Larson Chap 1 Prob Set A

PROBLEM SET A
Problem 1-1A (40 minutes)

Part 1
Company A:
(a)
Equity on December 31, 2004:

Assets.......................................................... $45,000
Liabilities..................................................... (23,500)
Equity.......................................................... $21,500
(b)
Equity on December 31, 2005:

Equity, December 31, 2004........................ $21,500
Plus owner investments............................
5,000
Plus net income..........................................
7,500
Less owners withdrawals......................... (2,500)
Equity, December 31, 2005....................... $31,500
(c)
Amount of liabilities on December 31, 2005:

Assets.......................................................... $48,000
Equity.......................................................... (31,500)
Liabilities..................................................... $16,500
Part 2
Company B:
(a) and (b)
Equity:
12/31/2004 12/31/2005
Assets................................... $35,000
$41,000
Liabilities.............................. (22,500)
(27,500)
Equity................................... $12,500
$13,500
Problem 1-1A (Continued)

(c)
Net income for 2005:

Equity, December 31, 2004..................... $12,500
Plus owner investments.........................
1,500
Plus net income.......................................
?
Less owners withdrawals...................... (3,000)
Equity, December 31, 2005..................... $13,500
Therefore, net income must have been $2,500.
Part 3
Company C:
First, calculate the beginning balance of equity:
Dec. 31, 2004
Assets.......................................................... $29,000
Liabilities..................................................... (14,000)
Equity.......................................................... $15,000
Next, find the ending balance of equity by completing this table:
Equity, December 31, 2004........................ $15,000
7,750
Plus net income..........................................
9,000
Equity, December 31, 2005........................ $27,875
Finally, find the ending amount of assets by adding the ending balance of
equity to the ending balance of liabilities:
Dec. 31, 2005
Liabilities..................................................... $19,000
Equity.......................................................... 27,875
Assets.......................................................... $46,875
Part 4
Company D:
First, calculate the beginning and ending owners equity balances:
12/31/2004 12/31/2005
Assets...................................... $80,000
$ 125,000
Liabilities.................................
Owners Equity.......................
Problem 1-1A (Concluded)
(38,000)
$42,000
(64,000)
$ 61,000
Then, find the amount of owner investments during 2005:

Equity, December 31, 2004.......................... $42,000
Plus owner investments...............................
?
Plus net income............................................ 12,000
Less owner withdrawals..............................
0
Equity, December 31, 2005.......................... $61,000
Thus, owner investments must have been:
$7,000
Part 5
Company E:
First, compute the balance of equity as of December 31, 2005:
Assets.......................................................... $112,500
Liabilities.................................................... (75,000)
Equity.......................................................... $ 37,500
Next, find the beginning balance of equity as follows:
Equity, December 31, 2004........................ $
?
4,500
Plus net income.......................................... 18,000
Equity, December 31, 2005....................... $37,500
Thus, the beginning balance of equity was $24,000.
Finally, find the beginning amount of liabilities by subtracting the
beginning balance of equity from the beginning balance of assets:
Dec. 31, 2004
Assets.......................................................... $123,000
Equity.......................................................... (24,000)
Liabilities.................................................... $ 99,000
Transaction
1 Owner invests
cash in business
2 Receives cash
for services
provided
3 Pays cash for
employee wages
Income
Statement of
Balance Sheet
Statement
Cash Flows
Total Total Total
Net
Operating Financing Investing
Assets Liab. Equity
Income
Activities Activities Activities
+
4 Incurs legal
costs on credit
5 Borrows cash
by signing L-T
note payable
6 Owner withdraws cash
7 Buys land by
signing note
payable
8 Provides services on credit
+
+
9 Buys office
equipment
for cash
+/
10 Collects cash
on receivable
from (8)
+/

Valdez Energy Company
Income Statement
For Year Ended December 31, 2005
Revenues ................................................... $65,000
Expenses.................................................. 50,000
Net income.................................................... $15,000

Amico
Balance Sheet
December 31, 2005
Assets ........... $90,000Liabilities
....................................$34,000
Equity...............................................
56,000
Total assets................... $90,000
Total liabilities and equity.....
$90,000

Trimark
Statement of Cash Flows
Cash from operating activities ........................ $ 7,000
Cash used by investing activities.................... (3,000)
Cash used by financing activities.................... (3,800)
Net increase in cash..........................................
200
Cash, December 31, 2004................................. 3,300
Cash, December 31, 2005................................. $ 3,500

