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Chapter 1: Q27E (page 39)

Indicate the effects of the following business transactions on the accounting equation for Sam’s Snack Foods, a supplier of snack foods. Transaction (a) is answered as a guide. a. Sam’s Snack Foods received cash from issuance of common stock to stockholders. Answer: Increase asset (Cash); Increase equity (Common Stock) b. Cash purchase of land for a building site. c. Paid cash on accounts payable. d. Purchased equipment; signed a note payable. e. Performed service for a customer on account. f. Employees worked for the week but will be paid next Tuesday. g. Received cash from a customer on accounts receivable. h. Borrowed money from the bank. i. Cash dividends paid to stockholders. j. Incurred utilities expense on account.

Short Answer

Expert verified

(a) Increase asset (Cash); Increase equity (Common Stock)

(b) Increase asset (Land);Decrease asset (Cash)

(c) Decrease asset (Cash); Decrease liability (Accounts Payable)

(d) Increase asset (Equipment); Increase liability (Note Payable)

(e) Increase asset (Accounts Receivable); Increase equity (Service Revenue)

(f) Increase liability (Salaries payable); Decrease equity (Salaries expense)

(g) Increase asset (Cash); Decrease asset (Accounts Receivable)

(h) Increase asset (Cash); Increase liability (Loan)

(i) Decrease asset (Cash), Decrease equity (Dividends)

(j) Increase liability (Utilities payable); Decrease equity (Utilities expense)

Step by step solution

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01

Step-by-Step-SolutionStep 1: Explanation on Accounting Equation

As per the accounting equation general rule, the left side of the equation represents the assets, and the right side of the equation represents liabilities and equity.

02

Explanation on Asset, Liability and Equity

Assets are resources that provides future economic benefits and are owned by the business.

Liabilities are the obligations (loan or debts) of the entity.

Equity represents the claim on the assets of the entity by the owners.

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Most popular questions from this chapter

Consider the following accounting terms and definitions, and match each term to the definition:

1. Accounting equation

2. Asset

3. Balance sheet

4. Expense

5. Income statement

6. Liability

7. Net income

8. Net loss

9. Revenue

10. Statement of cash flows

11. Statement of retained

earnings

a. An economic resource that is expected to be of benefit

in the future

b. Debts that are owed to creditors

c. Excess of total expenses over total revenues

d. Excess of total revenues over total expenses

e. The basic tool of accounting, stated as

Assets = Liabilities + Equity

f. Decreases in equity that occur in the course of selling

goods or services

g. Increases in equity that occur in the course of selling

goods or services

h. Reports on a business’s cash receipts and cash payments

during a period

i. Reports on an entity’s assets, liabilities, and stockholders’

equity as of a specific date

j. Reports on an entity’s revenues, expenses, and net

income or loss for the period

k. Reports how the company’s retained earnings balance

changed from the beginning to the end of the period

Abby Perry recently opened her own law office on December 1, which she operates as a corporation. The name of the new entity is Abby Perry, Attorney. Perry experienced the following events during the organizing phase of the new business and its first month of operation, December 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. Dec. 1 Sold personal investment in Nike stock, which she had owned for several years, receiving \(30,000 cash. 2 Deposited the \)30,000 cash from the sale of the Nike stock in her personal bank account. 3 Deposited \(89,000 cash in a new business bank account titled Abby Perry, Attorney. The business issued common stock to Perry. 5 Paid \)600 cash for ink cartridges for the printer. 7 Purchased computer for the law office, agreeing to pay the account, \(8,000, within three months. 9 Received \)2,900 cash from customers for services rendered. 15 Received bill from The Lawyer for magazine subscription, \(300. (Use Miscellaneous Expense account.) 23 Finished court hearings on behalf of a client and submitted a bill for legal services, \)8,000, on account. 28 Paid bill from The Lawyer. 30 Paid utilities, \(900. 31 Received \)2,800 cash from clients billed on Dec. 23. 31 Cash dividends of $3,000 were paid to stockholders. Requirements 1. Analyze the effects of the preceding events on the accounting equation of Abby Perry, Attorney. 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. d. Statement of cash flows

Exeter is a building contractor on the Gulf Coast. After losing a number of big lawsuits, it was facing its first annual net loss as the end of the year approached. The owner, Hank Snow, was under intense pressure from the company’s creditors to report positive net income for the year. However, he knew that the controller, Alice Li, had arranged a short-term bank loan of $10,000 to cover a temporary shortfall of cash. He told Li to record the incoming cash as “construction revenue” instead of a loan. That would nudge the company’s income into positive territory for the year, and then, he said, the entry could be corrected in January when the loan was repaid. Requirements 1. How would this action affect the year-end income statement? How would it affect the year-end balance sheet? 2. If you were one of the company’s creditors, how would this fraudulent action affect you?

Identifying users of accounting information For each user of accounting information, identify if the user would use financial accounting or managerial accounting. a. investor e. controller b. banker f. stockholder c. IRS g. human resources director d. manager of the business h. creditor

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 4. Prepare the balance sheet as of November 30, 2018.

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