Solution Manual For Accounting 2nd Canadian Edition by Warren

6. This treatment is not appropriate.
Even
SOLUTION MANUAL though the lamp meets the definition of an
FOR ACCOUNTING 2ND asset, the benefit versus cost constraint
suggests that the cost of setting up the lamp
CANADIAN EDITION BY as an asset and then depreciating it over
time is not justified.
WARREN 7. The land should be recorded at its cost of
$115,000 to Gremlin Repair Service. This is
consistent with the cost principle.
COMPLETE DOWNLOADABLE 8. A publicly accountable enterprise is not
FILE AT: allowed to use ASPE and must prepare their
https://testbanku.eu/Solution-Manual-for- financial statements in accordance with
Accounting-2nd-Canadian-Edition-by- IFRS. A private enterprise, however, may
Warren choose to use either IFRS or ASPE.
1. The objective of most businesses is to earn 9. An account receivable is a claim against a
a profit. Profit is the difference between the customer for goods or services sold. An
amounts received from customers for goods account payable is an amount owed to a
or services provided and the amounts paid creditor for goods or services purchased.
for the inputs used to provide those goods Therefore, an account receivable in the
or services. records of the seller is an account payable
2. A manufacturing business changes basic in the records of the purchaser.
inputs into products that are then sold to 10. (a); the business incurred a net loss of
customers. A service business provides $115,000 ($715,000 – $600,000).
services rather than products to customers. 11. Net income or net loss
A restaurant such as A & W has Owner’s equity at the end of the period
characteristics of both a manufacturing and
Cash at the end of the period
a service business in that A & W takes raw
inputs such as cheese, beef, and soft drink
ingredients and processes them into
products for consumption by its customers.
At the same time, A & W provides services
of waiting on its customers as they dine.
3. Some users of accounting information
include owners, managers, employees,
customers, creditors, and the government.
4. Simply put, the role of accounting is to
provide information for managers to use in
operating the business. In addition,
accounting provides information to others to
use in assessing the economic performance
and condition of the business.
5. The corporate form allows the company to
obtain large amounts of resources by
issuing shares. For this reason, most
companies that require large investments in
property, plant, and equipment are
organized as corporations.
Copyright © 2014 by Nelson Education Ltd. 1-1

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PRACTICE EXERCISES
PE 1–1
$81,000. Under the cost principle, the land should be recorded at the cost to Snap
Repair Service.
PE 1–2
a. A = L + OE b. A = L + OE
$800,000 = $450,000 + OE +$175,000 = +$60,000 + OE
OE = $350,000 OE = +$115,000
OE on December 31, 2015 =
$465,000 = $350,000 + $115,000
PE 1–3
ESCAPE TRAVEL SERVICE
Income Statement
For the Year Ended December 31, 2015
Fees earned....................................................................... $942,500
Expenses:
Wages expense............................................................ $562,500
Office expense............................................................. 391,625
Miscellaneous expense.............................................. 15,875
Total expenses........................................................ 970,000
Net loss.............................................................................. $ 27,500

PE 1–4
Statement of Owner’s Equity
Nancy Coleman, capital, January 1, 2015...................... $475,000
Additional investment by owner during year................. $ 45,000
Net loss for the year......................................................... (27,500)
17,500
Less withdrawals.............................................................. (25,000)
Decrease in owner’s equity............................................. (7,500)
Nancy Coleman, capital, December 31, 2015................ $467,500
PE 1–5
Balance Sheet
December 31, 2015
Assets Liabilities
Cash.................................. $ 56,750 Accounts payable............... $ 52,500
Accounts receivable........ 94,375
Supplies............................ 6,375 Owner’s Equity
Land.................................. 362,500 Nancy Coleman, capital..... 467,500
Total liabilities and
Total assets...................... $520,000 owner’s equity................ $520,000
EXERCISES
Ex. 1–1
a.
1. service 5. service 9. service
2. service 6. manufacturing 10. manufacturing
3. manufacturing 7. service 11. manufacturing
4. service 8. merchandise 12. manufacturing
b. The accounting equation is relevant to all companies. It serves as the basis
of the accounting information system.

Ex. 1–2
a.
1. R 5. X 9. S
2. R 6. R
3. X 7. S
4. R 8. X

b. A business transaction is an economic event that directly changes a business’
financial condition or results of operations.
Ex. 1–3
a. The cost principle has been violated. While the invention has correctly been
recorded as an asset, it should be recorded at its cost. The invention should be
recorded in an asset account with an amount of $80,000.
b. The business entity concept has been correctly followed. Since the bike trailer
is not used for business purposes, it should not be reported as a company
asset.
Ex. 1-4
Principle violated Correction
Timeliness – the financial statements Fred needs to prepare financial
should be prepared every year, not statements for each of the years since
once in three years. Mary started her business.
Business entity concept – Mary’s house Remove the house from the balance
is not owned by the business. sheet. (Office expenses may be shown
for the portion of the house Mary is
using for her office.)
Cost principle – if the house were a Use cost at which Mary purchased the
business asset, Fred should not be house, but only if the house were a
using fair market value for its value on business asset.
the balance sheet.
Ex. 1-4 (Concluded)
Faithful representation – Fred is Determine an estimate of the accounts

producing financial statements with that are not collectible and reduce the
unreliable information as the accounts accounts receivable asset by this
receivable are not worth $50,000. amount.
Understandability – without notes, Generally accepted accounting
users of the financial statements will principles require adequate disclosure
not have a full financial picture of the for items reported on the financial
business. statements. Notes should be prepared
for the financial statements.
The leasehold improvements should be The leasehold improvements to the
classified as an asset, not an expense. wine store will benefit the business for
a number of years and so the expense
should be set up as an asset and
expensed over time.
Ex. 1–5
CHAPTER 1 Faithful representation – the building has not yet met the
definition of an asset (result of a past transaction) and so it should not be
shown as an asset until next month.
1. Cost principle – the furniture should be recorded at its cost, which is

