Chapter 2 Solution of Fundamental of Financial Accouting by EDMONDS (4th Edition)

ANSWERS TO QUESTIONS - CHAPTER 2
1. Accrual accounting attempts to record the effects of

accounting events in the period when such events occur,
regardless of when cash is received or paid. The goal is
to match expenses with the revenues that they produce.
2. Recognition is the act of recording an event in the

financial statements. When accruals are used, events are
recognized before the associated cash is paid or
collected.
3. An asset source transaction increases assets and

increases either liabilities or equity.
4. The capital acquisition from owners increases business

assets (usually cash) and equity (capital stock, common
or preferred stock).
5. The recognition of revenue on account increases the

corresponding revenue account on the income statement,
but does not affect the statement of cash flows. The
cash flow statement is affected when the account is
collected.
6. Asset Source Transaction Effect on Accounting

Equation
Issue of Common Stock Increases Assets,

Increases
Common Stock
Revenue Earned Increases Assets,

Increases
Retained Earnings
Borrowed Funds Increases Assets,

Increases
Liabilities
2-1
7. Revenue is recognized under accrual accounting when a
revenue-producing transaction occurs, i.e., when the
revenue is earned, even if no cash is collected at the time
of the transaction.
8. The collection of cash for accounts receivable is an asset

exchange transaction. Only the asset side of the
accounting equation is affected because one asset
account increases (cash), and another asset account
decreases (accounts receivable). Total assets are
unchanged.
9. The recognition of expenses affects the accounting

equation by either decreasing assets or by increasing
liabilities (payables) and decreasing stockholders’ equity
(retained earnings).
10. A claims exchange transaction is one where the claims of

creditors (liabilities) increase and the claims of
stockholders’ (retained earnings) decrease, or vice versa.
The total amount of claims is unchanged.
11. Cash payments to creditors are asset use transactions.

These transactions result in the reduction of an asset
account (cash) and the reduction of the corresponding
liability account (payables).
12. Expenses are recognized under accrual accounting at the

time the expense is incurred or resources are consumed,
regardless of when cash payment is made.
13. Net cash flows from operations on the cash flow

statement may be different from net income because of
the application of accrual accounting. Revenues and
expenses reported on the income statement may be
recognized before the actual collection or payment of
cash that is reported on the cash flow statement.
14. The income statement reflects the change in net assets

associated with operating a business, as shown by
revenues and expenses. Expenses may result from a
2-2
decrease in assets or an increase in liabilities. Revenues
may result from an increase in assets or a decrease in
liabilities.
15. Net assets is defined as assets minus liabilities or as

stockholders’ equity (common stock + retained earnings).
16. Net income increases stockholders' claims on business

assets by increasing retained earnings.
17. An expense is a decrease in assets or an increase in

liabilities that occurs in the process of generating
revenue.
18. Revenue is an increase in assets or a decrease in

liabilities that results from the operating activities of the
business.
19. The purpose of the statement of changes in stockholders’

equity is to display the effects of business operations and
stock issued to owners and dividends paid to
stockholders. It identifies the ways that an entity's
equity increased and decreased as a result of its
operations and transactions with its stockholders.
20. The purpose of the balance sheet is to provide

information about an entity's assets, liabilities, and
stockholders’ equity and their relationships to each other
at a particular point in time. It provides a list of the
economic resources that the enterprise has available for
its operating activities and the claims to those resources.
21. The balance sheet is dated as of a specific date because

it shows information about an entity's assets, liabilities,
and stockholders’ equity as of that date, not measured
over a time period. The statement of changes in
stockholders’ equity, the income statement, and the cash
flow statement reflect transactions that occur over a
period of time.
2-3
22. Assets are listed on the balance sheet in accordance with
their respective levels of liquidity (how rapidly they can
be converted to cash).
23. The statement of cash flows explains the change in cash

from one accounting period to the next. It is prepared by
analyzing the cash account.
24. Under accrual accounting, interest revenue that has been

earned, but cash has not been received, is recognized at
the time financial statements are prepared by making an
adjusting entry.
25. An adjusting entry is an entry that updates account

balances prior to preparation of the financial statements.
Example: entry to recognize accrued interest revenue.
26. The entry to record accrued interest revenue is an

adjusting entry that affects the accounting equation by
increasing assets (interest receivable) and increasing
stockholders’ equity (retained earnings).
27. The entry to record accrued interest expense is an

adjusting entry that involves an increase in liabilities
(interest payable) and a corresponding decrease in
stockholders’ equity (retained earnings).
28. Land purchased in 1920 is listed on a balance sheet at its

historical cost.
29. The historical cost concept of accounting measurement

refers to the practice of recording and maintaining assets
at the actual price paid to acquire the asset.
30. No, all countries do not use historical cost. In countries

with extremely high inflation rates, historical cost is not
appropriate. Such countries may use replacement cost
rather than historical cost to value assets.
31. Temporary accounts (revenue, expense and dividends) are

closed at the end of the accounting period. It is necessary
2-4
to close these accounts so that revenue, expense and
dividends can be accumulated for the next period.
32. Period costs are costs that are recognized in an

accounting period. Examples of period costs include rent
expense, utilities expense, and salaries expense.
33. Salary of the tax return preparer could be directly with

the revenue that it produces.
34. The four stages of the accounting cycle: Record

transactions; adjust the accounts; prepare statements; and
close the nominal accounts. The adjustment process has
been added to the cycle in this chapter. It is necessary to
adjust accounts so that the accounts will reflect the correct
balances under the accrual basis of accounting.
35. A financial audit is a detailed examination of a company’s

financial statements and the documents that support the
information presented in those statements. A financial
audit is conducted by an independent Certified Public
Accountant (CPA).
36. An independent auditor is a CPA who is independent from

the client.
Independence assures users of the audited financial

statements that the auditor is relatively free from the
influence or control of the client.
37. An error is material if knowing about the error would

have affected the decisions of the average prudent
investor.
38. Unqualified Opinion - Financial statements are in

compliance with GAAP.
Adverse Opinion - Financial statements are not in

compliance with GAAP.
2-5
Qualified Opinion - For the most part, financial
statements are in compliance with GAAP, but the auditor
has reservations about something in the statements.
39. An unqualified opinion implies that the financial

statements are free from material errors or departures
from GAAP. It does not imply that the financial
statements are 100% accurate.
40. A disclaimer is issued if the auditor is unable to perform

audit procedures necessary to determine whether
financial statements are prepared in accordance with
GAAP.
41. An auditor can disclose confidential client information

only when called to testify in a court of law or in
response to certain questions from a successor auditor.
42. The Six Articles of the AICPA Code of Professional

Conduct are identified in Exhibit 2-7, p. 74.
43. The purpose of internal controls is to reduce the

possibility of errors or the opportunity for fraud.
2-6
SOLUTIONS TO EXERCISES - SERIES A - CHAPTER 2
EXERCISE 2-1A
W. Harder Company
Statements Model for the Year Ended 2004
Statement
Balance Sheet Income Statement of
Cash Flows
Assets =
Stockholders’ Rev. - Exp. = Net
Equity Inc.
Accts. Commo Retaine
Even Cash + Rec. = n Stock + d
t Earning
s
NA I NA I I NA I NA
2-7
EXERCISE 2-2A
Gayoso Company
Effect of Events on the 2008 Accounting Equation
Assets = Liabilitie + Stockholders’ Equity
s
Account Common Retained
Event Cash + s Rec. = + Stock + Earnings
Earned 4,500 4,500
Revenue
Coll. Acct. 3,000 (3,000)
Rec.
Ending 3,000 + 1,500 = -0- + -0- + 4,500
Balance
a. Accounts Receivable: $4,500 – $3,000 = $1,500

b. $4,500
c. $3,000 cash collected from accounts receivable.
d. $4,500
e. $4,500 of revenue was earned but only $3,000 of it was
collected.
2-8
EXERCISE 2-3A
a. $1,500 x 8% = $120; $120 x 4/12 = $40
b. $-0-, no interest was paid in 2005, interest will be paid in 2006.
c.
Rogers Company
Statements Model for 2005
Statement of
Balance Sheet Income Statement Cash Flows
Even Asset = Liabilities + Stockholders’ Rev. - E = Net
t s Equity xp. Inc.
No. Notes Int. Commo Ret.
Cash = Payabl + Payabl + n + Earn.
e e Stock
1. I NA NA NA I I NA I I OA
2. I I NA NA NA NA NA NA I FA
3. NA NA I NA D NA I D NA
2-9
EXERCISE 2-4A
Abbot Inc.
Effect of Events on the General Ledger Accounts
Assets = Liabiliti + Stockholders’
es Equity
Accounts Account Com. Retaine
Event Cash Receivab Land = s + Stock + d
le Payable Earning
s
1. Sales
on 75,000 75,000
Account
2. Coll. on
Account 68,000 (68,000)
3.
Incurred 59,000 (59,000)
Expense
4. Pd.
Acc. Pay. (50,000) (50,000
)
5. Issue
of Stock 20,000 20,000
6.
Purchase (15,000) 15,000
Land
Totals 23,000 7,000 15,000 = 9,000 + 20,000 + 16,000
a. Revenue recognized, $75,000.
b. Cash flow from revenue, $68,000.
c. Revenue, $75,000, less operating expenses, $59,000=$16,000 net

income.
d. Accounts receivable collected, $68,000, less cash paid for expenses,

$50,000=$18,000 cash flow from operating activities.
e. Income of $75,000 was earned, but only $68,000 was collected (a

difference of $7,000); operating expenses incurred were $59,000 but
only $50,000 was paid during the period (a difference of $9,000).
Consequently, net income is $2,000 less than cash flow from
operating activities.
f. $15,000 cash outflow for the purchase of land.
2-10
g. $20,000 cash inflow from the issue of common stock.
h. Total assets = $45,000 ($23,000+$7,000+$15,000)

