Financial Accounting

Accounting – Text & Cases – 13 Edition

CHAPTER 2
Basic Accounting Concepts: The Balance Sheet

Problem 2 – 1

a) If assets equal $95,000 and liabilities equal $40,000, then owners’ equity equals
55,000.
b) If assets equal $65,000 and owners’ equity equals $40,000, then liabilities equal
25,000.
c) If current assets equal $25,000, liabilities equal $40,000, and owners’ equity equals
$55,000, the noncurrent assets equal 70,000.
d) If the current ratio is 2.2:1, current assets are $33,000, and noncurrent assets equal
$55,000, then owners’ equity is (Assume that all liabilities are current.)
e) What is the current ratio if noncurrent assets equal $60,000, total assets equal $95,000,
and owners’ equity equals $70,000? (Assume that all liabilities are current.)

Note - (d) & (e) would be done in forthcoming sessions.

Problem 2 – 2

Prepare a balance sheet as of June 30, for the J. L. Gregory Company, using the following data:

Accounts payable $ 241,000 Cash $ 89,000

Accounts receivable 505,000 Equipment (at cost) 761,000
Accrued expenses 107,000 Estimated tax liability 125,000
Accumulated depreciation on Inventories 513,000
buildings 538,000 Investment in the Peerless
Accumulated depreciation on Company 320,000
equipment 386,000 Land (at cost) 230,000
Bonds payable 700,000 Marketable securities 379,000
Buildings (at cost) 1,120,000 Notes payable 200,000
Capital stock 1,000,000 Retained earnings ?

1
This study source was downloaded by 100000850097221 from CourseHero.com on 07-22-2022 00:35:02 GMT -05:00

https://www.coursehero.com/file/12258679/Chapter-2-Solutions/
Financial Accounting

Solution –

J. L. Gregory Company
Balance Sheet as on 30 June
Equity & Liabilities Amount ($) Assets Amount ($)
Owners’ equity Cash 89,000
Capital stock 1,000,000 Marketable securities 379,000
Retained earnings 620,000 Accounts receivable 505,000
Accounts payable 241,000 Inventories 513,000
Taxes payable 125,000 Land 230,000
Accrued expenses 107,000 Building 1,120,000
Notes payable 200,000 Less: Acc. Dep. (538,000) 582,000
Bonds payable 700,000 Equipment 761,000
Less: Acc. Dep. (386,000) 375,000
Investments 320,000
2,993,000 2,993,000

Problem 2 – 3

Indicate the net effect on assets, liabilities, and owners’ equity resulting from each of the
following transactions:

1) Capital stock was issued for $100,000 cash.

2) Bonds payable of $25,000 were refunded with capital stock.
3) Depreciation on plant and equipment equaled $8,500 for the year.
4) Inventory was purchased for $15,900 cash.
5) $9,400 worth of inventory was purchased on credit.
6) Inventory costing $4,500 was sold for $7,200 on credit.
7) $3,500 in cash was received for merchandise sold on credit.
8) Dividends of $3,000 were declared.
9) The declared dividends of $3,000 were paid.
10) The company declared a stock split, and replaced each outstanding share with two
new shares.

2
This study source was downloaded by 100000850097221 from CourseHero.com on 07-22-2022 00:35:02 GMT -05:00

https://www.coursehero.com/file/12258679/Chapter-2-Solutions/
Financial Accounting

Solution –

1) Cash + $100,000; Capital stock + $100,000

2) Bonds payable - $25,000; Capital stock + $25,000

3) Depreciation expense - $8,500, Plant and Machinery - $8500

4) Cash - $15,900; Inventory + $15,900

5) Inventory + $9,400; Accounts payable + $9,400

6) Inventory - $4,500; Accounts receivable + $7,200; Sales + $7,2700, COGS -$4500

7) Cash + $3,500; Accounts receivable - $3,500

8) Dividends payable + $3,000; Retained earnings - $3,000

9) Cash - $3,000; Dividends payable - $3,000.

10) No effect.

Problem 2 - 4

D. Carson and F. Leggatt formed a partnership on June 1 to operate a shoe store. Carson
contributed $50,000 cash and Leggatt contributed $50,000 worth of shoe inventory. During the
month of June, the following transactions took place:

1) Additional shoe inventory was purchased at a cost of $24,000 cash.

2) Total cash sales for the month were $31,000. The inventory that was sold had a cost
of $15,500.
3) Carson withdrew $6,200 of cash drawings. Leggatt withdrew only $3,700 of cash
drawings.
4) The partnership borrowed $50,000 from the Third National Bank.
5) Land and a building were purchased at a cash cost of $25,000 and $50,000,
respectively.

Required:

a) Prepare a balance sheet as of June 1.

b) Prepare a reconciliation of the beginning and ending balances for each owner’s
capital account.
c) Prepare a balance sheet as of June 30.