zero.
2. Timeliness – the financial statements should be produced closer to the
year-end.
3. Comparability – may not be able to compare the results to other
Canadian companies.
4. Cost principle – the equipment should be recorded at its cost of $1,500.
5. Faithful representation – the payment should not be recorded as
revenue until the services are provided.
Ex. 1–6
CHAPTER 2 Cost principle – the building should be recorded at its

cost.
1. Understandability – the notes give details that help users understand
the financial statements.
2. Business entity concept – the owner’s personal asset is not a business
asset and should not appear on the business accounts.
3. Benefit versus cost constraint – the cost of treating a stapler as an
asset is not warranted by the benefit of improved information. (also
materiality – whether the stapler is recorded as an asset or an expense
is immaterial to users of the financial information).
4. Comparability – users of the financial statements will have difficulty
comparing the company results to prior years.
5. Representational faithfulness – employees do not meet the definition of
assets (can’t control access to the asset).
Ex. 1–7
a. $1,030,000 ($250,000 + $780,000)

b. $85,500 ($125,000 – $39,500)
c. $52,500 ($60,000 – $7,500)
Ex. 1–8
a. $450,000 ($800,000 – $350,000)

b. $530,000 ($450,000 + $150,000 – $70,000)
c. $370,000 ($450,000 – $60,000 – $20,000)
d. $590,000 ($450,000 + $100,000 + $40,000)
e. Net income: $125,000 ($975,000 – $400,000 – $450,000)
Ex. 1–9
a. (2) liability
b. (1) asset
c. (3) owner’s equity
d. (1) asset
e. (1) asset
f. (1) asset
g. (3) owner’s equity
h. (3) owner’s equity
Ex. 1–10
a. Increases assets and increases owner’s equity.

b. Increases assets and increases owner’s equity.
c. Decreases assets and decreases owner’s equity.
d. Increases assets and decreases assets.
e. Increases assets and increases liabilities.
Ex. 1–11
a. (1) Total assets increased $140,000.

(2) No change in liabilities.
(3) Owner’s equity increased $140,000.
b. (1) Total assets decreased $80,000.

(2) Total liabilities decreased $80,000.
(3) No change in owner’s equity.
c. No, it is false that a transaction always affects at least two elements (Assets,
Liabilities, or Owner’s Equity) of the accounting equation. A transaction
always affects at least two accounts but both accounts could be of one
element. For example, purchasing supplies for cash only affects assets.
Ex. 1–12
1. (b) decrease
2. (a) increase
3. (a) increase
4. (b) decrease
Ex. 1–13
1. c 6. c
2. a 7. d
3. e 8. a
4. e 9. e
5. c
Ex. 1–14
a. (1) Provided catering services for cash, $29,000.

(2) Purchase of land for cash, $20,000.
(3) Payment of expenses, $14,000.
(4) Purchase of supplies on account, $1,000.
(5) Withdrawal of cash by owner, $2,000.
(6) Payment of cash to creditors, $7,000.
b. $14,000 ($25,000 – $11,000)

c. $13,000 (–$2,000 + $29,000 – $14,000)
d. $15,000 ($29,000 – $14,000)
e. $13,000 ($15,000 – $2,000)
Ex. 1–15
No. It would be incorrect to say that the business had incurred a net loss of
$10,000. The excess of the withdrawals over the net income for the period is a
decrease in the amount of owner’s equity in the business.
Ex. 1–16
Aries
Owner’s equity at end of year
($750,000 – $300,000)....................................................... $450,000
Deduct owner’s equity at beginning of year
($400,000 – $100,000)....................................................... 300,000
Net income (increase in owner’s equity).................... $150,000
Gemini
Increase in owner’s equity (as determined for Aries)....... $150,000
Add withdrawals................................................................... 40,000
Net income......................................................................... $190,000
Leo
Deduct additional investment............................................. 90,000
Net income......................................................................... $ 60,000
Pisces
Deduct additional investment............................................. 90,000
60,000
Add withdrawals................................................................... 40,000
Net income......................................................................... $100,000
Ex. 1–17
Balance sheet items: 1, 2, 4, 5, 6, and 10
Ex. 1–18
Income statement items: 3, 7, 8, and 9

Ex. 1–19
a.
LOST TRAIL COMPANY
For the Month Ended June 30, 2015
Penny Beall, capital, June 1, 2015.............................. $375,000
Net income for June..................................................... $125,000
Less withdrawals.......................................................... 18,000
Increase in owner’s equity........................................... 107,000
Penny Beall, capital, June 30, 2015............................ $482,000
b. The statement of owner’s equity is prepared before the June 30, 2015, balance
sheet because Penny Beall, Capital as at June 30, 2015, is needed for the
balance sheet.
Ex. 1–20
UNIVERSAL SERVICES
Income Statement
For the Month Ended October 31, 2015
Fees earned.......................................................................... $800,000
Expenses:
Wages expense............................................................ $270,000
Rent expense................................................................ 60,000
Miscellaneous expense............................................... 12,000
Supplies expense......................................................... 9,000
Total expenses.......................................................... 351,000
Net income........................................................................... $449,000
Ex. 1–21
In each case, solve for a single unknown, using the following equation:
Owner’s equity (beginning) + Investments – Withdrawals + Revenues – Expenses =
Owner’s equity (ending)
Aquarius Owner’s equity at end of year ($420,000 – $110,000)............. $310,000

Owner’s equity at beginning of year ($300,000 – $120,000) 180,000
Increase in owner’s equity........................................................ 130,000
Deduct increase due to net income ($190,000 – $80,000)..... 110,000
20,000
Add withdrawals......................................................................... 25,000
Additional investment in the business................................ (a) $ 45,000
Libra Owner’s equity at end of year ($700,000 – $220,000)............. $480,000

Owner’s equity at beginning of year ($500,000 – $260,000) 240,000
Increase in owner’s equity........................................................ 240,000
Add withdrawals......................................................................... 32,000
272,000
Deduct additional investment................................................... 100,000
Increase due to net income....................................................... 172,000
Add expenses............................................................................. 128,000
Revenue................................................................................... (b) $300,000
Scorpio Owner’s equity at end of year ($90,000 – $80,000)................. $ 10,000