Total liabilities = $9,000
Total equity = $36,000 ($20,000+$16,000)
2-11
EXERCISE 2-5A
a.
Jones and Reed

Statements Model
For the 2004 Accounting Year
Balance Sheet Income Statement Statement

of
Even Assets = Liabilities
Stk. + Rev. – Exp. = Net Inc. Cash Flows
t Equity
No. Accts. Acct. Sal. Retained
Cash + Rec. = Payabl + Pay. + Earnings
e
1. NA 85,000 NA NA 85,000 85,000 NA 85,000 NA
2. 25,000 NA NA NA 25,000 25,000 NA 25,000 25,000 OA
3. NA NA 32,000 NA (32,000) NA 32,000 (32,000 NA
)
4. (15,000 NA NA NA (15,000) NA 15,000 (15,000 (15,000)
) ) OA
5. 73,000 (73,000 NA NA NA NA NA NA 73,000 OA
)
6. (28,000 NA (28,00 NA NA NA NA NA (28,000)
) 0) OA
7. (5,000) NA NA NA (5,000) NA NA NA (5,000) FA
8. NA NA NA 1,250 (1,250) NA 1,250 (1,250) NA
Totals 50,000 + 12,000 = 4,000 + 1,250 + 56,750 110,000 − 48,250 = 61,750 50,000 NC
b. Total assets: $62,000 ($50,000 + $12,000)

c. $12,000
d. $4,000
2-12
e. Accounts Receivable (an asset) is an amount owed to you: $12,000;
Accounts Payable (a liability) is an amount that you owe: $4,000.
f. $61,750
g. $55,000 ($25,000 – $15,000 + $73,000 – $28,000)
2-13
EXERCISE 2-6A
a.
John Carroll, Inc.

General Ledger Accounts for the Year Ended December 31,2003
es Equity
Accoun Salarie Commo Retaine Acct.
Even Cash ts Rec. s Pay. n Stock d Title for
t Earning RE
s
1. 10,00 10,000
0
2. 35,000 35,000 Revenue
3. (700) (700) Util.
Exp.
4. 26,00 (26,000
0 )
5. 12,000 (12,000 Sal. Exp.
)
6. (2,000 (2,000) Dividend
) s
Total 33,30 9,000 = 12,000 + 10,000 20,300
s 0
b.
John Carroll, Inc.
Income Statement
For the Year Ended December 31, 2003
Revenue $35,000
Expenses
Utility Expense $ 700
Salaries Expense 12,000
Total Expenses (12,700)
Net Income $22,300
2-14
EXERCISE 2-6A b. (cont.)
John Carroll, Inc.

Statement of Changes in Stockholders’ Equity
Beginning Common Stock $ -0-
Plus: Common Stock Issued 10,000
Ending Common Stock $10,000
Beginning Retained Earnings -0-
Plus: Net Income 22,300
Less: Dividends (2,000)
Ending Retained Earnings 20,300
Total Stockholders’ Equity $30,300
John Carroll, Inc.

Balance Sheet
As of December 31, 2003
Assets
Cash $33,300
Accounts Receivable 9,000
Total Assets $42,300
Liabilities
Salaries Payable $12,000
Total Liabilities $12,000
Stockholders’ Equity
Common Stock 10,000
Retained Earnings 20,300
Total Stockholders’ Equity 30,300
Total Liab. and Stockholders’ $42,300
Equity
2-15
EXERCISE 2-6A b. (cont.)
John Carroll, Inc.

Statement of Cash Flows
Cash Flow From Operating
Activities
Cash Received from $26,000
Revenue
Cash Paid for Expenses (700)
Net Cash Flow from Operating $25,300
Act.
Cash Flow From Investing
Activities
Cash Flow From Financing -0-
Activities
Issue of Stock 10,000
Paid Dividends (2,000)
Net Cash Flow from Financing 8,000
Act.
Net Change in Cash 33,300
Plus: Beginning Cash Balance -0-
Ending Cash Balance $33,300
c. Net income is based on income earned of $35,000 and

expenses incurred of $12,700 for a net income of $22,300.
Net cash flow from operating activities is based on cash
collected from revenue, $26,000 and expenses paid, $700
for a net cash flow from operating activities of $25,300.
2-16
EXERCISE 2-7A
a. Interest revenue recognized for 2006: $80,000 x 6% =

$4,800;
$4,800 x 8/12 = $3,200
b.
N&J Company
Accounting Equation for 2006
Assets = Liab. + Equity
Interes Commo Retained
E Cash + t + CD = + n Stock + Earnings
vent Rec.
CD (80,000) 80,000
Adj. 3,200 3,200
See the adjusting entry in the accounting equation above

(assets increase, equity increases).
c. $-0-. All interest will be paid at maturity, May 1, 2007, for

this CD.
d. $3,200
e. $4,800 ($80,000 x 6%). All interest will be collected when

the CD matures.
f. $1,600 ($80,000 x 6% x 4/12) or ($4,800 − $3,200 = $1,600)
g. $-0-
2-17
EXERCISE 2-8A
a. $-0-. Interest will be paid at maturity of the note, April

30,2004.
b. $1,000 ($80,000 x 7.5% = $6,000; $6,000 x 2/12= $1,000)
c. $81,000 ($80,000 Notes Payable +$1,000 Interest Payable)
d. $83,000 [$80,000 principal + $3,000 interest ($80,000 x

7.5% x 6/12)]
e. $2,000 ($80,000 x 7.5% = $6,000; $6,000 x 4/12)
2-18
EXERCISE 2-9A
a. Asset Exchange
b. Asset Exchange
c. Asset Exchange
d. Asset Source
e. Asset Use
f. Asset Use
g. Claims Exchange
h. Asset Use
i. Asset Source
j. Asset Source
2-19
EXERCISE 2-10A
Note: These are only sample transactions. Other similar

transactions will satisfy the requirements of this exercise.
a. Provide service on account; accrued interest on a CD.
b. Provide service for cash; provide service on account.
c. Payment of a bank loan; payment of accounts payable.
d. Collection of accounts receivable; purchase of a CD.
e. Received a note receivable in exchange for the sale of
office equipment.
2-20
EXERCISE 2-11A
Sun Corp.
Effect of Events on the 2001 General Ledger Accounts
Assets = Liabilities + Stockholders’
Equity
Event Cash + Acc. Rec. + Land = Acc. Pay. + N. Pay. + Int. + C. + Ret.
Pay. Stock Earn.
1. Issue Stock 85,000 85,000
2. Svc. On 250,000 250,000
Acct.
3. Coll. Acc. 200,000 (200,000
Rec. )
4. Recog. Exp. 215,000 (215,000)
5. Paid Acc. (190,000 (190,000
Pay. ) )
6. Pur. Land (30,000) 30,000
7. Loan 25,000 25,000
8. Accrued Int. 1,250 (1,250)
Totals 90,000 + 50,000 + 30,000 = 25,000 + 25,000 + 1,250 + 85,000 + 33,750
a. $90,000
b. $50,000
c. $170,000 ($90,000 + $50,000 + $30,000)
d. $51,250 ($25,000 + $25,000 + $1,250)
e. $85,000
f. $33,750
2-21
EXERCISE 2-12A
a.
Transaction Revenue Expense
No. Recog. Recog.
1. No No
2. Yes; $80,000 No
3. No No
4. No No
5. No Yes; $55,000
6. Yes; $6,000 No
b.
Revenue $86,000
Expense (55,000)
Net Income $31,000
c. 4. $75,000
5. (55,000)
6. 6,000
d.
Cash Flow From Operating Activities
4. Inflow; cash collections on account $75,000
5. Outflow; cash paid for operating (55,000)
expense
6. Inflow; cash for services 6,000
Net Cash Flow from Operating Activities $26,000
2-22
EXERCISE 2-13A a.
Zig Company
s
Even Commo Retained Acct.
t No. n Stock + Earnings Title
/RE
1. +65,000 NA +65,00 NA
0
2. +175,000 NA NA +175,000 Revenue
3. NA +105,00 NA −105,000 Op. Exp.
0
4. −25,000 NA NA NA
+25,000
5. +95,000 NA NA NA
−95,000
6. −50,000 −50,000 NA NA
7. +15,000 NA NA +15,000 Revenue
8. −5,000 NA NA −5,000 Sal. Exp.
9. −10,000 NA NA −10,000 Dividen
ds
10. +20,000 +20,000 NA NA
11. NA +900 NA −900 Int. Exp.
Total 210,000 = 75,900 + 65,000 + 69,100
s
b. Revenue: $175,000 + $15,000 = $ 190,000

