Ex. 2.5 a.
$293,000: Assets $635,000 - liabilities $342,000 = owners’ equity $293,000
b. $1,172,500: Liabilities $562,500 + owners’ equity $610,000 = assets $1,172,500
c. $120,300: Assets $307,500 - owners’ equity $187,200 = liabilities $120,300
Ex. 2.7 Note to instructor: These are examples, but many others exist.
a. The purchase of office equipment (or any other asset) on credit will cause an
increase in the asset (office equipment) and an increase in a liability.
b. The cash payment of an account payable or note payable will cause a decrease in
the asset cash and a decrease in the liability paid.
c. The collection of an account receivable will cause an increase in one asset (cash)
and a decrease in another asset (accounts receivable). Other examples include the
purchase of land for cash, and the sale of land for cash.
d. The investment of cash in the business by the owners will cause an increase in an
asset (cash) and an increase in the owners’ equity.
e. The purchase of an automobile (or other asset) paying part of the cost in cash and
promising to pay the remainder at a later time would cause an increase in one
asset (automobile), a decrease in another asset (cash), and an increase in a
liability by the amount of the unpaid portion.
equity $293,000
0 = assets $1,172,500
bilities $120,300
credit will cause an
a liability.
will cause a decrease in
ase in one asset (cash)
er examples include the
cause an increase in an
rt of the cost in cash and
se an increase in one
an increase in a
PROBLEM 2.4A
PHILLIPS TRUCK RENTAL
Assets = Liabilities +
Accounts Office Notes Accounts
Cash Receivable + Equipment Trucks = Payable + Payable +
December 31 $ 9,500 $ 13,900 $ 3,800 $ 68,000 $ 20,000 $ 10,200
(1) (2,700) 2,700
Balances $ 6,800 $ 13,900 $ 6,500 $ 68,000 $ 20,000 $ 10,200
(2) 4,000 (4,000)
Balances $ 10,800 $ 9,900 $ 6,500 $ 68,000 $ 20,000 $ 10,200
(3) (3,200) (3,200)
Balances $ 7,600 $ 9,900 $ 6,500 $ 68,000 $ 20,000 $ 7,000
(4) 10,000 10,000
Balances $ 17,600 $ 9,900 $ 6,500 $ 68,000 $ 30,000 $ 7,000
(5) (15,000) 30,500 15,500
Balances $ 2,600 $ 9,900 $ 6,500 $ 98,500 $ 45,500 $ 7,000
(6) 85,000
Balances $ 87,600 $ 9,900 $ 6,500 $ 98,500 $ 45,500 $ 7,000
PROBLEM 2.4A
RUCK RENTAL
Owners'
Equity
Capital
Stock
$ 65,000
$ 65,000
$ 65,000
$ 65,000
$ 65,000
$ 65,000
85,000
$ 150,000
PROBLEM 2.9A
SPENCER PLAYHOUSE
a.
SPENCER PLAYHOUSE
Balance Sheet
September 30, current year
Assets Liabilities & Owner's Equity
Cash $ 16,900 Liabilities:
Accounts receivable 7,200 Notes paya $ 15,000
Props and costumes 18,000 Accounts p 3,900
Lighting equipment 9,400 Salaries pa $ 4,200
Total li $ 23,100
Owner's equity:
Anita Spence 28,400
Total $ 51,500 Total $ 51,500
b. (1) The cash in Anita Spencer's personal savings account is not an asset of
the business entity
Spencer Playhouse. Therefore, it should not appear in the balance sheet
of the business. The money on deposit in the business bank account
($15,000) and in the company safe ($1,900)
constitute cash owned by the business. It is not necessary to state
separately in the balance
sheet amounts of cash at different locations; thus, the cash owned by the
(2) business
Only the at
amount receivable from Artistic Tours ($7,200) should be
September
included in 30
thetotals $16,900.
company’s accounts receivable as of September 30. The
amounts expected from future tickets sales do not relate to completed
transactions and are not yet assets of the business.
(3) The props and costumes should be shown in the balance sheet at their
cost, $18,000, not at just the portion of the cost that was paid in cash.
The $15,000 note payable is a debt of the
business arising from a completed purchase transaction. Therefore, it
should be included among the company’s liabilities. The date at which
this liability must be paid is not relevant.
(4) The theater building is not owned by Spencer Playhouse. Therefore, it is
not an asset of this business entity and should not appear in the balance
sheet.
(5) The lighting equipment is an asset of the business and should be
presented in the balance sheet at its cost, $9,400.
(6) As the automobile is not used in the business, it appears to be Anita
Spencer’s personal asset rather than an asset of the business entity.
Therefore, it should not be included in the balance sheet of the business.
(Note: The advertised sales price of a similar automobile is not an
appropriate valuation figure even if the automobile were to be
included.)
(7) The accounts payable should be limited to the debts of the business,
$3,900,and should not include Anita Spencer’s personal liabilities.
The accounts payable should be limited to the debts of the business,
$3,900,and should not include Anita Spencer’s personal liabilities.
(8) The amount owed to stagehands for work done through September 30 is
the result of completed transactions and should be included among the
liabilities of the business. Even if agreement has been reached with
Mario Dane for him to perform in a future play, he has not yet
performed and therefore, is not yet owed any money. Thus, this
$25,000 is not yet a liability of the business.
(9) Owner’s equity is not valued at either the original amount invested or at
the estimated market value of the business. In fact, owner’s equity
cannot be valued independently of the amounts assigned to assets and
liabilities. Rather, it is a residual figure—the excess of total assets over
total liabilities. (If liabilities exceed assets, owner's equity would be a
negative amount.) Thus, the amount of Anita Spencer's capital is
determined by subtracting the corrected figure for total liabilities
($23,100) from the corrected amount of total assets ($51,500). This
indicates owner's equity of $28,400.
