Chapter 2

CHAPTER 2_revised

PRACTICE EXERCISES

PE 2-1 (LO1) Total Assets

Computation of total assets:

Cash ............................................................................ $ 2,800
Accounts receivable .................................................. 6,000
Supplies ...................................................................... 9,000
Equipment ................................................................... 30,000
Total assets ................................................................ $47,800

PE 2-2 (LO1) Total Liabilities

Computation of total liabilities:

Accounts payable....................................................... $ 3,600
Wages payable ........................................................... 1,800
Loan payable .............................................................. 26,000
Total liabilities ............................................................ $31,400

PE 2-3 (LO1) Total Equity

Computation of total equity:

Capital stock ............................................................... $5,600
Retained earnings ...................................................... 10,800
Total equity ................................................................. $16,400
Refer to the solutions for PE 2-1, 2-2, and 2-3. To confirm the accuracy of the solu-
tions, we can verify assets are equal to liabilities plus equity:
Total assets ................................................................ $47,800
Total liabilities ............................................................ $31,400
Total equity ................................................................. 16,400
Total liabilities and equity ......................................... $47,800
PE 2-4 (LO1) The Accounting Equation

Case A $10,000 – $4,000 = $6,000 Equity

Case B $8,000 – $3,500 = $4,500 Liabilities
Case C $5,500 + $7,000 = $12,500 Assets
Case D $13,000 – $15,000 = ($2,000) Equity
Note that in this case, total equity is negative because
liabilities are greater than assets.

PE 2-5 (LO1) Balance Sheet

Assets
Cash ............................................................................ $ 2,800
Accounts receivable .................................................. 6,000
Supplies ...................................................................... 9,000
Equipment ................................................................... 30,000
Total assets ................................................................ $47,800
Liabilities
Accounts payable....................................................... $ 3,600
Wages payable ........................................................... 1,800
Loan payable .............................................................. 26,000
Total liabilities ............................................................ $31,400
Equity
Capital stock ............................................................... $ 5,600
Retained earnings ...................................................... 10,800
Total equity ................................................................. $16,400
Total liabilities and equity ......................................... $47,800

PE 2-6 (LO1) Current Assets

Computation of total current assets:

Cash ............................................................................ $ 950
Accounts receivable .................................................. 1,400
Supplies ...................................................................... 3,300
Total current assets ................................................... $5,650
 Chapter 2

PE 2-7 (LO1) Current Liabilities

Computation of total current liabilities:

Accounts payable....................................................... $700
Loan payable (due in 6 months)................................ 250
Total current assets ................................................... $950
For simplicity, the entire $10,000 amount of the mortgage payable is assumed to
be a long-term liability. However, if monthly payments are to be made on the mort-
gage during the next year, some part of the liability is current. This portion might
be labeled as “current portion of mortgage payable.”

PE 2-8 (LO1) Book Value and Market Value of Equity

1. Book value of equity:
Assets = Liabilities + Equity
Case A $ 10,000 $ 4,000 $ 6,000
Case B 8,000 7,000 1,000
Case C 13,500 5,500 8,000
Case D 100,000 150,000 (50,000)

2. Market value of equity:

Shares of Stock Price per Market
Outstanding  Share = Value
Case A 1,000 $15 $15,000
Case B 500 10 5,000
Case C 300 20 6,000
Case D 1,000 7 7,000
Cases A and B illustrate the normal case in which the accounting book value
understates the actual value of the company. In Case C, the market value is
actually less than the book value; this can occur when a company makes un-
wise investment and operating decisions after the owners have invested their
money. Case D illustrates that a company can have positive market value even
when the book value of equity is negative. Surprisingly, about 5% of publicly
traded U.S. companies have negative equity book values.