Expenses: $105,000 + $5,000 + $900 = (110,900)
Net Income $ 79,100
c. $210,000
d. $75,900
2-23
EXERCISE 2-14A
a.
Event Classification
1. FA
2. NA
3. NA
4. OA
5. FA
6. OA
7. OA
8. OA
b.
Smoltz Company
Cash Flows From Operating
Activities:
Cash from the collection of accts. $20,000
rec.
Cash from service revenue 4,000
Cash payment on accounts (10,000
payable )
Cash payments for rent (600)
Activities 0
Cash Flows From Investing -0-
Activities
Cash Flows From Financing
Activities:
Cash receipt from stock issue 18,000
Cash payment for dividends (2,000)
Activities
2-24
0
2-25
EXERCISE 2-15A
a. Accounts Receivable: Year 2004 ÷ Year 2003

$27,060,000 ÷ $24,600,000 = 1.1 or 10% growth
Sales: Year 2004 ÷ Year 2003

$382,606,000 ÷ $332,700,000 = 1.15 or 15% growth
Accounts Payable: Year 2004 ÷ Year 2003

$18,644,000 ÷ $15,800,000 = 1.18 or 18% growth
Operating Expenses: Year 2004 ÷

Year 2003
$285,603,000 ÷ $257,300,000 = 1.11 or 11% growth
Alternate solution:
(Year 2004 − Year 2003) ÷ Year 2003
Accounts Receivable: ($27,060,000 − $24,600,000) ÷ $24,600,000

= 10%
Sales: ($382,606,000 − $332,700,000) ÷ $332,700,000 = 15%
Accounts Payable: ($18,644,000 − $15,800,000) ÷ $15,800,000 =

18%
Operating Expenses: ($285,603,000 − $257,300,000) ÷

$257,300,000 =
11%
b. Sales are growing faster than accounts receivable and

accounts payable is growing faster than operating expense.
These factors create excess cash.
2-26
EXERCISE 2-16A
Item Statement Item Statement

a. BS i. IS
b. BS j. SE
c. BS k. IS
d. BS/SE l. IS/SE
e. BS m. BS
f. BS n. BS/CF
g. NA o. CF
h. BS
EXERCISE 2-17
a. Examples of expenses that would be matched directly with

revenue:
Sales commissions
Salaries expense
b. Examples of period costs that are difficult to match with

revenue:
Interest expense- Money borrowed and associated interest is
borrowed to finance the business and is not directly related
to specific revenue.
Advertising expense - A company can not be certain when
dollars spent for advertising will produce benefits.
2-27
EXERCISE 2-18A
Closed at the end

Account of the period?
a. Cash no
b. Accounts no
Receivable
c. Service Revenue yes
d. Advertising yes
Expense
e. Accounts Payable no
f. Certificate of no
Deposit
g. Notes Payable no
h. Interest Expense yes
i. Interest Payable no
j. Dividends yes
k. Retained Earnings no
l. Utilities Expense yes
2-28
SOLUTIONS TO PROBLEMS - SERIES A - CHAPTER 2
PROBLEM 2-19A
a.
A-1 Auto
Horizontal Statements Model for 2004
Assets = Liabilities + S. Rev. − Exp. = Net Cash
Equity Inc. Flows
Acc. Acc. Notes Int. Ret.
Event Cash + Rec. = Pay. + Pay. + Pay. + Earn.
1. NA 8,600 NA NA NA 8,600 8,600 NA 8,600 NA
2. 8,000 NA NA 8,000 NA NA NA NA NA 8,000 FA
3. (1,700) NA NA NA NA (1,700) NA 1,700 (1,700 (1,700)
) OA
4. 3,200 NA NA NA NA 3,200 3,200 NA 3,200 3,200 OA
5. NA NA 3,900 NA NA (3,900) NA 3,900 (3,900 NA
)
6. 7,500 (7,500 NA NA NA NA NA NA NA 7,500
) OA
7. (3,400) NA (3,40 NA NA NA NA NA NA (3,400)
0) OA
8. NA NA NA NA 240* (240) NA 240 (240) NA
Total 13,600 + 1,100 = 500 + 8,000 + 240 + 5,960 11,800 − 5,840 = 5,960 13,600 NC
s
*$8,000 X 9% = $720; $720 X 4/12 = $240
b. Ending balance of Retained Earnings = $5,960

Net Income: $5,960 The amounts are the same in this problem because there was no
beginning retained earnings and no dividends paid during the period. Retained Earnings and
net income will probably not be the same at the end of 2005 because there is a beginning
Retained Earnings balance in 2005.
2-29
PROBLEM 2-20A
Accounting Equation
Common Retained
Event Assets = Liabilities + Stock + Earnings
a. I NA I NA
b. D NA NA D
c. I NA NA I
d. NA I NA D
e. I/D NA NA NA
f. D NA NA D
g. I NA NA I
h. D D NA NA
i. I I NA NA
j. D NA NA D
k. NA I NA D
l. D D NA NA
2-30
PROBLEM 2-21A
Note: The accounting equation is not required.

Marshall Company
Effect of Events on the General Ledger Account
2008 and 2009
Assets = Liabilities + Stockholders’
Equity
Accts. Notes Int. Com. Retained Acct.
Even Cash Rec. Pay. Pay. Stock Earnings Title/RE
t
2008
1. 12,000 12,000
2. 28,000 28,000 Rev.
3. 22,000 (22,00
0)
4. (15,000 (15,000) Sal.
) Exp.
5. +8001 (800) Int.
Exp.
Bal. 19,000 6,000 = 12,000 +800 + -0- 12,200
2009
1. 34,000 34,000 Rev.
2. 32,000 (32,00
0)
3. (18,000 (18,000) Sal.
) Exp.
4. 4002 (400) Int.
Exp.
5. (13,200 (12,00 (1,200)
) 0)
Bal. 19,800 8,000 = -0- -0- + -0- 27,800
1
$12,000 x 10% x 8/12 = $800
2
$12,000 x 10% x 4/12 = $400
a $7,000 ($22,000− $15,000) f. $400 (see note 2 above)

.
b $800 (see note 1 above) g $12,800 ($32,000 − $18,000
. . −$1,200)
c. $12,800 ($12,000 + $800) h $27,800 ($19,800 + $8,000)
.
d $12,200 i. $-0-
2-31
.
e $12,000 (loan) j. $27,100 ($27,800 − $700)
.
2-32
PROBLEM 2-22A
a.
Tri-State Company
For 2003
Assets = Liabilities + Stockholders’ Equity
Accts. Int. Sal. Notes Int. Commo Retaine Acct.
Even Cash Rec. CD Rec. Land Pay. Pay. Pay. n d Title/RE
t Stock Earning
s
2
003
1. 40,000 40,000
2. 97,000 97,000 Revenue
3. 75,000 (75,00
0)
4. (8,000) (8,000) Dividends
5. (32,000 (32,000 Sal. Exp.
) )
6. (21,000 (21,000 Op. Exp.
) )
7. (24,000 24,000
)
8. 3,000 (3,000) Sal. Exp.
9. 600 1
600 Int. Rev.
End.
Bal. 30,000 22,000 24,000 600 -0- = 3,000 -0- -0- + 40,000 33,600
1
$24,000 x 5% x 6/12 = $600
2-33
PROBLEM 2-22A a. (cont.)
Tri-State Company
For 2004
Int. Sal. Notes Int. Commo Retained Acct.
Event Cash Acct. CD Rec. Land Pay. Pay. Pay. n Earnings Titles/RE
Rec. Stock
2004
B. 30,000 22,000 24,000 600 -0- 3,000 -0- -0- 40,000 33,600
Bal.
1. (3,000) (3,000
)
2. 40,000 40,000
3. 6,000 6,000
4. 120,000 120,000 Revenue
5. 112,000 (112,00
0)
6. (50,000) 50,000
7. (12,000) (12,000) Dividend
s
8a. 1,2001 1,200 Int. Rev.
8b. 25,800 (24,00 (1,800
0) )
9. (40,000) (40,000) Sal. Exp.
10. (33,000) (33,000) Op. Exp.
11. 7,000 (7,000) Sal. Exp.
12. 2,8002 (2,800) Int. Exp.
E. 75,800 30,000 -0- -0- 50,000 = 7,000 40,000 2,800 + 46,000 60,000
Bal.
1
$24,000 x 5% = $1,200
2-34
2
$40,000 x 12% x 7/12 = $2,800
2-35
PROBLEM 2-22A (cont.)
b.
Tri-State Company
Income Statements
2003 2004
Revenue
Service Revenue $97,000 $120,00
0
Interest Revenue 600 1,200
Total Revenue 97,600 121,200
Expense
Salaries Expense (35,000) (47,000)
Other Operating Expense (21,000) (33,000)
Interest Expense -0- (2,800)
Total Expense (56,000) (82,800)
Net Income $41,600 $
38,400
Statements of Changes in Stockholders’ Equity

