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EXERCISES

1. PREPARATION OF A BALANCE SHEET

The line items of Perez Company's balance sheet as of December 31, 2001,
are shown below in random order: You should prepare a balance sheet for the
company, using a similar sequence for assets in the manner illustrated in the
balance sheet on page 64 of your notes. You must calculate the amount for the
Capital line item, Eduardo Perez.

Terrain $90.000 Office equipment $10.200

Accounts payable 43.800 Building 210.000
Accounts receivable 56.700 Capital, Eduardo Perez ?
Cash 36.300 Notes payable 213.600

2. ACCOUNTING PRINCIPLES AND ASSET VALUATION

The following cases relate to the valuation of assets. Consider each case
independently.

i. World-Wide Travel Agency has office supplies costing $1,700 on hand at

the balance sheet date. These supplies were purchased from a supplier
that does not give cash refunds. World-Wide management believes that
the company should sell these supplies for no more than $500 if it were
to advertise them for sale. However, the company expects you to use
these supplies and purchase more when they are gone. In its balance
sheet the supplies were valued at $500.

ii. Nofford Corporation purchased land in 1955 for $20,000. In 2001, he

purchased a similar parcel of land for $300,000. In its 2001 balance
sheet, the company presented these two land parcels for a combined
amount of $320,000.

iii. On December 30, 2001, Lenier, Inc. purchased a computer system from
a mail order vendor for $14,000. The actual value of the system,
according to the mail order vendor, was $20,000. On January 7,
however, the system was stolen during a burglary. In its balance sheet
as of December 31, 2001, Lenier showed this computer system at
$14,000 and made no reference to its retail value or theft. The December
balance sheet was issued in February 2002.
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In each case, indicate the appropriate amount of the asset balance sheet
under generally accepted accounting principles. If the amount allocated for
the company is incorrect, briefly explain the accounting principles that have
been violated. If the amount is correct, identify the accounting principles that
justify this amount.

3. USE OF THE ACCOUNTING EQUATION

Calculate the missing amounts in the table below:

Assets = Liabilities + Owner's Equity

a. $558.000 $342.000 ?
b. ? 562.000 $ 375.000
c. 307.500 ? 142.000

4. THE ACCOUNTING EQUATION

Various business transactions carried out by Green River Farms were as follows:
a. He borrowed money from a bank.

b. He sold a piece of land for cash at a price equal to its cost.

c. Paid an obligation.

d. Returned some of the office equipment previously purchased on credit but not
yet paid for.

e. Sold land for cash at a price above its cost.

f. He bought a computer on credit.

g. The owner invested cash in the business.

h. Purchased office equipment for cash.

i. Collected a bill.
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Indicate the effects of each of these transactions on the total amounts of the
company's assets, liabilities and owner's equity. Organize your answer in tabular

form, using the column headings shown below and code letters I for increase D for
decrease and NE for no effect. The answer for transaction (a) is given as an
example:

Transaction Active = Liabilities + Owner's Equity

(1) = +
(2) = +
(3) = +
(4) = +
(5) = +
(6) = +
(7) = +
(8) = +
(9) = +
(10) = +

5. EFFECTS OF BUSINESS TRANSACTIONS

For each of the following categories, state concisely one transaction that will have
the required effect on the elements of the accounting equation.

a. Increase in an asset and a liability

b. Decrease of an asset and a liability
c. Increase in one asset and decrease in another asset
d. Increase in an asset and in the owner's equity
e. Increase of an asset, decrease of another asset and increase of a liability.

6. PREPARATION AND EVALUATION OF A BALANCE SHEET

Listed below, in random order, are the line items to be included in Mystery
Mountain Lodge's balance sheet as of December 31, 2001.

Equipment $ 29.200 Buildings $450.000

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Terrain 425.000 Capital of Stanley Gardner -?-
Accounts payable 54.800 Cash 21.400
Accounts receivable 10.600 Furniture 58.700
Wages payable 33.500 Snow vehicle 15.400
Interest payable 12.000 Notes payable 620.000

Instructions

a. Prepare a balance sheet as of December 31, 2001. Include an appropriate

heading and organize your balance sheet in a manner similar to the illustration
on page 64 of your note. (After "Buildings", you can list the remaining assets in
any order). To do this you will need to calculate the amount to be shown for the
owners' equity.

b. Assume that no payment has been due on notes payable through 2003. Does
this balance sheet indicate that the company is in a sound financial position as
of December 31, 2001? Briefly explain.

