEM 1-9B
(a)
Montreal
Company
Calgary
Company
Edmonton
Company
Vancouver
Company
(a) $80,000 -$50,000

= $30,000
(d) $110,000 $60,000 = $50,000
(g) $75,000 +
$50,000 = $125,000
(j) $170,000 -$90,000

= $80,000
(b) $55,000 +
$58,000
= $113,000
(e) $145,000 $65,000 = $80,000
(h) $200,000 $130,000 = $70,000
(k) $80,000 + $180,000

= $260,000
(f) $60,000 +
$15,000 - X +
$420,000 $385,000 =
$80,000;
X = $30,000
(i) $50,000 +
$10,000 - $14,000 +
X - $350,000 =
$130,000;
X = $434,000
(l) $90,000 + $15,000

- $20,000 + $520,000
- X = $180,000;
X = $425,000
(c) $30,000 + X $25,000 + $350,000 $320,000 = $58,000;

X = $23,000
(b)
CALGARY COMPANY
Capital, January 1
Add: Investments
Net income
$60,000
$15,000
35,000
Less:
Drawings
Capital, December 31
1-65
50,000
110,000
30,000
$80,000

(c)
MEMO
Date:
To:
From: Student
Re:
Preparation and Interrelationship of Financial Statements
The sequence of preparing financial statements is (1) income statement, (2) statement of owner's
equity, and (3) balance sheet. It should be noted that the balance sheet is usually presented first, even
though it is prepared last.
The interrelationship of the statement of owner's equity to the other financial statements results from
the fact that net income from the income statement is reported in the statement of owner's equity. The
ending capital calculated in the statement of owner's equity is the amount reported for owner's equity
on the balance sheet.
1-66
PROBLEM 1-10B
FRANC DOR COIN SHOP
Balance Sheet
June 30, 2003
Assets
Cash ................................................................................................................... (a)
Office and store supplies .........................................................................................
Inventory .................................................................................................................
Land ........................................................................................................................
Office equipment ................................................................................................. (b)
Store equipment .................................................................................................. (c)
Building ...................................................................................................................
$ 4,000
6,000
6,000
110,000
40,000
17,000
19,500
120,000
Total assets ...................................................................................................
$322,500

Liabilities
Notes payable .......................................................................................... (d)
Accounts payable ..................................................................................... (e)
Long-term debt payable ............................................................................. (f)
$ 23,500
007,000
103,000
133,500
Owner's equity
Capital ...........................................................................................................
189,000
$322,500
1-67
Supporting calculations:
(a)
$13,000 (1) $4000 (2) $1,500 + (4) $4,500 (5) $8,000 = $4,000
(b)
$12,000 + (2) $5,000 = $17,000
(c)
$24,000 (4) $4,500 = $19,500
(d)
$20,000 + (2) $3,500 = $23,500
(e)
$11,000 (1) $4,000 = $7,000
(f)
$111,000 (5) $8,000 = $103,000
Note the following points:
Item 3 is not recorded, as there was no transaction.

The capital balance is unchanged because there were no transactions affecting owner's equity
on June 30.
1-68
PROBLEM 1-11B
(a)
NASH CONSULTING CO.

Income Statement
For the Month Ended January 31, 2003
Revenues
Fees earned ...................................................................
Expenses
Salaries expense ............................................................
Advertising expense .......................................................
Rent expense .................................................................
Utilities expense .............................................................
Property tax expense ......................................................
Repair expense ..............................................................
Total expenses .....................................................
Net income .............................................................................
(A)
(B)
(C)
(D)
(E)
$10,950 (A)
$1,700
1,550
800
480
150
250
(D)
(E)
4,930
$6,020
(6) $3,750 + (12) $2,300 + (20) $3,700 + (29) $1,200 = $10,950

(11) $1,200 + (32) $1,000 (32) $500 = $1,700
(8) $450 + (24) $1,100 = $1,550
(15) $300 + (36) $180 = $480
$250 (34) $100 = $150
1-69
(B)
(C)

(b)
NASH CONSULTING CO.

For the Month Ended January 31, 2003
T. Nash, Capital, January 1 ...........................................................
Add: Investment ..........................................................................
Net income ........................................................................
Less: Drawings .............................................................................
T. Nash, Capital, January 31 .........................................................
* (18) $600 + (27) $400 + (32) $500 + (34) $100 = $1,600
1-70
$00,000
$12,000
6,020
18,020
18,020
*1,600
$16,420
BYP 1-1 FINANCIAL REPORTING PROBLEM
(a)
The financial statements themselves take up three pages (14-16). There are 15 notes to the
financial statements, which occupy ten pages (17-26).
(b)
Ordinarily the fiscal year-end for the Second Cup is the last Saturday in June. This is disclosed in
Note 1 (page 18). In 1999 the fiscal year was extended to Wednesday, June 30 in order to reflect
the disposition of the Companys investment in Coffee People, Inc.
(c)
The auditors are PricewaterhouseCoopers, Chartered Accountants. (See page 13.)
(d)
Total assets as at
June 24, 2000:
June 30, 1999:
$18,565,000
$49,584,000
(e)
$11,067,000 (From a loss of $10,095,000 to net earnings of $972,000.)
(f)
June 24, 2000: $1,446,000