Owner’s equity at beginning of year ($100,000 – $76,000).... 24,000
Decrease in owner’s equity....................................................... (14,000)
Deduct decrease due to net loss ($115,000 – $122,500)........ (7,500)
(6,500)
Withdrawals from the business............................................ (c) $ (16,500)
Taurus Owner’s equity at end of year ($248,000 – $136,000)............. $112,000

Add decrease due to net loss ($112,000 – $128,000)............. 16,000
128,000
Add withdrawals......................................................................... 60,000
Owner’s equity at beginning of year 188,000
148,000
Add liabilities at beginning of year.......................................... 120,000
Assets at beginning of year.................................................. (d) $268,000
Ex. 1–22
a.
PLEXIGLASS INTERIORS
Balance Sheet
October 31, 2015
Assets Liabilities
Cash.................................. $180,000 Accounts payable........... $ 46,200
Claudia Symonds, capital 244,800
Total assets...................... $291,000 owner’s equity............ $291,000
PLEXIGLASS INTERIORS
Balance Sheet
November 30, 2015
Assets Liabilities
Cash.................................. $306,000 Accounts payable........... $ 49,800
Claudia Symonds, capital 381,075
b. Owner’s equity, November 30........................................ $381,075

Owner’s equity, October 31............................................ 244,800
Net income................................................................ $136,275
c. Owner’s equity, November 30........................................ $381,075

Owner’s equity, October 31............................................ 244,800
Increase in owner’s equity....................................... 136,275
Add withdrawal................................................................ 37,500
Net income................................................................ $173,775
Ex. 1–23
a. Balance sheet: 1, 2, 4, 6, 7, 8, 9
Income statement: 3, 5, 10
b. Cash and cash equivalents appears on both the balance sheet and cash flow
statement.
Chapter 1
PROBLEMS
Prob. 1–1A
1. Assets = Liabilities + Owner’s Equity
Linda Linda
Accts. Accts. Cross, Cross, Fees Rent Salaries
Misc.
Cash + Rec. + Supplies = Payable + Capital –Withdrawals+ Earned – Exp. – Exp. – Exp. – Exp.
a. + 40,000 + 40,000
b. + 2,200 + 2,200
c. + 6,000 + 6,000
d. – 2,700 – 2,700
e. – 1,000 – 1,000
f. + 5,000 + 5,000
g. – 900 – 600 – 300
h. – 1,900 – 1,900
i. – 1,800 –1,800
Bal. 37,700 5,000 2,200 1,200 40,000 –1,800 11,000 – 2,700 – 1,900 – 600 – 300
2. Owner’s equity is the right of owners to the assets of the business. These rights are increased by owner’s
investments and revenues and decreased by owner’s withdrawals and expenses.
3. $5,500 ($11,000 – $2,700 – $1,900 – $600 – $300)
4. September’s transactions increased Linda Cross’s capital by $43,700 ($40,000 + $5,500 – $1,800), which is
the initial capital invested of $40,000 plus the excess of September’s net income of $5,500 over Linda Cross’s
withdrawals of $1,800.
Copyright © 2014 by Nelson Education Ltd. 1- 15

Chapter 1
Prob. 1–2A
1.
Owner’s
Assets = Liabilities + Equity
Jean Jean
Accts. Accts. Howard, Howard, Fees Rent Sal. Auto Misc.
a. + 50,000 + 50,000
b. + 1,600 + 1,600
c. – 500 – 500
d. + 9,250 + 9,250
e. – 2,500 – 2,500
f. – 1,200 – 900 – 300
g. – 1,900 – 1,900
h. + 11,150 + 11,150
i. – 2,700 – 2,700
Bal. 50,450 11,150 1,600 1,100 50,000 – 2,700 20,400 – 2,500 – 1,900 – 900 – 300

Chapter 1
Prob. 1–3A
1.
NEW WORLD TRAVEL AGENCY
Income Statement
Fees earned................................................................... $200,000
Expenses:
Wages expense......................................................... $90,000
Rent expense............................................................ 45,000
Utilities expense....................................................... 18,000
Miscellaneous expense............................................ 4,000
Supplies expense..................................................... 3,000
Total expenses...................................................... 160,000
Net income..................................................................... $ 40,000
2.
Kris Taber, capital, January 1, 2015............................ $120,000
Net income for the year................................................ $40,000
Kris Taber, capital, December 31, 2015...................... $150,000
3.
Balance Sheet
December 31, 2015
Assets Liabilities
Cash.................................. $110,000 Accounts payable............... $ 25,000
Kris Taber, capital............... 150,000
Total assets...................... $175,000 owner’s equity................ $175,000
4. Net income of $40,000

Chapter 1
Prob. 1–4A
1.
OHM COMPUTER SERVICES
Income Statement
For the Month Ended July 31, 2015
Revenues:
Fees earned.................................................................. $ 50,250
Expenses:
Salaries expense.......................................................... $ 12,000
Rent expense................................................................ 8,000
Auto expense................................................................ 3,875
Total expenses.......................................................... 25,750
Net income........................................................................... $ 24,500
2.
Doug Van Buren, capital, July 1, 2015............................... $ 0
Investment on July 1, 2015................................................. $30,000
Net income for July............................................................. 24,500
54,500
Less withdrawals................................................................. 7,500
Increase in owner’s equity.................................................. 47,000
Doug Van Buren, capital, July 31, 2015............................. $47,000
3.
Balance Sheet
July 31, 2015
Assets Liabilities
Cash.................................. $ 25,000 Accounts payable........... $ 1,350
Doug Van Buren, capital 47,000
Total assets...................... $ 48,350 owner’s equity............ $ 48,350

Chapter 1
Prob. 1–5A
1.
Assets = Liabilities + Owner’s Equity
Carlton Carlton Office

Accts. Myers, Myers, Sales Rent Salaries Auto Misc.
Cash + Supplies = Payable + Capital –Withdrawals+ Comm. – Exp. – Exp. – Exp.– Exp.
a. + 25,000 +25,000
b. + 2,500 + 2,500
c. – 1,600 – 1,600
d. + 25,500 + 25,500
e. – 5,000 – 5,000
f. – 8,000 – 8,000
g. – 3,700 – 2,500 – 1,200
h. – 3,000 – 3,000
Bal. 29,200 2,500 900 25,000 – 8,000 25,500 – 5,000 – 3,000 – 2,500 – 1,200