7. INTERPRETATION OF THE EFFECTS OF BUSINESS TRANSACTIONS

Horizon Moving Company's six transactions are summarized below in equation

form, where each of the six is identified by a letter. For each of the transactions (a)
through (f) you must write a separate statement explaining the nature of the

transaction. For example, explanation of transaction a could be as follows:

Equipment purchased for cash at a cost of $3,200.

Patr. From the

Assets = Liabilities +
owner
Accounts Accounts Capital of
Cash + receivable + Land + Buildings + Team = payable + P. Youngblood
Balan $26,000 $39,000 $45,000 $110,000 $36,000 $42,000 rrrryuuYYYYo
$214,000
ces
(a) -3,200 +3,200
Balan $22,800 $39,000 $45,000 $110,000 $39,200 $42,000 $214,000
(b) +900 -900
Balan $23,700 $38,1 00 $45,000 $110,000 $39,200 ---
$42,000 $214,000
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(e) -3,500 +13,500 + 1 0,000

Balan $20,200 $38,100 $45,000 $110,000 $52,700 $52,000 $214,000
(d) -14,500 -14,500
Balan $5,700 $38,100 $45,000 $110,000 $52,700 $37,500 $214,000
(e) + 15,000 --- +15,000
Balan $20,700 $38,100 $45,000 $110,000 $52,700 $37,500 $229,000
ces
(f) --- --- --- +2,100 +2,100
Balan $20,700 $38,100 $45,000 $110,000 $54,800 $39,600 $229,000
ces

8. RECORDING THE EFFECTS OF TRANSACTIONS

Nova Communications was organized on December 1 of the current year and had
the following account balances as of December 31, listed in tabular form:
Heritage
Assets = Liabilities + of the owner
Team Documents Accounts Capital of
Cash + Terrain + Buildings + office = payable + payable + C.Sagan
Balance $37,000 $95,0000 $125,000 $51,250 = $80,000 $28,250 $300,000
s

In early January, Nava Communications completed the following transactions:

1. C. Sagan, the owner, deposited $25,000 of personal funds into the business
bank account.
2. He purchased land and a small office building for a total price of $90,000, of
which $35,000 was the value of the land and $55,000 was the value of the
building. He paid $22,500 in cash and signed a note payable for the remaining
$67,500.
3. Purchased various computer systems on credit for $8,500 (30 days).
4. Obtained a loan from Capital Bank in the amount of $10,000. Signed a
document to be paid.
5. Paid the account payable of $28,250 due at December 31.

Instructions
a. List the balances, as of December 31, of assets, liabilities and owner's
equity in the tabular form shown.
b. Record the effects of each of the five transactions in the format illustrated on
page 66 of your memo.
c. Display the totals of all columns after each transaction.
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9. AN ALTERNATIVE PROBLEM ON THE RECORDING OF THE EFFECTS OF
TRANSACTIONS

The line items that make up Triad Truck Rental's balance sheet as of December 31
are listed below in tabular form similar to the illustration of the accounting equation
on page 66 of your memorandum.
Heritage
Assets = Liabilities + of the owner
Accounts Team Documents Accounts Capital of
Cash + receivable + Vehicles + office + payable = payable + BiI! Foreman
Balan $9,500 $8,900 $58,000 $3,800 $20,000 $5,200 $55,000
ces

During a short period after December 31, Triad Truck Rental entered into the
following transactions:

1. Purchased office equipment at a cost of $2,700. Paid in cash.

2. Collected $4,000 in accounts receivable.
3. Paid $3,200 in accounts payable.
4. Obtained a $10,000 loan from a bank. He signed a note payable for the
balance.
5. Purchased two vehicles for $30,500. He paid $15,000 in cash and signed a
note payable for the balance.
6. Bill Foreman, the owner, invested $20,000 in cash in the business.

Instructions
a. List the December 31 balances of assets, liabilities and owner's equity in
tabular form as shown above.
b. Record the effects of each of the six transactions in the tabular order
illustrated above. Display the totals for all columns after each transaction.

10. PREPARATION OF A BALANCE SHEET; EFFECTS OF A CHANGE IN

ASSETS.

HERE COME THE CLOWNS! is the name of the traveling circus owned by Red
Costello. The general ledger accounts of the business as of June 30, 2001 are
listed here in alphabetical order.

Animals $189.060
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Trucks and vans 105.840
Capital, Costello Network 337.230
Tents 63.000
Accounts receivable 7.450
Accounts payable 26.100
Costumes 31.500
Notes receivable 9.500
Notes payable 180.000
Cash ?
Cages 24.630
Support material and equipment 89,580
Salaries paid 9.750

Instructions

a. Prepare a balance sheet using these line items and calculating the amount of
cash as of June 30, 2001. Organize your balance sheet in a manner similar to
that illustrated on page 64 of your note. (After "Accounts Receivable" you can
list the remaining assets in any order). Include an appropriate balance sheet
heading.

b. Suppose that late in the afternoon of June 30, after your balance sheet had
been prepared, a fire destroyed one of the tents, which had cost $14,300. The
tent was not secured. Explain the changes that would be required in your
balance sheet as of June 30 to reflect the loss of this asset.