June 30, 1999: $ 822,000
(g)
The percentage change in systemwide sales from 1996-2000 was a negative 25.43%.
$159,198,000 $213,488,000 = (25.43%)
$213,488,000
1-71
BYP 1-2 INTERPRETING FINANCIAL STATEMENTS
(a)
For a software company such as Corel, the most important economic resources are the
knowledge, skills, and creativity of its people. These human resources are not reflected in the
balance sheet.
(b)
The balance sheet reflects only the results of business transactions, based upon the cost
principle. It does not attempt to show what the company's assets are currently worth.
In the case of a company which has just recently been formed, the accounting (or book) values
recorded on the balance sheet may be approximately the same as the economic (or market)
values. For companies which have been in existence for some time, however, there may be a
great difference between the historical amounts recorded in the accounting system and the
current values of these items, in economic terms.
(c)
There are several reasons why Corel might prepare its financial statements in US dollars. It might
be done for regulatory reasons, in order to be listed on American stock exchanges. It might also
be done because the company does a great deal of business in the US and wants to be
compared accurately with its American competitors. Another possible reason is that Corel
Corporation competes in over 70 countries worldwide, and the US dollar is a more recognized
unit of currency on a global basis.
1-72
BYP 1-3 ACCOUNTING ON THE WEB
Due to the frequency of change with regard to information available on the world wide web, the
Accounting on the Web cases are updated as required. Their suggested solutions are also updated
whenever necessary, and can be found on-line in the Instructor Resources section of our home page
[www.wiley.com/canada/weygandt2].
1-73
BYP 1-4 COLLABORATIVE LEARNING ACTIVITY
(a)
The estimate of the $2,450 loss was based on the difference between the $10,000 initially
invested by the owner and the remaining bank balance of $7,550 at May 31.
This is not a valid basis for determining income, because it only shows the change in cash
between two points in time.
(b)
The balance sheet at May 31 is as follows:

LONG-SHOT DRIVING RANGE
Balance Sheet
May 31, 2003
Assets
Cash .......................................................................................................................
Caddy shack ...........................................................................................................
Equipment ...............................................................................................................
Total assets ...................................................................................................
$07,550
4,000
1,800
$13,350

Liabilities
Accounts payable ($150 + $100) ...................................................................
Owner's equity
P. & P. Ross, Capital ($10,000 + $3,900 - $800) ...........................................
$00,250
13,100
$13,350
As shown in the balance sheet, the owner's capital at May 31 is $13,100 (the amount required to
make Assets = Liabilities + Owner's Equity). The estimate of $3,100 of net income is the
difference between the initial investment of $10,000 and $13,100.
This was not a valid basis for determining net income because changes in owner's equity
between two points in time may have been caused by factors unrelated to net income. For
example, there may be drawings and/or additional capital investments by the owner.
1-74
BYP 1-4 (Continued)

(c)
Actual net income for May can be determined by adding owner's drawings to the change in
owner's capital during the month, as shown below:
Owner's capital, May 31, per balance sheet ............................................................
Owner's capital, May 1 ............................................................................................
Increase in owner's capital ......................................................................................
Add: Drawings .......................................................................................................
Net income ..............................................................................................................
(d)
$13,100
10,000
3,100
800
$ 3,900
Fees earned can be determined by adding expenses incurred during the month to net income.
May expenses were Rent, $1,000; Wages, $400; Advertising, $750; and Utilities, $100; for a total
of $2,250. Revenues earned, therefore, were $6,150 ($2,250 + $3,900).
Alternatively, since all fees are received in cash, fees earned can be calculated from an analysis
of the changes in cash, as follows:
Beginning cash balance ...................................................................
Less: Cash payments
Caddy shack ............................................................
Golf balls and clubs .................................................
Rent .........................................................................
Advertising ...............................................................
Wages .....................................................................
Drawings..................................................................
Cash balance before fees ................................................................
Actual cash balance, May 31............................................................
Fees earned (cash receipts) .............................................................
1-75
$10,000
$4,000
1,800
1,000
600
400
800
8,600
1,400
7,550
$ 6,150
BYP 1-5 COMMUNICATION ACTIVITY
Date:
To:
From:
Subject:
Israel Unger
Student
Balance Sheet Correction
I have received the balance sheet of Mount Company as of December 31, 2002. A number of items in
this balance sheet are not properly reported. They are:
1.
The balance sheet should be dated as of a specific date, not for a period of time. It should be
stated "December 31, 2002."
2.
The bottom portion of the balance sheet should be headed "Liabilities and Owner's Equity", with
sub-headings for the Liabilities section and the Owner's Equity section.
3.
Assets should be reordered, in order of liquidity. Equipment should be reported below Supplies
on the balance sheet. Accounts Receivable should be shown as an asset and reported between
Cash and Supplies.
4.
Accounts Payable should be shown as a liability, not an asset. The Note Payable should be
reported in the liability section.
5.
Unger, Capital and Unger, Drawings are not liabilities. They are part of owner's equity. The
Drawings account is not reported on the balance sheet but is subtracted from Unger, Capital to
arrive at owner's equity at the end of the period.
1-76
BYP 1-5 (Continued)

