ACCT 210 Lecture, Fall 2009

15 Minutes, Medium PROBLEM 2.4A RANKIN TRUCK RENTAL Owners' Assets = Liabilities Equity Accounts Office Notes Accounts Capital Cash Receivab Truck Equipme Payable Payable Stock December $ 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 ### 30 Minutes, Strong a. BIG SCREEN SCRIPTS Balance Sheet November 30, 2005 Assets Liabilities & Owners' Equity Cash $ 3,940 Liabilities: Notes receivable 2,200 Notes payable Accounts receivable 2,450 Accounts payable Land 39,000 Total liabilities Building 54,320 Owners' equity: Office furniture* 12,825 Capital stock Retained earnings * Total ### Total * $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) The cash in Pippin’s personal savings account is not an asset of the business entity Big Screen Scrip business. The money on deposit in the business bank account ($3,400) and in the company safe ($54 The years-old IOU does not qualify as a business asset for two reasons. First, it does not belong to th receivable that cannot be collected is not viewed as an asset, as it represents no future e The total amount to be included in “Office furniture” for the rug is $9,400, the total cost, regardless “Office furniture” should be increased by $6,500. The $6,500 liability arising from the purchase The computer is no longer owned by Big Screen Scripts and therefore cannot be included in the asse and owners’ 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 paid. Also, the payment of federal income taxes by Pippin was not a business transaction by Big Scr The proper valuation for the land is its historical cost of $39,000, the amount established by the tran land may have a current fair value in excess of its cost, the offer by the friend to buy the land (7) The accounts payable should be limited to the debts of the business, $32,700, and should not include PROBLEM 2.10A BIG SCREEN SCRIPTS CREEN SCRIPTS alance Sheet vember 30, 2005 $ 73,500 32,700 $ 106,200 5,000 3,535 $ 114,735 of the business entity Big Screen Scripts and should not appear in the balance sheet of the ($3,400) and in the company safe ($540) c o reasons. First, it does not belong to the business entity. Second, it appears to be uncollectible. A s it represents no future e ug is $9,400, the total cost, regardless of whether this amount was paid in cash. Consequently, liability arising from the purchase herefore cannot be included in the assets. To do so would cause an overstatement of both assets duced by $2,525. se there is no valid legal claim or any reasonable expectation of recovering the income taxes s not a business transaction by Big Scr 00, the amount established by the transaction in which the land was purchased. Although the er by the friend to buy the land iness, $32,700, and should not include Pippin’s personal liabilities. 15 Minutes, Medium PROBLEM 2.4B SMITH TRUCKING Owners' Assets = Liabilities Equity Accounts Office Notes Accounts Capital Cash Receivab Truck Equipmen Payabl Payable Stock December $ 4,700 $ 8,300 $ 72,000 $ 3,000 $ 10,000 $ 8,000 $ 70,000 (1) (2,600) 2,600 - Balances $ 2,100 $ 8,300 $ 72,000 $ 5,600 $ 10,000 $ 8,000 $ 70,000 (2) 2,500 (2,500) Balances $ 4,600 $ 5,800 $ 72,000 $ 5,600 $ 10,000 $ 8,000 $ 70,000 (3) (2,000) (2,000) Balances $ 2,600 $ 5,800 $ 72,000 $ 5,600 $ 10,000 $ 6,000 $ 70,000 (4) 5,000 5,000 Balances $ 7,600 $ 5,800 $ 72,000 $ 5,600 $ 15,000 $ 6,000 $ 70,000 (5) (5,000) 60,000 55,000 Balances $ 2,600 $ 5,800 ### $ 5,600 $ 70,000 $ 6,000 $ 70,000 (6) 25,000 25,000 Balances $ 27,600 $ 5,800 ### $ 5,600 $ 70,000 $ 6,000 $ 95,000 35 Minutes, Strong PROBLEM 2.9B OLD TOWN PLAYHOUSE a. OLD TOWN PLAYHOUSE Balance Sheet September 30, 2005 Assets Liabilities & Owners' Equity Cash $ 18,400 Liabilities: Accounts receivable 10,000 Notes p Props and costumes 18,000 Accoun Lighting equipment 10,000 Salarie Tot Owners' equity: Howard Total $ 56,400 Total b. (1) (2) (3) (4) (5) (6) The cash in Jaffe's personal savings account is not an asset of the business entity Old Town Playhouse. Therefore, it should not appear in the balance sheet of the business. The money on deposit in the business bank account ($16,000) and in the company sa Only the amount receivable from Dell, Inc. ($10,000) should be included in the company’s accounts receivable as of September 30. The amounts expected from future tickets sales do not relate to completed transactions and are not yet assets of the business. The props and costumes should be shown in the balance sheet at their cost, $18,000, not at just the portion of the cost that was paid in cash. The $15,000 note payable is a debt of the business arising from a completed purchase transaction. Therefore, it The theater building is not owned by Old Town Playhouse. Therefore, it is not an asset of this business entity and should not appear in the balance sheet. The lighting equipment is an asset of the business and should be valued in the balance sheet at its cost, $10,000. As the automobile is not used in the business, it appears to be Jaffe’s personal asset rather than an asset of the business entity. Therefore, it should not be included in the balance sheet of the business. (Note: The advertised sales price of a similar a (7) PROBLEM 2.9B OLD TOWN PLAYHOUSE (concluded) (8) (9) As the automobile is not used in the business, it appears to be Jaffe’s personal asset rather than an asset of the business entity. Therefore, it should not be included in the balance sheet of the business. (Note: The advertised sales price of a similar a The accounts payable should be limited to the debts of the business, $6,000,and should not include Jaffe’s personal liabilities. The amount owed to stagehands for work done through September 30 is the result of completed transactions and should be included among the liabilities of the business. Even if