11. PREPARATION OF A BALANCE SHEET, A SECOND PROBLEM

Following, in random order, is a list of Red River Farms' balance sheet items as of
September 30, 2001:

Terrain $550.000 Fences and gates 33.570

Stables and barns 78.300 Irrigation systems 20.125
Notes payable 530.000 Cash 16.710
Accounts receivable 22.365 Cattle 120.780
Citrus trees 76.650 Agricultural machinery 42.970
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Accounts payable 77.095 Capital of Hollis Roberts. ?
Property taxes payable 9.135 Wages payable 1820

Instructions

a) Prepare a balance sheet using these items and calculating the amount of
Hollis Roberts' capital. Use an asset sequence similar to the one illustrated
on page 64 of your note. (After "Stables and barns" you can list the
remaining assets in any order). Include an appropriate heading for your
balance sheet.

b) Suppose that on September 30, immediately after this balance sheet was
prepared, a hurricane completely destroyed one of the farms. This farm had
cost $23,800 and was not insured against this type of disaster. Explain the
changes that would be required in your balance sheet as of September 30
to reflect the loss of this farm.

12. PREPARATION OF A BALANCE SHEET; ANALYSIS OF ACCOUNTING

PRINCIPLES

Helen Berkeley is the founder and manager of Old Town Playhouse. The business
needs to obtain a bank loan to finance the production of its next play. As part of the
loan application, Berkeley was asked to prepare a balance sheet for the business.
She prepared the following balance sheet which is correctly ordered, but contains
several errors with respect to concepts such as business entity and valuation of
assets, liabilities and owners' equity.
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OLD TOWNPLAYHOUSE
Balance sheet
September 30, 2001

Assets Liabilities and owner's equity

Cash 21.900 Liabilities:

Accounts receivable 132.000 Accounts payable 6.000
Support material and costumes 3.000 Wages payable
29.200
Theater building 27.000 Total liabilities 35.200
Lighting equipment 9.400 Owner's Equity
Automobile 15.000 Capital of Helen Berkeley 50.000
Total $208.500 Total $85,200

In analysis with Berkeley and review of Old Town Playhouse's accounting records,
you discover the following facts:

1. The cash amount, $21,900, includes $15,000 in the company's bank

account, $1,900 in the company's safe deposit box and $5,000 in Berkeley's
personal savings account.

2. Accounts receivable, shown as $132,200, includes $7,200 due to the

business from Artistic Tours. The remaining $125,000 is Berkeley's estimate
of future ticket sales from September 30 through the end of the year
(December 31).

3. Berkeley explains that the props and costumes were purchased many days
ago for $18,000. The business paid $3,000 of this amount in cash and
issued a note payable to Actors' Supply Co. for the remainder of the
purchase price ($15,000). As this document does not expire until January of
next year, it was not included among the company's liabilities.

4. Old Town Playhouse leases a theater building from Kievits International at a

rate of $3,000 per month. The $27,000 shown on the balance sheet
represents rent paid through September 30 of the current year. Kievits
International acquired the building seven years ago at a cost of $135,000.

5. The lighting equipment was purchased on September 26 at a cost of

$9,400, but the stage manager says this one is not worth a cent.
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6. The car is a classic 1978 Berkeley model Jaguar, which she purchased two
years ago for $9,000. Recently she saw an ad for a similar car for sale for
$13,000. She does not use the car in the business, but it has a personalized
license plate that reads "PLAHOUS".

7. Accounts payable include business debts of $3,900 and the balance of

$2,100 on Berkeley's personal Visa card.

8. Wages to be paid include $25,000 offered to Mario Dane to play a lead role
in a new play starting next December and $4,200 still owed to people on the
stage for work performed through September 30.

9. When Berkeley founded Old Town Playhouse many years ago, he invested
$20,000 in the business. However, Live Theatre, Inc. recently offered to buy
his business for $50,000. Accordingly, she cited this amount as her net
worth in the previous balance sheet.

Instructions

a. Prepare a corrected balance sheet for Old Town Playhouse as of

September 30, 2001.
b. For each of the nine line items listed above, explain your reasoning as to
whether or not to include the items in the balance sheet and in determining
the appropriate valuation in pesos.