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Accounting Problems and Solutions

Chapter 1: The Accounting Equation

Question 1: Define the three components of the Accounting Equation.
Question 2: If a business owns a piece of real estate worth $250,000, and they owe $180,000 on a loan for that real estate, what is owners’ equity in the property?
Answer to Question 1:
  • Assets: All the property owned by a business.
  • Liabilities: A company’s outstanding debts.
  • Owners’ Equity: The company’s ownership interests in its property after all debts have been repaid.
Answer to Question 2: $70,000

Chapter 2: The Balance Sheet

Question 1: Categorize the following accounts as to whether they’re Asset, Liability, of Owners’ Equity accounts.
  • Common Stock
  • Accounts Receivable
  • Retained Earnings
  • Cash
  • Notes Payable
Question 2: For each of the following assets or liabilities, state whether it is current or non-current:
  • Accounts Payable
  • Cash
  • Property, Plant, and Equipment
  • Note Payable
  • Inventory
Answer to Question 1:
  • Common Stock: Owners’ Equity
  • Accounts Receivable: Asset
  • Retained Earnings: Owners’ Equity
  • Cash: Asset
  • Notes Payable: Liability
Answer to Question 2:
  • Accounts Payable: current liability
  • Cash: current asset
  • Property, Plant, and Equipment: non-current asset
  • Note Payable: non-current liability (Though if a portion of the note is due within the next twelve months, that portion should be shown as a current liability.)
  • Inventory: current asset

Chapter 3: The Income Statement

Question 1: Given the following information, calculate ABC Corp’s Net Income:
  • Sales: $260,000
  • Cost of Goods Sold: $100,000
  • Salaries and Wages: $20,000
  • Rent Expense: $15,000
  • Advertising Expense: $35,000
  • Cost of repairs resulting from fire: $50,000
Question 2: Using the above information, calculate ABC Corp’s Operating Income.
Question 3:Using the above information, calculate ABC Corp’s Gross Profit.
Answer to Question 1: $40,000 (Sales of $260,000 minus $220,000 of total expenses.)
Answer to Question 2: $90,000 (Operating Income is intended to represent income from typical business operations.  As a result, expenses resulting from a fire would certainly not be included when calculating Operating Income.)
Answer to Question 3: $160,000 (Sales minus Cost of Goods Sold)

Chapter 4: The Statement of Retained Earnings

Question 1: Using the following information, calculate the ending balance in Retained Earnings:
  • Beginning Retained Earnings: $10,000
  • Net Income: $5,000
  • Dividends Paid: $4,000
Question 2: Calculate Net Income given the following information:
  • Consulting Revenue: $50,000
  • Rent Expense: $5,000
  • Software Licensing Fees: $3,000
  • Dividends Paid: $6,000
  • Advertising Expense:$20,000
Question 3: Using the following information, calculate how much was paid out in dividends during the year:
  • Beginning Retained Earnings: $40,000
  • Net Income: $15,000
  • Ending Retained Earnings: $30,000
Answer to Question 1: $11,000
Answer to Question 2: $22,000 (Remember, dividends are not an expense! They are a distribution of net income rather than a reduction of net income.)
Answer to Question 3: $25,000

Chapter 5: The Cash Flow Statement

Question 1: Calculate cash flow from operating activities using the following information:
  • Cash sales: $10,000
  • Credit sales: $15,000
  • Cash received from prior credit sales: $8,000
  • Rent paid: $3,000
  • Inventory purchased: $6,000
  • Wages paid:$5,000
Question 2: Categorize the following cash flows as to whether they are operating, investing, or financing activities:
  • Taxes paid
  • Dividends paid to shareholders
  • Interest paid on loans
  • Dividends received on investments
  • Cash sales
  • Purchase of new office furniture
Answer to Question 1: Net cash inflow of $4,000. (Remember not to include the $15,000 of credit sales when calculating cash flow.)
Answer to Question 2:
  • Taxes paid: Operating Activities
  • Dividends paid to shareholders: Financing Activities
  • Interest paid on loans: Financing Activities
  • Dividends received on investments: Investing Activities
  • Cash sales: Operating Activities
  • Purchase of new office furniture: Investing Activities

