- Why is the knowledge of accounting concepts and terminology useful to anyone in a business activity?
- Is there a difference between bookkeeping and accounting? Discuss.
- Accounting reports past performance. How can this be useful when planning future operations?
FROM THE BOOK
Exercise 1-6A Components of the accounting equation
Lang Enterprises was started when it acquired $4,000 cash from creditors and $6,000 from
owners. The company immediately purchased land that cost $9,000.
a. Record the events under an accounting equation .
b. After all events have been recorded, Lang’s obligations to creditors represents what percent
of total assets?
c. After all events have been recorded, Lang’s stockholder’s equity represents what percent of
d. Assume the debt is due. Given that Lang has $6,000 in stockholders’ equity, can the company
repay the creditors at this point? Why or why not?
Exercise 1-7A Components of the accounting equation
The financial condition of GreyCo Inc. is expressed in the following accounting equation:
Assets 5 Liabilities 1 Common stock 1 Retained earnings
$800 Cash 1 $9,200 Land 5 $7,000 1 $2,000 1 $1,000
a. Are dividends paid to creditors or investors? Explain why.
b. How much cash is in the Retained Earnings account?
c. Determine the maximum dividend GreyCo can pay.
d. If the obligation to creditors is due, can GreyCo repay the loan? Why or why not?
e. Suppose the land sinks into the sea as a result of an earthquake and a resulting tsunami. The
business is then liquidated. How much cash will creditors receive? How much cash will investors
receive? (Assume there are no legal fees or other costs of liquidation.)
Exercise 1-8A Missing information in the accounting equation
Calculate the missing amounts in the following table.
Company Assets 5 Liabilities 1 Stock 1 Earnings
A $ ? $30,000 $ 50,000 $62,000
B 50,000 ? 10,000 25,000
C 85,000 20,000 ? 40,000
D 215,000 60,000 100,000 ?
Exercise 1-9A Missing information and recording events
As of December 31, 2013, Post Company had total cash of $156,000, notes payable of $85,600,
and common stock of $52,400. During 2014, Post earned $36,000 of cash revenue, paid $20,000
for cash expenses, and paid a $3,000 cash dividend to the stockholders.
a. Determine the amount of retained earnings as of December 31, 2013.
b. Create an accounting equation and record the beginning account balances under the appropriate
c. Record the revenue, expense, and dividend events under the appropriate elements of the accounting
equation created in Requirement b .
d. Prove the equality of the accounting equation as of December 31, 2014.
e. Identify the beginning and ending balances in the Cash and Common Stock accounts.
Explain why the beginning and ending balances in the Cash account are different, but the
beginning and ending balances in the Common Stock account remain the same.
Exercise 1-11A Effect of transactions on general ledger accounts
At the beginning of 2013, Foster Corp.’s accounting records had the following general ledger
accounts and balances.
Event Assets 5 Liabilities 1 Stockholders’ Equity for RE
Notes Common Retained
Cash Land Payable Stock Earnings
1/1/2013 30,000 16,000 10,000 20,000 16,000
Foster Corp. completed the following transactions during 2013:
1. Purchased land for $20,000 cash.
2. Acquired $10,000 cash from the issue of common stock.
3. Received $90,000 cash for providing services to customers.
4. Paid cash operating expenses of $65,000.
5. Borrowed $20,000 cash from the bank.
6. Paid a $5,000 cash dividend to the stockholders.
7. Determined that the market value of the land purchased in event 1 is $30,000.
a. Record the transactions in the appropriate general ledger accounts. Record the amounts of
revenue, expense, and dividends in the Retained Earnings column. Provide the appropriate
titles for these accounts in the last column of the table.
b. As of December 31, 2013, determine the total amount of assets, liabilities, and stockholder’s
equity and present this information in the form of an accounting equation.
c. What is the amount of total assets, liabilities, and stockholders’ equity as of January 1, 2014?
Exercise 1-12A Accounts titles and the accounting equation
The following account titles were drawn from the general ledger of Gutter Control, Incorporated
(GCI): Cash, Notes Payable, Land, Accounts Payable, Office Furniture, Salaries Expense, Common
Stock, Service Revenue, Interest Expense, Utilities Payable, Utilities Expense, Trucks, Supplies,
Operating Expenses, Rent Revenue, Dividends, Computers, Building, Supplies Expense,
Gasoline Expense, Retained Earnings, Dividends.
a. Create an accounting equation using the elements assets, liabilities, and stockholders’
equity. List each account title under the element of the accounting equation to which it
b. Will all businesses have the same number of accounts? Explain your answer.