PE 2-9 (LO2) Total Revenues

Computation of total revenues:

Consulting revenue ................................................... $36,600
Interest revenue.......................................................... 1,400
Total revenues ............................................................ $38,000
PE 2-10 (LO2) Total Expenses

Computation of total expenses:

Advertising expense ................................................. $ 5,300
Wages expense .......................................................... 29,200
Total expenses ........................................................... $34,500

PE 2-11 (LO2) ............... Computation of Net Income

Computation of net income (or net loss):
Case A Case B Case C Case D
Services revenue $100,000 $150,000 $ 70,000 $ 200,000
Rent revenue 5,000 1,000 12,000 10,000
Wages expense (60,000) (30,000) (60,000) (110,000)
Interest expense (18,000) (47,000) (25,000) (31,000)
Net income (loss) $ 27,000 $ 74,000 $ (3,000) $ 69,000

PE 2-12 (LO2) Statement of Comprehensive Income

Statement of comprehensive income:

Services revenue ............................................. $4,700
Expenses:
Wage expense ............................................ $ 900
Interest expense......................................... 1,200
Income tax expense ................................... 800
Total expenses ................................................ (2,900)
Net income ....................................................... $ 1,800
Other comprehensive income 0
Comprehensive income $1,800

PE 2-13 (LO3) Computation of Ending Retained Earnings

Computation of ending retained earnings:

Case A Case B Case C Case D
Beginning retained earnings $50,000 $15,000 $31,000 $ 70,000
Net income (loss) 5,000 1,000 12,000 (10,000)
$55,000 $16,000 $43,000 $ 60,000
Less: Dividends 3,000 4,500 2,100 6,000
Ending retained earnings $52,000 $11,500 $40,900 $ 54,000
 Chapter 2

PE 2-14 (LO1, LO3) Missing Amounts in Financial Statements

Renald Company $34,000 – $16,000 – $9,500 = $8,500 Capital stock

Jim’s Retail Shop $14,500 – $5,300 – $3,100 = $6,100 Liabilities
Shakira Company $22,000 + $13,000 + $29,000 = $64,000 Assets
Oliver Company $80,000 – $57,000 – $28,000 = ($5,000) Retained earnings
Note that for Oliver company, retained earnings is negative indicating
that either the company has reported a cumulative loss over its history
or cumulative dividends have exceeded cumulative income.

PE 2-19 (LO4) Financial Statement Articulation

Case A Case B Case C Case D

Cash, beginning $ 9,000 $35,000C $ 6,700 $ 41,000
Net increase (decrease) in cash 5,800 11,000 (4,200)E (9,200)
Cash, ending $14,800B $46,000 $ 2,500 $ 31,800H
Case A Case B Case C Case D
Beginning retained earnings $37,000 $ (1,800)D $17,000 $ 43,000
Net income (loss) 21,000 34,000 (3,200)F (19,000)
$58,000 $32,200 $13,800 $ 24,000
Less: Dividends 4,500 9,200 1,300 6,000G
Ending retained earnings $53,500A $23,000 $12,500 $ 18,000
 EXERCISES

E 2-1 (LO1) Classification of Financial Statement Elements

1. L 7. A 13. L
2. A 8. E 14. A
3. SCI 9. SCI 15. SCI
4. A 10. A 16. E
5. A 11. A 17. SCI
6. SCI 12. L

E 2-2 (LO1) Accounting Equation

Johnson Best Coury

Company Company Company
Cash ................................................................. $11,500 $ 5,800 $17,000
Accounts receivable ....................................... 5,500 11,000 11,750
Land and buildings ......................................... 48,500 20,200 41,000
Accounts payable............................................ 6,000 3,500 16,000
Mortgage payable ............................................ 37,500 19,000 32,250
Equity ............................................................... 22,000 14,500 21,500

E 2-3 (LO1) Analyze the Effect of Transactions on Assets, Liabilities, and Equity

1. (c) 5. (d)
2. (d) 6. (b)
3. (a) 7. (e)
4. (b) 8. (f)

E 2-4 (LO1, LO2) Comprehensive Accounting Equation

Davis Conaton Seipke

Company Company Company
Assets: January 1, 2017.................................. $360 $1,080 $230
Liabilities: January 1, 2017……………………. 280 460 80
Equity: January 1, 2017 .................................. 80 620 150
Assets: December 31, 2017 ............................ 380 1,240 310
Liabilities: December 31, 2017 ....................... 320 520 90
Equity: December 31, 2017 ............................. 60 720 220
Revenues in 2017 ............................................ 80 216 400
Expenses in 2017 ............................................ 100 116 330
 Chapter 2