Boardwalk
Statement of Owners Equity
B. Walk, Capital, Dec. 31, 2004 ........................ $ 8,000
Add: Net income..................................................... 9,000
17,000
Less: Owner withdrawals................................. (2,000)
B. Walk, Capital, Dec. 31, 2005......................... $15,000
Problem 1-7A (60 minutes) Parts 1 and 2

Assets
Date
Cash
Accounts
Receivable
May 1 +$60,000
1
Liabilities +
Office
=
Equipment
Accounts
Payable
Equity
+ J.D. Simpson, - J.D. Simpson, +

Capital
Withdrawals
Revenues
$1,680
800
8 +
4,600
$4,600
3,000
12
15 -
850
20 +
3,000
22
25 +
2,800
26 -
1,680
$3,000
3,000
2,800
2,800
27
$3,200
800
850
60
= + $1,680
Expenses
$60,000
3,200
= -
1,680
= +
60
2,800
28 -
850
850
30 -
200
200
30 -
480
480
31 -
1,200
$6,440
$61,140
$1,680
60
$60,000
$1,200
$1,200
$10,400

Part 3
THE SIMPSON CO.
Income Statement
For Month Ended May 31
Revenues
Consulting services revenue ............
Expenses
Rent expense.......................................
Salaries expense.................................
Advertising expense...........................
Cleaning expense...............................
Telephone expense............................
Utilities expense..................................
Total expenses....................................
Net income..................................................
$10,400
$3,200
1,700
60
800
200
480
6,440
$ 3,960
THE SIMPSON CO.

J.D. Simpson, Capital, May 1.................................... $
0
Plus: Owner Investments.....................................
60,000
Net Income.......................................................
3,960
63,960
Less: Owner Withdrawals.........................................
1,200
J.D. Simpson, Capital, May 31.................................. $62,760
THE SIMPSON CO.

Balance Sheet
May 31
Assets
Liabilities
Cash............................... $61,140
Accounts payable.....................
60
Office equipment..........
1,680
Equity
J.D. Simpson, Capital...............
62,760
Total assets................... $62,820

..........................$62,820
Total liabilities and equity........

Part 3
THE SIMPSON CO.
Cash flows from operating activities
Cash received from customers................................
Cash paid for rent......................................................
Cash paid for cleaning...............................................
Cash paid for telephone............................................
Cash paid for utilities.................................................
Cash paid to employees............................................
Net cash provided by operating activities...............
$10,400
(3,200)
(800)
(200)
(480)
(1,700)
Cash flows from investing activities

Purchase of equipment.............................................
Net cash used by investing activities......................
(1,680)
Cash flows from financing activities

Investments by owner...............................................
Withdrawals by owner...............................................
Net cash provided by financing activities...............
60,000
(1,200)
Net increase in cash..................................................

Cash balance, May 1..................................................
Cash balance, May 31................................................
$ 4,020
(1,680)
58,800
$61,140
0
$61,140

Assets
Date
Cash
Accounts
Receivable
Office
Supplies
Office
Equipment
Electrical
Equipment
Liabilities
Accounts
Payable
+ C.Hamilton, - C.Hamilton, +
Capital
Withdrawals
Revenues -
Expenses
$800
56,000
Dec. 1 +$56,000
2 800
Bal.
55,200
3 - 3,200
$14,000
Bal.
14,000
10,800 +
56,000
800
800
52,000
5
Bal.
900
14,000
10,800
56,000
+
$1,000
52,100
900
14,000
10,800 +
+
3,800
56,000
1,000
800
52,100
15
Bal.
Bal.
$3,800
900
3,800
14,000
14,600
56,000
+
+
1,000
4,000
800
$4,000
52,100
4,000
+
+
900
500
3,800
14,000
14,600 +
+
500
56,000
5,000
800
52,100
4,000
1,400
3,800
14,000
15,100
56,000
5,000
800
56,000
+
+
5,000
600
800
800
5,600 5,600 -
800
1,200
$2,440
18
3,800
48,300
+
+
4,000
600
1,400
3,800
14,000
3,800
11,300 +
48,300
28 + 4,000
1,400
3,800
14,000
11,300
56,000
5,600
4,600
4,000
52,300
600
1,400
3,800
14,000
11,300
56,000
5,600
1,200
51,100
600
1,400
3,800
14,000
11,300
56,000
440
50,660
600
1,400
3,800
14,000
11,300
56,000
Bal.
24
Bal.
Bal.
30
Bal.
31
Bal.
+ $10,800
$ 900
Bal.
29
800
Bal.
$56,000
900
51,100
+ 1,000
Bal.
20
Equity
700
$49,960
$ 600
$1,400
$3,800
$14,000
$11,300
$56,000
2,000
440
2,440
$700
$700 +
$5,600

