CHAPTER 1

EXERCISES: SET B
E1-1B Sophie Company performs the following accounting tasks during the year. Classify the three activities of
______Summarizing economic events. accounting.
______Selecting economic activities relevant to the company. (LO 1)
______Reporting information in a standard format.
______Preparing accounting reports.
______Measuring events in dollars and cents.
______Keeping a systematic chronological diary of events.
______Explaining uses, meaning, and limitations of data.
______Classifying economic events.
______Analyzing and interpreting information.
Accounting is “an information system that identifies, records, and communicates the
economic events of an organization to interested users.”
Instructions
Categorize the accounting tasks performed by Sophie as relating to either the identifica-
tion (I), recording (R), or communication (C) aspects of accounting.

E1-2B (a) The following are users of financial statements. Identify users of accounting
information.
______Customers ______Securities and Exchange Commission
______Internal Revenue Service ______Investors (LO 1)
______Labor unions ______Suppliers
______Factory manager ______Human resource worker
______Vice-president of finance

Instructions
Identify the users as being either external users or internal users.

(b) The following questions could be asked by an internal user or an external user.
______What price should we set for our product?
______Did the company earn a satisfactory income?
______Should we hire more employees?
______How does the company’s profitability compare to other companies?
______What does it cost us to manufacture each unit produced?
______Which product should we emphasize?
______Will the company be able to provide a return to its stockholders?

Instructions
Identify each of the questions as being more likely asked by an internal user or an external
user.

E1-3B Rick Payne, president of Lions Company, has instructed Ken Mason, the head of the Discuss ethics and the
accounting department for Lions Company, to report the company’s land in the company’s historical cost principle.
accounting reports at its fair value of $225,000 instead of its cost of $125,000. Payne says, (LO 1)
“Showing the land at $225,000 will make our company look like a better investment when
we try to attract new investors next month.”

Instructions
Explain the ethical situation involved for Ken Mason, identifying the stakeholders and the
alternatives.

E1-4B The following situations involve accounting principles and assumptions. Use accounting concepts.

1. Hodge Company owns land that is worth substantially more than it originally cost. (LO 2)
In an effort to provide more relevant information, Hodge reports the land at fair value
in its accounting reports.
2. Franklin Company includes in its accounting records only transaction data that can be
expressed in terms of money.
3. Jose Ortiz, owner of Jose’s MovieHouse, records his personal living costs as expenses of
the MovieHouse.
2 1 Accounting in Action

Instructions
For each of the three situations, say if the accounting method used is correct or incorrect.
If correct, identify which principle or assumption supports the method used. If incorrect,
identify which principle or assumption has been violated.

Classify accounts as assets, E1-5B Luther Cleaners has the following balance sheet items.
liabilities, and owner’s equity.
Accounts payable Accounts receivable
(LO 3) Cash Notes payable
Equipment Rent payable
Supplies Owner’s capital

Instructions
Classify each item as an asset, liability, or owner’s equity.

Analyze the effect of E1-6B Selected transactions for Lush Lawn Care Company are listed below.
transactions.
1. Made cash investment to start business.
(LO 3, 4) 2. Purchased equipment on account.
3. Paid salaries.
4. Billed customers for services performed.
5. Received cash from customers billed in (4).
6. Withdrew cash for owner’s personal use.
7. Incurred advertising expense on account.
8. Purchased additional equipment for cash.
9. Received cash from customers when service was performed.

Instructions
List the numbers of the above transactions and describe the effect of each transaction on
assets, liabilities, and owner’s equity. For example, the first answer is: (1) Increase in assets
and increase in owner’s equity.

Analyze the effect of E1-7B Rita’s Payroll Services Company entered into the following transactions during
transactions on assets, May 2017.
liabilities, and owner’s equity.
1. Purchased computer terminals for $15,000 from Comp-time on account.
(LO 3, 4) 2. Paid $3,000 cash for May rent on storage space.
3. Received $12,000 cash from customers for contracts billed in April.
4. Provided computer services to Magic Construction Company for $2,500 cash.
5. Paid Northern Ohio Power Co. $7,000 cash for energy usage in May.
6. Rita invested an additional $25,000 in the business.
7. Paid Comp-time for the terminals purchased in (1) above.
8. Incurred advertising expense for May of $900 on account.
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.

Analyze transactions and E1-8B An analysis of the transactions made by Holmes & Co., a certified public
compute net income. accounting firm, for the month of August is shown on the next page. The expenses were
(LO 4) $820 for rent, $5,400 for salaries and wages, and $500 for utilities.
 Exercises: Set B 3

Owner’s Equity
Accounts Accounts Owner’s Owner’s
Cash 1 Receivable 1 Supplies 1 Equipment 5 Payable 1 Capital 2 Drawings 1 Revenues 2 Expenses
1. 1$20,000 1$20,000
2. 22,000 1$5,000 1$3,000
3. 2750 1$750
4. 15,600 1$2,700 1$8,300
5. 21,500 21,500
6. 22,000 2$2,000
7. 2820 $820
8. 1450 2450
9. 25,400 25,400
10. 1500 2500

Instructions
(a) Describe each transaction that occurred for the month.
(b) Determine how much owner’s equity increased for the month.
(c) Compute the amount of net income for the month.