A correct balance sheet is as follows:
MOUNT COMPANY
Balance Sheet
December 31, 2002
Assets
Cash .................................................................................................................................
Supplies ............................................................................................................................
Equipment ........................................................................................................................
Total assets ..................................................................................................
$09,000
3,000
2,000
21,500
$35,500

Liabilities
Note payable ...........................................................................................................
Total liabilities ................................................................................................
$10,500
6,000
16,500
Owner's equity
Unger, Capital .........................................................................................................
19,000
$35,500
1-77
BYP 1-6 ETHICS CASE
(a)
The students should identify all of the stakeholders in the case; that is, all the parties that are
affected, either beneficially or negatively, by the action or decision described in the case. The list
of stakeholders are:
Stephane Pelli
The two firms
University of New Brunswick
(b)
(c)
The students should identify the ethical issues, dilemmas, or other considerations pertinent to the
situation described in the case. In this case the ethical issues are:
Is it proper that Stephane charged both firms for the total travel costs, rather than splitting
the actual amount of $244 between the two firms?
Is collecting $488 as reimbursement for total costs of $244 ethical behaviour?
Did Stephane deceive both firms or neither firm?
Each student must answer the question for himself/herself. Would you want to start your first job
having deceived your employer before your first day of work? Would you be embarrassed if either
firm found out that you double-charged? Would your school be embarrassed if your act was
uncovered? Would you be proud to tell your instructor, or your family, that you collected your
expenses twice?
1-78

BAT 4M Chapt 1 All Solutions

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CHAPTER 1

1. Explain what accounting is.

2. Identify the users and

4. Explain the meaning of

5. Explain the meaning of the

6. State and utilize the basic

12, 13, 14,

7. Calculate the effect of

8. Understand what the four

19, 20, 21,

ASSIGNMENT CHARACTERISTICS TABLE

Identify users and uses of financial statements.

Discuss accounting assumptions and GAAP related

Identify assumption or principle violated.

Analyse transactions and calculate net income.

Analyse transactions and prepare financial

Use financial statement relationships to determine

Prepare financial statements.

Determine financial statement amounts, prepare a

Analyse transactions and prepare balance sheet.

Prepare income statement and statement of owners

Identify users and uses of financial statements.

Discuss accounting assumptions and GAAP related

Identify assumption or principle violated.

Analyse transactions and calculate net income.

Analyse transactions and prepare financial

Use financial statement relationships to determine

Prepare financial statements.

Determine financial statement amounts, prepare a

Analyse transactions and prepare balance sheet.

Prepare income statement and statement of owners

BLOOMS TAXONOMY TABLE

1. Explain what accounting

4. Explain the meaning of

5. Explain the meaning of

6. State and utilize the

7. Calculate the effect of

8. Understand what the

Questions Chapter 1 (Continued)

Questions Chapter 1 (Continued)

The basic accounting equation is Assets = Liabilities + Owner's Equity.

Questions Chapter 1 (Continued)

(a) Income statement.

(d) Balance sheet.

Questions Chapter 1 (Continued)

Ending capital balance ...................................................................................

(b) Ending capital balance .......................................................................................

Total revenues ($35,000 + $70,000) ..............................................................

Total expenses ($26,000 + $40,000) ..............................................................

Total revenues ...............................................................................................

SOLUTIONS TO BRIEF EXERCISES

BRIEF EXERCISE 1-2

(a) Simple to set up, founder retains control.

BRIEF EXERCISE 1-3

$80,000 $50,000 = $30,000 (Owner's Equity).

$45,000 + $70,000 = $115,000 (Assets).

$94,000 $62,000 = $32,000 (Liabilities).

BRIEF EXERCISE 1-4

$90,000 + $240,000 = $330,000 (Total assets).

$170,000 $80,000 = $90,000 (Total liabilities).

$600,000 (2/3 x $600,000) = $200,000 (Owner's equity).

BRIEF EXERCISE 1-5

($700,000 + $150,000) ($500,000 $80,000) = $430,000 (Owner's equity).

($500,000 + $100,000) + ($200,000 $70,000) = $730,000 (Assets).