Part 3
HAMILTON ELECTRIC
Income Statement
For Month Ended December 31
Revenues
Electrical fees earned......................
Expenses
Rent expense....................................
Salaries expense..............................
Utilities expense ..............................
Total expenses.................................
Net income..................................................
$5,600
$ 800
1,200
440
2,440
$3,160
HAMILTON ELECTRIC
C. Hamilton, Capital, December 1.............
Plus: Owner investments
Net income.......................................
Less: Owner withdrawals..........................
C. Hamilton, Capital, December 31...........
Assets
Cash.................................
Accounts receivable.......
Office supplies................
Office equipment.............
Electrical equipment.......
Total assets.....................
$
0
56,000
3,160
59,160
700
$58,460
HAMILTON ELECTRIC
Balance Sheet
December 31
Liabilities
$49,960
Accounts payable.................... $11,300
600
1,400
Equity
3,800
14,000
C. Hamilton, Capital................. 58,460
$69,760
Total liabilities and equity....... $69,760

Part 3continued
HAMILTON ELECTRIC
Cash flows from operating activities
Cash received from customers...................................
Cash paid for rent.........................................................
Cash paid for supplies.................................................
Cash paid for utilities...................................................
Cash paid to employees..............................................
Net cash provided by operating activities.................
$ 5,000
(800)
(900)
(440)
(1,200)
Cash flows from investing activities

Purchase of electrical equipment...............................
Purchase of office equipment.....................................
Net cash used by investing activities........................
(3,200)
(3,800)
Cash flows from financing activities

Cash invested by owner..............................................
Cash withdrawals by owner........................................
Net cash provided by financing activities.................
56,000
(700)
Net increase in cash.....................................................

Cash balance, Dec. 1....................................................
Cash balance, Dec. 31..................................................
$ 1,660
(7,000)
55,300
$49,960
0
$49,960
Part 4
If the December 1 owner investment had been $40,000 cash instead of
$56,000 and the $16,000 difference was borrowed by the company from a
bank, then:
(a) beginning and ending equity would be $16,000 less,
(b) total liabilities would be $16,000 greater, and
(c) total assets would remain the same.

Assets
Cash
Accounts +
Receivable
Office
Supplies
a. +$60,000
=
+
b.
- 50,000
Bal.
10,000
6,000
4,000
c.
Bal.
e.
4,000
3,000
+
$4,000
Bal.
3,000 +
4,000
g. +
Bal.
Bal.
i. +
Bal.
k.
Bal.
$4,000
4,000
Payable
$30,000
30,000 +
M.Right,
Capital
$90,000
M.Right, +
Withdrawals
Revenues
4,000
4,000
+
+
4,000
4,000
9,200 +
4,000
3,000
3,000
12,200 +
1,000
300,000 =
250,000 +
90,000
36,000 +
300,000 =
250,000 +
90,000
5,000 +
250,000 +
90,000
1,000
37,000 +
300,000 =
37,000 +
37,000 +
300,000 =
5,000 +
300,000 =
5,000 +
250,000 +
250,000 +
90,000
90,000
37,000 +
300,000 =
5,000 +
4,000
8,000
12,000
1000
12,000
1,000
1,000
$4,500 + $250,000 + $90,000 - $1,800 + $12,000 -
1,000
5,000 +
250,000 +
4,000
37,000 +
300,000 =
5,000 +
250,000 +
90,000
1,800 +
12,000
250,000 +
90,000
1,800 +
12,000
$4,000
1,000
300,000 =
37,000 +
300,000 =
$37,000 + $300,000 =
1,000
90,000
37,000 +
$1,000
250,000 +
$1,000
$4,000
4,000
2,500
$9,200 +
4,000
+ $5,000
- $1,800
90,000 1,800 +
Expenses
6,000
500
1,000
$250,000
1,800
11,700 +
Notes
8,000
11,000 +
Bal.
f.
j.
Accounts
Payable
Equity
1,000
Bal.
h.
+ Building =
+ $300,000
d.
Bal.
Office
Equipment
Liabilities
500
4,500 +
2,500
$3,500

Part 3
Right Consultings net income = $12,000 - $3,500 = $8,500

1. Return on assets equals net income divided by average total
assets.
Coca-Cola return:
$50 / $625 = 0.08 or 8%.
PepsiCo return:
$37.5 / $312.5 = 0.12 or 12%.
2. On strictly amount of sales to consumers, Cokes sales of $400

exceed PepsiCos sales of $250.
3. Success in returning net income from the average amount
invested is revealed by the return on assets. Part 1 showed that
PepsiCos 12% return is better than Coca-Colas 8% return.
4. Current performance figures suggest that PepsiCo yields a higher
return on assets than Coca-Cola. Based on this information alone,
we would be better advised to invest in PepsiCo than Coca-Cola.
Nevertheless, we would look for additional information in financial
statements and other sources for further guidance. For example, if
Coca-Cola could expand its sales, it could be a more appealing
investmentalternatively, if it could dispose of some assets
without curtailing its sales level, it would look more attractive. We
would also look for consumer trends, market expansion,
competition, product development, and promotion plans.

