Solutions - Chapter 2

Chapter 2
Constructing Financial Statements
Learning Objectives – coverage by question

Mini- Cases
Exercises Problems
Exercises and Projects
LO1 – Describe and construct the 14, 17, 19, 49 - 57, 59,
34-44,
balance sheet and understand how 21 - 27, 60, 62, 66, 71
46, 47
it can be used for analysis. 29 - 31 67, 69
LO2 – Use the financial statement

57, 62,
effects template (FSET) to analyze 18, 29 - 31 44 - 47
67, 69
transactions.
LO3 – Describe and construct the

35, 37, 49 - 51, 54,
income statement and discuss how 19 - 23,
39 - 44, 57, 61, 62, 71, 72
it can be used to evaluate 28, 31
47 64 - 67, 69
management performance.
LO4 – Explain revenue

18 - 20, 22,
recognition, accrual accounting,
23, 25, 26, 39, 44, 47 57, 62, 67, 69 71
and their effects on retained
28, 29, 31
earnings.
LO5 – Illustrate equity transactions

18, 21 - 24,
and the statement of stockholders’ 35 - 37 53, 66, 67, 69 71
27, 31
equity.
LO6 – Use journal entries and T-

accounts to analyze and record 32, 33 45, 48 58, 63, 68, 70
transactions.
LO7 – Compute net working

capital, the current ratio, and the 34, 36, 38, 52, 55, 56,
quick ratio, and explain how they 41, 42, 46 59, 60
reflect liquidity.
©Cambridge Business Publishers, 2020

Solutions Manual, Chapter 2 2-1
QUESTIONS
Q2-1. An asset is something that we own that is expected to provide future benefits.
A liability is a current obligation that will require a future sacrifice. Equity is the
difference between assets and liabilities. It represents the claims of the
company’s owners to its income and assets. The following are some examples
of each:
Assets  Cash
 Receivables
 Inventories
 Plant, property and equipment
Liabilities  Accounts payable
 Accrued liabilities
 Notes payable
 Long-term debt
Equity  Contributed capital (common and preferred stock)
 Additional paid-in capital
 Earned capital (retained earnings)
 Treasury stock
Q2-2. The revenue recognition principle requires that revenues be recognized when
earned. Revenues are earned when the product has been delivered to the
buyer and is usually signified by a formal transfer of title. A good test of whether
revenue has been earned is whether the rights, risks and obligations of
ownership have been transferred to the buyer. If a service is involved, revenues
are not earned until the service has been provided. The expense recognition
principle prescribes that expenses be recognized when assets are diminished
(or liabilities increased) as a result of earning revenue or carrying out the
company’s operations. When these two principles are followed, income can be
properly measured in a given accounting reporting period.
Q2-3. Accrual accounting entails the recognition of revenue under the revenue
recognition principle (record revenues when goods or services are transferred
to the customer), and the recognition of expenses when net assets decrease
from the process of earning revenue or supporting the company’s operations.
The recognition of revenues or the expenses does not require that cash be
received or disbursed. For example, the recognition of revenues on sale can
lead to an account receivable, and wage expense can be accrued using a
wages payable (accrued) liability account.

2-2 Financial Accounting, 6th Edition
Q2-4. The statement of stockholders’ equity provides information relating to all events
that impact stockholders’ equity during the period. It contains information
relating to stock sales and repurchases, net income, dividends, and the use of
stock for other purposes including occasional acquisition of assets. This
statement, also referred to as the statement of owners’ equity, also includes the
effects of some transactions that are not captured in the determination of net
income. These items are included in what is called “other comprehensive
income.” One example of such an item is the loss or gain on the translation of
the assets and liabilities of foreign owned subsidiaries into United States
currency.
Q2-5. An asset must be “owned” and it must provide “future benefits.” Owning means
we have title to the asset (some leased assets are also recorded on the
balance sheet as we will discuss in Chapter 10). Future benefits can mean the
future inflows of cash. Or, it could relate to some other benefit, such as the
reduction of expenditures, an increase in another asset, or the reduction of a
liability.
Q2-6. Liquidity generally refers to cash. That is, how much cash do we have, how
much cash is being generated, and how much cash can we raise quickly.
Liquidity is essential to the survival of the business. After all, we can only pay
our loans with cash, and our employees will only accept cash for their wages.
Some assets are more liquid than others in the sense that they can be
converted more easily to cash. Money market accounts and accounts
receivable, which can be sold, provide examples. Inventories are considered
more liquid than plant assets. We will address liquidity issues more formally in
Chapters 4 and 9.
Q2-7. Current means that the asset will be liquidated (converted to cash) within the
next year (or the operating cycle if longer than 1 year).
Q2-8. Historical costs are used by accountants because they are less subjective and,
therefore, more reliable than using market values. Market values can be biased
for two reasons: first, we may not be able to measure them accurately (consider
our inability to accurately measure the market value of a production facility, for
example), and second, managers may intervene in the reporting process to
intentionally bias the results in order to achieve a particular objective (i.e.
enhancing the stock price). The use of historical costs in accounting records
does not negate the importance of market values. For example, a firm offering
to pledge land as collateral for a loan will be expected to use the market value
of that land rather than its historic cost. The same would be true if a corporation
were considering the sale of the land. Finally, we shall see that certain assets
are reported at market value in the balance sheet; securities that are available
to be sold provide an example.

