Financial Accounting 1 ACC-204

Assignment 1
Submission Date 11 Feb. 2020 (27th Lecture)
Instructions:
1. Prepare assignment in group
2. Group member shall be 3 to 4
3. Copied assignment shall be treated cancel
4. Hand written assignment shall not be acceptable
5. Only MS office format will be entertain
6. Presentation of each group is necessary (28th & 29th Lecture)
Case 1.
Natalie Koebel spent much of her childhood learning the art of cookie-making from her
grandmother. They passed many happy hours mastering every type of cookie imaginable and
later creating new recipes that were both healthy and delicious. Now at the start of her second
year in college, Natalie is investigating various possibilities for starting her own business as part
of the requirements of the entrepreneurship program in which she is enrolled. A long-time friend
insists that Natalie has to somehow include cookies in her business plan.

After a series of brainstorming sessions, Natalie settles on the idea of operating a cookie making
school. She will start on a part-time basis and offer her services in people’s homes. Now that she
has started thinking about it, the possibilities seem endless. During the fall, she will concentrate
on holiday cookies. She will offer individual lessons and group sessions (which will probably be
more entertainment than education for the participants). Natalie also decides to include children
in her target market. The first difficult decision is coming up with the perfect name for her
business. In the end, she settles on “Cookie Creations” and then moves on to more important
issues.

Instructions

(a) What form of business organization—proprietorship, partnership, or corporation—do you

recommend that Natalie use for her business? Discuss the benefits and weaknesses of each form
and give the reasons for your choice.

(b) Will Natalie need accounting information? If yes, what information will she need and why?
How often will she need this information?

(c) Identify specific asset, liability, and equity accounts that Cookie Creations will likely use to
record its business transactions.

(d) Should Natalie open a separate bank account for the business? Why or why not?

Case 2.
Mary and Jack Gray, local golf stars, opened the Chip-Shot Driving Range on March 1, 2010, by
investing $25,000 of their cash savings in the business. A caddy shack was constructed for cash
at a cost of $8,000, and $800 was spent on golf balls and golf clubs. The Grays leased five acres
of land at a cost of $1,000 per month and paid the first month’s rent. During the first month,
advertising costs totaled $750, of which $150 was unpaid at March 31, and $400 was paid to
members of the high-school golf team for retrieving golf balls. All revenues from customers were
deposited in the company’s bank account. On March 15, Mary and Jack withdrew a total of $1,000
in cash for personal living expenses. A $100 utility bill was received on March 31 but was not
paid. On March 31, the balance in the company’s bank account was $18,900.

Mary and Jack thought they had a pretty good first month of operations. But, their estimates of
profitability ranged from a loss of $6,100 to net income of $2,450.

Instructions

(a) How could the Grays have concluded that the business operated at a loss of $6,100? Was
this a valid basis on which to determine net income?

(b) How could the Grays have concluded that the business operated at a net income of $2,450?
(Hint: Prepare a balance sheet at March 31.) Was this a valid basis on which to determine net
income?

(c) Without preparing an income statement, determine the actual net income for March.

(d) What was the revenue earned in March?

Case 3.
Lynn Benedict, the bookkeeper for New York Company, has been trying to get the balance sheet
to balance. The company’s balance sheet is as follows.

NEW YORK COMPANY

Balance Sheet
As on December 31, 2010

Assets Liabilities

Equipment $25,500 Don Wenger, Capital $26,000

Cash 9,000 Accounts receivable (6,000)
Supplies 2,000 Don Wenger, Drawing (2,000)
Accounts payable (8,000) Notes payable 10,500
$28,500 $28,500
Instructions

Explain to Lynn Benedict in a memo why the original balance sheet is incorrect, and what should
be done to correct it.

Case 4.
Lisa Ortega operates Ortega Riding Academy. The academy’s primary sources of revenue are
riding fees and lesson fees, which are paid on a cash basis. Lisa also boards horses for owners,
who are billed monthly for boarding fees. In a few cases, boarders pay in advance of expected
use. For its revenue transactions, the academy maintains the following accounts: No. 1 Cash, No.
5 Boarding Accounts Receivable, No. 27 Unearned Boarding Revenue, No. 51 Riding Revenue,
No. 52 Lesson Revenue, and No. 53 Boarding Revenue.

