Financial Accounting – Problems 2

Exercise 2.1:

A number of business transactions carried out by Smalling Manufacturing Company are as

follows:

a.   Borrowed money from a bank.

b.  Sold land for cash at a price equal to its cost.

c.   Paid a liability.

d.  Returned for credit some of the office equipment previously purchased on credit but not yet
paid for. (Treat this the opposite of a transaction in which you purchased office equipment on
credit.)

e.   Sold land for cash at a price in excess of cost. (Hint: The difference between cost and sales
price represents a gain that will be in the company's income statement.)

f.   Purchased a computer on credit.

g.   The owner invested cash in the business.

h.  Purchased office equipment for cash.

i.   Collected an account receivable.

Indicate the effects of each of these transactions on the total amounts of the company's assets,
liabilities, and owners' equity. Organize your answer in tabular form, using the following column
headings and the code letters I for increase, D for decrease, and NE for no effect. The answer for
transaction a is provided as an example:

Solution 2.1:

Transaction Assets = Liabilities + Owners’

Equity
a I   I   NE
b NE NE NE
c D D NE
d D D NE
e I NE I
f I I NE
g I NE I
h NE NE NE
 i NE NE NE

Exercise 2.2: For each of the following categories, state concisely a transaction that will have
the required effect on the elements of the accounting equation.

a.   Increase an asset and increase a liability.

b.  Decrease an asset and decrease a liability.

c.   Increase one asset and decrease another asset.

d.  Increase an asset and increase owners' equity.

e.   Increase one asset, decrease another asset, and increase a liability.

Answers:

a. Buying goods on credit

b. Paying off bank loans
c. Buying goods on cash
d. Purchasing office items on owner’s money
e. Buying a car by taking car loan and doing a down-payment

Exercise 2.3: Listed below in random order are the items to be included in the balance sheet of
Smokey Mountain Lodge at December 31, 2011:

Prepare a balance sheet at December 31, 2011 with proper heading and classification.

Solution 2.3:
 a
.          
Balance Sheet of SMOKEY MOUNTAIN LODGE as on Dec 31, 2011
Liabilities & Owners'
Assets Equity  
Non-Current Assets Equity  
Property, Plant and Equipment 988,300 Equity Share Capital 135,000
Other Equity 175,000

Current Assets Liabilities

Financial Asset Financial Liabilities
a. Trade Receivables 10,600 a. Trade Payables 54,800
a. Cash 31,400 b. Others 665,500

Total 1,030,300 Total 1,030,300

Exercise 2.4:

The following six transactions of Ajax Moving Company, a corporation, are summarized in
equation form, with each of the six transactions identified by a letter. For each of the
transactions (a) through (f) write a separate statement explaining the nature of the transaction.
For example, the explanation of transaction (a) could be as follows: Purchased equipment for
cash at a cost of $3,200.

Answers:
 a. Purchased equipment for cash at a cost of $3,200.
b. Received accounts receivable worth $900.
c. Bought equipment worth $13,500, paid $3,500 in cash and $10,000 on credit.
d. Paid creditors $14,500
e. Issued Equity shares for cash worth $15,000
f. Purchased equipment on credit $7,500

Exercise 2.5:

Goldstar Communications was organized on December 1 of the current year and had the
following account balances at December 31, listed in tabular form:

Early in January, the following transactions were carried out by Goldstar Communications:

1.  Sold capital stock to owners for $35,000.

2.  Purchased land and a small office building for a total price of $90,000, of which $35,000 was
the value of the land and $55,000 was the value of the building. Paid $22,500 in cash and
signed a note payable for the remaining $67,500.
3.  Bought several computer systems on credit for $9,500 (30-day open account).
4.  Obtained a loan from Capital Bank in the amount of $20,000. Signed a note payable.
5.  Paid the $28,250 account payable due as of December 31.
Instructions

a.   List the December 31 balances of assets, liabilities, and owners' equity in tabular form as
shown above.
b.  Record the effects of each of the five transactions in the preceding tabular arrangement and
show the totals for all columns after each transaction.

