Demonstration Problem

Chapter 1
The Demonstration Problem below includes an Action Plan. Once you've completed the problem, you can
compare to the Solution, also available below.

Problem 1
The following is a list of some users of accounting information.

(a) (b)

Internal or
User External Question

1. Canada Revenue External Is the company following the tax laws? (Can reference GST/HST,
Agency employee payroll deductions, or income tax)

2. Controller

3. Human resources

4. Provincial securities
commissions

5. Labour union

6. Information Technology
manager

7. Vice President of
Finance

8. Investors

9. Marketing manager

10. Creditor – bank loan

officer

11. Customers

12. Supplier

Instructions
a. For each type of user determine whether they are an internal or an external user. The first one has been
done for you as an example.
b. For each type of user provide an example of a question that might be asked by that user. The first one has
been done for you as an example.

Action Plan

Understand that internal users work for the company and have direct access to the business’s
accounting information.
Understand that external users are users who do not work for the company and have access to only
the accounting information available publicly and/or provided to them by the company.
Understand that users require information to make decisions.

Next: View the Solution ([Link])

Demonstration Problem

Chapter 1

Problem 1: Solution
(a) (b)

Internal or
User External Question

1. Canada Revenue External Is the company following the tax laws? (Can reference GST/HST,
Agency employee payroll deductions, or income tax)

2. Controller Internal How profitable is our company?

3. Human resources Internal How many new employees can we afford to hire this year?

Can we afford to give our employees a raise or change the

benefits package offered?

4. Provincial securities External Is the company respecting the established rules?

commissions

5. Labour union External Can the company afford to pay increased salaries and benefits
to the union members?

6. Information Technology Internal Can we afford to purchase new computers and a new system
manager this year?

7. Vice President of Internal Do we have enough cash to pay the bills?

Finance
How is our financial performance compared to the budget?

8. Investors External Should I buy shares?

Should I hold the shares I own?

Should I sell the shares I own?

9. Marketing manager Internal What selling price should we set for our products?

How profitable will our new sales campaigns be based on our

projections?

10. Creditor – bank loan External Will the company be able to pay the interest and the principal on
officer a loan?
 (a) (b)

Internal or
User External Question

11. Customers External If I buy the extended warranty, can I count on the company
being able to service the product?

12. Supplier External Should we offer credit to the company for our inventory?

Please note that there are many other questions that would be acceptable. These are example questions that the
user could ask.

Back: Problem 1 ([Link])

Demonstration Problem

Chapter 1
Once you've completed the problem, you can compare to the Solution, also available below.

Problem 2
Instructions
For each of the following descriptions, decide if the business has been formed as: a proprietorship, a partnership
or a corporation.

1. This business is responsible for its debts and paying taxes on its profits.
2. This business is owner by one owner.
3. This business is often used for service-type businesses such as lawyers and accountants.
4. This business offers its owners limited liability.
5. This business is a separate legal entity from its owners.
6. This business has two or more owners and has unlimited liability.
7. Ownership of this business is easily transferred from one owner to another.
8. This business has a single owner who pay income tax on the profit of the business.
9. This business has the best chance of having a long life.
10. This business is usually the easiest form of organization to set up.
11. This business is generally the easiest form of organization to raise capital.

Next: View the Solution ([Link])

Demonstration Problem

Chapter 1

Problem 2: Solution
1. Corporation
2. Proprietorship
3. Partnership
4. Corporation
5. Corporation
6. Partnership
7. Corporation
8. Proprietorship
9. Corporation
10. Proprietorship
11. Corporation

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Demonstration Problem

Chapter 1
Once you've completed the problem, you can compare to the Solution, also available below.

Problem 3
Instructions
Match the items selected from the conceptual framework shown below by entering the appropriate code letter in
the space provided.

A. Relevance
B. Comparability
C. Historical cost
D. Timeliness
E. Verifiability
F. Understandability

_____ 1. Information is classified, characterized, and presented clearly and concisely.

_____ 2. Information that has a bearing on a decision.
_____ 3. Different companies using the same accounting principles.
_____ 4. Different knowledgeable and independent users can reach consensus that the information is
faithfully represented.
_____ 5. Information must be available to decision makers before it loses its ability to influence decisions.
_____ 6. Assets are generally reported at the amount paid for the asset.