E 2-5 (LO1, LO2) Computing Elements of Equity

1. Total assets at December 31 ($220,000 + $25,000) .......................... $245,000

Less liabilities at December 31 ......................................................... 85,000
Equity at December 31 ....................................................................... $160,000
Less capital stock at December 31 ($70,000 + $20,000).................. 90,000
Retained earnings at December 31 ................................................... $ 70,000

2. Beginning retained earnings balance......................... $60,000

Add net income for period........................................... X
Less dividends for period............................................ (9,000)
Ending retained earnings balance .............................. $70,000 (see item 1)

Therefore:
$60,000 + X – $9,000 = $70,000
X = $19,000 = Net Income
Net Income = Revenues – Expenses
$19,000 = X – $55,000
X = $74,000 = Revenues

E 2-6 (LO1, LO2) Balance Sheet Relationships

Canfield Corporation
Balance Sheet
December 31, 2017
Assets Liabilities
Cash .................................... $ 55,000 Accounts payable............... $ 65,000
Accounts receivable .......... 75,000 Mortgage payable ............... 150,000
Interest receivable .............. 20,000
Equipment ........................... 85,000 Equity
Buildings ............................. 325,000 Capital stock ....................... 200,000
Retained earnings .............. 145,000
Total liabilities and
Total assets ................... $560,000 equity ........................ $560,000

Note: Sales revenue, rent expense, and utilities expense are not part of the balance sheet,
but instead are components of the statement of comprehensive income.
E 2-7 (LO1, LO2) Balance Sheet Preparation

Taylorsville Construction Company

Balance Sheet
December 31, 2017
Assets
Current assets:
Cash ................................................................................. $153,600
Accounts receivable ....................................................... 113,500
Supplies ........................................................................... 4,250
Total current assets ................................................... $271,350
Non-current assets:
Land.................................................................................. $ 90,000
Buildings .......................................................................... 512,000
Total non-current assets ........................................... 602,000
Total assets ........................................................................... $873,350
Liabilities and Equity
Liabilities:
Accounts payable............................................................ $ 74,300
Mortgage payable ............................................................ 423,400
Total liabilities ............................................................ $497,700
Equity..................................................................................... 375,650*
Total liabilities and equity .................................................... $873,350
*Computation of Equity:
Equity, January 1, 2017 ........................................................ $314,300
Add net income for 2017 ...................................................... 109,450
$423,750
Less distributions to owners during 2017 .......................... 48,100
Equity, December 31, 2017 .................................................. $375,650

E 2-8(LO1) Correcting an Incorrectly Prepared Balance Sheet

Westhood Company
Balance Sheet
December 31, 2017

Assets
Cash .................................................................................................. $ 14,000
Accounts receivable ........................................................................ 8,500
Supplies............................................................................................ 8,000
Equipment ........................................................................................ 48,000
Total assets ...................................................................................... $78,500
© 2017 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S.
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 Chapter 2

Liabilities and Equity

Liabilities
Accounts payable ................................................................... $16,000
Total Liabilities ................................................................................ $16,000

Equity
Capital stock ........................................................................... $50,000
Retained earnings (€17,500 – €5,000) ................................... 12,500 $62,500
Total liabilities and equity ............................................................... $78,500

E 2-9 (LO2) Statement of Comprehensive Income Computations

1. Revenues....................................................................... $335,000
Expenses:
Supplies expense .................................................... $ 95,000
Salaries expense ..................................................... 120,000
Rent expense ........................................................... 10,000
Administrative expense .......................................... 16,000 241,000
Income before income taxes ....................................... $ 94,000

2. Income before income taxes ....................................... $ 94,000

Income tax rate .............................................................  30%
Income taxes ................................................................. $ 28,200

3. Income before income taxes ....................................... $ 94,000

Income taxes ................................................................. 28,200
Net income .................................................................... $ 65,800

4. Earnings per share ($65,800/25,000 shares) .............. $ 2.63

5. Because this example assumes no other comprehensive income. Hence, net income
equals comprehensive income. Hence, comprehensive income is $65,800.