Q2-9. An intangible asset is an asset that we cannot touch. To be included on the
balance sheet, it has to meet the tests of an asset (e.g., we own it, and it will
provide future benefits). In addition, recognized intangible assets are always
acquired in a transaction with an independent party. Internally generated
intangible assets, however, are not recorded on the balance sheet. Some
examples are goodwill, patents and trademarks, contractual agreements like
royalties, leases, and franchise agreements. All of the intangible assets, though
not recorded if internally generated, are recorded if purchased, as in an
acquisition of another company, for example.
Q2-10. Both the current ratio and quick ratio are measures of a firm’s ability to pay its
obligations as they come due; measures of a firm’s liquidity. The current ratio is
computed by dividing the firm’s current assets by its current liabilities. Current
ratios that exceed 1.0 are deemed to represent a strong current liquidity
position. The quick ratio is an even more conservative measure of a firm’s
liquidity as it excludes inventory from the calculation. The quick ratio is
computed by dividing the firm’s sum of cash and cash equivalents, marketable
securities and accounts receivable by its current liabilities.
Q2-11. The three conditions necessary to recognize a liability are:
1. The liability reflects a probable future sacrifice on the part of the
organization.
2. The amount of the obligation is known or can be reasonably estimated.
3. The transaction that caused the obligation has occurred.
Q2-12. Net working capital = Current assets – Current liabilities. Increasing the amount
of trade credit (e.g., accounts payable to suppliers) increases current liabilities
and reduces net working capital. As trade credit increases, we are using
someone else’s cash rather than our own. As a business grows, its net working
capital grows, as the growth of inventories and receivables are generally
greater than that of accounts payable and accrued liabilities. Net working
capital is an asset category that must be financed just like fixed assets.
Q2-13. $700,000 Assets - $220,000 Liabilities = $480,000 Stockholders' equity
$480,000 Stockholders’ equity – $300,000 Common stock
= $180,000 Retained earnings

MINI EXERCISES
M2-14. (10 minutes)

LO 1
Use the accounting equation.
a. Cash $ 8,000
Accounts receivable 23,000
Supplies 9,000
Equipment 138,000
178,000
Accounts payable $ 11,000
Common stock 110,000 121,000
Retained earnings $ 57,000
b. Retained Earnings:
December 31, 2018 $ 57,000
January 1, 2018 30,000
Increase 27,000
Add: Dividends 12,000
Net Income $ 39,000
M2-15. (5 minutes)
LO 1
a. $200,000 - $85,000 = $115,000 equity

b. $32,000 + $28,000 = $60,000 assets
c. $93,000 - $52,000 = $41,000 liabilities
M2-16. (5 minutes)
LO 1
a. $375,000 - $105,000 = $270,000 equity

b. $43,000 + $11,000 = $54,000 assets
c. $878,000 - $422,000 = $456,000 liabilities

M2-17. (5 minutes)
LO 1
a. $450,000 - $326,000 = $124,000 equity

b. $618,000 - $165,000 = $453,000 liabilities
c. $400,000 + $200,000 + $185,000 = $785,000 assets
M2-18. (10 minutes)

LO 2, 4, 5
a. no effect e. increase
b. decrease f. increase
c. decrease g. increase
d. no effect
M2-19. (15 minutes)

LO 1, 3, 4
a. Balance sheet e. Balance sheet i. Income statement

b. Income statement f. Balance sheet j. Income statement
c. Balance sheet g. Balance sheet k. Balance sheet
d. Income statement h. Balance sheet l. Balance sheet
M2-20. (20 minutes)

LO 3, 4
a. Net income computation

Service revenue (record when earned) …………… $100,000
Wage expense …………………………………………. (60,000)
Net income ……………………………………………… $ 40,000
b. Yes, recognizing the wage liability would cause wage expense to increase by
$10,000 and net income would decrease by the same amount (before taxes).

