Survey Of Accounting
Survey Of Accounting
4th Edition
ISBN: 9780077862374
Author: Edmonds, Thomas P.
Publisher: Mcgraw-hill Education,
Question
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Chapter 1, Problem 21E

a.

To determine

Calculate the amount of retained earnings as of January, 2014.

a.

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Explanation of Solution

Accounting equation:

Accounting equation is an accounting tool expressed in the form of equation, by creating a relationship between the resources or assets of a company, and claims on the resources by the creditors and the owners. Accounting equation is expressed as shown below:

Assets = Liabilities + Stockholders’ equity

Calculate the amount of retained earnings as of January, 2014:

Company W
Accounting Equation
As of January 1, 2014
Assets=Liabilities+Stockholders’ Equity
Cash+Land=Notes payable+

Common

Stock

+

Retained

Earnings (1)

$200$1,800$600$1,000400

Table (1)

Working note 1: Calculate the amount of retained earnings:

Retainedearnings=[AssetLiabilities(Notespayable)Stockholders'equity(Commonstock)]=$2,000$600$1,000=$400

Note: Asset($2,000)=Cash($200)+Land($1,800)

Conclusion

Therefore, the amount of retained earnings is $400.

b.

To determine

State the reason whether the dividend can be paid or cannot be paid.

b.

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Explanation of Solution

Dividends:

Dividends are the rewards to the stockholders for investing their money in the company. Payment of dividend depends upon the decision of the management.

The company has only $200 as cash balance . Therefore, it cannot pay $300 as dividend. Retained earnings account balance is zero. Dividends can be paid only if the company has enough balance in its retained earnings account.

c.

To determine

Ascertain the percentage of assets acquired from creditors.

c.

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Debt to Asset Ratio:

Debt to asset ratio is the ratio that measures the difference between total asset and total liability of the company. Debt ratio reflects the finance strategy of the company. It is used to evaluate company’s ability to pay its debts. Higher debt ratio implies the higher financial risk.

Calculate the percentage of assets acquired from creditors:

Percentageofassets acquired from creditors)=Creditor's loanTotalassets×100=$600$2,00×100=30%

Note: Asset($2,000)=Cash($200)+Land($1,800)

Conclusion

Therefore, the Percentage of total assets acquired from creditors is 30%.

d.

To determine

Ascertain the percentage of assets acquired from investors.

d.

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Stockholders’ equity to asset ratio:

Stockholders ‘equity to asset ratio is the ratio that measures the difference between total asset and stockholders ‘equity of the company. Stockholders’ equity ratio reflects the amount of assets that can be claimed by the stockholders in proportion to the value of shares owned by them.

Percentage of total assets acquired from investors is calculated as follows:

Percentageof totalassetsacquired frominvestors)=Investor'scontributionTotalassets×100=$1,000$2,000×100=50%

Note: Asset($2,000)=Cash($200)+Land($1,800)

Conclusion

Therefore, the Percentage of total assets acquired from investors is 50%.

e.

To determine

Ascertain the percentage of assets acquired from retained earnings.

e.

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Explanation of Solution

Retained earnings:

Retained earnings are the portion of earnings kept by the business for the purpose of reinvestments, payment of debts, or for future growth.

Percentage of total assets acquired from retained earnings:

  Percentageoftotalassetsacquiredfromretainedearnings)=RetainedearningsTotalassets×100=$4,00$2,000×100=20%

Note: Asset($2,000)=Cash($200)+Land($1,800)

Conclusion

Therefore, the Percentage of total assets acquired from retained earnings is 20%

f.

To determine

Create an accounting equation using percentage for the right side of the accounting equation.

f.