Solution 2.5:
        
Balance Sheet of GOLDSTAR COMMUNICATION as on Dec 31
Assets Liabilities & Owners'  
Equity
Non-Current Assets Equity  
Property, Plant and Equipment 271,250 Equity Share Capital 2,00,000

Current Assets Current Liabilities

Financial Asset Financial Liabilities
a. Cash and Cash 37,000 a. Trade Payables 28,250
Equivalents
b. Others 80,000
Total 308,250 Total 308,250

              Owners'
Liabilities
    Assets   = + Equity

        Office Notes Accounts Capital

Cash Land Building Equipment Payable Payable

  + + + = + + Stock
$ $ $ $ $ $ $
37,000 95,000 125,000 51,250 80,000 28,250 200,000
(1
) 72,000 95,000 125,000 51,250 80,000 28,250 235,000
(2
) 49,500 130,000 180,000 51,250 147,500 28,250 235,000
(3
) 49,500 130,000 180,000 60,750 147,500 37,750 235,000
(4
) 69,500 130,000 180,000 60,750 167,500 37,750 235,000
(5
) 41,250 130,000 180,000 60,750 167,500 9,500 235,000
Exercise 2.6:
The items making up the balance sheet of Rankin Truck Rental at December 31 are listed below
in tabular form.

During a short period after December 31, Rankin Truck Rental had the following transactions:

1.  Bought office equipment at a cost of $2,700. Paid cash.

2.  Collected $4,000 of accounts receivable.

3.  Paid $3,200 of accounts payable.

4.  Borrowed $10,000 from a bank. Signed a note payable for that amount.

5.  Purchased two trucks for $30,500. Paid $15,000 cash and signed a note payable for the
balance.

6.  Sold additional stock to investors for $75,000.

Instructions

a.   List the December 31 balances of assets, liabilities, and owners' equity in tabular form as
shown above.

b.  Record the effects of each of the six transactions in the preceding tabular arrangement. Show
the totals for all columns after each transaction.

Solution 2.6:

Balance Sheet of RANKIN TRUCK RENTAL as on Dec 31

Assets Liabilities & Owners'  
Equity
Non-Current Assets Equity  
Property, Plant and Equipment 71,800 Equity Share Capital 65,000

Current Assets
Financial Asset Current Liabilities
a. Accounts Receivable 13,900 Financial Liabilities
b. Cash and Cash 9,500 a. Trade Payables 10,200
Equivalents
 b. Others 20,000
Total 95,200 Total 95,200

              Owners'
Liabilities
    Assets   = + Equity
    Accounts   Office Notes Accounts Capital

Cash Receivable Trucks Equipment Payable Payable

  + + + = + + Stock
$ $ $ $ $ $ $
9,500 13,900 68,000 3,800 20,000 10,200 65,000
(1) 6,800 13,900 68,000 6,500 20,000 10,200 65,000
(2) 10,800 9,900 68,000 6,500 20,000 10,200 65,000
(3) 7,600 9,900 68,000 6,500 16,800 10,200 65,000
(4) 17,600 9,900 68,000 6,500 26,800 10,200 65,000
(5) 2,600 9,900 98,500 6,500 42,300 10,200 65,000
(6) 77,600 9,900 98,500 6,500 42,300 10,200 140,000

Exercise 2.7: HERE COME THE CLOWNS! is the name of a traveling circus. The ledger
accounts of the business at June 30, 2011, are listed here in alphabetical order:
Prepare a balance sheet by using these items and computing the amount of Cash at June 30,
2011.

Solution 2.7:

Balance Sheet of HERE COME THE CLOWNS! As on June 30, 2011

Assets     Liabilities & Owners' Equity
Non-Current Assets   Equity
Property, Plant and 503,610   Equity Share Capital 310,000
Equipment
  Other Equity 27,230
 
Current Assets   Current Liabilities
Financial Assets   Financial Liabilities
a. Trade Receivables 7,450   a. Accounts Payable 26,100
b. Cash and Cash 32,520 b. Others 189,750
Equivalents
c. Others 9,500
553,080   553,080