The academy owns 10 horses, a stable, a riding corral, riding equipment, and office equipment.
These assets are accounted for in accounts No. 11 Horses, No. 12 Building, No. 13 Riding Corral,
No. 14 Riding Equipment, and No. 15 Office Equipment.
For its expenses, the academy maintains the following accounts: No. 6 Hay and Feed Supplies,
No. 7 Prepaid Insurance, No. 21 Accounts Payable, No. 60 Salaries Expense, No. 61 Advertising
Expense, No. 62 Utilities Expense, No. 63 Veterinary Expense, No. 64 Hay and Feed Expense, and
No. 65 Insurance Expense.

Lisa makes periodic withdrawals of cash for personal living expenses. To record Lisa’s equity in
the business and her drawings, two accounts are maintained: No. 50 Lisa Ortega, Capital, and
No. 51 Lisa Ortega, Drawing.

During the first month of operations an inexperienced bookkeeper was employed. Lisa Ortega
asks you to review the following eight entries of the 50 entries made during the month. In each
case, the explanation for the entry is correct.

May 1 Cash 18,000

Lisa Ortega, Capital 18,000

(Invested $18,000 cash in business)

5 Cash 250

Riding Revenue 250

(Received $250 cash for lessons provided)

7 Cash 300

Boarding Revenue 300

(Received $300 for boarding of horses beginning June 1)

14 Riding Equipment 80

Cash 800

(Purchased desk and other office equipment for $800 cash)

15 Salaries Expense 400

Cash 400

(Issued check to Lisa Ortega for personal use)

20 Cash 148

Riding Revenue 184

(Received $184 cash for riding fees)

30 Veterinary Expense 75

Accounts Payable 75

(Received bill of $75 from veterinarian for services rendered)

31 Hay and Feed Expense 1,700

Cash 1,700

(Purchased an estimated 2 months’ supply of feed and hay for $1,700 on account)
Instructions

(a) Identify each journal entry that is correct. For each journal entry that is incorrect, prepare
the entry that should have been made by the bookkeeper.

(b) Which of the incorrect entries would prevent the trial balance from balancing?

(c) What was the correct net income for May, assuming the bookkeeper reported net income of
$4,500 after posting all 50 entries?

(d) What was the correct cash balance at May 31, assuming the bookkeeper reported a balance
of $12,475 after posting all 50 entries (and the only errors occurred in the items listed above)?

Case 5.
Happy Camper Park was organized on April 1, 2009, by Amaya Berge. Amaya is a good manager
but a poor accountant. From the trial balance prepared by a part-time bookkeeper, Amaya
prepared the following income statement for the quarter that ended March 31, 2010

HAPPY CAMPER PARK

Income Statement
For the Quarter Ended March 31, 2010
Revenues
Rental revenue 90,000
Operating expenses
Advertising 5,200
Wages 29,800
Utilities 900
Depreciation 800
Repairs 4,000
Total operating expenses 40,700
Net income 49,300
Amaya thought that something was wrong with the statement because net income had never
exceeded $20,000 in any one quarter. Knowing that you are an experienced accountant, she asks
you to review the income statement and other data.

You first look at the trial balance. In addition to the account balances reported above in the
income statement, the ledger contains the following additional selected balances at March 31,
2010.

Supplies 6,200
Prepaid Insurance 7,200
Notes Payable 12,000
You then make inquiries and discover the following.

1. Rental revenues include advanced rentals for summer occupancy $15,000.

2. There were $1,700 of supplies on hand at March 31.
3. Prepaid insurance resulted from the payment of a one-year policy on January 1, 2010.
4. The mail on April 1, 2010, brought the following bills: advertising for week of March 24, $110;
repairs made March 10, $260; and utilities, $180.
5. There are four employees, who receive wages totaling $300 per day. At March 31, 2 days’
wages have been incurred but not paid.
6. The note payable is a 3-month, 10% note dated January 1, 2010.
Instructions:

(a) Prepare a correct income statement for the quarter ended March 31, 2010.

(b) Explain to Amaya the generally accepted accounting principles that she did not recognize in
preparing her income statement and their effect on her results.