M2-21. (10 minutes)
LO 1, 3, 5
a. Balance sheet
b. Income statement, Statement of stockholders’ equity
c. Balance sheet
d. Income statement
e. Statement of stockholders’ equity
f. Statement of stockholders’ equity
g. Balance sheet
h. Income statement
i. Statement of stockholders’ equity, Balance sheet
M2-22. (10 minutes)

LO 1, 3, 4, 5
a. Balance sheet
b. Balance sheet
c. Income statement, Statement of stockholders’ equity
d. Statement of stockholders’ equity, Balance sheet
e. Balance sheet
f. Income statement
g. Balance sheet
h. Balance sheet
M2-23. (10 minutes)

LO 1, 3, 4, 5
a. Balance sheet
b. Income statement
c. Statement of stockholders’ equity, Balance sheet
d. Income statement
e. Statement of stockholders’ equity
f. Balance sheet
g. Balance sheet
h. Balance sheet
M2-24. (15 minutes)
LO 1, 5
Ending retained earnings = Beginning retained earnings + Net income – Dividends + the
effects of other adjustments. And, the ending retained earnings for one period is the
beginning retained earnings for the following period.
Fiscal year ending: Jan. 28, 2017 Feb. 3, 2018

Beginning retained earnings (deficit) ………… $ (258) $ (727)
Net income (loss) …………… 1,158 983
Dividends paid …………… (1,268) (686)
Other net changes in retained earnings ……… (359) (321)
Ending retained earnings (deficit) …………… $ (727) $ (751)
M2-25. (10 minutes)

LO 1, 4
a. Increase assets (Cash);

Increase equity (Service Revenues)
b. Increase assets (Office Supplies)

Increase liabilities (Accounts Payable)
c. Increase assets (Cash)

Increase equity (Contributed Capital or Common Stock)
d. Decrease liabilities (Accounts Payable)

Decrease assets (Cash)
e. Increase assets (Cash)

Increase liabilities (Notes Payable)
f. Increase assets (Accounts Receivable)

Increase equity (Service Revenues)
g. Increase assets (Office Equipment)

h. Decrease equity (Interest Expense)

i. Decrease equity (Utilities Expense)


M2-26. (10 minutes)
LO 1, 4
a. Increase assets (Office Equipment)

b. Increase assets (Accounts Receivable)

Increase equity (Service Revenue)
c. Decrease equity (Rent Expense)

d. Increase assets (Cash)

Increase equity (Service Revenue)
e. Increase assets (Cash)

Decrease assets (Accounts Receivable)
f. Increase assets (Office Equipment)

g. Decrease equity (Salaries Expense)

h. Decrease liabilities (Accounts Payable)

i. Decrease equity (Retained Earnings)

M2-27. (10 minutes)

LO 1, 5
JOHNSON & JOHNSON

Statement of Retained Earnings
For Year Ended December 31, 2017
Retained earnings, January 1, 2017................................................... $70,418
Add: Net income.............................................................................. 1,300
Less: Dividends................................................................................ (8,943)
Other retained earnings changes........................................... (2,615)
Retained earnings, December 28, 2014............................................. $60,160

M2-28. (10 minutes)
LO 3, 4
2018 2019
Revenues...................................................................... $350,000 $ 0
Expenses....................................................................... 200,000 0
Net income.................................................................... $150,000 $ 0
Explanation: All of the revenue is reported in 2018 when services are provided—per the
revenue recognition principle. Likewise, the expense is reported in 2018 when it is
incurred—because a liability was incurred to generate the revenue. The timing of
receipts or payments of cash does not affect the recording of revenues, expenses, and
net income.
M2-29. (15 minutes)

LO 1, 2, 4
Balance Sheet Income Statement

Cash Noncash Contrib. Earned Net
Transaction Asset + Assets = Liabil-ities + Capital + Capital Revenues - Expenses = Income
a. Issue stock +20,000 +20,000
for $20,000 Cash = Common - =
cash. Stock
b. Pay $2,000 -2,000 +2,000
rent in Cash Prepaid = - =
advance. rent
c. Purchase -7,000 +7,000
computer Cash Computer
equipment Equipment = - =
for $7,000
cash.
d. Purchase +13,000 +13,000
inventory Inventory Accts
for $13,000 = Payable - =
on account
e. Pay -13,000 -13,000

supplier of Cash Accts
inventory in = - =
Payable
part d.
Totals -2,000 + 22,000 = 0 + 20,000 + - =