Next: View the Solution ([Link])

Demonstration Problem

Chapter 1

Problem 3: Solution
1. F Understandability
2. A Relevance
3. B Comparability
4. E Verifiability
5. D Timeliness
6. C Historical cost

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Demonstration Problem

Chapter 1
The Demonstration Problem below includes an Action Plan. Once you've completed the problem, you can
compare to the Solution, also available below.

Problem 4
Listed in alphabetical order, the following selected accounts were taking from Doolan Legal Services Company’s
April 30, 2021, financial statements:

Account Name Type of Account Financial Statement

1. Advertising Expense E IS

2. Accounts Payable

3. Accounts Receivable

4. Building

5. Cash

6. Insurance Expense

7. Interest Expense

8. Interest Payable

9. Land

10. Mortgage Payable

11. Repairs Expense

12. S. Doolan, Capital, May 1

13. S. Doolan, Drawings

14. Salaries Expense

15. Service Revenue

16. Supplies

17. Vehicles

Instructions
a. For each account, identify in the column labelled “Type of Account” whether the item is an asset (A), liability
(L), capital (C), drawings (D), revenue (R), or expense (E) item. The first one has been done for you as an
example.
b. For each account, identify in the column labelled “Financial Statement” which financial statement the item
would be reported on – income statement (IS), statement of owner’s equity (OE), or balance sheet (BS). The
first one has been done for you as an example.

Action Plan

Understand that assets are resources owned or controlled by the business.

Understand that liabilities are amounts owed by the business.
Understand that owner’s equity is the owner’s claim on the assets of the company. It is the residual
equity of assets minus liabilities. Owner’s equity is affected by profit or loss. Revenues (business
activities that are undertaken to earn profit) increase owner’s equity and expenses (costs of assets
that are consumed and services that are used) decrease owner’s equity.
Recall what information is included in each of the financial statements.

Next: View the Solution ([Link])

Demonstration Problem

Chapter 1

Problem 4: Solution
Account Name Type of Account Financial Statement

1. Advertising Expense E IS

2. Accounts Payable L BS

3. Accounts Receivable A BS

4. Building A BS

5. Cash A BS

6. Insurance Expense E IS

7. Interest Expense E IS

8. Interest Payable L BS

9. Land A BS

10. Mortgage Payable L BS

11. Repairs Expense E IS

12. S. Doolan, Capital, May 1 C OE

13. S. Doolan, Drawings D OE

14. Salaries Expense E IS

15. Service Revenue R IS

16. Supplies A BS

17. Vehicles A BS

Back: Problem 4 ([Link])

Demonstration Problem

Chapter 1
The Demonstration Problem below includes an Action Plan. Once you've completed the problem, you can
compare to the Solution, available below.

Problem 5
J. Daigle's Payroll Services Company entered into the following transactions during May 2024.

1. Purchased computers for $15,000 from Bytes of Data on account.

2. Paid $3,000 cash for May rent on storage space.
3. Received $12,000 cash from customers for contracts billed in April.
4. Performed payroll services for Magic Construction Company for $2,500 cash.
5. Paid Northern Power Co. $700 cash for energy usage in May.
6. Daigle invested an additional $25,000 in the business.
7. Paid Bytes of Data for the computers purchased in 1. above.
8. Incurred advertising expense for May of $900 on account.
9. Daigle withdrew $1,000 cash for personal use.
10. Supplies worth $400 were purchased using cash.

Instructions
Indicate with the appropriate letter whether each of the transactions above results in:

a. an increase in assets and a decrease in assets.

b. an increase in assets and an increase in owner's equity.
c. an increase in assets and an increase in liabilities.
d. a decrease in assets and a decrease in owner's equity.
e. a decrease in assets and a decrease in liabilities.
f. an increase in liabilities and a decrease in owner's equity.
g. an increase in owner's equity and a decrease in liabilities.

Note: the letters may be used more than once or not at all.

Action Plan

Analyze the effects of each transaction on the accounting equation.

