Elaine’s Inflatables earns service revenue by providing party planning services and inflatable playscapes. Elaine’s Inflatables is organized as a corporation. During the past month, Elaine’s Inflatables had the following transactions:
a. Received contributions of $10,000 in exchange for common stock.
b. Purchased equipment for $5,000 on account
c. Paid $400 for office supplies.
d. Earned and received $2,500 cash for service revenue.
e. Paid $400 for wages to employees.
f. Cash dividends of $1,000 were paid to stockholders.
g. Earned $1,000 for services provided. Customer has not yet paid.
h. Paid $1,000 for rent.
i. Received a bill for $250 for the monthly utilities. The bill has not yet been paid.
Indicate the effects of the business transactions on the accounting equation for
Elaine’s Inflatables. Transaction (a) is answered as a guide.
a. Increase asset (Cash); Increase equity (Common Stock)
(a) Increase asset (Cash); Increase equity (Common Stock)
(b)Increase asset (Equipment); Increase liability (Accounts payable)
(c) Increase asset (Office supplies); Decrease asset (Cash)
(d) Increase asset (Cash); Increase equity (Service Revenue)
(e) Decrease asset (Cash); Decrease equity (Salaries Expense)
(f) Decrease asset (Cash); Decrease equity (Dividends)
(g) Increase asset (Accounts Receivable); Increase equity (Service Revenue)
(h) ) Decrease asset (Cash); Decrease equity (Rent Expense)
(i) Increase liability (Accounts Payable); Decrease equity (Utilities Expense)
As per the Accounting equation general rule, total assets is equal to the sum of total liabilities and equity.
Assets indicates the resources of the business, that it owns and provides economic benefits in future. It includes cash, building, land, accounts receivable, inventories, etc.
Liabilities are the obligations or debts that the business has to repay it to the creditors or lenders. It includes accounts payable, notes payable, interest payable, etc.
Equity indicates the claim of the owners of the entity on the assets of the entity. It includes common stock, revenues, retained earnings, expenses, etc.
Amos Sharp recently opened his own accounting firm on October 1, which he operates as a corporation. The name of the new entity is Amos Sharp, CPA. Sharp experienced the following events during the organizing phase of the new business and its first month of operations in 2018. Oct. 5 Sharp deposited $45,000 in a new business bank account titled Amos Sharp, CPA. The business issued common stock to Sharp. 6 Paid $300 cash for letterhead stationery for new office. 7 Purchased office furniture for the office on account, $6,500. 10 Consulted with tax client and received $3,300 for services rendered. 11 Paid utilities, $340. 12 Finished tax hearings on behalf of a client and submitted a bill for accounting services, $16,000. 18 Paid office rent, $1,800. 25 Received amount due from client that was billed on October 12. 27 Paid full amount of Accounts Payable created on October 7. 31 Cash dividends of $3,800 were paid to stockholders. Requirements 1. Analyze the effects of the events on the accounting equation of Amos Sharp, CPA. Use a format similar to Exhibit 1-6. 2. Prepare the following financial statements: a. Income statement. b. Statement of retained earnings. c. Balance sheet
Canyon Canoe Company is a service-based company that rents canoes for use on local lakes and rivers. Amber and Zack Wilson graduated from college about 10 years ago. They both worked for one of the “Big Four” accounting firms and became CPAs. Because they both love the outdoors, they decided to begin a new business that will combine their love of outdoor activities with their business knowledge. Amber and Zack decide that they will create a new corporation, Canyon Canoe Company, or CCC for short. The business began operations on November 1, 2018. Nov. 1 Received $16,000 cash to begin the company and issued common stock to Amber and Zack. 2 Signed a lease for a building and paid $1,200 for the first month’s rent. 3 Purchased canoes for $4,800 on account. 4 Purchased office supplies on account, $750. 7 Earned $1,400 cash for rental of canoes. 13 Paid $1,500 cash for wages. 15 Paid $50 dividends to stockholders. 16 Received a bill for $150 for utilities. (Use separate payable account.) 20 Received a bill for $175 for cell phone expenses. (Use separate payable account.) 22 Rented canoes to Early Start Daycare on account, $3,000. 26 Paid $1,000 on account related to the November 3, 2018, purchase. 28 Received $750 from Early Start Daycare for canoe rental on November 22, 2018. 30 Paid $100 dividends to stockholders. Requirements 3. Prepare the statement of retained earnings for the month ended November 30, 2018.
Michael McNamee is the proprietor of a property management company,Apartment Exchange, near the campus of Pensacola State College. The business has cash of $8,000 and furniture that cost $9,000 and has a marketvalue of $13,000. The business debts include accounts payable of $6,000. Michael's personal home is valued at $400,000, and his personal bank accounthas a balance of $1,200. Consider the accounting principles and assumptionsdiscussed in the chapter, and identify the principle or assumption that best matches the situation:
a. Michael's personal assets are not recorded on the Apartment Exchange's
b. The Apartment Exchange records furniture at its cost of $9,000, not its market
value of $13,000.
c. The Apartment Exchange reports its financial statements in U.S. dollars.
d. Michael expects the Apartment Exchange to remain in operation for the
Annette Pachelo recently opened her own law office on March 1, which she operates as a corporation. The name of the new entity is Annette Pachelo, Attorney. Pachelo experienced the following events during the organizing phase of the new business and its first month of operation, March 2018. Some of the events were personal and did not affect the law practice. Others were business transactions and should be accounted for by the business. Mar. 1 Sold personal investment in Amazon stock, which she had owned for several years, receiving $35,000 cash. 2 Deposited the $35,000 cash from the sale of the Amazon stock in her personal bank account. 3 Deposited $73,000 cash in a new business bank account titled Annette Pachelo, Attorney. The business issued common stock to Pachelo. 5 Paid $700 cash for ink cartridges for the printer. 7 Purchased computer for the law office, agreeing to pay the account, $5,000, within three months. 9 Received $2,800 cash from customers for services rendered. 15 Received bill from The Lawyer for magazine subscription, $400. (Use Miscellaneous Expense account.) 23 Finished court hearings on behalf of a client and submitted a bill for legal services, $10,000, on account. 28 Paid bill from The Lawyer. 30 Paid utilities, $1,200. 31 Received $3,300 cash from clients billed on March 23. 31 Cash dividends of $5,500 were paid to stockholders. Requirements 2. Prepare the following financial statements: c. Balance sheet. d. Statement of cash flows
Let’s examine a case using Greg’s Tunes and Sal’s Silly Songs. It is now the end of the first year of operations, and the stockholders want to know how well each business came out at the end of the year. Neither business kept complete accounting records, and no dividends were paid. The businesses throw together the data shown on the next page at year-end: $ 23,000 8,000 35,000 22,000 $ 10,000 6,000 44,000 9,000 Total Assets Common Stock Total Revenues Total Expenses Greg’s Tunes: Sal’s Silly Songs: Total Liabilities Common Stock Total Expenses Net Income To gain information for evaluating the businesses, the stockholders ask you several questions. For each answer, you must show your work to convince the stockholders that you know what you are talking about. Requirements 1. Which business has more assets?
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