Question

1. Applying the accounting equation (15 points) a. Total assets of Charter Company equal $700,000 and its equity is $420,000. What is the amount of its liabilities? b. Total assets of Martin Marine equal $500,000 and its liabilities and equity amounts are equal. What is the amount of its liabilities? What is the amount of its equity? 2. Identifying Financial Statements (10 points) Indicate in which financial statement each item would most likely appear: income statement (I), balance sheet (B), statement of owner’s equity (E), or statement of cash flows (CF). • a. Assets • b. Cash from operating activities • c. Withdrawals • d. Equipment • e. Expenses • f. Liabilities • g. Net decrease (or increase) in cash • h. Revenues • i. Total liabilities and equity 3. Analyze debit or credit by account (10 points) Identify whether a debit or credit yields the indicated change for each of the following accounts. 1. To increase Land 2. To decrease Cash 3. To increase Fees Earned (Revenues) 4. To increase Office Expense 5. To decrease Unearned Revenue 6. To decrease Prepaid Rent 7. To increase Notes Payable 8. To decrease Account Receivable 9. To increase Owner, Capital 10. To increase Store Equipment 4. Computing cash and accrual income (10 points) In its first year of operations, Roma Co. earned $45,000 in revenues and received $37,000 cash from these customers. The company incurred expenses of $25,500 but had not paid $5,250 of them at year-end. The company also prepaid $6,750 cash for costs that will not be expensed until the next year. Calculate the first year's net income under both the cash basis and the accrual basis of accounting. 5. Identifying inventory costs (10 points) Costs of $5,000 were incurred to acquire goods and make them ready for sale. The goods were shipped to the buyer (FOB shipping point) for a cost of $200. Additional necessary costs of $400 were incurred to acquire the goods. What is the buyer's total cost of merchandise inventory? 6. Prepare financial statements (45 points) On October 1, Ebony Ernst organized Ernst Consulting; on October 3, the owner contributed $84,000 in assets to launch the business. On October 31, the company’s records show the following items and amounts. Use this information to prepare an October income statement, statement of owner’s equity and balance sheet for the business.

Answer 1

1 (a)

Liabilities + Equity = Assets

Liabilities + $420,000 = $700,000

Liabilities = $700,000 - $420,000 i.e. $280,000

1 (b)

Liabilities = Equity

Liabilities + Equity = Assets

Liabilities + Liabilities = Assets

2 liabilities = $500,000

Liabilities = $250,000

Liabilities = Equity = $250,000

2

a. Assets : balance sheet (B)

b. Cash from operating activities : statement of cash flows (CF)

c. Withdrawals : statement of owner’s equity (E)

d. Equipment : balance sheet (B)

e. Expenses : income statement (I)

f. Liabilities : balance sheet (B)

g. Net decrease (or increase) in cash : statement of cash flows (CF)

h. Revenues : income statement (I)

i. Total liabilities and equity : balance sheet (B)

3

1. To increase Land : Debit

2. To decrease Cash : Credit

3. To increase Fees Earned (Revenues) : Credit

4. To increase Office Expense : Debit

5. To decrease Unearned Revenue : Debit

6. To decrease Prepaid Rent : Credit

7. To increase Notes Payable :Credit

8. To decrease Account Receivable : Credit

9. To increase Owner, Capital : Credit

10. To increase Store Equipment : Debit

4

(a) Net Income under accrual basis

Revenues earned = $45,000

Expenses incurred = $25,500

Net Income = $45,000 - $25,500 i.e. $19,500

(b) Net Income under cash basis

Revenues received = $37,000

Expenses paid = $25,500 - $5,250 + $6,750 i.e. $27,000

Net Income = $37,000 - $27,000 i.e. $10,000

Note: As per HOMEWORKLIB POLICY, we have to answer a maximum of 4 parts of a question. Please ask question 5 and 6 again. Moreover, the facts required to solve question 6 are not complete. Please provide the complete details for early solution.