2003 2004
Beginning Common Stock $ -0- $
40,000
Plus: Common Stock Issued 40,000 6,000
Ending Common Stock 40,000 46,000
Beginning Retained Earnings -0- 33,600
Plus: Net Income 41,600 38,400
Less: Dividends (8,000) (12,000)
Ending Retained Earnings 33,600 60,000
Total Stockholders’ Equity $73,600 $106,00
0
2-36
PROBLEM 2-22A b. (cont.)
Tri-State Company
Balance Sheets
2003 2004
Assets
Cash $30,000 $
75,800
Accounts Receivable 22,000 30,000
Certificate of Deposit 24,000 -0-
Interest Receivable 600 -0-
Land -0- 50,000
Total Assets $76,600 $155,80
0
Liabilities
Salaries Payable $ 3,000 $ 7,000
Interest Payable -0- 2,800
Notes Payable -0- 40,000
Total Liabilities 3,000 49,800
Common Stock 40,000 46,000
Retained Earnings 33,600 60,000
Total Stockholders’ Equity 73,600 106,000
Total Liab. and Stockholders’ $76,600 $155,80
Equity 0
2-37
Tri-State Company
Statements of Cash Flows
2003 2004
Activities:
Cash Receipts from Revenue $75,000 $112,000
Cash Receipts from Interest -0- 1,800
Rev.
Cash Payment for Op. Expense (21,000) (33,000)
Cash Payments for Sal. (32,000) (43,000)
Expense
Net Cash Flow from Operating 22,000 37,800
Act.
Cash Flows From Investing
Activities:
Purchased CD (24,000)
Purchased Land (50,000)
Proceeds of CD 24,000
Net Cash Flow from Investing (24,000) (26,000)
Act.
Activities:
Cash Receipts from Stock 40,000 6,000
Issue
Cash from Borrowing -0- 40,000
Cash Payment for Dividends (8,000) (12,000)
Net Cash Flow from Financing 32,000 34,000
Act.
Net Change in Cash 30,000 45,800
Plus: Beginning Cash Balance -0- 30,000
Ending Cash Balance $30,000 $ 75,800
2-38
PROBLEM 2-23A
Simmons & Associates

Income Statement
Revenue
Consulting Revenue $60,000
Interest Revenue 3,000
Total Revenue $63,000
Expenses
Salary Expense 36,000
Interest Expense 6,000
Net Income $21,000

Beginning Common Stock $19,000
Plus: Common Stock 17,000
Issued
Beginning Retained 43,500*
Earnings
Total Stockholders’ $92,500
Equity
*This amount must be computed; it is not given in the

problem.
Ending Retained Earnings + Dividends − Net Income = Beg.
Retained Earn.
$56,500 + $8,000 − $21,000 = $43,500
2-39

Balance Sheet
Assets
Cash $42,000
Land 52,000
0
Liabilities
Interest Payable $ 2,000
Salaries Payable 6,500
Notes Payable 24,000
Common Stock 36,000
Equity 0
2-40

Cash Flows From Operating $40,000
Activities
Cash Flows From Investing (50,000)

Activities
Cash Flows From Financing 33,000

Activities

Plus: Beginning Cash Balance 19,000*
*Not given in the problem. Computed as follows:

Ending Cash Balance − Net Change in Cash = Beginning Cash
Balance
$42,000 − $23,000 = $19,000
2-41
PROBLEM 2-24A a.
Even Classificati Even Classificati
t on t on
1. AS 7. AU
2. AE 8. AS
3. AU 9. AU
4. AS 10. AS
5. CE 11. AU
6. CE 12. AE
b.
L & N Advisory Services
Assets = Liab. +Stkholders’ Rev. − Exp. = Net Cash Flows
Equity Inc.
Acc. Acc. Com. Ret.
Event Cash + Rec. + Land = Pay. + Stock + Earn.
1. 50,000 NA NA NA 50,00 NA NA NA NA 50,000 FA
0
2. (25,000 NA 25,00 NA NA NA NA NA NA (25,000)
) 0 IA
3. (3,600) NA NA NA NA (3,600 NA 3,600 (3,600 (3,600) OA
) )
4. NA 15,200 NA NA NA 15,20 15,20 NA 15,200 NA
0 0
5. NA NA NA 9,600 NA (9,600 NA 9,600 (9,600 NA
) )
6. NA NA NA 800 NA (800) NA 800 (800) NA
7. (4,400) NA NA (4,400 NA NA NA NA NA (4,400) OA
)
8. 7,000 NA NA NA 7,000 NA NA NA NA 7,000 FA
9. (5,200) NA NA (5,200 NA NA NA NA NA (5,200) OA
)
2-42
10. 4,500 NA NA NA NA 4,500 4,500 NA 4,500 4,500 OA
11. (1,800) NA NA NA NA (1,800 NA NA NA (1,800) FA
)
12. 8,600 (8,600 NA NA NA NA NA NA NA 8,600 OA
)
Total 30,100 + 6,600 + 25,00 = 800 + 57,00 + 3,900 19,70 − 14,00 = 5,700 30,100
s 0 0 0 0
c. Net Income = $5,700

d. Cash flow from operating activities = $−100 (–$3,600 – $4,400 – $5,200 + $4,500 + $8,600)
2-43
PROBLEM 2-25A
Accounting Equation - 2006
Assets = Liabilities +
Stockholders’
Equity
Acct. Int. Acct. Notes. Int. Com. Retained
Event Cash Rec. Rec. CD Land = Pay. Pay. Pay. + Stock Earnings
Beg. Bal. 21,000 33,000 -0- 16,00 62,000 27,000 20,000 -0- 51,000 34,000*
0
1. 44,000 44,000
Revenue
2. Coll. AR 46,000 (46,000)*
3. Op. 29,000 (29,000)
Exp.
4. Pd. AP (33,000 (33,000
) )
5. Int. 1,200 1,200
Rev.
6. Int. 1,700 (1,700)
Exp.
7. (2,500) (2,500)
Dividends
Totals 31,500 31,000 1,200 16,00 62,000 = 23,000 20,000 1,700 + 51,000 46,000
0
*Not given in the problem.

($21,000 + $33,000 +$16,000 + $62,000) − ($27,000 + $20,000 + $51,000)
a. $46,000 ($33,000+$44,000 −$31,000)
2-44
b.
Lake Properties
Balance Sheet
As of January 1, 2006
Assets
Cash $ 21,000
Investment (CD) 16,000
Land 62,000
0
Liabilities
Accounts Payable $ 27,000
Total Liabilities $
47,000
Common Stock 51,000
Equity 0
2-38
Lake Properties
Income Statement
Revenues
Service Revenue $44,000
Interest Income 1,200
Expenses
Operating Expense 29,000
Net Income $14,500
Lake Properties
Plus: Stock Issued -0-
Beginning Retained 34,000
Earnings
Equity
2-39
PROBLEM 2-25A c. (cont.)
Lake Properties
Balance Sheet
Assets
Cash $31,500
Interest Receivable 1,200
Land 62,000
0
Liabilities
Accounts Payable $23,000
Interest Payable 1,700
Total Liabilities $
44,700
Common Stock 51,000
Total Liab. and Stkholders’ $141,70
Equity 0
2-40
PROBLEM 2-25A c. (cont.)
Lake Properties
For the Year Ended 2006
Activities:
Cash Receipt from Revenue $46,000
Cash Payment for Expense (33,000
)
Activities 0

Activities

Activities:
Dividends Paid (2,500)
Net Cash Flow from Financing (2,500)
Activities