3
This study source was downloaded by 100000850097221 from CourseHero.com on 07-22-2022 00:35:02 GMT -05:00

https://www.coursehero.com/file/12258679/Chapter-2-Solutions/
Financial Accounting

Solution –

Carson Leggatt Partnership

Balance Sheet as on June 1
Equity & Liabilities Amount ($) Assets Amount ($)
Carson’s Capital 50,000 Cash 50,000
Leggatt’s Capital 50,000 Inventory 50,000
100,000 100,000

Cash A/c
Receipts Amount ($) Payments Amount ($)
Opening Balance 50,000 Inventory 24,000
Sales 31,000 Drawings by Carson 6,200
Third National Bank- Loan 50,000 Drawings by Leggatt 3,700
Land 25,000
Building 50,000
1,31,000 1,08,900
Difference 22,100

Inventory A/c
Opening Balance 50,000
Add: Purchase 24,000
Less: Sold (15,500)
Net Balance 58,500

Carson Leggatt Partnership

Profit and Loss A/c
Expenses Amount ($) Incomes Amount ($)
Cost of Goods Sold 15,500 Sales 31,000
Profit 15,500

4
This study source was downloaded by 100000850097221 from CourseHero.com on 07-22-2022 00:35:02 GMT -05:00

https://www.coursehero.com/file/12258679/Chapter-2-Solutions/
Financial Accounting

Carson’s share 50% = 7,750

Leggatt’s share 50% = 7,750

Carson’s capital A/c

Capital – June 1 $ 50,000
Withdrawals (6,200)
Share in profit (50%) 7,750
Capital – June 30 $ 51,550

Leggatt’s capital A/c

Capital – June 1 $ 50,000
Withdrawals (3,700)
Share in profit (50%) 7,750
Capital – June 30 $ 54,050

Carson Leggatt Partnership

Balance Sheet as on June 30
Equity & Liabilities Amount ($) Assets Amount ($)
Carson’s capital 51,550 Cash 22,100
Leggatt’s capital 54,050 Inventory 58,500
Bank loan (TNB) 50,000 Land 25,000
Building 50,000
155,600 155,600

5
This study source was downloaded by 100000850097221 from CourseHero.com on 07-22-2022 00:35:02 GMT -05:00

https://www.coursehero.com/file/12258679/Chapter-2-Solutions/
Financial Accounting

Problem 2 – 5

The January 1 balance sheet of the Marvin Company, an unincorporated business, is as

follows:

Marvin Company
Balance Sheet as on January 1
Equity & Liabilities Amount ($) Assets Amount ($)
Capital 20,000 Cash 25,000
Notes payable 55,000 Inventory 50,000
75,000 75,000

The following transactions took place in January:

Jan. 4 Merchandise was sold for $12,000 cash that had cost $7,000.
6 To increase inventory, Marvin placed an order with Star Company for merchandise
that would cost $7,000.
8 Marvin received the merchandise ordered from Star and agreed to pay the $7,000 in
30 days.
11 Merchandise costing $1,500 was sold for $2,500 in cash.
16 Merchandise costing $2,000 was sold for $3,400 on 30-day open account.
26 Marvin paid employees for the month $4,200 in cash.
29 Purchased land for $20,000 in cash.
31 Marvin purchased a two-year insurance policy for $2,800 in cash.

Required:

Describe the impact of each transaction on the balance sheet, and prepare a new balance sheet
as of January 31.

Solution –

Jan. 4 Sales + $12,000; Cash + $12,000 Inventory - $7,000 ; Cost of goods sold - $7,000
6 No effect.
8 Inventory + $7,000; Accounts Payable + $7,000
11 Inventory - $1,500; Cash + $2,500; Sales + $2,500; Cost of goods sold - $1,500
16 Inventory - $2,000; Cost of goods sold - $2,000; Accounts receivable + $3,400; Sales
+ $3,400

6
This study source was downloaded by 100000850097221 from CourseHero.com on 07-22-2022 00:35:02 GMT -05:00

https://www.coursehero.com/file/12258679/Chapter-2-Solutions/
Financial Accounting

26 Cash - $4,200; Wages (expenses) - $4,200

29 Cash - $20,000; Land + $20,000
31 Cash - $2,800; Prepaid insurance + $2,800

Marvin Company
Balance Sheet as of January 31
Equity & Liabilities Amount ($) Assets Amount ($)
Owners’ equity Cash 12,500
Capital 55,000 Accounts receivable 3,400
Retained earnings 3,200 Inventory 46,500
Accounts payable 7,000 Land 20,000
Notes payable 20,000 Prepaid insurance 2,800
85,200 85,200

Problem 2 – 6

As of December 31, Brian Company had the following account balances:

Accounts payable $ 5,000 Long-term investments $ 1,500

Accounts receivable 7,000 Marketable securities 3,500
Bonds payable 8,000 Plant and equipment 8,500
Cash 2,000 Wages payable 1,500
Current portion of bonds payable 2,000

Required:

a) What was the current ratio?

b) Explain what the current ratio measures.

Note – This question is based on ratio analysis that would be covered in forthcoming sessions.

7
This study source was downloaded by 100000850097221 from CourseHero.com on 07-22-2022 00:35:02 GMT -05:00

https://www.coursehero.com/file/12258679/Chapter-2-Solutions/
Powered by TCPDF (www.tcpdf.org)