M2-30 (15 minutes)
LO 1, 2

Transaction + = Liabilities + + Revenues - Expenses =
Asset Assets Capital Capital Income
a. Borrow +19,000 +19,000
€19,000 from Cash = Note - =
local bank. Payable
b. Pay €3,000 -3,000 +3,000
insurance Cash Prepaid
premium for insurance = - =
covered for
following year.
c. Purchase -32,000 +32,000

vehicle for Cash Vehicle = - =
€32,000 cash.
d. Purchase and +2,500 +2,500

receive €2,500 Supplies Accts
of office Inventory Payable
supplies on = - =
account (pay
supplier later).
e. Place order for

€1,000 of
additional
supplies to be NO ENTRY = - =
delivered next
month.
Totals -16,000 + 37,500 = 21,500 + 0 + 0 - =

M2-31. (15 minutes)
LO 1, 2, 3, 4, 5

a. Receive -9,000 +9,000
merchandise Cash Inventory
inventory
costing $9,000, = - =
purchased with
cash
b. Sell half of -4,500 -4,500 +4,500 -4,500
inventory in (a) Inventory Cost of
for $7,500 on Goods Sold
credit. = - =
+7,500 +7,500 +7,500 +7,500
Accounts Revenue
Receivable
c. Place order for

$5,000 of
additional
merchandise NO ENTRY = - =
inventory to be
delivered next
month.
d. Pay employee -4,000 -4,000 +4,000 -4,000

$4,000 for Cash Wage
compensation = - Expense =
earned during
the month.
e. Pay $7,000 -7,000 -7,000 +7,000 -7,000

rent for use of Cash Rent
premises = - Expense =
during the
month.
f. Receive full +7,500 -7,500

payment from Cash Accounts
customer in Receivable
part b.
Totals -12,500 + 4,500 = + + -8,000 7,500 - 15,500 = -8,000

M2-32. (10 minutes)
LO 6
a. Inventory (+A)............................................................................ 9,000

Cash (-A)............................................................................. 9,000
b. Cost of goods sold expense (+E, -SE)...................................... 4,500

Inventory (-A)....................................................................... 4,500
Accounts receivable (+A) .......................................................... 7,500
Sales revenue (+R, +SE) .................................................... 7,500
c. NO ENTRY
d. Wage expense (+E, -SE)........................................................... 4,000

Cash (-A).............................................................................. 4,000
e. Rent expense (+E, -SE)............................................................. 7,000

Cash (-A).............................................................................. 7,000
f. Cash (+A) …………………………………………………….. 7,500

Accounts receivable (-A) ……………………………….. 7,500
M2-33. (10 minutes)

LO 6
+ Cash (A) - + Accounts Receivable (A) -

(f) 7,500 (a) 9,000 (b) 7,500 (f) 7,500
(d) 4,000
(e) 7,000
+ Cost of Goods Sold (E) -
(b) 4,500
+ Inventory (A) -
(a) 9,000 (b) 4,500
+ Wage Expense (E) -
(d) 4,000
- Sales (R) +
(b) 7,500
+ Rent Expense (E) -
(e) 7,000

EXERCISES
E2-34. (25 minutes)

LO 1, 7
Use the accounting equation to determine Retained Earnings as of May 31, 2019.
a. & b.
BEAVER, INC.
Balance Sheets
May 31, 2019 June 1, 2019
Assets
Cash $ 12,200 $ 3,200
Accounts receivable 18,300 18,300
Supplies 16,400 16,400
Equipment 55,000 70,000
Total assets $101,900 $107,900
Liabilities
Accounts payable $ 5,200 $ 5,200
Notes payable 20,000 33,000
Total liabilities 25,200 38,200
Stockholders' Equity
Common stock 42,500 42,500
Retained earnings 34,200 27,200
Total stockholders' equity 76,700 69,700
Total liabilities and stockholders' equity $101,900 $107,900
c. Net working capital = Current assets – Current liabilities

$32,700 = ($3,200 + $18,300 + $16,400) – $5,200

E2-35. (30 minutes)
LO 1, 3, 5
Use the accounting equation and the information on changes in contributed capital and
retained earnings.
Beginning equity (= Beginning assets – Beginning liabilities)

+ Common Stock Issued
+ Net income (= Revenues – Expenses)
– Dividends
Ending equity (= Ending assets – Ending liabilities)
a. Equity, Beginning ($28,000 - $18,600) $ 9,400