Plus: Beginning Cash Balance 21,000
0
d. $1,200 ÷ $16,000=7.5%
e. $1,700 ÷ $20,000=8.5%
2-41
SOLUTIONS TO EXERCISES - SERIES B - CHAPTER 2
EXERCISE 2-1B
F. Aquillno Company
Statements Model for the Year Ended 2006
Statement
Balance Sheet Income Statement of
Cash Flows
Assets =Liabilitie + Stockholders’ Rev. - Exp. = Net
s Equity Inc.
Salarie + Commo Retaine
Even Cash + s n Stock + d
t Payabl Earning
e s
NA I NA D NA I D NA
2-42
EXERCISE 2-2B
McNeil Company
Effect of Events on the 2008 Accounting Equation
Assets + Liabiliti = Stockholders’
es Equity
Acct. Commo Retained
Event Cash + Rec. = + n + Earnings
Stock
Earned 13,00 13,000
Revenue 0
Coll. Acct. 7,000 (7,000
Rec. )
Ending 7,000 + 6,000 = -0- + -0- + 13,000
Balance
a. Accounts Receivable: $6,000

b. $13,000
c. $7,000 cash collected from accounts receivable.
d. $13,000
e. $13,000 of revenue was earned but only $7,000 of it was
collected.
2-43
EXERCISE 2-3B
a. $4,000 x10% = $400; $400 x 4/12 = $133 (rounded to nearest dollar)
b. $133
c. $-0-, No interest was paid in 2007; interest will be paid in 2008 when the note
matures.
d.
Parker Company
Statement of
Balance Sheet Income Statement Cash Flows
Even Asset = Liabilities + Stockholders’ Rev. - E = Net
t s Equity xp. Inc.
No. Notes Int. Commo Ret.
Cash = Payabl + Payabl + n + Earn.
e e Stock
1. I NA NA NA I I NA I I OA
2. I I NA NA NA NA NA NA I FA
3. NA NA I NA D NA I D NA
2-44
EXERCISE 2-4B
Best Company
es Equity
Accounts Account Common Retaine
Event Cash Receivab Land = s + Stock + d
le Payable Earning
s
1. Sales
on 100,000 100,00
Account 0
2. Coll.
on 73,000 (73,000)
Account
3.
Incurred 69,000 (69,000
Expense )
4. Pd.
Acc. Pay. (62,000) (62,000)
5. Issue
of Stock 30,000 30,000
6. Pur.
Land (40,000) 40,000
Totals 1,000 27,000 40,000 = 7,000 + 30,000 + 31,000
a. Revenue recognized: $100,000
b. Net Income: $31,000
c. Cash flow from revenue: $73,000
d. Collection of accounts receivable, $73,000, less payment of accounts

payable, $62,000, = $11,000
e. Income of $100,000 was earned, but only $73,000 was collected (a

difference of $27,000); operating expenses incurred were $69,000 but
only $62,000 was paid during the period (a difference of $7,000).
Consequently, net income is $20,000 more than cash flow from
operating activities.
f. $40,000 cash outflow for the purchase of land.
g. $30,000 cash inflow from the issue of common stock.
2-45
h. Common stock = $30,000
Retained Earnings = 31,000
Total equity = $61,000
2-46
EXERCISE 2-5B
a.
Poole and Pierce

Balance Sheet Income Statement Statement

of
Assets = Liabilities + S. Rev. – Exp. = Net Inc. Cash Flows
Equity
Even Accts. Acct. Sal. Ret.
t No. Cash + Rec. = Payabl + Pay. + Earn.
e
1. NA 65,000 NA NA 65,000 65,000 NA 65,000 NA
2. 40,000 NA NA NA 40,000 40,000 NA 40,000 40,000 OA
3. NA NA 35,000 NA (35,000) NA 35,000 (35,000 NA
)
4. (10,000 NA NA NA (10,000) NA 10,000 (10,000 (10,000)
) ) OA
5. 47,000 (47,000 NA NA NA NA NA NA 47,000 OA
)
6. (12,000 NA (12,00 NA NA NA NA NA (12,000)
) 0) OA
7. (8,000) NA NA NA (8,000) NA NA NA (8,000) FA
8. NA NA NA 2,000 (2,000) NA 2,000 (2,000) NA
Totals 57,000 + 18,000 = 23,000 + 2,000 + 50,000 105,000 − 47,000 = 58,000 57,000 NC
b. Total assets: $75,000 ($57,000 + $18,000)

c. $18,000
d. $23,000
e. Accounts Receivable (an asset) is an amount owed to you: $18,000;
2-47
Accounts Payable (a liability) is an amount that you owe: $23,000
f. $58,000
g. $65,000 ($40,000 – $10,000 + $47,000 – $12,000)
2-48
EXERCISE 2-6B
a.
Market, Inc.
General Ledger Accounts
es Equity
Acct. Salarie Commo Retaine Acct.
Even Cash Rec. s Pay. n Stock d Earn. Title for
t RE
1. 15,000 15,000
2. 42,000 42,000 Revenue
3. (800) (800) Util. Exp.
4. 32,000 (32,000
)
5. 5,000 (5,000) Sal. Exp.
6. (1,000 (1,000) Dividend
) s
Total 45,200 10,000 5,000 15,000 35,200
s
b.
Market, Inc.
Income Statement
Revenue $42,000
Expenses
Utility Expense $ 800
Salaries Expense 5,000
Net Income $36,200
2-49
EXERCISE 2-6B b. (cont.)
Market, Inc.
Beginning Common Stock $ -0-
Plus: Common Stock Issued 15,000
Beginning Retained Earnings -0-
Market, Inc.
Balance Sheet
Assets
Cash $45,200
Liabilities
Salaries Payable $ 5,000
Total Liabilities $ 5,000
Common Stock 15,000
Equity
2-50
EXERCISE 2-6B b. (cont.)
Market, Inc.
Activities
Cash Received from $32,000
Revenue
Cash Paid for Expenses (800)
Act.
Cash Flow From Investing -0-
Activities
Cash Flow From Financing
Activities
Issue of Stock 15,000
Paid Dividends (1,000)
Act.
Ending Cash Balance 45,200
c. The ending cash balance and the net change in cash will be
the same in the first year of operations because there is no
beginning cash balance.
2-51
EXERCISE 2-7B
a. Interest revenue recognized for 2006: $80,000 x 6% =

$4,800;
$4,800 x 5/12 = $2,000
b.
Pine Company
Assets = Liab. + Stockholders’ Equity
Interes Commo Retained
E Cash + t + CD = + n Stock + Earnings
vent Rec.
CD (80,000) 80,000
Adj. 2,000 2,000
See the adjusting entry in the accounting equation above

(assets increase, equity increases).
c. $-0-. All interest will be paid at maturity, August 1, 2007,

for this CD.
d. $2,000
e. $4,800 ($80,000 x 6%). All interest will be collected when

the CD matures.
f. $2,800 ($80,000 x 6% x 7/12)
g. $-0-
2-52
EXERCISE 2-8B
a. $-0-. Interest will be paid at maturity of the note, March

31, 2005.
b. $900 ($40,000 x 9% = $3,600; $3,600 x 3/12= $900)
c. $40,900 ($40,000 Notes Payable +$900 Interest Payable)
d. $41,800 [$40,000 principal + $1,800 interest ($40,000 x 9%

x 6/12)]
e. $900 ($40,000 x 9% = $3,600; $3,600 x 3/12)
2-53
EXERCISE 2-9B
a. Asset Source
b. Asset Use
c. Asset Source
d. Claims Exchange
e. Asset Source
f. Asset Use
g. Asset Exchange
h. Asset Use
i. Asset Source
j. Asset Exchange
2-54
EXERCISE 2-10B
Note: These are only sample transactions. Other similar

transactions will satisfy the requirements of this exercise.
a. Payment of rent expense; payment of other operating
expense.
b. Payment of accounts payable; payment of dividends.
c. Received a note receivable in exchange for the sale of a
delivery van.
d. Collection of accounts receivable; purchase of a CD.
e. Proceeds of a loan; issue of common stock.
2-55
EXERCISE 2-11B
Putnam Corp.
Effect of the 2003 Events on the General Ledger Accounts
Assets = Liabilities +
Stockholders’
Equity
Event + Accounts + = Accounts + Notes + Interes + Comm + Retained
Cash Receivab Land Payable Payable t Stock Earnings
le Payabl
e
1. Issue Stock 105,000 105,00
0
2. Svc. On 300,000 300,000
Acct.
3. Coll. Acc. 250,000 (250,000
Rec. )
4. Recog. Exp. 185,000 (185,000
)
5. Paid Acc. (120,000 (120,000
Pay. ) )
6. Pur. Land (20,000) 20,000
7. Loan 50,000 50,000
8. Accrued Int. 750 (750)
Totals 265,000 + 50,000 + 20,000 = 65,000 + 50,000 + 750 + 105,00 + 114,250
0
a. $265,000
b. $50,000
c. $335,000 ($265,000 + $50,000 + $20,000)
d. $115,750 ($65,000 + $50,000 + $750)
e. $105,000
2-56
f. $114,250 ($300,000 − $185,000 − $750)
2-57
EXERCISE 2-12B
a.
Transaction Revenue Expense
No. Recog. Recog.
1. No No
2. Yes; $130,000 No
3. No No
4. No No
5. No Yes; $65,000
6. Yes; $5,000 No
b.
Revenue $135,000
Expense (65,000)
Net Income $ 70,000
c.
Activities
4. Collection of accounts $80,000
receivable
6. Cash revenue 5,000
5. Paid expense (65,000)
Net Cash Flow from Operating $ 20,000
Activities
2-58
EXERCISE 2-13B a.
Wilson Company
Assets = Liabiliti + Stockholders’ Equity
es
Even Commo Retained Acct.
t No. n Stock + Earnings Title for
RE
1. +150,000 NA NA +150,00 Revenue
0
2. +60,000 NA +60,000 NA
3. +20,000 NA NA NA
−20,000
4. NA +80,000 NA −80,000 Op. Exp.
5. +18,000 NA NA +18,000 Revenue
6. −50,000 −50,000 NA NA
7. +90,000 NA NA NA
−90,000
8. −20,000 NA NA −20,000 Dividend
9. −9,000 NA NA −9,000 Sal. Exp.
10. +30,000 +30,000 NA NA
11. NA +1,200 NA −1,200 Int. Exp.
Total 179,000 = 61,200 + 60,000 + 57,800
s
b. Revenue:$150,000 + $18,000 = $ 168,000