Chapter 1
Prob. 1–5A (Continued)
2.
VISTA REALTY
Income Statement
For the Month Ended January 31, 2015
Sales commissions...................................................... $25,500
Expenses:
Rent expense............................................................ $5,000
Office salaries expense........................................... 3,000
Automobile expense................................................ 2,500
Total expenses...................................................... 11,700
Net income.................................................................... $13,800
VISTA REALTY
Carlton Myers, capital, January 1, 2015..................... $ 0
Investment on January 1, 2015.................................... $25,000
Net income for January................................................ 13,800
38,800
Carlton Myers, capital, January 31, 2015................... $30,800
VISTA REALTY
Balance Sheet
January 31, 2015
Assets Liabilities
Cash................................. $29,200 Accounts payable........... $ 900
Supplies.......................... 2,500
Owner’s Equity
Carlton Myers, capital.... 30,800
Total assets.................... $31,700 owner’s equity............ $31,700

Chapter 1
Prob. 1–6A
1.
Accounts Accounts
Cash + Receivable + Supplies + Land = Payable + Marie Lapointe, Capital
34,200 + 40,000 + 5,000 + 50,000 = 16,400 + Marie Lapointe, Capital
129,200 = 16,400 + Marie Lapointe, Capital
112,800 = Marie Lapointe, Capital
2.
Owner’s
Marie Marie
Accounts Accounts Lapointe, Lapointe,
Cash + Receivable + Supplies + Land = Payable + Capital – Withdrawals
Bal. 34,200 40,000 5,000 50,000 16,400 112,800

a. + 35,000 + 35,000
b. – 30,000 + 30,000
c. – 4,500
d. + 18,250
e. – 9,000 – 9,000
f. + 2,800 + 2,800
g. + 31,750
h. + 27,800 – 27,800
i. + 14,800
j. – 12,500
k. – 10,000 – 10,000
Bal. 62,750 30,450 7,800 80,000 25,000 147,800 – 10,000

Chapter 1
Prob. 1–6A Continued
Owner’s Equity (Continued)
Dry Dry
Cleaning Cleaning Wages Rent Truck Utilities Misc.
+ Revenue – Exp. – Exp. – Exp. – Exp. – Exp. – Exp.
Bal.
a.
b.
c. – 4,500
d. + 18,250
e.
f.
g. + 31,750
h.
i. – 14,800
j. – 8,200 – 1,875 – 1,575 – 850
k.
Bal. 50,000 – 14,800 – 8,200 – 4,500 – 1,875 – 1,575 – 850

Chapter 1
Prob. 1–6A Continued
3.
COLFAX DRY CLEANERS
Income Statement
For the Month Ended November 30, 2015
Revenues:
Dry cleaning revenue................................................... $50,000
Expenses:
Dry cleaning expense.................................................. $ 14,800
Wages expense............................................................ 8,200
Rent expense................................................................ 4,500
Truck expense.............................................................. 1,875
Utilities expense........................................................... 1,575
Miscellaneous expense............................................... 850
Total expenses.......................................................... 31,800
Net income........................................................................... $18,200
COLFAX DRY CLEANERS

Marie Lapointe, capital, November 1, 2015. . . $112,800
Additional investment by Marie Lapointe...... $35,000
Net income for November................................ 18,200 $ 53,200
Less withdrawals.............................................. 10,000
Increase in owner’s equity............................... 43,200
Marie Lapointe, capital, November 30, 2015. $156,000
COLFAX DRY CLEANERS

Balance Sheet
November 30, 2015
Assets Liabilities
Land.................................. 80,000 Marie Lapointe, capital. . 156,000

Chapter 1
PR 1-7A
1.
a. All financial statements should contain the name of the business in their heading.
The statement of owner’s equity is incorrectly headed as “Steffy Owen” rather
than Driftwood Realty. The heading of the balance sheet needs the name of the
business.
b. The income statement and statement of owner’s equity cover a period of time and
should be labelled “For the Month Ended August 31, 2015.”
c. The year in the heading for the statement of owner’s equity should be 2015 rather
than 2014.
d. The balance sheet should be labelled as at “August 31, 2015,” rather than “For
the Month Ended August 31, 2015.”
e. In the income statement, the total expenses are incorrectly subtracted from the
sales commissions, resulting in an incorrect net income amount. The correct net
income should be $44,100. This also affects the statement of owner’s equity and
the amount of Steffy Owen, capital, that appears on the balance sheet.
f. In the statement of owner’s equity, the additional investment should be added
first to Steffy Owen, capital, as at August 1, 2015. The net income should be
presented next, followed by the amount of withdrawals, which is subtracted from
the net income to yield a net increase in owner’s equity.
g. Accounts payable should be listed as a liability on the balance sheet.
h. Accounts receivable and supplies should be listed as assets on the balance
sheet.
i. The balance sheet assets should equal the sum of the liabilities and owner’s
equity.

Chapter 1
Prob. 1–7A Concluded

Corrected financial statements appear as follows:
2.
DRIFTWOOD REALTY
Income Statement
For the Month Ended August 31, 2015
Revenues:
Expenses:
Office salaries expense............................................... $291,600
Rent expense................................................................ 99,000
Automobile expense.................................................... 22,500
Total expenses.......................................................... 423,000
Net income........................................................................... $ 44,100
3.
DRIFTWOOD REALTY
For the Month Ended August 31, 2015
Steffy Owen, capital, August 1, 2015................................. $ 93,600
Additional investment during August............................... $22,500
Net income for August........................................................ 44,100

66,600
Less withdrawals during August....................................... 18,000
Steffy Owen, capital, August 31, 2015............................... $142,200
4.
DRIFTWOOD REALTY
Balance Sheet
August 31, 2015
Assets Liabilities
Steffy Owen, capital....... 142,200