Understand that assets are resources owned or controlled by the business.
Understand that liabilities are amounts owed by the business.
Understand that owner's equity is the owner's claim on the assets of the company. It is the residual
equity of assets minus liabilities. Owner's equity is affected by profit or loss. Revenues (business
activities that are undertaken to earn profit) increase owner's equity and expenses (costs of assets
that are consumed and services that are used) decrease owner's equity.
For each transaction (1 through 10) determine which letter scenario explains the transaction.

Next: View the Solution ([Link])

Demonstration Problem

Chapter 1

Problem 5: Solution
Trans. Solution Basic Analysis

1 c The asset Equipment is increased by $15,000 and the liability Accounts Payable is increased
by the same amount.

2 d The asset Cash is decreased by $3,000 and the owner's equity expense account Rent
Expense is increased by the same amount, which then decreases owner's equity.

3 a The asset Cash is increased by $12,000 and the asset Accounts Receivable is decreased by
the same amount.

4 b The asset Cash is increased by $2,500 and the owner's equity account Service Revenue is
increased by the same amount.

5 d The asset Cash is decreased by $700 and the owner's equity expense account Utilities
Expense is increased by the same amount, which then decreases owner's equity.

6 b The asset Cash is increased by $25,000 and the owner's equity account J. Daigle, Capital is
increased by the same amount.

7 e The asset Cash is decreased by $15,000 and the liability Accounts Payable is decreased by
the same amount.

8 f The liability Accounts Payable is increased by $900 and the owner's equity expense account
Advertising Expense is increased by the same amount, which then decreases owner's equity.

9 d The asset Cash is decreased by $1,000 and the owner's equity account J. Daigle, Drawings is
increased by the same amount, which then decreases owner's equity.

10 a The asset Cash is decreased by $400 and the asset Supplies is increased by the same
amount.
Problem 6
Andre Catapang, a CPA, operates an accounting office under the name Andre Catapang, Chartered
Professional Accountant. On June 30, 2024, the balance sheet showed: Cash $3,000, Accounts
Receivable $1,200, Supplies $600, Equipment $5,900, Accounts Payable $3,400, and A. Catapang,
Capital, $7,300.

During July, the following transactions occurred:

1. Collected $900 of the accounts receivable.

2. Paid $2,500 cash on accounts payable.
3. Performed services of $8,500, of which $3,000 is collected in cash and the balance is due in
August.
4. Purchased additional equipment for $1,200, paying $500 in cash and the balance on
account.
5. Paid salaries $1,500, rent for July $750, supplies $200, and advertising expenses $250.
6. Withdrew $1,200 in cash for personal use.
7. Received $3,000 from the Royal Bank representing money borrowed on a note payable.
8. Incurred utility expenses for month on account, $250.
9. Supplies on hand at the end of July were $500. (Hint: You have to add the supplies on hand
at June 30 to the supplies purchased during July and then subtract the supplies on hand at
the end of July. This will give you the amount of supplies used, which reduces the asset and
represents an expense.)

Instructions
1. Beginning with June 30 balances, prepare a tabular analysis of the July transactions.
2. Prepare an income statement for July, a statement of owner's equity for July, and a balance
sheet at July 31.
3. Currently, the business is a proprietorship. What would be the advantages of incorporating
the business?
A ANDRE CATAPANG, CHARTERED PROFESSIONAL ACCOUNTANT

Assets Liabilities + Owner's Equity

Accounts A. Catapang,
Trans: Cash + Receivable + Supplies + Equipment = Notes Payable + Accounts Payable + Capital -
Balance $3.000 $1.200 $600 $5.900 $3.400 $7.300
1 $900 -$900
2 -$2.500 -$2.500
3 $3.000 $5.500
4 -$500 $1.200 $700
5 -$1.500
-$750
-$200 $200
-$250
6 -$1.200
7 $3.000 $3.000
8 $250
9 -$300
Total $3.000 $5.800 $500 $7.100 # $3.000 $1.850 # $7.300

Assets 16.400

Liabilities 4.850
Owner's Equity 11.550
Total 16.400

FileName: Problem 1.6 (solution), Tab: Tabular Analysis, Page 1 of , 25/06/2024, 10:22 a. m.
COUNTANT

Owner's Equity
A. Catapang,
Drawings + Revenues - Expenses

$8.500

-$1.500
-$750

-$250
-$1.200

-$250
-$300
-$1.200 $8.500 -$3.050

FileName: Problem 1.6 (solution), Tab: Tabular Analysis, Page 2 of , 25/06/2024, 10:22 a. m.
Demonstration Problem

Chapter 1
The Demonstration Problem below includes an Action Plan and electronic Working Papers (in Excel). Download
the Working Papers and complete the problem, using the Action Plan (be sure to save your work). Once you've
completed the problem, you can compare to the Solution, also available below.