Chapter 6: Financial Ratios

Questions 1-3: Use the following income statement and balance sheet to answer the following questions.
Income Statement
Sales130,000
Cost of Goods Sold26,000
Profit Margin104,000
Salaries and Wages15,000
Rent Expense5,000
Licensing Expenses20,000
Advertising Expense4,000
Total Expenses44,000
Net Income60,000
Balance Sheet
Assets
Cash10,000
Inventory15,000
Property, Plant, and Equipment250,000
Accounts Receivable5,000
Total Assets280,000
Liabilities
Accounts Payable20,000
Notes Payable40,000
Total Liabilities60,000
Owners’ Equity
Common Stock120,000
Retained Earnings100,000
Total Owners’ Equity220,000
Question 1: Calculate the company’s current ratio and quick ratio.
Question 2: Calculate the company’s return on assets and return on equity.
Question 3: Calculate the company’s debt ratio and debt to equity ratio.
Answer to Question 1: Current ratio = 1.5 (30,000 current assets ÷ 20,000 current liabilities). Quick ratio = 0.75 (15,000 non-inventory current assets ÷ 20,000 current liabilities).
Answer to Question 2: Return on assets = 21.4% (60,000 net income ÷ 280,000 total assets). Return on equity = 27.3% (60,000 net income ÷ 220,000 shareholders’ equity)
Answer to Question 3: Debt ratio = 21.4% (60,000 liabilities ÷ 280,000 assets). Debt to equity ratio = 27.3% (60,000 liabilities ÷ 220,000 shareholders’ equity).

Chapter 7: What is GAAP?

Question 1: Who is required to follow GAAP?
Question 2: Who creates the rules for GAAP?
Question 3: What is the purpose of Generally Accepted Accounting Principles (GAAP)?
Answer to Question 1: Publicly-traded companies. (Governmental entities are required to follow GAAP as well, but the rules that make up GAAP for governmental entities are significantly different from the rules for publicly-traded companies.)
Answer to Question 2: The Financial Accounting Standards Board (FASB)
Answer to Question 3: To purpose of GAAP is to ensure that companies’ financial statements are prepared using a similar set of rules and assumptions. This helps to enable meaningful comparisons between the financial statements of multiple companies.

Chapter 8: Debits and Credits

Questions 1-3: Show how the following transactions would affect the Accounting Equation
Question 1: James purchases a $5,000 piece of equipment.
Question 2: James writes his monthly check for rent: $3,000.
Question 3: James takes out a $25,000 loan with his bank.
Questions 4-6: Create journal entries to record the following transactions
Question 4: James purchases a $5,000 piece of equipment.
Question 5: James writes his monthly check for rent: $3,000.
Question 6: James takes out a $25,000 loan with his bank.
Answer to Question 1:
Assets=Liabilities+Owners’ Equity
-5,000no changeno change
+5,000
Answer to Question 2:
Assets=Liabilities+Owners’ Equity
-3,000-3,000
Answer to Question 3:
Assets=Liabilities+Owners’ Equity
+25,000+25,000
Answer to Question 4:
Dr. Equipment5,000
Cr. Cash5,000
Answer to Question 5:
Dr. Rent Expense3,000
Cr. Cash3,000
Answer to Question 6:
Dr. Cash25,000
Cr. Note Payable25,000

Chapter 9: Cash vs. Accrual

Questions 1-5: Prepare journal entries to record each of the following events.
Question 1: Tom’s Tax Prep’s monthly rent is $3,500. At the end of February, they had not yet received their monthly rent invoice.
Question 2: In early March, Tom’s Tax Prep receives and pays their rent bill for February.
Question 3: Marla, a marketing consultant, performs services for a client. The agree-upon price was $10,000, due 30 days from the date the services were completed.
Question 4: ABC Hardware makes a sale (on credit) for $2,500 worth of lumber. The lumber originally cost them $1,300.
Question 5: Julie takes out a $10,000 loan for her business. Repayment is due in one year along with $1,200 interest.
Answer to Question 1:
Dr. Rent Expense3,500
Cr. Rent Payable3,500
Answer to Question 2:
Dr. Rent Payable3,500
Cr. Cash3,500
Answer to Question 3:
Accounts Receivable10,000
Sales10,000
Answer to Question 4:
Accounts Receivable2,500
Sales2,500
Cost of Goods Sold1,300
Inventory1,300
Answer to Question 5:
When the loan is taken out:
Cash10,000
Note Payable10,000
At the end of each month during the year:
Interest Expense100
Interest Payable100
When the loan is repaid:
Note Payable10,000
Interest Payable1,200
Cash11,200

Chapter 10: Other GAAP Concepts and Assumptions

Question 1: Andy runs a real estate development firm. Five years ago, he purchased a piece of land for $250,000. This year, an appraiser tells Andy that the land is worth $300,000. At what value should Andy report the land on his balance sheet? Why?
Question 2: Andy is the sole owner of his firm. In June, he moves $30,000 from his business checking account to his personal checking account. If Andy wants his financial records to be in accordance with GAAP, should he record the transaction or not? Why?
Answer to Question 1: Andy should report the land at its original cost: $250,000. Under GAAP’s “Historical Cost” assumption, assets are reported at their historical cost rather than at their current market value. This is done in order to remove subjective asset valuations from the reporting process.
Answer to Question 2: Yes, in order to be in compliance with GAAP, Andy must record the transaction. GAAP’s “Entity Assumption” considers businesses to be separate entities from their owners. As such, transactions between a business and its owners must be recorded as if they were between the business and an entirely separate party.