E1-9B An analysis of transactions for Holmes & Co. was presented in E1–8B. Prepare financial statements.
(LO 5)
Instructions
Prepare an income statement and an owner’s equity statement for August and a balance
sheet at August 31, 2017.

E1-10B Dunn Company had the following assets and liabilities on the dates indicated. Determine net income (or
loss).
December 31 Total Assets Total Liabilities
(LO 4)
2016 $390,000 $240,000
2017 $460,000 $280,000
2018 $590,000 $360,000

Dunn began business on January 1, 2016, with an investment of $100,000.

Instructions
From an analysis of the change in owner’s equity during the year, compute the net income
(or loss) for:
(a) 2016, assuming Dunn’s drawings were $20,000 for the year.
(b) 2017, assuming Dunn made an additional investment of $55,000 and had no drawings
in 2017.
(c) 2018, assuming Dunn made an additional investment of $10,000 and had drawings of
$20,000 in 2018.

E1-11B Two items are omitted from each of the following summaries of balance sheet and Analyze financial statements
income statement data for two proprietorships for the year 2017, Gary Carmel and Taso items.
Enterprises. (LO 3, 4)
Gary Taso
Carmel Enterprises
Beginning of year:
Total assets $ 115,000 $129,000
Total liabilities 90,000 (c)
Total owner’s equity (a) 78,000
End of year:
Total assets 160,000 180,000
Total liabilities 100,000 50,000
Total owner’s equity 60,000 130,000
Changes during year in owner’s equity:
Additional investment (b) 25,000
Drawings 19,000 (d)
Total revenues 215,000 100,000
Total expenses 175,000 61,000

Instructions
Determine the missing amounts.
4 1 Accounting in Action

Prepare income statement E1-12B The following information relates to Eusey Co. for the year 2017.
and owner’s equity statement.
Owner’s capital, January 1, 2017 $ 48,000 Advertising expense $ 1,800
(LO 5)
Owner’s drawings during 2017 7,000 Rent expense 12,000
Service revenue 65,000 Utilities expense 3,100
Salaries and wages expense 30,000

Instructions
After analyzing the data, prepare an income statement and an owner’s equity statement for
the year ending December 31, 2017.

Correct an incorrectly E1-13B Mary Colaw is the bookkeeper for Nymeyer Company. Mary has been trying to get
prepared balance sheet. the balance sheet of Nymeyer Company to balance. Nymeyer balance sheet is shown below.
(LO 5)
NYMEYER COMPANY
Balance Sheet
December 31, 2017
Assets Liabilities
Cash $11,000 Accounts payable $18,000
Supplies 7,000 Accounts receivable (10,500)
Equipment 48,000 Owner’s capital 64,500
Owner’s drawings 6,000 Total liabilities and
Total assets $72,000 owner’s equity $72,000

Instructions
Prepare a correct balance sheet.

Compute net income and E1-14B Linda Pedigo is the sole owner of Wilderness Park, a trailer park near the Lake
prepare a balance sheet. Tahoe National Recreation Area. Linda has compiled the following financial information
(LO 5) as of December 31, 2017.
Revenues during 2017—camping fees $120,000 Fair value of equipment $140,000
Revenues during 2017—general store 60,000 Notes payable 50,000
Accounts payable 12,000 Expenses during 2017 145,000
Cash on hand 11,000 Supplies on hand 3,500
Original cost of equipment 119,000

Instructions
(a) Determine Linda Pedigo’s net income from Wilderness Park for 2017.
(b) Prepare a balance sheet for Wilderness Park as of December 31, 2017.

Prepare an income statement. E1-15B Presented below is financial information related to the 2017 operations of
(LO 5) Williamson Company.
Maintenance and repairs expense $ 89,000
Property tax expense (on dock facilities) 11,000
Salaries and wages expense 150,000
Advertising expense 5,500
Ticket revenue 370,000

Instructions
Prepare the 2017 income statement for Williamson Company.

Prepare an owner’s equity E1-16B Presented below is information related to the sole proprietorship of Jeff Tabor,
statement. attorney.
(LO 5)
Legal service revenue—2017 $340,000
Total expenses—2017 221,000
Assets, January 1, 2017 105,000
Liabilities, January 1, 2017 63,000
Assets, December 31, 2017 165,000
Liabilities, December 31, 2017 103,000
Drawings—2017 ?

Instructions
Prepare the 2017 owner’s equity statement for Jeff Tabor’s legal practice.