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E 2-10 (LO2) Statement of Comprehensive Income Preparation

1. Pickard and Associates

Statement of Comprehensive Income
For the Year Ended December 31, 2017
Fees (revenues) ............................................................ $476,000
Expenses:
Advertising expense .............................................. $14,500
Supplies expense .................................................... 31,500
Rent expense ........................................................... 12,000
Utilities expense ...................................................... 2,500
Miscellaneous expense .......................................... 5,100
Salaries expense ..................................................... 78,000 (143,600)
Income before income taxes ....................................... $332,400
Income taxes (30%) ...................................................... 99,720
Net income ................................................................... $232,680
Other comprehensive income 0
Comprehensive income $232,680
Earnings per share ($232,680/11,000 shares) ............ $ 21.15

2. EPS tells the reader that for every individual share of stock outstanding, Pickard and
Associates earned $21.15 during 2017. This helps investors see how profitable their
individual investments in Pickard and Associates are.

E 2-11 (LO3) Income and Retained Earnings Relationships

1. Increase in retained earnings ........................................................... $750,000

Plus dividends paid ........................................................................... 270,000
Net income ......................................................................................... $1,020,000

2. Revenues............................................................................................ $1,660,000
Less net income 1,020,000
Expenses for the year ....................................................................... $ 640,000

E 2-12 (LO3) Retained Earnings Computations

Retained earnings, December 31, 2016 = $170,000

Retained earnings, December 31, 2017 = $250,000

Computations:
Revenues in 2017 ...................................................................................... $ 520,000
Expenses in 2017....................................................................................... (390,000)
Net income in 2017 .................................................................................... $ 130,000

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 Chapter 2

Assets: December 31, 2016 ..................................................................... $ 700,000

Liabilities: December 31, 2016 ................................................................. (210,000)
Equity: December 31, 2016 ...................................................................... $ 490,000

Equity: December 31, 2016 ...................................................................... $ 490,000

Capital stock: December 31, 2016 ........................................................... (320,000)
Retained earnings: December 31, 2016 .................................................. $ 170,000

Retained earnings: December 31, 2016 .................................................. $ 170,000

Add net income for 2017 .......................................................................... 130,000
Deduct dividends for 2017 ........................................................................ (50,000)
Retained earnings: December 31, 2017 ................................................... $ 250,000

E 2-13 (LO2, LO3) Preparation of Statement of Comprehensive Income and Statement of

Retained Earnings

Big Sky Corporation

Statement of Comprehensive Income
For the Year Ended June 30, 2017
Ski rental revenue ...................................................... $77,900
Expenses:
Rent expense ........................................................ $ 6,000
Salaries expense .................................................. 38,600
Utilities expense ................................................... 2,400
Advertising expense ............................................ 7,500
Miscellaneous expense ....................................... 7,700 (62,200)
Income before income taxes .................................... $15,700
Income taxes .............................................................. (2,100)
Net income ................................................................. $13,600
Other comprehensive income 0
Comprehensive income $13,600
Earnings per share ($13,600/1,500 shares) ............. $ 9.07 (rounded)

Big Sky Corporation

Statement of Retained Earnings
For the Year Ended June 30, 2017
Retained earnings, July 1, 2016 ............................................................... $76,800
Add net income for the year ..................................................................... 13,600
$90,400
Less dividends ........................................................................................... 6,500
Retained earnings, June 30, 2017 ............................................................ $83,900

© 2017 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be di fferent from the U.S.
Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
E 2-14 (LO3) Articulation: Relationships between a Balance Sheet and a
Statement of Comprehensive Income

1. Assets (increased $64,000) = Liabilities (increased $16,000) + Equity (increased

$48,000). If equity increased by $48,000 and dividends of $12,100 were paid, net in-
come must have been $48,000 + $12,100, or $60,100.

2. Again, If equity increased $48,000 and $18,000 of this was the result of additional
issuance of stock, net income must have been $48,000 – $18,000, or $30,000.