Chapter 1
Prob. 1–8A
a. Wages expense, $54,825 ($121,890 – $24,480 – $20,400 – $13,770 – $8,415)

b. Net income, $117,810 ($239,700 – $121,890)
c. Jeremy Parks, capital, July 1, 2015, $0
d. Investment on July 1, 2015, $459,000; from statement of cash flows.
e. Net income for July, $117,810
f. $576,810 ($459,000 + $117,810)
g. Withdrawals, $61,200; from statement of cash flows.
h. Increase in owner’s equity, $515,610 ($576,810 – $61,200)
i. Jeremy Parks, capital, July 31, 2015, $515,610
j. Land, $367,200; from statement of cash flows.
k. Total assets, $527,850
l. Jeremy Parks, capital, $515,610
m. Total liabilities and owner’s equity, $527,850 ($12,240 + $515,610)

Chapter 1
Prob. 1–1B
1. Assets = Liabilities + Owner’s Equity
Alec Alec
Accts. Accts. Lee, Lee, Fees Rent Salaries
Misc.
a. + 75,000 + 75,000
b. + 3,000 + 3,000
c. – 1,000 – 1,000
d. + 11,800 + 11,800
e. – 4,000 – 4,000
f. – 800 – 600
– 200
g. – 2,500 – 2,500
h. + 12,500 + 12,500
i. – 5,000 – 5,000
Bal. 73,500 12,500 3,000 2,000 75,000 – 5,000 24,300 – 4,000 – 2,500 – 600
– 200
3. $17,000 ($24,300 – $4,000 – $2,500 – $600 – $200)
4. January’s transactions increased Alec Lee’s capital by $87,000 ($75,000 + $17,000 – $5,000), which is the
initial capital invested of $75,000 plus the excess of January’s net income of $17,000 over Alec Lee’s
withdrawals of $5,000.

Chapter 1
Prob. 1–2B
1.
Owner’s
Rhea Rhea
Accts. Accts. Quade, Quade, Fees Rent Sal. Auto Misc.
Cash + Rec. + Supplies = Payable + Capital - Withdrawals + Earned – Exp. – Exp. – Exp. – Exp.
a. + 30,000 + 30,000
b. + 1,750 + 1,750
c. + 3,600 + 3,600
d. – 1,300 – 1,300
e. – 500 – 500
f. + 4,800 + 4,800
g. – 700 – 500 – 200
h. – 1,000 – 1,000
i. – 2,000 – 2,000
Bal. 28,100 4,800 1,750 1,250 30,000 – 2,000 8,400 – 1,300 – 1,000 – 500 – 200

Chapter 1
Prob. 1–3B
1.
ST. SIMON TRAVEL SERVICE
Income Statement
Fees earned................................................................... $500,000
Expenses:
Wages expense......................................................... $280,000
Rent expense............................................................ 75,000
Utilities expense....................................................... 36,000
Supplies expense…………………………………….. 18,000
Total expenses...................................................... 420,000
Net income..................................................................... $ 80,000
2.
Gwen Perez, capital, January 1, 2015......................... $150,000
Net income for the year................................................ $80,000
Gwen Perez, capital, December 31, 2015................... $200,000
3.
Balance Sheet
December 31, 2015
Assets Liabilities
Cash................................. $123,000 Accounts payable........... $ 25,000
Accounts receivable...... 90,000
Supplies........................... 12,000 Owner’s Equity
Gwen Perez, capital........ 200,000
Total assets..................... $225,000 owner’s equity............ $225,000
4. Net income of $80,000
Copyright © 2014 by Nelson Education Ltd.

1-29
Chapter 1
Prob. 1–4B
1.
FAIR PLAY FINANCIAL SERVICES
Income Statement
Revenues:
Fees earned.................................................................. $39,500
Expenses:
Salaries expense.......................................................... $ 16,000
Rent expense................................................................ 7,500
Auto expense................................................................ 4,500
Total expenses.......................................................... 29,200
Net income........................................................................... $10,300
2.
Ashley Rhymer, capital, January 1, 2015.......................... $ 0
Investment on January 1, 2015.......................................... $15,000
Net income for January....................................................... 10,300
25,300
Less withdrawals................................................................. 5,000
Ashley Rhymer, capital, January 31, 2015........................ $20,300
3.
Balance Sheet
January 31, 2015
Assets Liabilities
Ashley Rhymer, capital. . 20,300
Total assets...................... $ 21,880 owner’s equity............ $ 21,880

1-30
Chapter 1
Prob. 1–5B
1.
Lindsey Lindsey Office

Accts. Brown, Brown, Sales Rent Salaries Auto Misc.
Cash + Supplies = Payable + Capital –Withdrawals+ Comm. – Exp. – Exp. – Exp. – Exp.
a. + 15,000 + 15,000
b. – 4,000 – 4,000
c. – 2,000 – 1,200 – 800
d. + 1,000 + 1,000
e. + 18,500 + 18,500
f. – 600 – 600
g. – 2,500 – 2,500
h. – 5,000 – 5,000
Bal. 19,400 1,000 400 15,000 – 5,000 18,500 – 4,000 – 2,500 – 1,200 – 800

Chapter 1
Prob. 1–5B Concluded
2.
EQUITY REALTY
Income Statement
Expenses:
Rent expense............................................................ $4,000
Office salaries expense........................................... 2,500
Automobile expense................................................ 1,200
Miscellaneous expense............................................ 800
Total expenses...................................................... 8,500
Net income..................................................................... $10,000
EQUITY REALTY
Lindsey Brown, capital, June 1, 2015......................... $ 0
Investment on June 1, 2010......................................... $15,000
Net income for June..................................................... 10,000
25,000
Lindsey Brown, capital, June 30, 2015....................... $20,000
EQUITY REALTY
Balance Sheet
June 30, 2015
Assets Liabilities
Cash................................. $19,400 Accounts payable............. $ 400
Supplies........................... 1,000
Owner’s Equity
Lindsey Brown, capital..... 20,000
Total assets..................... $20,400 owner’s equity............... $20,400

