ACCT 210 Homework Chapter 2, Fall 2011

© The McGraw-Hill Companies, Inc., 2012 P2.4A 15 Minutes, Medium PROBLEM 2.4A RANKIN TRUCK RENTAL Owners' Assets = Liabilities + Equity Accounts Office Notes Accounts Capital Cash + Receivable + Trucks + Equipment = Payable + Payable + Stock December 31 balances $ 9,500 $ 13,900 $ 68,000 $ 3,800 $ 20,000 $ 10,200 $ 65,000 (1) (2,700) 2,700 Balances $ 6,800 $ 13,900 $ 68,000 $ 6,500 $ 20,000 $ 10,200 $ 65,000 (2) 4,000 (4,000) Balances $ 10,800 $ 9,900 $ 68,000 $ 6,500 $ 20,000 $ 10,200 $ 65,000 (3) (3,200) (3,200) Balances $ 7,600 $ 9,900 $ 68,000 $ 6,500 $ 20,000 $ 7,000 $ 65,000 (4) 10,000 10,000 Balances $ 17,600 $ 9,900 $ 68,000 $ 6,500 $ 30,000 $ 7,000 $ 65,000 (5) (15,000) 30,500 15,500 Balances $ 2,600 $ 9,900 $ 98,500 $ 6,500 $ 45,500 $ 7,000 $ 65,000 (6) 75,000 75,000 Balances $ 77,600 $ 9,900 $ 98,500 $ 6,500 $ 45,500 $ 7,000 $ 140,000 © The McGraw-Hill Companies, Inc., 2012 P2.10A 30 Minutes, Strong PROBLEM 2.10A a. BIG SCREEN SCRIPTS BIG SCREEN SCRIPTS Balance Sheet November 30, 2011 Assets Liabilities & Owner's Equity Cash $ 3,940 Liabilities: Notes receivable 2,200 Notes payable $ 73,500 Accounts receivable 2,450 Accounts payable 32,700 Land 39,000 Total liabilities $ 106,200 Building 54,320 Owner's equity: Office furniture* 12,825 Capital stock 5,000 Retained earnings * 3,535 Total $ 114,735 Total $ 114,735 * $8,850 + $6,500 - $2,525. * Total assets ($114,735), Less (Total Liabilities, $106,200, + Capital Stock, $5,000) b. (1) (2) (3) (4) (5) (6) (7) The cash in Pippin’s personal savings account is not an asset of the business entity Big Screen Scripts and should not appear in the balance sheet of the business. The money on deposit in the business bank account ($3,400) and in the company safe ($540) constitute cash owned by the business. Thus, the cash owned by the business at November 30 is $3,940. The years-old IOU does not qualify as a business asset for two reasons. First, it does not belong to the business entity. Second, it appears to be uncollectible. A receivable that cannot be collected is not viewed as an asset, as it represents no future economic benefit. The total amount to be included in “Office furniture” for the rug is $9,400, the total cost, regardless of whether this amount was paid in cash. Consequently, “Office furniture” should be increased by $6,500. The $6,500 liability arising from the purchase of the rug came into existence prior to the balance sheet date and must be added to the "Notes payable" amount. The computer is no longer owned by Big Screen Scripts and therefore cannot be included in the assets. To do so would cause an overstatement of both assets and owner's equity. The “Office furniture” amount must be reduced by $2,525. The $22,400 described as “Other assets” is not an asset, because there is no valid legal claim or any reasonable expectation of recovering the income taxes paid. Also, the payment of federal income taxes by Pippin was not a business transaction by Big Screen Scripts. If a refund were obtained from the government, it would come to Pippin personally, not to the business entity. The proper valuation for the land is its historical cost of $39,000, the amount established by the transaction in which the land was purchased. Although the land may have a current fair value in excess of its cost, the offer by the friend to buy the land if Pippin would move the building appears to be mere conversation rather than solid, verifiable evidence of the fair value of the land. The "cost principle," although less than perfect, produces far more reliable financial statements than would result if the owners could "pull figures out of the air" in recording asset values. The accounts payable should be limited to the debts of the business, $32,700, and should not include Pippin’s personal liabilities.