Expenses: $80,000 + $9,000 + $1,200 =
(90,200)
Net Income $ 77,800
c. $179,000
d. $61,200
2-59
EXERCISE 2-14B
a.
Event Classification
1. FA
2. NA
3. OA
4. OA
5. OA
6. NA
7. OA
8. FA
b.
Harrison Company
Activities:
Cash from the collection of accts. $65,000
rec.
Cash from service revenue 5,000
Cash payment on accounts (20,000
payable )
Cash payments for expense (1,800)
Activities 0
Activities
Activities:
Cash receipt from stock issue 20,000
Cash payment for dividends (5,000)
Activities
2-60
0
2-61
EXERCISE 2-15B
(Numbers are in thousands)

a. Accounts Receivable ÷ Sales
2005 2006
$11,605 ÷ $232,100 = 5% $14,736 ÷ $245,600 = 6%
b. Accounts Payable ÷ Operating Expenses

2005 2006
$5,872 ÷ $146,800 = 4% $4,527 ÷ $150,900 = 3%
c. Looking strictly at the change in accounts receivable and

the change in accounts payable, Watts’ is not meeting its
cash management goals. This is evidenced by the fact that
accounts receivable as a percentage of sales increased,
indicating that it is not collecting receivables as rapidly as
in the past. Also, the accounts payable as a percentage of
operating expenses decreased indicating that Watts’ is
paying its bills at a faster rate than in the past. Both of
these indicators will produce a faster drain on cash.
2-62
EXERCISE 2-16B
Item Statement Item Statement

a. BS i. IS
b. BS j. IS,SE
c. BS k. IS
d. SE l. IS
e. CF m. CF
f. BS,SE n. IS
g. IS o. NA
h. BS,CF
EXERCISE 2-17
a. Directly matched
b. Period expense
c. Period expense
d. Directly matched
2-63
EXERCISE 2-18B
Closed at the end

Account of the period?
a. Land no
b. Interest Revenue yes
c. Interest Receivable no
d. Rent Expense yes
e. Notes Payable no
f. Interest Payable no
g. Retained Earnings no
h. Cash no
i. Dividends yes
j. Accounts no
Receivable
k. Common Stock no
l. Advertising yes
Expense
2-64
SOLUTIONS TO PROBLEMS - SERIES B - CHAPTER 2
PROBLEM 2-19B
a.
Expert Services
Assets = Liabilities + S. Rev. − Exp. = Net Cash Flows
Equity Inc.
Account Acc. Notes Intere Retaine
Event Cash + s Rec. = Pay. + Payabl + st + d
e Payabl Earning
e s
1. 5,000 NA NA NA NA 5,000 5,000 NA 5,000 5,000 OA
2. (1,000) NA NA NA NA (1,000) NA 1,000 (1,000) (1,000) OA
3. 15,000 NA NA 15,000 NA NA NA NA NA 15,000 FA
4. NA 20,000 NA NA NA 20,000 20,000 NA 20,000 NA
5. NA NA 6,000 NA NA (6,000) NA 6,000 (6,000) NA
6. 12,000 (12,000 NA NA NA NA NA NA NA 12,000 OA
)
7. (3,100) NA (3,100) NA NA NA NA NA NA (3,100) OA
8. NA NA NA NA 1,000* (1,000) NA 1,000 (1,000) NA
Totals 27,900 + 8,000 = 2,900 + 15,000 1,000 + 17,000
+ 25,000 − 8,000 = 17,000 27,900 NC
*$15,000 x8%= $1,200; $1,200 X 10/12 = $1,000
b. Ending balance of Retained Earnings = $17,000

Net Income: $17,000. The amounts are the same in this problem because there was no
beginning retained earnings and no dividends paid during the period. Retained Earnings and
net income would be different if it were not the first year or if dividends had been paid in 2003.
2-65
PROBLEM 2-20B
Accounting Equation
Common Retained
Event Assets = Liabilities + Stock + Earnings
a. I NA I NA
b. D D NA NA
c. I/D (NA) NA NA NA
d. D D NA NA
e. I/D(NA) NA NA NA
f. D NA NA D
g. I NA NA I
h. NA I NA D
i. I I NA NA
j. D NA NA D
k. NA I NA D
2-66
PROBLEM 2-21B
Diamond Enterprises
Effect of Events on the Accounting Equation
2006 and 2007
Stockholders’
Assets = Liabilities + Equity
Account Notes Interest Com. Retaine
Event Cash s Payable Payable Stock d
Rec. Earning
s
2006
1. Loan 18,000 18,000
2. Rev. 42,500 42,500
3. Coll. AR 36,000 (36,000
)
4. Op. Exp. (24,000 (24,000)
)
5. Int. Acc. 900* (900)
End. Bal. 30,000 6,500 = 18,000 900 -0- 17,600
2007
1. Rev. 45,000 45,000
2. Coll. AR 35,000 (35,000)
3. Op. Exp. (28,000 (28,000)
)
4. Int. Acc. 900* (900)
5. Pay Int. (1,800) (1,800)
5. Pay (18,000 (18,000
Loan ) )
End. Bal. 17,200 16,500 = -0- -0- -0- 33,700
*$18,000 x 10% x 6/12 = $900
a $900 f. $900
.
b $12,000($36,000 − g $5,200 ($35,000 −
. $24,000) . $28,000 −$1,800)
c. $18,900 ($18,000+ $900) h $33,700 ($17,200 +
. $16,500)
2-67
d $17,600 i. $-0-
.
e $18,000 loan j. $32,200 ($33,700 −
. $1,500)
2-68
PROBLEM 2-22B
a.
Maples Machine Company
Effect of Events on the General Ledger Accounts for 2007
Account Intere Salari Notes Int. Com. Retaine
Even Cash s CD st Land = es Payab Payabl + Stock + d
t Receiva Rec. Payab le e Earning
ble le s
20X7
1. 80,000 80,000
2. 190,000 190,000 Revenue
3. 166,000 (166,00
0)
4. (10,000 (10,000) Dividends
)
5. (92,000 (92,000) Sal. Exp
)
6. (48,000 48,000
)
7. 6,000 (6,000) Sal. Exp.
8. 2,400 1
2,400 Int. Rev.
96,000 24,000 48,000 2,400 -0- = 6,000 -0- -0- +80,000 + 84,400
1
$48,000 x 10% x 6/12 = 2,400
2-69
PROBLEM 2-22B a. (cont.)

Effect of Events on the General Ledger Accounts for 2008
Account Intere Salari Notes Intere Com. Retaine
Even Cash s CD st Land = es Payab st + Stock + d
t Receiva Rec. Payab le Payab Earning
ble le le s
Beg.
Bal. 96,000 24,000 48,000 2,400 -0- 6,000 -0- -0- 80,000 84,400
2008
1. (6,000) (6,00
0)
2. 60,000 60,000
3. 210,000 210,000 Revenue
4. 224,000 (224,00
0)
5. (30,000) (30,000 Dividend
) s
6. (70,000) (70,000 Sal. Exp.
)
7. (280,00 280,00
0) 0
8. 84,000 84,00
0
9. 2,4001 2,400 Int. Rev.
52,800 (48,00 (4,800
0) )
10. 10,00 (10,000 Sal. Exp.
0 )
11. 3,9202 (3,920) Int. Exp.
130,800 10,000 -0- -0- 280,000= 10,00 84,00 3,920 +140,00 +182,880
2-70
0 0 0
1
$48,000 x 10% = $4,800; $4,800 x 6/12 = 2,400
2
$84,000 x 8% =$6,720; $6,720 x 7/12 = $3,920
2-71
PROBLEM 2-22B (cont.)
b.
Income Statements
2007 2008
Revenue
Service Revenue $190,00 $210,00
0 0
Interest Revenue 2,400 2,400
Total Revenue 192,400 212,400
Expense
Salaries Expense (98,000) (80,000)
Interest Expense -0- (3,920)
Total Expense (98,000) (83,920)
Net Income (Loss) $94,400 $128,48
0
Statements of Changes in Stockholders’ Equity

2007 2008
Beginning Common Stock $ -0- $
80,000
Plus: Stock Issued 80,000 60,000
Ending Common Stock 80,000 140,000
Beginning Retained Earnings -0- 84,400
Plus: Net Income (Loss) 94,400 128,480
Less: Dividends (10,000) (30,000)
Ending Retained Earnings 84,400 182,880
Total Stockholders’ Equity $164,40 $322,88
0 0
2-72
PROBLEM 2-22B b. (cont.)