Equity, Ending ($30,000 - $17,300) 12,700
Increase 3,300
Add: Net Capital Withdrawn ($5,000 - $2,000) 3,000
Net Income 6,300
Add: Expenses 8,500
Revenues $14,800
b. Equity, Beginning ($12,000 - $5,000) $ 7,000

Add: Net Capital Contributed ($4,500 - $1,500) 3,000
10,000
Add: Net Income ($28,000 - $21,000) 7,000
Equity, Ending $17,000
Assets, Ending $26,000

Equity, Ending 17,000
Liabilities, Ending, $ 9,000
c. Equity, Beginning ($28,000 - $19,000) $ 9,000

Add: Net Income ($18,000 - $11,000) 7,000
16,000
Less: Dividends 1,000
15,000
Equity, Ending ($34,000 - $15,000) 19,000
Common Stock Issued $ 4,000
d. Common Stock Issued $ 3,500

Net Income ($24,000 - $17,000) 7,000
10,500
Cash Dividends 6,500
Increase in Equity 4,000
Equity, Ending ($40,000 - $19,000) 21,000
Equity, Beginning 17,000
Add: Liabilities, Beginning 9,000
Total Assets, Beginning $26,000

E2-36 (30 minutes)
LO 1, 5, 7
Use the accounting equation to determine stockholders’ equity balances.
a.
LANG SERVICES
Balance Sheets
December 31,
2018 2017
Assets
Cash $10,000 $ 8,000
Supplies 4,700 4,200
Equipment 32,000 27,000
Total assets $69,500 $56,700
Liabilities
Accounts payable $25,000 $25,000
Stockholders’ equity
Equity 42,700 30,100
Total liabilities and stockholders’ equity $69,500 $56,700
b. Equity, December 31, 2018 $42,700

Equity, December 31, 2017 30,100
Increase 12,600
Add: Dividends 17,000
29,600
Less: Common Stock issued 5,000
Net Income for 2018 $24,600
c. Current ratio = ($10,000 + $22,800 + $4,700)/$25,000 = 1.50

Quick ratio = ($10,000 + $22,800)/$25,000 = 1.31
d. Lang’s liquidity position is satisfactory as its current ratio meets the industry norm,
and its quick ratio is also above the industry average. The firm appears to have
invested about the “right” amount in liquid assets—neither too much, nor too little.

E2-37. (30 minutes)
LO 1, 3, 5
Use the accounting equation to determine Retained Earnings balances.
a.
LYNCH SERVICES
Balance Sheets
December 31,
2018 2017
Assets
Cash $ 23,000 $ 20,000
Supplies 20,000 18,000
Land 40,000 40,000
Building 250,000 260,000
Equipment 43,000 45,000
Total assets $418,000 $416,000
Liabilities
Mortgage payable 90,000 100,000
Common stock 220,000 220,000
b.
Retained Earnings, December 31, 2018 $102,000
Retained Earnings, December 31, 2017 87,000
Increase during 2018 15,000
Add: Dividend for 2018 10,000
Net Income for 2018 $ 25,000

E2-38. (30 minutes)
LO 1, 7
Use the accounting equation to determine Retained Earnings as of September 30,

2019. The two transactions have the following effects:
 Equipment purchase increases the equipment asset by $11,000, decreases the

cash asset by $3,000, and increases the notes payable liability by $8,000.
 Dividend payment decreases the cash asset by $3,000 and decreases the
retained earnings equity by $3,000.
a. & b.
BROWNLEE CATERING SERVICE
Balance Sheets
September 30, October 1,
2019 2019
Assets
Cash $10,000 $ 4,000
Supplies inventory 9,000 9,000
Equipment 34,000 45,000
Total assets $70,000 $75,000
Liabilities
Accounts payable $24,000 $24,000
Common stock 27,500 27,500
c. September 30 October 1
Current ratio (10,000 + 17,000 + 9,000) ÷ 24,000 (4,000 + 17,000 + 9,000) ÷ 24,000
= 1.50 = 1.25
Quick ratio (10,000 + 17,000) ÷ 24,000 (4,000 + 17,000) ÷ 24,000

= 1.13 = 0.88
d. Quite a few possibilities exist, from increasing long-term borrowing to issuing new
stock to selling unneeded equipment.