1-32
Chapter 1
Prob. 1–6B
1.
Accounts Accounts
Cash + Receivable + Supplies + Land = Payable + Peyton Keyes, Capital
17,000 + 31,000 + 3,200 + 36,000 = 10,400 + Peyton Keyes, Capital
87,200 = 10,400 + Peyton Keyes, Capital
76,800 = Peyton Keyes, Capital
2.
Owner’s
Peyton Peyton
Accounts Accounts Keyes, Keyes,
Cash + Receivable + Supplies + Land = Payable + Capital –Withdrawals
Bal. 17,000 31,000 3,200 36,000 10,400 76,800

a. + 25,000 + 25,000
b. – 24,000 + 24,000
c. + 19,500
d. – 3,000
e. + 1,550 + 1,550
f. – 5,100 – 5,100
g. + 24,750
h. + 8,200
i. – 8,050
j. + 26,750 – 26,750
k. – 18,000 – 18,000
Bal. 30,100 29,000 4,750 60,000 15,050 101,800 – 18,000

1-33
Chapter 1
Prob. 1–6B Continued
Owner’s Equity (Continued)
Dry Dry
Cleaning Cleaning Wages Rent Truck Utilities Misc.
+ Revenue – Exp. – Exp. – Exp. – Exp. – Exp. – Exp.
Bal.
a.
b.
c. + 19,500
d. – 3,000
e.
f.
g. + 24,750
h. – 8,200
i. – 5,100 – 1,200 – 800 – 950
j.
k.
Bal. 44,250 – 8,200 – 5,100 – 3,000 – 1,200 – 800 – 950

1-34
Chapter 1
Prob. 1–6B Concluded
3.
SWAN DRY CLEANERS
Income Statement
Revenues:
Dry cleaning revenue................................................... $ 44,250
Expenses:
Dry cleaning expense.................................................. $8,200
Wages expense............................................................ 5,100
Rent expense................................................................ 3,000
Truck expense.............................................................. 1,200
Miscellaneous expense………………………………… 950
Utilities expense........................................................... 800
Total expenses.............................................................. 19,250
Net income........................................................................... $ 25,000
SWAN DRY CLEANERS

Peyton Keyes, capital, July 1, 2015................ $ 76,800
Additional investment by Peyton Keyes........ $ 25,000
Net income for July.......................................... 25,000 $ 50,000
Less withdrawals.............................................. 18,000
Increase in owner’s equity............................... 32,000
Peyton Keyes, capital, July 31, 2015.............. $108,800
SWAN DRY CLEANERS

Balance Sheet
July 31, 2015
Assets Liabilities
Land.................................. 60,000 Peyton Keyes, capital.... 108,800

1-35
Chapter 1
Prob. 1–7B
1. All financial statements should contain the name of the business in their
heading. The statement of owner’s equity is incorrectly headed as “Bertram
Mitchell” rather than Empire Realty.
2. The heading of the balance sheet needs the name of the business.
2. The income statement and statement of owner’s equity cover a period of time
and should be labelled “For the Month Ended May 31, 2015.”
3. The year in the heading for the statement of owner’s equity should be 2015
rather than 2014.
4. The balance sheet should be labelled “May 31, 2015,” rather than “For the
Month Ended May 31, 2015.”
6. In the income statement, the total expenses are incorrectly subtracted from
the sales commissions, resulting in an incorrect net income amount. The
correct net income should be $22,050. This also affects the statement of
owner’s equity and the amount of Bertram Mitchell, Capital, that appears on
the balance sheet.
7. Since May is the first month of operations, the May 1, 2015 capital in the
statement of owner’s equity should be shown as zero. The initial investment
and the additional investment should be added first to Bertram Mitchell,
capital, as at May 1, 2015. The net income should be presented next, followed
by the amount of withdrawals, which is subtracted from the net income to
yield a net increase in owner’s equity.
8. Accounts payable should be listed as a liability on the balance sheet.
9. Accounts receivable and supplies should be listed as assets on the balance
sheet.
10. The balance sheet assets should equal the sum of the liabilities and owner’s
equity.

1-36
Chapter 1
Prob. 1–7B (Concluded)
Corrected financial statements appear as follows:
EMPIRE REALTY
Income Statement
For the Month Ended May 31, 2015
Sales commissions............................................................. $233,550
Expenses:
Office salaries expense............................................... $145,800
Rent expense................................................................ 49,500
Automobile expense.................................................... 11,250
Total expenses.......................................................... 211,500
Net income........................................................................... $ 22,050
EMPIRE REALTY
For the Month Ended May 31, 2015
Bertram Mitchell, capital, May 1, 2015............................... $ 0
Investment on May 1, 2015................................................. $46,800
Additional investment during May..................................... 11,250
Net income for May............................................................. 22,050
80,100
Less withdrawals during May............................................ 9,000
Bertram Mitchell, capital, May 31, 2015............................. $71,100
EMPIRE REALTY
Balance Sheet
May 31, 2015
Assets Liabilities
Cash..................................... $14,850 Accounts payable............... $17,100
Accounts receivable........... 64,350
Supplies............................... 9,000 Owner’s Equity
Bertram Mitchell, capital.... 71,100
Total assets......................... $88,200 owner’s equity................ $88,200

1-37
Chapter 1
Prob. 1–8B
a. Fees earned, $180,000 ($74,400 + $105,600)

b. Supplies expense, $18,000 ($105,600 – $51,000 – $19,200 – $10,800 – $6,600)
c. Laura Biddle, capital, November 1, 2015, $0
d. Net income for November, $74,400
e. $314,400 ($240,000 + $74,400)
f. Increase in owner’s equity, $278,400 ($314,400 – $36,000)
g. Laura Biddle, capital, November 30, 2012, $278,400
h. Total assets, $288,000 ($26,700 + $21,300 + $240,000)
i. Laura Biddle, capital, $278,400 ($288,000 – $9,600)
j. Total liabilities and owner’s equity, $288,000

1-38
Chapter 1
CONTINUING PROBLEM
1.
Pat Pat Adver-

Accounts Accounts Sharpe, Sharpe, Fees Music tising
Cash + Receivable + Supplies = Payable + Capital – Withdrawals + Earned – Exp. – Exp.
Nov. 1 9,000 9,000