Balance Sheets
2007 2008
Assets
Cash $96,000 $130,800
Accounts Receivable 24,000 10,000
Certificate of Deposit 48,000 -0-
Interest Receivable 2,400 -0-
Land -0- 280,000
Total Assets $170,400 $420,800
Liabilities
Salaries Payable $ 6,000 $ 10,000
Interest Payable -0- 3,920
Notes Payable -0- 84,000
Total Liabilities 6,000 97,920
Common Stock 80,000 140,000
Retained Earnings 84,400 182,880
Total Stockholders’ Equity 164,400 322,880
Total Liabilities and Stockholders’ $170,400 $420,800
Equity
2-73
PROBLEM 2-22B b. (cont.)

Statements of Cash Flows
2007 2008
Activities:
Cash Receipts from Consulting $166,000 $224,000
Rev.
Cash Receipts from Interest -0- 4,800
Rev.
Cash Payments for Salaries (92,000) (76,000)
Net Cash Flow from Operating 74,000 152,800
Act.
Cash Flows From Investing
Activities:
Purchased CD (48,000)
Purchased Land (280,000
)
Proceeds from CD 48,000
Net Cash Flow from Investing (48,000) (232,000
Act. )
Activities:
Cash Receipts from Stock 80,000 60,000
Issue
Cash from Borrowing -0- 84,000
Cash Payment for Dividends (10,000) (30,000)
Net Cash Flow from Financing 70,000 114,000
Act.
Net Change in Cash 96,000 34,800

Plus: Beginning Cash Balance -0- 96,000
Ending Cash Balance $96,000 $130,800
2-74
2-75
PROBLEM 2-23B
Vickers & Associates

Income Statement
For Year Ended December 31, 2004
Revenues
Revenue $51,000
Interest Revenue 375
Total Revenues $51,375
Expenses
Salary Expense 22,500
Net Income $27,500

Plus: Stock Issued 10,000
Earnings
Equity
1
This amount was not given in the problem. It is computed as
follows:
Ending Retained Earnings + Dividends − Net Income = Beg.
Ret. Earn.
$60,500 + $2,000 − $27,500 = $35,000
2-76

Balance Sheet
Assets
Cash $ 16,700
Land 97,500
0
Liabilities
Interest Payable $ 300
Salaries Payable 17,000
Total Liabilities $ 52,300
Common Stock 22,000
Equity 0

Cash Flows From Operating Activities $ 30,800
Cash Flows From Investing Activities (7,700)
Cash Flows From Financing Activities (8,400)

Plus: Beginning Cash Balance 2,000*
Ending Cash Balance $ 16,700
2-77
*This amount must be computed. ($16,700 − $14,700 =
$2,000)
2-78
PROBLEM 2-24B
a.
Even Classificatio Even Classificati
t n t on
1. AS 6. AS
2. AU 7. AU
3. AS 8. AS
4. CE 9. AU
5. AU 10. AE
b.
Bunyard Financial Services
Assets = Liab. + Stockholders’ Rev. − Exp. = Net Cash
Equity Inc. Flows
Event Cash + A. Rec. = A. Pay. + C. + Ret. Ear.
Stock
1. 10,000 + NA = NA + 10,000 + NA NA − NA = NA 10,000 FA
2. (1,200) + NA = NA + NA + (1,200) NA − 1,200 = (1,200) (1,200) OA
3. NA + 8,000 = NA + NA + 8,000 8,000 − NA = 8,000 NA
4. NA + NA = 1,750 + NA + (1,750) NA − 1,750 = (1,750) NA
5. (1,400) + NA = (1,400) + NA + NA NA − NA = NA (1,400) OA
6. 1,500 + NA = NA + 1,500 + NA NA − NA = NA 1,500 FA
7. (350) + NA = (350) + NA + NA NA − NA = NA (350) OA
8. 3,500 + NA = NA + NA + 3,500 3,500 − NA = 3,500 3,500 OA
9. (500) + NA = NA + NA + (500) NA − NA = NA (500) FA
10. 7,250 + (7,250) = NA + NA + NA NA − NA = NA 7,250 OA
Totals 18,800 + 750 = -0- + 11,500 + 8,050 11,500 − 2,950 = 8,550 18,800 NC
2-79
c. Net Income = $8,550
d. Cash flow from operating activities = $7,800 (−$1,200 − $1,400 − $350 + $3500 +
$7,250)
2-80
PROBLEM 2-25B

Dudley Properties
Assets = Liabilities + Stkholder’
Equity
Acct. Int. Accts. Notes Int. Commo Retaine
Event Cash Rec. Rec. CD Land = Pay. Pay. Pay. + n Stock d
Earnings
Beg. Bal. 1,600 2,400 -0- 5,000 20,000 1,000 8,000 -0- 5,400 14,600*
1. Rev. 3,600 3,600
2. Coll. AR 2,200* (2,200)
3. Op. 2,100 (2,100)
Exp.
4. Pd. AP (2,600) (2,600)
5. Int. 400 400
Rev.
6. Int. 700 (700)
Exp.
7. (800) (800)
Dividends
Totals 400 3,800 400 5,000 20,000 = 500 8,000 700 + 5,400 15,000
*Not given in the problem. Computed as follows:

Beginning Retained Earnings = ($1,600 +$2,400 + $5,000 + $20,000) − ($1,000 + $8,000 + $5,400)
= $14,600
a. $2,200 ($2,400 + $3,600 − $3,800)
2-81
2-82
b.
Dudley Properties
Balance Sheet
As of January 1, 2007
Assets
Cash $ 1,600
Land 20,000
Total Assets $29,00
0
Liabilities
Accounts Payable $1,000
Notes Payable 8,000
Total Liabilities $
9,000
Common Stock 5,400
Equity 0
2-73
c.
Dudley Properties
Income Statement
Revenues
Service Revenue $3,600
Interest Income 400
Expenses
Operating Expense 2,100
Interest Expense 700
Net Income $1,200
Dudley Properties
Plus: Stock Issued -0-
Earnings
Less: Dividends (800)
2-74
PROBLEM 2-25B c. (cont.)
Dudley Properties
Balance Sheet
Assets
Cash $ 400
Interest Receivable 400
Land 20,000
Liabilities
Accounts Payable $ 500
Interest Payable 700
Notes Payable 8,000
Common Stock 5,400
Equity
2-75
PROBLEM 2-25B c. (cont.)
Dudley Properties
Activities:
Cash Receipt from Revenue $2,200
Cash Payment for Expense (2,600)
Net Cash Flow from Operating $ (400)
Activities
Activities
Activities:
Dividends Paid (800)
Net Cash Flow from Financing (800)
Activities
Net Change in Cash (1,200)
Plus: Beginning Cash Balance 1,600
Ending Cash Balance $ 400
d. $400 ÷ $5,000 = 8%
e. $700 ÷ $8,000 = 8.75%
2-76
ATC 2-1
a. PricewaterhouseCoopers
b. An “unqualified” opinion was given.
c. The audit work was completed by February 15,2001.
d. The first paragraph of the auditors’ report explained

that the audit was conducted in accordance with
“generally accepted auditing standards” (GAAS).
However, it does not explain what these are. The
instructor may wish to discuss some of the basic
elements of GAAS with the students.
e. Yes. The first paragraph of the auditors’ report

mentioned “…in all material respects,…”
2-77
ATC 2-2
a. 1. (in thousands)
2000 1999 1998
Revenue $7,093 $7,822 $8,479
Less, Operating Costs (6,233) (6,582) (7,451)
Operating Income 860 1,240 1,028
Interest Expense (176) (202) (272)
Net Income $ 684 $1,038 $ 756
2. Retained earnings is affected as follows:

