EXERCISE 1-3

1. O
2. I
3. O
4. F
5. F
6. F
7. O
8. O
9. O
10. F

EXERCISE 1-6
;
(a) Assets – Liabilities = Shareholders’ equity
2017: $550,000 – $400,000 = $150,000
2018: $630,000 – $420,000 = $210,000
(Assets – Liabilities = Shareholders’ equity)

(b) Change in shareholders’ equity $210,000 – $150,000 = $60,000 increase

(c) 1. Net income is $60,000 = the increase in shareholders’ equity

2. Net income is $70,000 = the increase in shareholders’ equity + dividends
declared of $10,000
3. Net income is $30,000 = the increase in shareholders’ equity – common
shares issued of $30,000
4. Net income is $50,000 = the increase in shareholders’ equity + dividends
declared of $10,000 – common shares issued of $20,000
EXERCISE 1-7

[1] Total revenues – Net income = Total expenses

$1,000,000 – $150,000 = $850,000

[2] Common shares, end of year $100,000 = Beginning balance of common shares
+ Issue of shares of $100,000

[3] $150,000 equal to Net income given above

[4] Beginning balance of retained earnings plus net income less dividends declared
= Ending balance of retained earnings.
$0 + $150,000 – Dividends declared = $100,000
Dividends declared = $50,000

[5] Beginning balance in shareholders' equity + Issue of shares + Net income –

Dividends declared = Ending balance in shareholders’ equity
$0 + $100,000 + $150,000 – $50,000 = $200,000

[6] Total assets – Total liabilities = total Shareholders’ equity

$1,050,000 – $850,000 = $200,000 or [5] above

[7] Total revenues – Total expenses = Net income

Total revenues – $250,000 = $50,000
Total revenues = $300,000

[8] Beginning balance of common shares + Issue of shares = Common shares, end
of year
$0 + Issue of shares = $20,000
Issue of shares = $20,000

[9] $50,000 equal to Net income given above

[10] Common shares, end of year + Retained Earnings, end of year

$20,000 + $40,000 = $60,000 Total shareholders’ equity, end of year
EXERCISE 1-7 (CONTINUED)

[11] Total liabilities + Total shareholders’ equity = Total assets

$150,000 + $60,000 (from [10]) = $210,000

[12] $60,000 (from [10]) or $210,000 (from [11]) − $150,000 total liabilities = $60,000
total shareholders’ equity
EXERCISE 1-8

[1] Total expenses + Net income = Total revenues

$1,700,000 + $1,100,000 = $2,800,000

[2] Common shares, end of year $200,000 = Beginning balance of common shares
(nil) + Issue of shares of $200,000

[3] $1,100,000 equal to Net income given above

[4] Beginning balance of retained earnings plus net income less dividends declared
+ Beginning balance of common shares + Issue of shares = Ending balance in
shareholders’ equity.
$0 + $1,100,000 – $300,000 + $0 + $200,000 = $1,000,000
Ending balance in total shareholders’ equity = $1,000,000

[5] Total liabilities + Total Shareholders’ equity = Total assets

$1,600,000 + $1,000,000 or [4] above = $2,600,000

[6] [4] above $1,000,000

[7] Total revenues – Net income = Total expenses

$3,200,000 – $1,500,000 = $1,700,000

[8] Beginning balance of common shares + Issue of shares = Common shares, end
of year
$0 + Issue of shares = $500,000
Common shares, end of year $500,000

[9] $1,500,000 equal to Net income given above

[10] Beginning balance of retained earnings plus net income less dividends declared
= Ending balance of retained earnings.
$0 + $1,500,000 – Dividends declared = $1,200,000
Dividends declared = $300,000

[11] Common shares, end of year + Retained Earnings, end of year

$500,000 (from [8]) + $1,200,000 = $1,700,000 Total shareholders’ equity, end of
year

[12] Total assets – Total Shareholders’ equity = Total liabilities

$3,100,000 – $1,700,000 = $1,400,000
 PROBLEM 1-1B
(a) 1. An investor purchasing common shares of Fight Fat Ltd. is an external user.

2. As a potential creditor, Comeau Ltée is an external user.

3. The chief financial officer is an internal user.

4. As a potential creditor, Drummond Bank is an external user.

(b) 1. In making an investment in common shares, the Ontario investor is becoming a

partial owner (shareholder) of the company. In this case, the investment will be
held for at least three years. The information that will be most relevant to him/her
will be on the income statement. The income statement reports the past
performance of the company in terms of its revenue, expenses, and net income.
This is the best indicator of the company’s future potential.

2. In deciding to extend credit to a new customer, Comeau would focus its attention
on the new customer's statement of financial position. The terms of credit they
are extending require repayment in a short period of time. Funds to repay the
credit would come from current assets. The statement of financial position of the
new customer will show whether the company has enough current assets to
meet its current obligations.

