Chapter 1 Solutions

EXERCISE 1-3
Accounts payable L
Accounts receivable A
Equipment A
Sales revenue R
Service revenue R
Inventory A
Mortgage payable L
Supplies expense E
Rent expense E
Salaries and wages expense E
EXERCISE 1-8
(a) A Cash
SE Retained earnings
E Cost of goods sold
E Salaries and wages expense
A Prepaid insurance
A Inventory
A Accounts receivable
R Sales revenue
L Notes payable
L Accounts payable
R Service revenue
E Interest expense
(b) LONYEAR INC.

Income Statement
For the Year Ended December 31, 2017
Revenues
Sales revenue ...................................... $584,951
Service revenue ................................... 4,806
Total revenues.................................. $589,757
Expenses
Cost of goods sold .............................. 438,458
Salaries and wages expense .............. 115,131
Interest expense .................................. 1,882
Total expenses ................................. 555,471
Net income ................................................... $ 34,286
PROBLEM 1-1A
(a) The concern over legal liability would make the corporate form
a better choice over a partnership. Also, the corporate form will
allow the business to raise cash more easily, which may be of
importance in a rapidly growing industry.
(b) Bob should run his business as a sole proprietor. He has no

real need to raise funds, and he doesn’t need the expertise
provided by other partners. The sole proprietorship form
would provide the easiest form. One should avoid a more
complicated form of business unless the characteristics of that
form are needed.
(c) The fact that the combined business expects that it will need to
raise significant funds in the near future makes the corporate
form more desirable in this case.
(d) It is likely that this business would form as a partnership. Its

needs for additional funds would probably be minimal in the
foreseeable future. Also, the three know each other well and
would appear to be contributing equally to the firm. Service
firms, like consulting businesses, are frequently formed as
partnerships.
(e) One way to ensure control would be for Don to form a sole
proprietorship. However, in order for this business to thrive it
will need a substantial investment of funds early. This would
suggest the corporate form of business. In order for Don to
maintain control over the business he would need to own more
than 50 percent of the voting shares of common stock. In order
for the business to grow, he may have to be willing to give up
some control.
PROBLEM 1-3A
(a) ELITE SERVICE CO.

Income Statement
For the Month Ended June 30, 2017
Revenues
Service revenue ................................................ $7,500
Expenses
Salaries and wages expense ........................... $1,400
Supplies expense ............................................. 1,000
Maintenance and repairs expense .................. 600
Advertising expense ........................................ 400
Utilities expense ............................................... 300
Total expenses .......................................... 3,700
Net income ................................................................. $3,800
ELITE SERVICE CO.

Retained Earnings Statement
For the Month Ended June 30, 2017
Retained earnings, June 1 ........................................................ $ 0

Add: Net income ...................................................................... 3,800
3,800
Less: Dividends ........................................................................ 1,400
Retained earnings, June 30 ...................................................... $2,400
PROBLEM 1-3A (Continued)
ELITE SERVICE CO.

Balance Sheet
June 30, 2017
Assets
Cash ............................................................................. $ 4,600
Accounts receivable .................................................. 4,000
Supplies ...................................................................... 2,400
Equipment ................................................................... 26,000
Total assets ................................................................. $37,000
Liabilities and Stockholders’ Equity

Liabilities
Notes payable ..................................................... $12,000
Accounts payable ............................................... 500
Total liabilities ............................................. $12,500
Stockholders’ equity
Common stock .................................................... 22,100
Retained earnings............................................... 2,400 24,500
Total liabilities and stockholders’ equity .................... $37,000
[Revenues – Expenses = Net income or (loss)]

(Beginning retained earnings ± Changes in retained earnings = Ending retained
earnings)
(Assets = Liabilities + Stockholders’ equity)
(b) Elite had a very successful first month, earning $3,800 or 51%
of service revenues ($3,800 ÷ $7,500). Its net income
represents a 17% return on the initial investment ($3,800 ÷
$22,100).
(c) Distributing a dividend after only one month of operations is

probably unusual. Most new businesses choose to build up a
cash balance to provide for future operating and investing
activities or pay down debt. Elite distributed 37% ($1,400 ÷
$3,800) of its first month’s income but it had adequate cash to
do so and still showed a significant increase in retained
earnings.

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EXERCISE 1-3

(b) LONYEAR INC.

(b) Bob should run his business as a sole proprietor. He has no

(d) It is likely that this business would form as a partnership. Its

(a) ELITE SERVICE CO.

ELITE SERVICE CO.

Retained earnings, June 1 ........................................................ $ 0

ELITE SERVICE CO.

Liabilities and Stockholders’ Equity

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

(c) Distributing a dividend after only one month of operations is

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