2000 - retained earnings is increased by $684 million.
1999 - retained earnings is increased by $1,038
million.
1998 - retained earnings is increased by $756 million.
3. Average debt for each year based on average interest

rate of 7%:
2000: $176 ÷ .07 = $2,514 million

1999: $202 ÷ .07 = $2,885 million
1998: $272 ÷ .07 = $3,886 million
b. Since its growth pattern has been declining, if it is to

get on track to increase growth, you would expect sales
and net income to increase for 2001.
2-78
ATC 2-3
a. The $30 billion of “Noninterest-bearing deposits” on
First Union’s balance sheet represents the balances in
its customers’ checking accounts. First Union may
never have to repay all of this liability because most
customers will always have some amount in their
checking accounts. However, if a customer writes a
check on his or her account at First Union, the bank
must pay out the cash. These accounts are often
referred to as “demand deposits” since banks must
give customers the money in their checking accounts
upon demand.
The $160 million of “Reclamation and remediation

liabilities” on Newmont’s balance sheet represents
the estimated cost of restoring land after mining
activities have ended at a given site. The company
will “pay off” when it repairs damages done to land
by mining activities. It might do these restorations
with its own workers and equipment or it might pay
cash to others to do the work on its behalf.
The $702 million for “accrued dismantlement,

removal, and environmental cost” that has been
recorded by Phillips Petroleum is similar to the
liability on Newmont’s books. In many circumstances
companies are required to repair environmental
damage that is caused by their operations. At Phillips
Petroleum, much of this liability includes the
estimated cost of removing gasoline tanks at service
stations that have been closed. This estimated
liability will be “paid off” by repairing the
environmental damage to the extent required by law.
b. Of these three situations, the environmental accruals

on Phillips’ books is probably the most difficult
liability to estimate. Until clean-up efforts are
underway, it is difficult to know exactly how much
environmental damage has been done. For example,
2-79
an underground gasoline tank that has been leaking
for years will cause much more damage than a tank
that has never leaked, but it may not be apparent
that the tank was leaking until it is dug up.
2-80
ATC 2-4
1. The overstatement of revenue by Foxx Co. probably is

material, but it is a close call. If the $6,000
overstatement is compared to total revenue, the error
seems small, less than 1% ($6,000 ÷ $1,000,000 = .006).
But, the overstatement of revenue also causes net
earnings to be overstated by $6,000. This is a material
effect on earnings: 7.5% ($6,000 ÷ $80,000).
2. The overstatement of cash by Guzza Co. probably is

immaterial. If compared only to total cash, the error
appears significant: 7.1% ($5,000 ÷ $70,000). However,
the error has little effect on total assets: .125% ($5,000 ÷
$4,000,000); and may have no effect on net earnings.
3. The problem at Jeter Co. is material not because of the

amounts involved, but because of the nature of the
problem. If the president of the company would
inappropriately take $5,000 from the company for
personal gain, there is the concern that he may commit
other misstatements in the future that may be more
significant to the company. The auditor should bring this
situation to the attention of company’s other owners or
board of directors if it exists.
2-81
ATC 2-5
1. Ms. Lewis is failing to consider the liabilities of Trident

Co.
2. The review services, as explained in the case, apply

specifically to accountants’ work on the unaudited
financial statements of nonpublic companies. The CPA
report does not interpret the statements. The report
simply attests to their accuracy of being prepared in
accordance with generally accepted accounting
principles. According to generally accepted accounting
principles, assets are listed at historical cost in the
financial statements, not at market value. The
$4,500,000 of assets is probably not an accurate
estimate of the market value. Ms. Lewis needs to have
the assets appraised by someone reputable and
knowledgeable of that particular type of business.
2-82
ATC 2-6
a. $4,550,000,000 x 7% = $318,500,000
b. The amount of debt seems excessive in view of the fact

that the amount of interest on the debt is more than the
net income for 1997. Unless profits can be increased
significantly, the debt load will further create a deficit in
retained earnings.
c. One common explanation of how Tricom would have a

negative equity would be that it had operating losses in
excess of common stock. An explanation of how Tricom
could meet its debt payments would be that there is
sufficient cash flow to pay debt. With a large amount of
depreciation (a noncash deduction), this would be possible.
2-83
ATC 2-7

s
Explanation Cash Other = + Com. Ret. Earn.
Assets Stock
Beginning Balances 10,000 380,000 80,000 25,000 285,000*
Purchased (50,000) 50,000
Equipment
Repay Note (15,000) (15,000)
Dividend (20,000) (20,000)
Revenue 200,000 200,000
Expense (175,000) (175,000)
Ending Balance (50,000) 430,000 = 65,000 + 25,000 290,000
Reported Cash 12,000
Balance
Unrecorded Cash 62,000
*Not given in the problem. ($10,000 + $380,000) − ($80,000 + $25,000) = $285,000
b. Assets: understated
Liabilities: not affected
Common Stock: not affected
Retained Earnings: understated
Revenue: understated
Expenses: not affected (This answer applies only to the direct effect associated
with the understatement of revenue. There would be an indirect effect. The
unreported income would cause the underpayment of taxes and thereby
understate tax expense.)
2-84
Net Income: understated
Dividends: not affected
ATC 2-7 (cont)
c. An auditor is responsible for performing an audit in accordance with generally

accepted auditing standards. Such performance may or may not uncover
fraudulent activity. Accordingly, Sanders could have conducted a proper audit
and still not have discovered the fraud. If fraud is discovered, the auditor is
required to inform management at one level above the position of the employee
who is engaged in the fraud and to notify the board of directors of the company.
d. Signing Travera’s fraudulent return would constitute an act of fraud on the part
of Sanders. It would also violate the code of ethics for CPAs. Accordingly,
signing the return could result in a criminal conviction and loss of license for
Sanders.
e. The code of ethics for CPAs requires the exercise of professional confidentiality
which would restrict Sanders from reporting Travera unless a valid subpoena is
issued to Sanders.
f. The professional confidentiality required by the code of ethics for CPAs would
apply to Abbott as well as to Travera. Sanders would be restricted from reporting
Abbott unless valid inquiries were made by the appropriate authorities.
2-85

Chapter 2 Solution of Fundamental of Financial Accouting by EDMONDS (4th Edition)

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Chapter 2 Solution of Fundamental of Financial Accouting by EDMONDS (4th Edition)

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ANSWERS TO QUESTIONS - CHAPTER 2

1. Accrual accounting attempts to record the effects of

2. Recognition is the act of recording an event in the

3. An asset source transaction increases assets and

4. The capital acquisition from owners increases business

5. The recognition of revenue on account increases the

6. Asset Source Transaction Effect on Accounting

Issue of Common Stock Increases Assets,

Revenue Earned Increases Assets,

Borrowed Funds Increases Assets,

8. The collection of cash for accounts receivable is an asset

9. The recognition of expenses affects the accounting

10. A claims exchange transaction is one where the claims of

11. Cash payments to creditors are asset use transactions.

12. Expenses are recognized under accrual accounting at the

13. Net cash flows from operations on the cash flow

14. The income statement reflects the change in net assets

15. Net assets is defined as assets minus liabilities or as

16. Net income increases stockholders' claims on business

17. An expense is a decrease in assets or an increase in

18. Revenue is an increase in assets or a decrease in

19. The purpose of the statement of changes in stockholders’

20. The purpose of the balance sheet is to provide

21. The balance sheet is dated as of a specific date because

23. The statement of cash flows explains the change in cash

24. Under accrual accounting, interest revenue that has been

25. An adjusting entry is an entry that updates account

26. The entry to record accrued interest revenue is an

27. The entry to record accrued interest expense is an

28. Land purchased in 1920 is listed on a balance sheet at its

29. The historical cost concept of accounting measurement

30. No, all countries do not use historical cost. In countries

31. Temporary accounts (revenue, expense and dividends) are

32. Period costs are costs that are recognized in an

33. Salary of the tax return preparer could be directly with

34. The four stages of the accounting cycle: Record

35. A financial audit is a detailed examination of a company’s

36. An independent auditor is a CPA who is independent from

Independence assures users of the audited financial

37. An error is material if knowing about the error would

38. Unqualified Opinion - Financial statements are in

Adverse Opinion - Financial statements are not in

39. An unqualified opinion implies that the financial

40. A disclaimer is issued if the auditor is unable to perform

41. An auditor can disclose confidential client information

42. The Six Articles of the AICPA Code of Professional

43. The purpose of internal controls is to reduce the

a. Accounts Receivable: $4,500 – $3,000 = $1,500

a. $1,500 x 8% = $120; $120 x 4/12 = $40

b. $-0-, no interest was paid in 2005, interest will be paid in 2006.

a. Revenue recognized, $75,000.

b. Cash flow from revenue, $68,000.

c. Revenue, $75,000, less operating expenses, $59,000=$16,000 net

d. Accounts receivable collected, $68,000, less cash paid for expenses,

e. Income of $75,000 was earned, but only $68,000 was collected (a

f. $15,000 cash outflow for the purchase of land.

h. Total assets = $45,000 ($23,000+$7,000+$15,000)

Jones and Reed

Balance Sheet Income Statement Statement