Chapter 11: Depreciation of Fixed Assets

Questions 1-6: Prepare journal entries to record each of the following events:
Question 1: Liliana spends $20,000 (cash) on a piece of equipment for use in her restaurant. She plans to use the straight-line method to depreciate the equipment over 5 years. She expects it to have no value at the end of the 5 years.
Question 2: After 4 years,  Liliana sells the equipment for $4,000.
Question 3: Same as question 2, except she sells the equipment for $6,000.
Question 4: Same as question 2, except she sells the equipment for $2,000.
Question 5: Oscar is a self-employed electrician. He purchases a piece of equipment for $30,000 cash. He plans to use it for 10 years, at which point he plans to sell it for approximately $4,000.He elects to use the straight-line method of depreciation.
Question 6: Sandra runs a business making embroidered linens for wedding receptions. She purchases a new piece of equipment for $15,000 in credit. She plans to use the units of production method of depreciation. The equipment is expected to produce approximately 5,000 linens, at which point it will be valueless. During the first year after buying the equipment, Sandra uses it to produce 1,500 linens.
Answer to Question 1:
To record the purchase:
Equipment20,000
Cash20,000
To record depreciation every year:
Depreciation Expense4,000
Accumulated Depreciation4,000
Answer to Question 2:
Cash4,000
Accumulated Depreciation16,000
Equipment20,000
Answer to Question 3:
Cash6,000
Accumulated Depreciation16,000
Gain on Sale of Equipment2,000
Equipment20,000
Answer to Question 4:
Cash2,000
Accumulated Depreciation16,000
Loss on Sale of Equipment2,000
Equipment20,000
Answer to Question 5:
To record the purchase:
Equipment30,000
Cash30,000
To record depreciation every year:
Depreciation Expense2,600
Accumulated Depreciation2,600
(Depreciable value is $26,000. If depreciated over 10 years, that’s $2,600 depreciation per year.)
Answer to Question 6:
To record the purchase:
Equipment15,000
Accounts Payable15,000
When the purchase is eventually paid for:
Accounts Payable15,000
Cash15,000
To record depreciation for the first year:
Depreciation Expense4,500
Accumulated Depreciation4,500
($15,000 depreciable value ÷ 5,000 units = $3 of depreciation per unit. 1,500 units produce x $3 per unit = $4,500 depreciation expense.)

Chapter 12: Amortization of Intangible Assets

Questions 1-2: Prepare journal entries to record each of the following events.
Question 1: Trent runs a business as an engineering consultant. He invents a new system for preparing bridges to deal with extreme weather conditions. He spends $28,000 securing a 14-year patent for his invention. He expects the system to be used for the next few decades at least.
Question 2: Tina runs a business creating medical supplies for surgeries. Her team develops a new tool for assisting in heart surgery. She spends $42,000 on getting it patented. She receives a 14-year patent, but she only expects the technology to be used for about 7 years before a newer technology comes along to replace it.
Answer to Question 1:
To record receiving the patent:
Patents28,000
Cash28,000
To record amortization expense each year:
Amortization Expense2,000
Accumulated Amortization2,000
Answer to Question 2:
To record receiving the patent:
Patents42,000
Cash42,000
To record amortization expense each year:
Amortization Expense6,000
Accumulated Amortization6,000

Chapter 13: Inventory and Cost of Goods Sold

Question 1: Using the following information, calculate Cost of Goods Sold:
  • Beginning Inventory: $3,000
  • Ending Inventory: $4,500
  • Purchases: $6,000
Question 2-4: Use the following information to answer questions 2-4.
  • Beginning Inventory: 1,000 units at $4/unit.
  • Purchases: 600 units at $5/unit.
  • Ending Inventory: 900 units.
Question 2: Calculate Cost of Goods Sold using First-In-First-Out (FIFO)
Question 3: Calculate Cost of Goods Sold using Last-In-First-Out (LIFO)
Question 4: Calculate Cost of Goods Sold using the Average Cost Method
Answer to Question 1: CoGS = $4,500
Answer to Question 2: CoGS = $2,800
Explanation:
The first thing to calculate is how many units were sold. In this case, 700 units must have been sold. Now we just have to figure out the cost for each unit of sold inventory.
Using FIFO, we assume that the first units purchased were the first units sold. Therefore, all 700 sold units must have been from the older ($4 per unit) inventory. 700 units x $4 per unit = $2,800
Answer to Question 3: CoGS =$3,400
Again, we know that 700 units were sold. Under LIFO, we assume that the most recently purchased units are sold first. Therefore, all 600 of the $5 units must have been sold. The remaining 100 sold units must have been from the older ($4/unit) inventory.
(600 units x $5 per unit) + (100 units x $4 per unit) = $3,400
Answer to Question 4: CoGS =$3,062.50
Using the Average Cost Method, we have to calculate the average cost per unit of inventory. We know that there were a total of 1,600 units available for sale and that–in total–they cost $7,000. That gives us an average cost per unit of $4.38 (or $4.375 to be precise).
To calculate CoGS, we multiply this average cost per unit by the number of units sold. 700 units x $4.375 per unit = $3,062.50

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