Practice Problems

Site: Saylor Academy
Course: BUS103: Introduction to Financial Accounting
Book: Practice Problems
Printed by: Guest user
Date: Saturday, April 13, 2024, 3:12 AM

Description

Complete these practice problems. Check your answers after you finish.

Demonstration problem

On 2010 June 1, Green Hills Riding Stable, Incorporated, was organized. The following transactions occurred during June:

June 1: Shares of capital stock were issued for USD 10,000 cash.

June 4: A horse stable and riding equipment were rented (and paid for) for the month at a cost of USD 1,200.

June 8: Horse feed for the month was purchased on credit, USD 800.

June 15: Boarding fees of USD 3,000 for June were charged to those owning horses boarded at the stable. (Fee is due on July 10)

June 20: Miscellaneous expenses of USD 600 were paid.

June 29: Land was purchased from a savings and loan association by borrowing USD 40,000 on a note from that association. The loan is due to be repaid in five years. Interest payments are due at the end of each month beginning July 31.

June 30: Salaries of USD 700 for the month were paid.

June 30: Riding and lesson fees were billed to customers in the amount of USD 2,800. (Fees are due on July 10)


a) Prepare a summary of the preceding transactions. Use columns headed Cash, Accounts Receivable, Land, Accounts Payable, Notes Payable, Capital Stock, and Retained Earnings. Determine balances after each transaction to show that the basic accounting equation is in balance.

b) Prepare an income statement for June 2010.

c) Prepare a statement of retained earnings for June 2010.

d) Prepare a balance sheet as of 2010 June 30.


Source: Textbook Equity, https://learn.saylor.org/pluginfile.php/41229/mod_resource/content/8/AccountingPrinciples.pdf
Creative Commons License This work is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 License.

Solution


a. GREEN HILLS RIDING STABLE, INCORPORATED
Summary of Transactions
Month of June 2010
Assets = Liabilities + Stockholders Equity
Date Explanation Cash Accounts
Receivable
Land Accounts
Payable
Notes
Payable
Capital +
Stock
Retained
Earnings
June 1
Capital stock issued 10,000 = +$10,000
4 Rent expense (1,200)
$(1,200)
$8,800 = +$10,000 $(1,200)
8 Feed expense $800 (800)
$8,800 = $800 +$10,000 $(2000)
15 Boarding fees $3,000 3,000
$8,800 $3,000 = $800 +$10,000 $1,000
20 Miscellaneous expenses
(600) (600)
$8,200 $3,000 = 800 +$10,000 $400
29 Purchased land by borrowing $40,000
$8,200 $3,000 =
$800 $40,000 +$10,000 $400
30 Salaries paid (700) $40,000
(700)
$7,500 $3,000 $40,000= $800 $40,000 +$10,000 $(300)
30 Riding and lesson fees billed
2,800 2,800
$7,500 $5,800 $40,000 $800 $40,000 +$10,000 $2,500

b)
GREEN HILLS RIDING STABLE, INCORPORATE
Income Statement
For the Month Ended 2010 June 30
Revenues:
Horse boarding fees revenue $3,000
Riding and lesson fee revenue 2,800
Total revenues
$5,800
Expenses:
Rent expense $1,200
Feed expense 800
Salaries expense 700
Miscellaneous expense 600
Total expenses 3,300
Net income $2,500

c)

GREEN HILLS RIDING STABLE, INCORPORATED
Statement of Retained Earnings
For the Month Ended 2010 June 30

Retained earnings, June 1 $-0-
Add: Net income for June
2,500
Total $2,500
Less: Dividends
-0-
Retained earnings, June 30 $2,500

d)

GREEN HILLS RIDING STABLE, INCORPORATE
Balance Sheet
2010 June 30
Cash
$7,500
Accounts receivable   5,800
Land
40,000
Total assets
$53,300
Liabilities and Stockholders' Equity
Liabilities:
Accounts payable

$800
Noted payable
40,000
Total liabilities
$40,800
Stockholders' equity:
Capital stock
$10,000
Retained earnings
2,500
Total stockholders' equity
$12,500
Total liabilities and stockholders' equity
$53,300.00

Self-test

True-False

Indicate whether each of the following statements is true or false.

  1. The three forms of business organizations are single proprietorship, partnership, and trust. 
  2. The three types of business activity are service, merchandising, and manufacturing.
  3. The income statement shows the profitability of the company and is dated as of a particular date, such as 2010 December 31.
  4. The statement of retained earnings shows both the net income for the period and the beginning and ending balances of retained earnings.
  5. The balance sheet contains the same major headings as appear in the accounting equation.

Multiple-choice

Select the best answer for each of the following questions.

  1. The ending balance in retained earnings is shown in the:
  1. Income statement.
  2. Statement of retained earnings.
  3. Balance sheet.
  4. Both (b) and (c).

  1. Which of the following is not a correct form of the accounting equation?
  1. Assets = Equities.
  2. Assets = Liabilities + Stockholders' equity.
  3. Assets – Liabilities = Stockholders' equity.
  4. Assets + Stockholders' equity = Liabilities.

  1. Which of the following is not one of the five underlying assumptions or concepts mentioned in the chapter?
  1. Exchange-price concept.
  2. Inflation accounting concept.
  3. Business entity concept.
  4. Going-concern concept.

  1. When the stockholders invest cash in the business, what is the effect?
  1. Liabilities increase and stockholders' equity increases.
  2. Both assets and liabilities increase.
  3. Both assets and stockholders' equity increase.
  4. None of the above.

  1. When services are performed on account, what is the effect?
  1. Both cash and retained earnings decrease.
  2. Both cash and retained earnings increase.
  3. Both accounts receivable and retained earnings increase.
  4. Accounts payable increases and retained earnings decreases.

Solution

True-False

1. False. Corporation, not trust, is the third form.

2. True. The accounting for all three of these is covered in this text.

3. False. The income statement is dated using a period of time, such as "For the Year Ended 2010 December 31".

4. True. In addition, the statement of retained earnings shows dividends declared.

5. True. Both show assets, liabilities, and stockholders' equity.


Multiple-choice

  1. d. The ending balance in retained earnings is shown in both the statement of retained earnings and in the balance sheet.
  2. d. This form of the equation would not balance.
  3. b. The inflation accounting concept was not one of the ones discussed. The other two were the money measurement concept and the periodicity concept.
  4. c. When the stockholders invest cash, assets and stockholders' equity increase.
  5. c. The performance of services on account increases both accounts receivable and retained earnings.