E2-39. (15 minutes)
LO 1, 3, 4
Income statement Balance sheet

Sales..................................$30,000 Cash........................................................
$ 8,000
Wages expense................. 12,000 Accounts receivable................................ 30,000
Net income (loss)...............$18,000 Total assets.............................................
$38,000
Wages payable........................................
$12,000
Common stock ........................................8,000
Retained earnings...................................
18,000
Total liabilities and equity........................
$38,000
E2-40. (15 minutes)

LO 1, 3
a.
Procter & Gamble ($ millions) Amount Classification
Net sales........................................................................
$ 65,058 I
Income tax expense...................................................... 3,063 I
Retained earnings.........................................................96,124 B
Net earnings..................................................................15,411 I
Property, plant and equipment (net)..............................19,893 B
Selling, general and administrative expense................18,568 I
Accounts receivable...................................................... 4,594 B
Total liabilities................................................................64,268 B
Stockholders' equity......................................................56,138 B
Net earnings from continuing operations 10,194 I
b. Total assets = Total liabilities + Stockholders’ equity

Total assets = $64,268 + $56,138 = $120,406

E2-41. (15 minutes)
LO 1, 3, 7
a.
Shoprite Holdings Ltd (rand millions) Amount Classification
Sales of merchandise R 141,000 I
Depreciation and amortization 2,176 I
Reserves (Retained earnings) 18,838 B
Property, plant and equipment 18,407 B
Cost of goods and services 107,174 I
Trade and other payables 17,414 B
Total assets 55,723 B
Total equity 27,749 B
Employee benefits expense 10,498 I
Total non-current assets 24,572 B
Total non-current liabilities 1,492 B
b. Total liabilities = Total assets minus total equity

Total liabilities = R 55,723 – R 27,749 = R 27,974 million.
c. Current ratio = Current assets/Current liabilities

= [R 55,723 – R 24,572] / [R 27,974 – R 1,492]
= R 31,151 / R 26,482 = 1.18

E2-42. (15 minutes)
LO 1, 3, 7
a.
El Puerto de Liverpool Classificatio
Amount
(Mexican peso thousands) n
Total revenue $122,168,279 I
Retained earnings 82,963,786 B
Inventory 18,486,423 B
Administration expenses 33,549,108 I
Total assets 168,266,121 B
Long-term debt 33,358,545 B
Financing costs (expenses) 7,137,563 I
Total current assets 67,351,290 B
Total stockholders’ equity 90,082,378 B
Prepaid expenses 1,913,794 B
Total non-current liabilities 38,849,994 B
b. Total liabilities = Total assets - Stockholders’ equity

Total liabilities = $168,266,121 - $90,082,378 = $78,183,743
Current liabilities = $78,183,743 - $38,849,994 = $39,333,749
c. Quick ratio = [Cash + Marketable securities + Accts. receivable] / Current Liabilities

= [Current assets – Inventory – Prepaid expenses] / Current liabilities
= [$67,351,290 - $18,486,423 - $1,913,794] / $39,333,749
= 1.19

E2-43. (15 minutes)
LO 1, 3
a.
Kimberly-Clark ($ millions) Amount Classification
Net sales........................................................................
$18,259 I
Cost of goods sold.........................................................11,706 I
Retained earnings......................................................... 6,730 B
Net income.................................................................... 2,319 I
Property, plant & equipment, net................................... 7,436 B
Marketing, research and general expenses.................. 3,227 I
Accounts receivable, net............................................... 2,315 B
Total liabilities................................................................14,269 B
Total stockholders' equity.............................................. 882 B
b. Total assets = Total liabilities + Stockholders’ equity

Total assets = $14,269 + $882 = $15,151
Total revenue – Total expenses = Net income

$18,259 – Total expenses = $2,319
Thus, Total expenses = $15,940
c. Debt-to-equity ratio = Total liabilities / Stockholders’ equity

= $14,269 / $882 = 16.18

E2-44. (15 minutes)
LO 1, 2, 3. 4

(1) Receive +50,000 +50,000
€50,000 in
Cash Common
exchange for = - =
Stock
common
stock.
(2) Borrow +10,000 +10,000
€10,000
Cash = Notes - =
from bank.
Payable
(3) Purchase +2,000 +2,000

€2,000 of
Inventory Accounts
supplies = - =
Payable
inventory on
credit.
(4) Receive +15,000 +15,000 +15,000

€15,000
Cash Retained Revenue
cash from +15,000
= Earnings - =
customers
for services
provided.
(5) Pay €2,000 - 2,000 - 2,000

cash to
Cash = Accounts - =
supplier in
Payable
part (3).
(6) Receive order +3,500 +3,500

for future
Cash Unearned
services with
€3,500 = Revenue - =
advance
payment.
(7) Pay - 5,000 - 5,000