Case 6.
Winterschid Company’s trial balance at December 31, 2010, is presented below. All 2010
transactions have been recorded except for the items described below.

Debit Credit

Cash 28,000
Accounts Receivable 36,800
Notes Receivable 10,000
Interest Receivable –0–
Merchandise Inventory 36,200
Prepaid Insurance 3,600
Land 20,000
Building 150,000
Equipment 60,000
Patent 9,000
Allowance for Doubtful Accounts 500
Accumulated Depreciation—Building 50,000
Accumulated Depreciation—Equipment 24,000
Accounts Payable 27,300
Salaries Payable –0–
Unearned Rent 6,000
Notes Payable (short-term) 11,000
Interest Payable –0–
Notes Payable (long-term) 35,000
Winterschid,Capital 113,600
Winterschid,Drawing 12,000
Sales 900,000
Interest Revenue –0–
Rent Revenue –0–
Gain on Disposal –0–
Bad Debts Expense –0–
Cost of Goods Sold 630,000
Depreciation Expense—Buildings –0–
Depreciation Expense—Equipment –0–
Insurance Expense –0–
Interest Expense –0–
Other Operating Expenses 61,800
Amortization Expense—Patents –0–
Salaries Expense 110,000
Total 1,167,400 1,167,400
Unrecorded transactions:

1. On May 1, 2010, Winterschid purchased equipment for $13,200 plus sales taxes of $600 (all
paid in cash).
2. On July 1, 2010, Winterschid sold for $3,500 equipment which originally cost $5,000.
Accumulated depreciation on this equipment at January 1, 2010, was $1,800; 2010 depreciation
prior to the sale of the equipment was $450.
3. On December 31, 2010, Winterschid sold for $9,000 on account inventory that cost $6,300.
4. Winterschid estimates that uncollectible accounts receivable at year-end is $4,000.
5. The note receivable is a one-year, 8% note dated April 1, 2010.No interest has been recorded.
6. The balance in prepaid insurance represents payment of a $3,600 6-month premium on
September 1, 2010.
7. The building is being depreciated using the straight-line method over 30 years. The salvage
value is $30,000.
8. The equipment owned prior to this year is being depreciated using the straight-line method
over 5 years. The salvage value is 10% of cost.
9. The equipment purchased on May 1, 2010, is being depreciated using the straight-line method
over 5 years, with a salvage value of $1,800.
10. The patent was acquired on January 1, 2010, and has a useful life of 10 years from that date.
11. Unpaid salaries at December 31, 2010, total $2,200.
12. The unearned rent of $6,000 was received on December 1, 2010, for 3 months’ rent.
13. Both the short-term and long-term notes payable are dated January 1, 2010, and carry a 9%
interest rate. All interest is payable in the next 12 months.
Instructions:
(a) Prepare journal entries for the transactions listed above.
(b) Prepare an updated December 31, 2010, trial balance.
(c) Prepare a 2010 income statement and an owner’s equity statement.
(d) Prepare a December 31, 2010, balance sheet.

Case 7.
Reimer Company and Lingo Company are two proprietorships that are similar in many
respects.One difference is that Reimer Company uses the straight-line method and Lingo
Company uses the declining-balance method at double the straight-line rate.On January 2,2008,
both companies acquired the following depreciable assets.

Asset Cost Salvage Value Useful Life

Building 320,000 20,000 40 years
Equipment 110,000 10,000 10 years

Including the appropriate depreciation charges, annual net income for the companies in the years
2008, 2009, and 2010 and total income for the 3 years were as follows.

2008 2009 2010 Total

Reimer Company 84,000 88,400 90,000 262,400
Lingo Company 68,000 76,000 85,000 229,000

At December 31, 2010, the balance sheets of the two companies are similar except that Lingo
Company has more cash than Reimer Company.
Sally Vogts is interested in buying one of the companies. She comes to you for advice.
Instructions:
(a) Determine the annual and total depreciation recorded by each company during the 3 years.
(b) Assuming that Lingo Company also uses the straight-line method of depreciation instead of
the declining-balance method as in (a), prepare comparative income data for the 3 years.
(c) Which company should Sally Vogts buy? Why?