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Chapter 1: Q5SE (page 33)

Michael McNamee is the proprietor of a property management company,Apartment Exchange, near the campus of Pensacola State College. The business has cash of \(8,000 and furniture that cost \)9,000 and has a marketvalue of \(13,000. The business debts include accounts payable of \)6,000. Michael's personal home is valued at \(400,000, and his personal bank accounthas a balance of \)1,200. Consider the accounting principles and assumptionsdiscussed in the chapter, and identify the principle or assumption that best matches the situation:

a. Michael's personal assets are not recorded on the Apartment Exchange's

balance sheet.

b. The Apartment Exchange records furniture at its cost of \(9,000, not its market

value of \)13,000.

c. The Apartment Exchange reports its financial statements in U.S. dollars.

d. Michael expects the Apartment Exchange to remain in operation for the

foreseeable future

Short Answer

Expert verified

(a) Separate legal entity

(b) Cost principle

(c) Monetary unit assumption

(d) Going concern assumption

Step by step solution

01

Explanation on Separate Legal Entity

As per the separate legal entity assumption, the company and the company's owner are considered separate entities. The personal property of the owner can not be used to repay the debts of the business.

02

Explanation on Cost Principle

As per the cost principle, assets purchased by the entity should be recorded at purchase price or historical cost.

03

Explanation on Monetary Unit Assumption

As per the monetary unit assumption, the financial statement should be measured as per the monetary unit like dollars, yen, Canadian dollar, etc.

04

Explanation on Going Concern Assumption

As per the going concern assumption, it is assumed that business will continue to be functional in the foreseeable future.

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Most popular questions from this chapter

Elaine’s Inflatables earns service revenue by providing party planning services and inflatable playscapes. Elaine’s Inflatables is organized as a corporation. During the past month, Elaine’s Inflatables had the following transactions:

a. Received contributions of \(10,000 in exchange for common stock.

b. Purchased equipment for \)5,000 on account

c. Paid \(400 for office supplies.

d. Earned and received \)2,500 cash for service revenue.

e. Paid \(400 for wages to employees.

f. Cash dividends of \)1,000 were paid to stockholders.

g. Earned \(1,000 for services provided. Customer has not yet paid.

h. Paid \)1,000 for rent.

i. Received a bill for $250 for the monthly utilities. The bill has not yet been paid.

Indicate the effects of the business transactions on the accounting equation for

Elaine’s Inflatables. Transaction (a) is answered as a guide.

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

Cosmo Thomas started a new business, Thomas Gymnastics, and completed the following transactions during December: Dec. 1 Received \(19,000 cash from Thomas in exchange for common stock. 2 Received \)3,800 cash from customers for services performed. 5 Paid \(300 cash for office supplies. 9 Performed services for a customer and billed the customer for services rendered, \)4,500. 10 Received \(150 invoice for utilities due in two weeks. 15 Paid for advertising in the local paper, \)350. 20 Paid utility invoice received on Dec. 10. 25 Collected cash in full from customer billed on Dec. 9. 28 Paid rent for the month, \(2,600. 28 Paid \)1,200 to assistant for wages. 30 Received \(1,600 cash from customers for services performed. 31 Cash dividends of \)3,000 were paid to stockholders. Analyze the effects of the transactions on the accounting equation of Thomas Gymnastics using a format similar to Exhibit 1-6.

You would like to start a cellular telephone equipment service business. You are considering organizing the business as a sole proprietorship. Identify the advantages and disadvantages of owning a sole proprietorship.

Amos Sharp recently opened his own accounting firm on October 1, which he operates as a corporation. The name of the new entity is Amos Sharp, CPA. Sharp experienced the following events during the organizing phase of the new business and its first month of operations in 2018. Oct. 5 Sharp deposited \(45,000 in a new business bank account titled Amos Sharp, CPA. The business issued common stock to Sharp. 6 Paid \)300 cash for letterhead stationery for new office. 7 Purchased office furniture for the office on account, \(6,500. 10 Consulted with tax client and received \)3,300 for services rendered. 11 Paid utilities, \(340. 12 Finished tax hearings on behalf of a client and submitted a bill for accounting services, \)16,000. 18 Paid office rent, \(1,800. 25 Received amount due from client that was billed on October 12. 27 Paid full amount of Accounts Payable created on October 7. 31 Cash dividends of \)3,800 were paid to stockholders. Requirements 1. Analyze the effects of the events on the accounting equation of Amos Sharp, CPA. 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.

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.
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