2 + 3,600 + 3,600
Nov. 4 + 700 + 700
Nov. 6 – 450 – 450
Nov. 13 – 100 – 100

Nov. 22 + 1,250 + 1,250
Nov. 30 – 1,000
Nov. 30 – 500 – 500 – 1,000
Bal. 10,550 1,250 700 600 9,000 – 500 4,850 – 1,000 – 450

Chapter 1
Continuing Problem (Concluded)
2.
MUSIC DEPOT
Income Statement
Fees earned................................................................... $4,850
Expenses:
Music expense.......................................................... $1,000
Advertising expense................................................ 450
Total expenses...................................................... 1,450
Net income..................................................................... $3,400
3.
MUSIC DEPOT
Pat Sharpe, capital, Nov. 1, 2015................................. $ 0
Investment on Nov. 1, 2015.......................................... $ 9,000
Net income for November............................................ 3,400
12,400
Less withdrawals.......................................................... 500
Pat Sharpe, capital, Nov. 30, 2015............................... $11,900
4.
MUSIC DEPOT
Balance Sheet
November 30, 2015
Assets Liabilities
Cash................................ $10,550 Accounts payable….. $ 600
Accounts receivable..... 1,250
Supplies......................... 700 Owner’s Equity
Pat Sharpe, capital..... 11,900
Total assets................... $12,500 owner’s equity........ $12,500

1-40
Chapter 1
SPECIAL ACTIVITIES
Activity 1–1
1. Acceptable professional conduct requires that Vince Hunt supply TD Bank

with all the relevant financial statements necessary for the bank to make an
informed decision. Therefore, Vince should provide the complete set of
financial statements. These can be supplemented with a discussion of the net
loss in the past year or other data explaining why granting the loan is a good
investment by the bank. Vince is not following the qualitative characteristic of
faithful representation as he is not providing complete information that
reflects the financial situation.
2. a. Owners are generally willing to provide bankers with information about the
operating and financial condition of the business, such as the following:
 Operating Information:
 Description of business operations
 Results of past operations
 Preliminary results of current operations
 Plans for future operations
 Financial Condition:
 List of assets and liabilities (balance sheet)
 Estimated current values of assets
 Owner’s personal investment in the business
 Owner’s commitment to invest additional funds in the business
Owners are normally reluctant to provide the following types of
information to bankers:
 Proprietary Operating Information. Such information, which might hurt
the business if competitors know it, might include special processes
used by the business or future plans to expand operations into areas
that are not currently served by a competitor.
 Personal Financial Information. Owners may have little choice here
because banks often require owners of small businesses to pledge their
personal assets as security for a business loan. Personal financial
information requested by bankers often includes the owner’s net worth,
salary, and other income. In addition, bankers usually request
information about factors that might affect the personal financial
condition

1-41
Chapter 1
Activity 1–1 Concluded
of the owner. For example, a pending divorce by the owner might

significantly affect the owner’s personal wealth.
b. Bankers typically want as much information as possible about the ability

of the business and the owner to repay the loan with interest. Examples of
such information are described above.
c. Both bankers and business owners share the common interest of the
business doing well and being successful. If the business is successful,
the bankers will receive their loan payments on time with interest, and the
owners will increase their personal wealth.
Activity 1–2
The difference in the two bank balances, $45,000 ($75,000 – $30,000), may not be
pure profit from an accounting perspective. To determine the accounting profit
for the six-month period, the revenues for the period would need to be matched
with the related expenses. The revenues minus the expenses would indicate
whether the business generated net income (profit) or a net loss for the period.
Using only the difference between the two bank account balances ignores such
factors as amounts due from customers (receivables), liabilities (accounts
payable) that need to be paid for wages or other operating expenses, additional
investments that Ms. Hendley may have made in the business during the period,
or withdrawals during the period that Ms. Hendley might have taken for personal
reasons unrelated to the business.
Some businesses that have few, if any, receivables or payables may use a “cash”
basis of accounting. The cash basis of accounting ignores receivables and
payables because they are assumed to be insignificant in amount. However, even
with the cash basis of accounting, additional investments during the period and
any withdrawals during the period have to be considered in determining the net
income (profit) or net loss for the period in relation to the change in the bank
balance.

1-42
Chapter 1
Activity 1–3
1.
Owner’s
Jan Jan
Accts. Martinelli, Martinelli, Service Salary Rent Misc.
Cash + Supplies = Payable + Capital –Withdrawals+ Revenue – Expense – Expense – Expense
a. + 1,000 + 1,000
b. – 300 + 300
c. – 200 – 200
d. – 150 + 100 – 250
e. + 1,600 + 1,600
f. + 500 + 500
g. – 800 – 800
h. – 225 – 225
i. + 1,200 + 1,200
j. – 270 – 270
Bal. 2,355 300 100 1,000 – 270 3,300 – 800 – 450 – 225

Chapter 1
Activity 1–3 Continued
2.
TOPSPIN
Income Statement
Revenues:
Service revenue............................................................ $3,300
Expenses:
Salary expense............................................................. $800
Rent expense................................................................ 450
Miscellaneous expense............................................... 225
Total expenses.......................................................... 1,475
Net income........................................................................... $1,825
3.
TOPSPIN
Jan Martinelli, capital, June 1, 2014.................................. $ 0
Investment on June 1, 2014................................................ $1,000
Net income for June............................................................ 1,825
2,825
Less withdrawals................................................................. 270
Jan Martinelli, capital, June 30, 2014................................ $2,555
4.
TOPSPIN
Balance Sheet
June 30, 2014
Assets Liabilities
Cash.................................. $2,355 Accounts payable……. $ 100
Supplies............................ 300
Owner’s Equity
Jan Martinelli, capital..... 2,555

1-44
Chapter 1
Activity 1–3 Concluded
5. a. Topspin would provide Jan with $745 more income per month than
working as a waitress. This amount is computed as follows:
Net income of Topspin, per month......................................... $1,825