3. In order to determine whether the company is generating enough cash to

increase the amount of dividends paid to investors, the CFO of Private Label
needs information on the amount of cash generated and used in various
activities of the business. The statement of cash flows is the most useful
statement for this purpose. This statement presents the amount of cash at the
beginning and end of the period as well as the details of the amount of cash
generated by operating activities and the amount spent on expanding
operations (investing activities).

4. In deciding whether to extend a loan, Drummond Bank is interested in two

things: the ability of the company to make its monthly interest payments for the
next five years and the ability to repay the principal amount at the end of five
years. In order to evaluate both of these factors the focus should be on the
statement of cash flows. This statement provides information on the cash the
company generates from its operating activities on an ongoing basis. This will
be the most important factor in determining if the company will survive and be
able to repay the principal and interest on the loan.
 PROBLEM 1-2B
(a) 1. Dawn will likely operate her vegetable stand as a proprietorship because she is
planning on operating it for a short time period. A proprietorship is the simplest
and least costly business organization to form and dissolve.

2. Joseph and Sabra should form a private corporation when they combine their
operations. A private corporation will be easier and less expensive to form than
a public corporation. It will also be an easier type of organization in which to raise
funds than a proprietorship or partnership. A corporation may also receive more
favourable income tax treatment.

3. The professors should incorporate their business as a private corporation

because of their concerns about the legal liabilities. A corporation is the only form
of business that provides limited liability to its owners.

4. Abdul would likely form a public corporation because he needs to raise funds to
invest in inventories and property, plant, and equipment. He has no savings or
personal assets and it is normally easier to raise funds through a corporation
than through a proprietorship or partnership. A public corporation will allow Abdul
to raise larger amounts of funds by selling shares to the public.

5. A partnership would be the most likely form of business for Mary, Richard, and
Jigme to choose. It is simpler to form than a corporation and less costly.

(b) 1. ASPE
2. ASPE
3. ASPE
4. IFRS
5. ASPE
 PROBLEM 1-7B
(a) AERO FLYING SCHOOL LTD.
Income Statement
Month Ended May 31, 2018

Revenues
Service revenue $215,300
Expenses
Fuel expense $85,400
Rent expense 12,100
Office expense 12,700
Salaries expense 36,600
Repair and maintenance expense 40,900
Interest expense 12,500 200,200
Income before income tax 15,100
Income tax expense 2,800
Net income $ 12,300

[Revenues – Expenses = Net income or (loss)]

AERO FLYING SCHOOL LTD.

Statement of Changes in Equity
Month Ended May 31, 2018

Common Retained Total

Shares Earnings Equity
Balance, May 1 $ 0 $ 0 $ 0
Issued common shares 180,000 180,000
Net income 12,300 12,300
Dividends declared (2,700) (2,700)
Balance, May 31 $180,000 $9,600 $189,600

(Beginning equity ± Changes to equity = Ending equity)

PROBLEM 1-7B (CONTINUED)

(a) (continued)

Note to instructors: Students may list the accounts in the following statement in any
order within the assets, liabilities, and shareholders’ equity classifications as they
have not yet learned how to classify/order accounts.

AERO FLYING SCHOOL LTD.

Statement of Financial Position
May 31, 2018

Assets

Cash $ 26,900
Accounts receivable 22,600
Supplies 15,000
Equipment 372,500
Total assets $ 437,000

Liabilities and Shareholders’ Equity

Liabilities
Accounts payable $ 6,400
Bank loan payable 241,000
Total liabilities 247,400
Shareholders’ equity
Common shares 180,000
Retained earnings 9,600
Total shareholders’ equity 189,600
Total liabilities and shareholders’ equity $437,000

(Assets – Liabilities = Shareholders’ equity)

(b) The financial statements must be prepared in the order of (1) income statement,
(2) statement of changes in equity, and (3) statement of financial position. This is
because each subsequent financial statement depends on information contained
in the previous statement. The net income from the income statement flows to the
retained earnings in the statement of changes in equity. The shareholders’ equity
totals (for example, for common shares and retained earnings) in the statement of
changes in equity then flow to the shareholders’ equity section of the statement of
financial position.
 PROBLEM 1-4A
(a) (b)

Accounts payable L SFP

Accounts receivable A SFP
Bank indebtedness L SFP
Bank loan payable L SFP
Cash A SFP
Common shares SC SFP, SCE
Equipment A SFP
Goodwill A SFP
Income tax expense E IS
Income tax payable L SFP
Interest expense E IS
Office expense E IS
Prepaid insurance A SFP
Rent expense E IS
Repair and maintenance expense E IS
Salaries payable L SFP
Service revenue R IS
Supplies A SFP
Vehicles A SFP