Expert Solution
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Explanation of Solution

Accounting equation:

Accounting equation is an accounting tool expressed in the form of equation, by creating a relationship between the resources or assets of a company, and claims on the resources by the creditors and the owners. Accounting equation is expressed as shown below:

Assets = Liabilities + Stockholders’ equity

Create an accounting equation using percentage for the right side of the accounting equation:

Company W
Accounting Equation
As of January 1, 2014
Assets=Liabilities+Stockholders’ Equity
Cash +Land

=

Notes payable

Common

Stock

+

Retained

Earnings (2)

$200 $1,800 30% 50% 20%

Table (2)

Working note 2:

Calculate Percentage of total assets acquired from retained earnings:

  Percentageof totalassetsacquiredfromretainedearnings)=RetainedearningsTotalassets×100=$4,00$2,000×100=20%

Note: Asset($2,000)=Cash($200)+Land($1,800)

g.

To determine

Prepare income statement, statement of changes in stockholders’ equity, a balance sheet, and a statement of cash flows.

g.

Expert Solution
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Explanation of Solution

Accounting equation:

Accounting equation is an accounting tool expressed in the form of equation, by creating a relationship between the resources or assets of a company, and claims on the resources by the creditors and the owners. Accounting equation is expressed as shown below:

Assets = Liabilities + Stockholders’ equity

Statement of cash flows:

Statement of cash flows is one among the financial statement of a Company statement that shows aggregate data of all cash inflows and cash outflows that is received and paid by the Company from its ongoing business operations.

Prepare Accounting equation as on December 31, 2014:

Company W
Accounting Equation
As of December 31, 2014
AssetsLiabilitiesStockholders’ Equity
Cash+Land=

Notes

Payable

Common

Stock

+

Retained

Earnings

Account title
$200 $1,800 $600$1,000$400
$500 NA NANA$500Revenue
($300) NA NANA($300)Expenses
($50)NANANA($50)Dividends
$350$1,800$600$1,000$550

Table (3)

Income statement:

Income statement is the financial statement of a company which shows all the revenues earned and expenses incurred by the company over a period of time.

Prepare Income statement for the year ended December 31, 2014:

Company W
Income Statement
For the year Ended December 31, 2014
ParticularsAmount
Revenues$500
Expenses($300)
Net Income$200

Table (4)

Statement of changes in stockholders’ equity:

Statement of changes in stockholders' equity records the changes in the owners’  equity during the end of an accounting period by explaining about the increase or  decrease in the capital reserves of shares.

Prepare Statement of changes in stockholders' equity for the year ending December 31, 2014:

Company W
Statement of Changes in Stockholders’ Equity
For the Year Ended December 31, 2014
ParticularsAmount ($)Amount ($)
Beginning Common Stock            1,000 
Add: Common Stock Issued0 
Ending Common Stock             1,000
Beginning Retained Earnings            400 
Add: Net Income                200 
Less: Dividends(50) 
Ending Retained Earnings 500
Total Stockholders’ Equity $1,550

Table (5)

Balance sheet:

Balance Sheet is one of the financial statements that summarize the assets, the liabilities, and the Shareholder’s equity of a company at a given date. It is also known as the statement of financial status of the business.

Prepare Balance sheet as on December 31, 2014:

Company W
Balance Sheet
As of December 31, 2014
ParticularsAmount ($)Amount ($)
Assets:  
Cash       350 
Land1,800 
Total Assets2,150
Liabilities:  
Notes Payable600 
Total Liabilities             600
Stockholders’ Equity:  
Common Stock    1,000 
Retained Earnings550 
Total Stockholders’ Equity1,550
Total Liabilities and Stockholders’ Equity  2,150

Table (6)

Statement of cash flows: Statement of cash flows is one among the financial statement of a Company statement that shows aggregate data of all cash inflows and cash outflows that is received and paid by the Company from its ongoing business operations.

Statement of cash flows is prepared as follows:

Company W
Statement of Cash Flows
For the Year Ended December 31, 2014
ParticularsAmount ($)Amount ($)
Cash Flows From Operating Activities:  
Cash Receipts from Customers        500 
Cash Payments for Expenses(300) 
Net Cash Flow from Operating Activities                200
Cash Flows From Investing Activities:                    0
Cash Flows From Financing Activities:  
Cash Payments for Dividends(50) 
Net Cash Flow from Financing Activities (50)
Net Increase in Cash                150
Add: Beginning Cash Balance 200
Ending Cash Balance $350

Table (7)

h.