Problem 7
Danielle Young decided to start her own home-based document translation service so that she can have more
time to spend with her children. She started her business on November 1, 2024 under the name Young Document
Translations. The following transactions were completed during the month:

Nov. 1 Deposited $18,000 cash at the Bank of Montreal in a new bank account in the name of her business.

2 Purchased equipment for $4,000. Paid $500 in cash with the balance on account.

4 Purchased office supplies for $250 cash.

7 Incurred $340 of advertising costs, on account.

10 Provided translation services for which she was paid $2,000 cash.

16 Purchased educational computer games for her children for $110 with cash from her personal
account.

25 Withdrew $1,750 cash for personal use.

27 Provided $4,000 of translation services to a client on account.

28 Paid monthly expenses: utilities $300, Internet $75, and telephone $73.

29 Received a call from a customer for a translation contract worth $8,000. Danielle will receive the
documents and start work on this contract next week.

30 Paid the amount due for the November 7 transaction.

Instructions
A. Prepare a tabular analysis of the November transactions.
B. From an analysis of the appropriate columns in the tabular analysis, calculate profit or loss for November.
C. (1) Identify two internal users of Young’s accounting information and write a question that each user might
try to answer by using the accounting information. (2) Identify one external users of Young’s accounting
information and write a question that the user might try to answer by using the accounting information.
 Action Plan

Understand that internal users work for the business and have direct access to the business’s
accounting information.
Understand that external users are users that do not work for the company and have access to only
the accounting information provided to them by the business.
Understand that users require information to make decisions.
Only transactions that change the business’s financial position are recorded.
Assets must equal liabilities plus owner's equity after each transaction.
Investments and revenues increase owner's equity.
Withdrawals and expenses decrease owner's equity.
Profit is the amount by which revenues exceed expenses. Loss is the amount by which expenses
exceed revenues.

Download the Working Papers (Excel Spreadsheet) (ch01_d7_worksheet.xls)

Next: View the Solution ([Link])

Demonstration Problem

Chapter 1

Problem 7: Solution
A.

YOUNG DOCUMENT TRANSLATIONS

Assets = Liabilities + Owner's Equity

+ + + + + − + −

Trans. Cash Accounts Supplies Equipment Accounts D. D. Revenues Expen

Receivable Payable Young, Young,
Capital Drawings

Nov. 1 $18,000 +$18,000

2 −500 +$4,000 +$3,500

4 −250 +$250

7 +340 −$

10 +2,000 +2,000

16

22

25 −1,750 −$1,750

27 +$4,000 +4,000

28 −300 −

28 −75

28 −73

29

30 −340 −340

Total $16,712 +$4,000 +$250 +$4,000 = +$3,500 + +$18,000 −$1,750 +$6,000 −$

$24,962 = $24,962

Notes:
The November 16 transaction is not relevant to the business entity as it is a personal transaction (the reporting
entity assumption).
The November 29 transaction is not recorded because the transaction is not completed yet. Danielle has not
received any cash nor performed any services so has not earned any revenue on this contract.

B.

YOUNG DOCUMENT TRANSLATIONS

Income Statement
Month Ended November 30, 2024

Revenue

Service Revenue $6,000

Expenses

Advertising expense $340

Internet expense 75

Telephone expense 73

Utilities expense 300

Total expenses 788

Profit for the month $5,212

C.

(1)

Danielle Young — Does the business generate enough cash to live on? Is the amount charged to customers for
services appropriate such that enough profit is being generated?

Employees — How much is the business’s annual profit and salary expense? Can the business afford to pay the
employees more?

(2)

Creditor — Does the business have enough cash available to meet its obligations to pay for purchases made on
account? Should we allow the business to continue to make purchases on account, or should we demand cash
immediately for all purchases?

Back: Problem 7 ([Link])