1.
Prepare the financial report of Person A and Person J, and compare what it owns and owes on September 30, along with a list of any decisions made while preparing the report.
1.
Explanation of Solution
The financial report that compares what A and J own and owe, could be the balance sheet as it summarizes the assets and the liabilities on a given date.
The comparisons were made on the basis of:
- To estimate the net worth of both the individuals;
- Use both the Historical Cost and Fair Value to make an acceptable comparison;
- The potential assets have not been included in the report.
The Net worth of Person A as on September 30 is shown below:
Person A | ||
Particulars | Amount ($) | Amount ($) |
Assets | ||
Current Assets | ||
Cash | $1,000 | |
Art work | $800 | |
Total assets (A) | $1,800 | |
Liabilities | ||
Liabilities | ||
Loan payable | $250 | |
Total liabilities (B) | $250 | |
Net Worth | $1,550 |
Table (1)
The Net worth of Person J as on September 30 is shown below:
Person J | ||
Particulars | Amount ($) | Amount ($) |
Assets | ||
Current Assets | ||
Cash | $6,000 | |
Play Station Console | $250 | |
Total assets (A) | $6,250 | |
Liabilities | ||
Liabilities | ||
Tuition payable | $800 | |
Loan payable | $4,800 | |
Total liabilities (B) | $5,600 | |
Net Worth | $650 |
Table (2)
The Net worth of Person A as on September 30, based on fair value is shown below:
Person A | ||
Particulars | Amount ($) | Amount ($) |
Assets | ||
Current Assets | ||
Cash | $1,000 | |
Art work | $1,400 | |
Total assets (A) | $2,400 | |
Liabilities | ||
Liabilities | ||
Loan payable | $250 | |
Total liabilities (B) | $250 | |
Net Worth | $2,150 |
Table (3)
The Net worth of Person J as on September 30, is shown below:
Person J | ||
Particulars | Amount ($) | Amount ($) |
Assets | ||
Current Assets | ||
Cash | $6,000 | |
Play Station Console | $180 | |
Total assets (A) | $6,180 | |
Liabilities | ||
Liabilities | ||
Tuition payable | $800 | |
Loan payable | $4,800 | |
Total liabilities (B) | $5,600 | |
Net Worth | $580 |
Table (2)
2.
Identify the character that is better amongst Person A and Person J, and justify as a creditor to whom one would rather lend money.
2.
Explanation of Solution
Identify the character that is better amongst A and J and justify as a creditor to whom one would rather lend money as follows:
The financial position of person A is better off than person J as has a greater net worth. Also being a creditor lending money to person A would be far more advisable as person A has greater ability to repay the loan and also has less amount of loan when compared to person J.
3.
Prepare the financial report that compares what person A and person J earned in October along with a list of any decisions made while preparing the report.
3.
Explanation of Solution
Income statement: Income statement is a financial statement that shows the net income or net loss by deducting the expenses from the revenues and vice versa.
The above report was made on the following basis:
- Income tax for both the individuals is not calculated;
- Winning of lottery may not recur.
The Net income of person A in October, is shown below:
Person A | ||
Particulars | Amount ($) | Amount ($) |
Revenues | ||
Part Time Job (for October) | $1,500 | |
Expenses | ||
Rent expense (for October) | $470 | |
Living expenses (for October) | $950 | |
Total expenses | $1,420 | |
Net income | $80 |
Table (5)
The Net income of person J in October is shown below:
J | ||
Particulars | Amount ($) | Amount ($) |
Revenues | ||
Part Time Job (for October) | $1,950 | |
Expenses | ||
Rent expense (for October) | $800 | |
Living expenses (for October) | $950 | |
Total expenses | $1,750 | |
Net income | $200 |
Table (6)
4.
Identify the successful character amongst person A and person J and justify as a creditor to whom one would rather lend money as a three year loan.
4.
Explanation of Solution
Identify the successful character amongst person A and person J and justify as a creditor to whom one would rather lend money as a three year loan as follows:
Person J is more successful than person A in the month of October. However, being a creditor lending money to A would be far more advisable as person A has a stable income which ensures a greater ability to repay the loan and also has less amount of loan when compared to person J.
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Chapter 1 Solutions
Fundamentals Of Financial Accounting
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