1.
Return on assets is net income divided by the average amount

invested.
Zias return: $55,000 / $250,000 = 0.22 or 22%.
2.
Return on assets seems satisfactory for the risk involved in the

manufacturing, marketing, and selling of cellular telephones.
Moreover, Zias 22% return is nearly double that of its
competitors 12% return.
3.
We know that sales less expenses equal net income. Taking the
sales and net income numbers for Zia we obtain:
$455,000 - Expenses = $55,000 Expenses must equal $400,000.
4.
We know from the accounting equation that total financing

(liabilities plus equity) must equal the total for assets (investing).
Since average total assets are $250,000, we know the average
total of liabilities plus equity (financing) must equal $250,000.
Problem 1-12AA (20 minutes)

Case 1
Return:
Risk:
4% interest or $40/year.
Very low; it is the risk of the financial
institution not paying interest and principal.
Case 2
Return:
Risk:
Expected winnings from your bet.

Depends on the probability of your team
covering the spread.
Case 3
Return:
Expected return on your stock investment

(both dividends and stock price changes).
Depends on the current and future
performance of Yahoos stock price (and
dividends).
Risk:
Case 4
Return:
Risk:
Expected increase in career earnings and

other rewards from an accounting degree.
Depends on your ability to successfully learn
and apply accounting knowledge.
Problem 1-13AB (15 minutes)

1.
2.
3.
4.
A
B
B
A
5.
6.
7.
8.
B
C
C
C
Problem 1-14AB (15 minutes)

An organization pursues three major business activities: financing,
investing, and operating.
(1)
Financing is the means used to pay for resources.
(2)
Investing refers to the buying and selling of resources (assets)

necessary to carry out the organizations plans.
(3)
Operating activities are the carrying out of an organizations

plans.
If financial statements are to be informative about an organizations

activities, then they will need to report on these three major activities.
Also note that planning is the glue that links and coordinates these
three major activitiesit includes the ideas, goals, and strategies of
an organization.

Larson Chap 1 Prob Set A

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Larson Chap 1 Prob Set A

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PROBLEM SET A

Problem 1-1A (40 minutes)

Equity on December 31, 2004:

Equity on December 31, 2005:

Amount of liabilities on December 31, 2005:

Problem 1-1A (Continued)

Net income for 2005:

Then, find the amount of owner investments during 2005:

Problem 1-2A (25 minutes)

Problem 1-3A (15 minutes)

Problem 1-4A (15 minutes)

Problem 1-5A (15 minutes)

Problem 1-6A (15 minutes)

Problem 1-7A (60 minutes) Parts 1 and 2

+ J.D. Simpson, - J.D. Simpson, +

Problem 1-7A (Continued)

THE SIMPSON CO.

THE SIMPSON CO.

Total assets................... $62,820

Total liabilities and equity........

Problem 1-7A (Concluded)

Cash flows from investing activities

Cash flows from financing activities

Net increase in cash..................................................

Problem 1-8A (60 minutes) Parts 1 and 2

Problem 1-8A (Continued)

Problem 1-8A (Concluded)

Cash flows from investing activities

Cash flows from financing activities

Net increase in cash.....................................................

Problem 1-9A (60 minutes) Parts 1 and 2

$4,500 + $250,000 + $90,000 - $1,800 + $12,000 -

Problem 1-9A (Concluded)

Problem 1-10A (20 minutes)

$50 / $625 = 0.08 or 8%.

$37.5 / $312.5 = 0.12 or 12%.

2. On strictly amount of sales to consumers, Cokes sales of $400

Problem 1-11A (15 minutes)

Return on assets is net income divided by the average amount

Return on assets seems satisfactory for the risk involved in the

We know from the accounting equation that total financing

Problem 1-12AA (20 minutes)

Expected winnings from your bet.

Expected return on your stock investment

Expected increase in career earnings and

Problem 1-13AB (15 minutes)

Problem 1-14AB (15 minutes)

Financing is the means used to pay for resources.

Investing refers to the buying and selling of resources (assets)

Operating activities are the carrying out of an organizations

If financial statements are to be informative about an organizations

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