To determine

Comment on the terminology used to date each statement.

h.

Expert Solution
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Explanation of Solution

Comment on the terminology used is as follows:

  • The statements of income, changes in stockholders’ equity and cash flows explain about the happening of the company over a span of time. The span of time in this case is one year. Therefore, these statements use terminology “For the year ended December 31, 2014”.
  • On the other hand, the balance sheet is prepared at a specific point of time. Therefore this statement use terminology “As of December 31, 2014 “

i.

To determine

State the way the fact of appraised value of land will change the financial statements.

i.

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Explanation of Solution

Historical cost principle:

Historical cost principle refers to the original cost of an asset at the time, when the asset is acquired.

Generally, the market value of the asset is not recorded in the fianancial statements as the assets are reported by the amount paid (original cost) for them regardless of the increase in the market value of the asset according to the historical cost concept.

j.

To determine

Ascertain the balance in the revenue account on January 1, 2015.

j.

Expert Solution
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Explanation of Solution

The revenue account had zero balance on January 1, 2015 because the balance in this account is transferred to retained earnings account during December 31, 2014 closing process.

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Chapter 1 Solutions

Survey Of Accounting

Ch. 1 - Prob. 11QCh. 1 - 12. Distinguish between elements of financial...Ch. 1 - Prob. 13QCh. 1 - 14. To whom do the assets of a business belong?Ch. 1 - 15. Describe the differences between creditors and...Ch. 1 - Prob. 16QCh. 1 - Prob. 17QCh. 1 - Prob. 18QCh. 1 - 19. What does a double-entry bookkeeping system...Ch. 1 - 22. How does acquiring capital from owners affect...Ch. 1 - Prob. 21QCh. 1 - Prob. 22QCh. 1 - 25. What are the three primary sources of assets?Ch. 1 - 26. What is the source of retained earnings?Ch. 1 - 27. How does distributing assets (paying...Ch. 1 - 28. What are the similarities and differences...Ch. 1 - Prob. 27QCh. 1 - 30. Which of the general-purpose financial...Ch. 1 - 31. What causes a net loss?Ch. 1 - 35. What three categories of cash receipts and...Ch. 1 - Prob. 31QCh. 1 - 37. Discuss the term articulation as it relates to...Ch. 1 - 38. How do temporary accounts differ from...Ch. 1 - Prob. 34QCh. 1 - 41. Identify the three types of accounting...Ch. 1 - Prob. 36QCh. 1 - Prob. 37QCh. 1 - Prob. 1ECh. 1 - Prob. 2ECh. 1 - Prob. 3ECh. 1 - Prob. 4ECh. 1 - Prob. 5ECh. 1 - Prob. 6ECh. 1 - Prob. 7ECh. 1 - Prob. 8ECh. 1 - Prob. 9ECh. 1 - Prob. 10ECh. 1 - Prob. 11ECh. 1 - Prob. 12ECh. 1 - Prob. 13ECh. 1 - Prob. 14ECh. 1 - Prob. 15ECh. 1 - Prob. 16ECh. 1 - Prob. 17ECh. 1 - Prob. 18ECh. 1 - Prob. 19ECh. 1 - Prob. 20ECh. 1 - Prob. 21ECh. 1 - Prob. 22ECh. 1 - Prob. 23ECh. 1 - Prob. 24ECh. 1 - Prob. 25ECh. 1 - Types of transactions and the horizontal...Ch. 1 - Prob. 27ECh. 1 - Prob. 28PCh. 1 - Prob. 29PCh. 1 - Prob. 30PCh. 1 - Prob. 31PCh. 1 - Prob. 32PCh. 1 - Prob. 33PCh. 1 - Prob. 34PCh. 1 - Prob. 1ATCCh. 1 - ATC 1-5 Writing Assignment Elements of financial...
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