€5,000 cash
Cash = Retained - =
dividend to
Earnings
shareholders.
(8) Pay - 6,000 - 6,000 +6,000

employees
Cash Retained Wages
€6,000 - 6,000
= Earnings - Expense =
cash for
compensation
earned.
(9) Pay €500 - 500 - 500 +500

cash for - 500
Cash = Retained - Interest =
interest on
Earnings Expense
loan in (2).
Totals 65,000 + 2,000 = 13,500 + 50,000 + 3,500 15,000 - 6,500 = 8,500

E2-45. (20 minutes)
LO 2, 6
a.
1. Cash (+A).................................................................................
50,000
Common stock (+SE)........................................................... 50,000
Receive €50,000 in exchange for common stock.
2. Cash (+A).................................................................................
10,000
Notes payable (+L).............................................................. 10,000
Borrow €10,000 from bank.
3. Inventory (+A)...........................................................................2,000
Accounts payable (+L)......................................................... 2,000
Purchase €2,000 supplies inventory on account.
4. Cash (+A).................................................................................
15,000
Revenue (+R, +SE).............................................................. 15,000
Recognize €15,000 revenue for services provided.
5. Accounts payable (-L)..............................................................2,000

Cash (-A).............................................................................. 2,000
Pay supplier €2,000 cash.
6. Cash (+A).................................................................................3,500
Unearned revenue (+L)........................................................ 3,500
Receive €3,500 advance from customer.
7. Retained earnings (-SE)...........................................................5,000

Cash (-A).............................................................................. 5,000
Pay €5,000 cash dividend to shareholders.
8. Wages expense (+E, -SE)........................................................6,000

Cash (-A).............................................................................. 6,000
Pay employees €6,000
9. Interest expense (+E, -SE)....................................................... 500

Cash (-A).............................................................................. 500
Pay €500 interest on note.

b.
+ Cash (A) - - Accounts Payable (L) +
(1) 50,000 2,000 (5) (5) 2,000 2,000 (3)
(2) 10,000 5,000 (7) 0 Bal.
(4) 15,000 6,000 (8)
(6) 3,500 500 (9) - Unearned Revenue (L) +
Bal. 65,000 3,500 (6)
3,500 Bal.
+ Supplies Inventory (A) - - Notes Payable (L) +

(3) 2,000 10,000 (2)
Bal. 2,000 10,000 Bal.
- Revenue (R) + - Common Stock (SE) +

15,000 (4) 50,000 (1)
15,000 Bal. 50,000 Bal.
+ Wages Expense (E) - - Retained Earnings (SE) +

(8) 6,000 (7) 5,000
Bal. 6,000 Bal. 5,000
+ Interest Expense (E) -

(9) 500
Bal. 500

E2-46. (20 minutes)
LO 1, 7
a. & b.
BETTIS CONTRACTORS
Balance Sheets
June 30, July 2,
2019 2019
Assets
Cash $ 14,700 $ 2,200
Supplies 30,500 30,500
Current assets 54,400 41,900
Land 25,000 25,000
Equipment 98,000 108,000
Total assets $177,400 $174,900
Liabilities
Current liabilities 8,900 8,900
Common stock 100,000 100,000
c. CR = $54,400 / $8,900 = 6.11

QR = ($14,700 +$9,200) / $8,900 = 2.69
d. Bettis’ current ratio indicates a strong liquidity position. The firm might want to
consider investing some of its cash in assets that contribute to the firm’s earning
power. The quick ratio is reasonable as a company does not want to tie up too much
of its assets in a nonearning asset (cash). A quick glance at the data indicates that
the firm's liquidity position has weakened since June.

E2-47. (15 minutes)
LO 1, 2, 3, 4

1. Receive +20,000 +20,000
$20,000 cash
Cash Common
in exchange = - =
Stock
for common
stock.
2. Purchase +2,000 +2,000

$2,000 of
Inventory = Accts - =
inventory on
Payable
credit.
3. Sell inventory +3,000 +3,000 +3,000

for $3,000 on +3,000
Accounts = Retained Sales - =
credit.
Receivable Earnings
4. Record cost -2,000 -2,000 + 2,000

of goods sold
Inventory = Retained - COGS = - 2,000
in 3.
Earnings Expense
5. Collect +3,000 -3,000

$3,000 cash
Cash Accounts = - =
from
Receivable
transaction 3.
6. Acquire +5,000 +5,000

$5,000 of
Equipment Notes
equipment by = Payable - =
signing a
note.
7. Pay wages of -1,000 -1,000 + 1,000