Earnings as waitress, per month:
30 hours per week × $9 per hour × 4 weeks...................... 1,080
Difference................................................................................... $ 745
b. Other factors that Jan should consider before discussing a long-term

arrangement with the North Fulton Tennis Club include the following:
Jan should consider whether the results of operations for June are
indicative of what to expect each month. For example, Jan should
consider whether club members will continue to request lessons or use
the ball machine during the winter months when interest in tennis may
slacken. Jan should evaluate whether the additional income of $745 per
month from Topspin is worth the risk being taken and the effort being
expended.
Jan should also consider how much her investment in Topspin could have
earned if invested elsewhere. For example, if the initial investment of
$1,000 had been deposited in a money market or savings account at 2%
interest, it would have earned $1.67 interest in June, or $20 for the year.
Note to Instructors: Numerous other considerations could be mentioned

by students, such as the ability of Jan to withdraw cash from Topspin for
personal use. Unlike a money market account or savings account, some of
her investment in Topspin will be in the form of supplies (tennis balls,
etc.), which may not be readily convertible to cash. Jan should also
consider the probability of extra income, such as tips, from the two types
of employment. It is possible that both jobs could generate tips, though
the amount is unknown at this point in time. Qualitative factors, such as
job satisfaction and the experience gained from running her own
business, should also be considered.
The objective of this case is not to mention all possible considerations,

but rather to encourage students to begin thinking about the use of
accounting information in making business decisions.

1-45
Chapter 1
Activity 1–4
Note to Instructors: The purpose of this activity is to familiarize students with the
CICA website and to have them start to look at the process behind accounting
standard changes.
1. The site contains information on many subjects related to accounting,
such as information on accounting standards, on changes to the
accounting environment, on publications, and on professional
development opportunities. This information could be useful to
accountants, CEOs and CFOs of private and public corporations,
regulators, government, and educators.
2. The accounting standards in Canada are changing. Clicking on the links to

any of the accounting boards, such as Public Sector Accounting Board,
leads to a page that identifies recent decisions made by each board.
Activity 1–5
As can be seen from the balance sheet data in the case, Enron was financed
largely by debt as compared to equity. Specifically, Enron’s equity represented
only 17.5% ($11,470 divided by $65,503) of Enron’s total assets. The remainder of
Enron’s total assets, 82.5%, was financed by debt. When a company is financed
largely by debt, it is said to be highly leveraged.
In late 2001 and early 2002, allegations arose as to possible misstatements of

Enron’s financial statements. These allegations revolved around the use of
“special purpose entities” (partnerships) and related party transactions. The use
of special purpose entities allowed Enron to hide a significant amount of
additional debt off its balance sheet. The result was that Enron’s total assets
were even more financed by debt than the balance sheet indicated.
After the allegations of misstatements became public, Enron’s shares rapidly

declined, and the company filed for bankruptcy. Subsequently, numerous
lawsuits were filed against the company and its management. In addition, the U.S.
Securities and Exchange Commission, Justice Department, and Congress
launched investigations into Enron. As a result, several of Enron’s top executives
faced criminal prosecution and were sentenced to prison.
Note to Instructors: The role of the auditors and board of directors of Enron
might also be discussed. However, these topics are not covered in Chapter 1 but
are covered in later chapters.

1-46
Chapter 1
Notes

1-47

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6. This treatment is not appropriate.

Copyright © 2014 by Nelson Education Ltd. 1-1

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Copyright © 2014 by Nelson Education Ltd. 1-4

Faithful representation – Fred is Determine an estimate of the accounts

1. Cost principle – the furniture should be recorded at its cost, which is

CHAPTER 2 Cost principle – the building should be recorded at its

a. $1,030,000 ($250,000 + $780,000)

a. $450,000 ($800,000 – $350,000)

a. Increases assets and increases owner’s equity.

a. (1) Total assets increased $140,000.

b. (1) Total assets decreased $80,000.

a. (1) Provided catering services for cash, $29,000.

b. $14,000 ($25,000 – $11,000)

Balance sheet items: 1, 2, 4, 5, 6, and 10

Income statement items: 3, 7, 8, and 9

Aquarius Owner’s equity at end of year ($420,000 – $110,000)............. $310,000

Libra Owner’s equity at end of year ($700,000 – $220,000)............. $480,000

Scorpio Owner’s equity at end of year ($90,000 – $80,000)................. $ 10,000

Taurus Owner’s equity at end of year ($248,000 – $136,000)............. $112,000

b. Owner’s equity, November 30........................................ $381,075

c. Owner’s equity, November 30........................................ $381,075

Copyright © 2014 by Nelson Education Ltd. 1- 15

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4. Net income of $40,000

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Carlton Carlton Office

Copyright © 2014 by Nelson Education Ltd. 1- 19

Prob. 1–5A (Continued)

Copyright © 2014 by Nelson Education Ltd. 1- 20

Bal. 34,200 40,000 5,000 50,000 16,400 112,800

Copyright © 2014 by Nelson Education Ltd. 1- 21

Prob. 1–6A Continued

Owner’s Equity (Continued)

Copyright © 2014 by Nelson Education Ltd. 1- 22

Prob. 1–6A Continued

COLFAX DRY CLEANERS

COLFAX DRY CLEANERS

Copyright © 2014 by Nelson Education Ltd. 1- 23

Copyright © 2014 by Nelson Education Ltd. 1- 24

Prob. 1–7A Concluded

Net income for August........................................................ 44,100

Copyright © 2014 by Nelson Education Ltd. 1- 25

a. Wages expense, $54,825 ($121,890 – $24,480 – $20,400 – $13,770 – $8,415)

Copyright © 2014 by Nelson Education Ltd. 1- 26

Copyright © 2014 by Nelson Education Ltd. 1- 27

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4. Net income of $80,000

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Lindsey Lindsey Office

Copyright © 2014 by Nelson Education Ltd. 1- 31

Prob. 1–5B Concluded

Copyright © 2014 by Nelson Education Ltd.

Bal. 17,000 31,000 3,200 36,000 10,400 76,800

Copyright © 2014 by Nelson Education Ltd.

Prob. 1–6B Continued

Owner’s Equity (Continued)

Copyright © 2014 by Nelson Education Ltd.

Prob. 1–6B Concluded

SWAN DRY CLEANERS