agreement has been reached with Robin Needelman for her to perform in a future play, she has not yet performed and, therefore, is not yet owed any money. Thus, this $30,000 is not yet a liability of the business. Owner’s equity is not valued at either the original amount invested or at the estimated market value of the business. In fact, owner’s equity cannot be valued independently of the values assigned to assets and liabilities. Rather, it is a residual figure—the excess of total assets over total liabilities. (If liabilities exceed assets, owner’s equity would be a negative amount.) Thus, the amount of Jaffe’s capital should be determined by subtracting the corrected figure for total liabilities ($23,000) from the corrected amount of total assets ($56,400). This indicates owner’s equity of $33,400. PROBLEM 2.9B OLD TOWN PLAYHOUSE WN PLAYHOUSE lance Sheet mber 30, 2005 es & Owners' Equity Liabilities: $ 15,000 6,000 $ 2,000 $ 23,000 Owners' equity: 33,400 $ 56,400 ngs account is not an asset of the business entity Old Town not appear in the balance sheet of the business. The money on ount ($16,000) and in the company sa m Dell, Inc. ($10,000) should be included in the company’s mber 30. The amounts expected from future tickets sales do not and are not yet assets of the business. be shown in the balance sheet at their cost, $18,000, not at just aid in cash. The $15,000 note payable is a debt of the business se transaction. Therefore, it d by Old Town Playhouse. Therefore, it is not an asset of this ppear in the balance sheet. et of the business and should be valued in the balance sheet at its the business, it appears to be Jaffe’s personal asset rather than herefore, it should not be included in the balance sheet of the sales price of a similar a PROBLEM 2.9B OLD TOWN PLAYHOUSE (concluded) the business, it appears to be Jaffe’s personal asset rather than herefore, it should not be included in the balance sheet of the sales price of a similar a limited to the debts of the business, $6,000,and should not s. for work done through September 30 is the result of completed ded among the liabilities of the business. Even if agreement has man for her to perform in a future play, she has not yet yet owed any money. Thus, this $30,000 is not yet a liability of ither the original amount invested or at the estimated market ner’s equity cannot be valued independently of the values Rather, it is a residual figure—the excess of total assets over eed assets, owner’s equity would be a negative amount.) Thus, uld be determined by subtracting the corrected figure for total rected amount of total assets ($56,400). This indicates owner’s 30 Minutes, Medium CASE 2.3 USING A BALANCE SHEET a. b. Bankers considering a loan application are particularly interested in the ability of the company to pay its debts. They want to make loans that will be repaid promptly and in full at the agreed maturity date. Therefore, they give close attention to the am A banker is also interested in the amount of owners’ equity, since this ownership capital serves as a protecting buffer between the banker and any losses that may befall the business. Although Star Corporation has slightly greater owners’ equity than Moon As an investor, you would probably be willing to pay a higher price to buy the capital stock of Star Corporation. Since both companies are newly organized and the cost of assets shown on the balance sheet approximates fair market value, we can assume in t An important consideration for an investor interested in Star Corporation is that it may be necessary to invest a significant additional amount of cash in the business in the near future to enable the company to pay the large note payable due in 60 days. An investor would of course be interested in the earnings prospects of the companies, but no income statements or other information on income potential are provided in the problem. Profitability of the two companies cannot really be compared by the balanc 35 Minutes, Medium CASE 2.5 ETHICS AND WINDOW DRESSING 1. 2. 3. 4. Postponing the cash purchase of WordMaster would indeed leave Omega Software with an additional $8 million in cash at year-end, which would make the company appear more liquid. There is nothing illegal or unethical about postponing this transaction. Howev The deliberate omission of liabilities from the balance sheet would be unethical and illegal. This action would be in direct violation of the federal securities laws, and the responsible officers would probably face criminal charges. Further, the idea tha There is nothing unethical or illegal about renegotiating the due date of a liability. In fact, as Omega needs to borrow money anyway, extending this obligation to Delta at a 12% interest rate may be a good idea. The due date of this liability may require The intentional violation of generally accepted accounting principles with the intent to mislead financial statement users is both unethical and illegal. Federal securities laws require that publicly owned corporations prepare their financial statements i *Note to instructor: Investments in some marketable securities now are presented in the balance sheet at market value. We discuss this change in traditional accounting theory (called “mark-to-market”) in Chapter 7. But at present, the cost principle still 15 Minutes, Easy PROBLEM 2.2A AJAX MOVING COMPANY Description of transactions: a. Purchased equipment for cash at a cost of $3,200. b. Received $900 cash from collection of accounts receivable. c. d. Paid $14,500 of accounts payable. e. $15,000 cash was received from the sale of capital stock. f. Purchased equipment on account for $7,500. Purchased equipment at a cost of $13,500; paid $3,500 cash as down payment and incurred a liability (account payable) for the remaining $10,000.