Chapter 1, Problem 2APSA

To determine

Introduction:

Assets: These are resources which the company owns and will generate future economic benefits. The assets are categorized into fixed asset which will help in generating revenues for long period of time and examples is plant and machinery, building, equipments etc and current assets are resources which will be converted into cash within one year examples are accounts receivable, inventory.

Liabilities: These are amounts which the company has to pay to external stakeholders like creditors for credit purchases, banks for loans taken.

Owner equity: The amount contributed by owner to the company by way capital infusion, the purchase of equity shares by shareholders, the net profits are part of owners equity.

Accounting Equation: In accounting all transactions will always have debit and credit entry and always the total amount of debit will be equal to credit amount for every accounting equation. The accounting equation can be written as follows.

Assets = Liabilities + Equity

The accounting equation can be more detailed if equity component is detailed and can be shown as follows.

Assets = Liabilities + Equity(owner capital - owners withdrawal + revenues - expenses)

To Prepare:

Requirement I

Calculate for Company A amount of equity as on December 2014 and December 2015 and liabilities amount as on December 31, 2015.

Answer to Problem 2APSA

Solution:

The amount of equity as on December 31, 2014 is $30,500.

The amount of equity as on December 31, 2015 is $41,500.

The amount of liabilities as on December 31, 2015 is $16,500.

Explanation of Solution

The amount of equity as on December 31, 2014 is calculated as below by using accounting equation.

Assets = Liabilities + Equity

Putting values in formula for December 31, 2014 balances.

$55,000 = $24,500 + Equity

Equity = $55,000 - $24,500

Equity = $30,500

The closing balance of equity as on December 31, 2014 is $30,500 which will become opening balance of equity balance for December 2015.

To calculate the closing balance of equity as on December 31, 2015 the following accounting equation will be used.

Closing balance of Equity = opening balance of equity + owners investment + net profit - Owner cash withdrawal.

putting the values of 2015 in the formula,

Closing balance of Equity = $30,500 + $6,000 + $8,500 - $3,500

Closing balance of Equity = $41,500

To calculate the liabilities as on December 31, 2015 the following accounting equation will be used.

Assets = Liabilities + Equity

Putting the balances in the formula of December,2015.

$58,000 = Liabilities + $41,500

Liabilities = $58,000 - $41,500

Liabilities = $16,500.

To determine

To Prepare:

Requirement II

To calculate for Company B amount of equity as on December 2014 and December 2015 and net profit amount in 2015.

Answer to Problem 2APSA

Solution:

The amount of equity as on December 31, 2014 is $12,500.

The amount of equity as on December 31, 2015 is $13,500.

The amount of Net profit as on December 31, 2015 is $1,600.

Explanation of Solution

The amount of equity as on December 31, 2014 is calculated as below by using accounting equation.

Assets = Liabilities + Equity

Putting values in formula for December 31, 2014 balances.

$34,000 = $21,500 + Equity

Equity = $34,000 - $21,500

Equity = $12,500

The closing balance of equity as on December 31, 2014 is $12,500 which will become opening balance of equity balance for December 2015.

To calculate the Equity as on December 31, 2015 the following accounting equation will be used.

Assets = Liabilities + Equity

Putting the balances in the formula of December,2015.

$40,000 = $26,500 + Equity

Equity = $40,000 - $26,500

Equity = $13,500.

To calculate the net profit of equity as on December 31, 2015 the following accounting equation will be used.

Closing balance of Equity = opening balance of equity + owners investment + net profit - Owner cash withdrawal putting the values of 2015 in the formula

$13,500 = $12,500 + $1,400 + Net profit - $2,000

Net profit = $13,500 + $2,000 - $12,500 - $1,400

Net profit = $1,600.

To determine

To Prepare:

Requirement III

To calculate for Company C amount of assets as on December 2015.

Answer to Problem 2APSA

Solution:

The amount of assets as on December 2015 is $55,875.

Explanation of Solution

The amount of equity as on December 31, 2014 is calculated as below by using accounting equation.

Assets = Liabilities + Equity

Putting values in formula for December 31, 2014 balances.

$24,000 = $9,000 + Equity

Equity = $24,000 - $9,000

Equity = $15,000.

The closing balance of equity as on December 31, 2014 is $15,000 which will become opening balance of equity balance for December 2015.

To calculate the closing balance of equity as on December 31, 2015 the following accounting equation will be used.

Closing balance of Equity = opening balance of equity + owners investment + net profit - Owner cash withdrawal putting the values of 2015 in the formula

Closing balance of Equity = $15,000 + $9,750 + $8,000 - $5,875

Closing balance of Equity = $26,875

To calculate the Assets as on December 31, 2015 the following accounting equation will be used.

Assets = Liabilities + Equity

Putting the balances in the formula of December,2015.

Assets = $29,000 + $26,875

Assets = $55,875.

To determine

To Prepare:

Requirement IV

To calculate for Company D amount of owner investment as on December 2015.

Answer to Problem 2APSA

Solution:

The amount of owner investment as on December 2015 is $27,000.

Explanation of Solution

The amount of equity as on December 31, 2014 is calculated as below by using accounting equation.

Assets = Liabilities + Equity

Putting values in formula for December 31, 2014 balances.

$60,000 = $40,000 + Equity

Equity = $60,000 - $40,000

Equity = $20,000

The closing balance of equity as on December 31, 2014 is $20,000 which will become opening balance of equity balance for December 2015.

To calculate the Equity as on December 31, 2015 the following accounting equation will be used.

Assets = Liabilities + Equity

Putting the balances in the formula of December,2015.

$85,000 = $24,000 + Equity

Equity = $85,000 - $24,000

Equity = $61,000

To calculate the net owner investment of equity as on December 31, 2015 the following accounting equation will be used.

Closing balance of Equity = opening balance of equity + owners investment + net profit - Owner cash withdrawal.

putting the values of 2015 in the formula

$61,000 = $20,000 + owners investment + $14,000 - $0

Owners Investment = $61,000 - $20,000 - $14,000 - $0

Owners Investment = $27,000.

To determine

To Prepare:

Requirement V

To calculate for Company E amount of liabilities as on December 2014.

Answer to Problem 2APSA

Solution:

The amount of liabilities as on December 2014 is $91,500.

Explanation of Solution

To calculate the Equity as on December 31, 2015 the following accounting equation will be used.

Assets = Liabilities + Equity

Putting the balances in the formula of December,2015. $113,000 = $70,000 + Equity Equity = $113,000 - $70,000 Equity = $43,000.

The amount of opening balance of equity as on December 31, 2014 is calculated as below by using accounting equation.

Closing balance of Equity = opening balance of equity + owners investment + net profit - Owner cash withdrawal
putting the values of 2015 in the formula.

$43,000 = opening balance of equity + $6,500 + $20,000 - $11,000

Opening balance of Equity = $43,000 + $11,000 - $6,500 - $20,000

Opening balance of equity = $27,500

The opening balance of equity as on December 31,2015 is Closing balance of equity in December 31,2014.

The calculation of liabilities as on December 31, 2014 will be calculated using following accounting equation.

Assets = Liabilities + Equity

Putting values in formula for December 31, 2014 balances.

$119,000 = Liabilities + $27,500

Liabilities = $119,000 - $27,500

Equity = $91,500.