$1,000 in - 1,000
Cash = Retained - Wages =
cash.
Earnings Expense
8. Pay $5,000 -5,000 -5,000

cash on a
Cash = Notes - =
note payable.
Payable
9. Pay $2,000 -2,000 -2,000

cash = - =
Cash Retained
dividend.
Earnings
TOTALS 15,000 + 5,000 = 2,000 + 20,000 + -2,000 3,000 - 3,000 = 0

E2-48. (20 minutes)
LO 6
a.
1. Cash (+A).................................................................................
20,000
Common stock (+SE)........................................................... 20,000
2. Inventory (+A)...........................................................................
2,000
Accounts payable (+L)......................................................... 2,000
3. Accounts receivable (+A).........................................................

3,000
Sales (+R, +SE)................................................................... 3,000
4. Cost of goods sold (+E, -SE).................................................... 2,000

Inventory (-A)....................................................................... 2,000
5. Cash (+A).................................................................................
3,000
Accounts receivable (-A)...................................................... 3,000
6. Equipment (+A)........................................................................
5,000
Notes payable (+L).............................................................. 5,000
7. Wages expense (+E, -SE)........................................................ 1,000

Cash (-A).............................................................................. 1,000
8. Notes payable (-L)....................................................................

5,000
Cash (-A).............................................................................. 5,000
9. Retained earnings (-SE)........................................................... 2,000

Cash (-A).............................................................................. 2,000

b.
+ Cash (A) - - Common Stock (SE) +
(1) 20,000 1,000 (7) 20,000 (1)
(5) 3,000 5,000 (8)
2,000 (9)
- Sales Revenue (R) +
3,000 (3)
+ Inventory (A) -
(2) 2,000 2,000 (4)
+ Cost of Goods Sold (E) -
(4) 2,000
+ Accounts Receivable (A) -
(3) 3,000 3,000 (5)
+ Wages Expense (E) -
+ Equipment (A) - (7) 1,000
(6) 5,000
- Retained Earnings (SE) +

- Accounts Payable (L) + (9) 2,000
2,000 (2)
- Notes Payable (L) +

(8) 5,000 5,000 (6)


Solutions - Chapter 2

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What are the main components of a balance sheet?

What are the main components of a balance sheet?

What is the revenue recognition principle and how does it impact financial statements?

What is the revenue recognition principle and how does it impact financial statements?

Chapter 2

Constructing Financial Statements

Learning Objectives – coverage by question

LO2 – Use the financial statement

LO3 – Describe and construct the

LO4 – Explain revenue

LO5 – Illustrate equity transactions

LO6 – Use journal entries and T-

LO7 – Compute net working

©Cambridge Business Publishers, 2020

©Cambridge Business Publishers, 2020

©Cambridge Business Publishers, 2020

©Cambridge Business Publishers, 2020

M2-14. (10 minutes)

Use the accounting equation.

a. $200,000 - $85,000 = $115,000 equity

a. $375,000 - $105,000 = $270,000 equity

©Cambridge Business Publishers, 2020

a. $450,000 - $326,000 = $124,000 equity

M2-18. (10 minutes)

M2-19. (15 minutes)

a. Balance sheet e. Balance sheet i. Income statement

M2-20. (20 minutes)

a. Net income computation

©Cambridge Business Publishers, 2020

M2-22. (10 minutes)

M2-23. (10 minutes)

Fiscal year ending: Jan. 28, 2017 Feb. 3, 2018

M2-25. (10 minutes)

a. Increase assets (Cash);

b. Increase assets (Office Supplies)

c. Increase assets (Cash)

d. Decrease liabilities (Accounts Payable)

e. Increase assets (Cash)

f. Increase assets (Accounts Receivable)

g. Increase assets (Office Equipment)

h. Decrease equity (Interest Expense)

i. Decrease equity (Utilities Expense)

©Cambridge Business Publishers, 2020

a. Increase assets (Office Equipment)

b. Increase assets (Accounts Receivable)

c. Decrease equity (Rent Expense)

d. Increase assets (Cash)

e. Increase assets (Cash)

f. Increase assets (Office Equipment)

g. Decrease equity (Salaries Expense)

h. Decrease liabilities (Accounts Payable)

i. Decrease equity (Retained Earnings)

M2-27. (10 minutes)

JOHNSON & JOHNSON

©Cambridge Business Publishers, 2020

M2-29. (15 minutes)

Balance Sheet Income Statement

e. Pay -13,000 -13,000

Totals -2,000 + 22,000 = 0 + 20,000 + - =