3. Again, if equity increased by $48,000 but additional stock was issued for $72,000 and
dividends of $12,400 were paid, then the net loss must have been $48,000 - $72,000
+ $12,400, or ($11,600).

E 2-17 (LO7) The Cost Principle

The property purchased by Peet Development Company on January 1, 2017, should be

recorded at $325,000, the amount of cash paid for the property. This assumes that the
land was purchased in an arm’s-length transaction. The amount reported at year-end,
after the rezoning decision, would still be $325,000—the historical cost or exchange price,
at the date of the transaction. The historical cost provides an objective measure of value
in accounting measurements. The increased value of the land would be recognized later,
when the land is sold in another arm’s-length transaction.

E 2-18 (LO7) The Monetary Measurement Concept

Accounting records report only those transactions and events that can be measured in
dollars. Some items are not measurable in monetary terms and therefore are not reported
on financial statements. There can be little doubt that good employees add great value to
a business enterprise. However, measuring that value is very difficult, and it is the main
reason why that information is not reported on a balance sheet.

E 2-19 (LO7) Fundamental Concepts and Assumptions

1. Correct. The fair value principle requires companies to use fair value to measure
a company’s holdings of equity securities.

2. Correct. The monetary unit assumption requires that companies include in the ac-
counting records only transaction data that can be expressed in terms of money.

3. Incorrect. The economic entity assumption requires that the activities of the entity
be kept separate and distinct from the activities of its owner and all other economic
entities.

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Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
 Chapter 2

E 2-20 (LO7) The Going Concern Assumption

If the auto repair business is regarded as a going concern, the values assigned to the
assets will be equal to the original exchange prices of the transactions. If the business is
not regarded as a going concern, the values assigned to the assets will likely be much
lower (reflecting the lower liquidation values that the entity would obtain if it were forced
to sell the assets immediately).

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 PROBLEMS

P 2-1 (LO1) Balance Sheet Classifications and Relationships

1. Cash .................................................................................................... $106,500*

Accounts receivable .......................................................................... 178,500
Total current assets ..................................................................... $285,000
*Computations:
Total liabilities plus stockholders' equity = Total current liabilities ($298,500) + Long-
term (non-current) liabilities ($379,500) + Total equity ($579,000) = $1,257,000.
Total current assets ($285,000) = Total assets ($1,257,000) – Total long-term (non-
current) assets ($972,000).
Cash ($106,500) = Total current assets ($285,000) – Accounts receivable ($178,500).

2. Land .................................................................................................... $312,000

Buildings ............................................................................................ 337,500
Equipment .......................................................................................... 322,500
Total long-term assets ................................................................. $972,000

3. Accounts payable .............................................................................. $151,500

Notes payable (short-term) ............................................................... 147,000
Total current liabilities ................................................................. $298,500

4. Mortgage payable (Total long-term liabilities) ................................ $379,500

5. Capital stock ...................................................................................... $300,000

Retained earnings ............................................................................. 279,000
Total equity ................................................................................... $579,000

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 Chapter 2

P 2-2 (LO1, LO2) Preparation of a Classified Balance Sheet

1. Siraco Company
Balance Sheet
December 31, 2017
Assets
Current assets:
Cash ......................................................................... $ 1,950
Accounts receivable ............................................... 2,500
Supplies ................................................................... 1,800
Total current assets ........................................... $ 6,250
Non-current assets:
Equipment ................................................................ $11,275
Total non-current assets ................................... 11,275
Total assets ................................................................... $17,525
Liabilities and Equity
Current liabilities:
Accounts payable ................................................... $ 3,450
Wages payable ....................................................... 250
Total current liabilities....................................... $ 3,700
Equity:
Capital stock ............................................................ $ 775
Retained earnings ................................................... 13,050*
Total equity......................................................... 13,825
Total liabilities and equity ............................................ $17,525
*Retained Earnings as of December 31, 2017, is equal to the January 1, 2017, Re-
tained Earnings balance plus net income, less dividends paid for 2017.
Beginning retained earnings ............................................................ $12,000
Net income (see following calculation)............................................ 2,550
Dividends paid ................................................................................... (1,500)
Ending retained earnings.................................................................. $13,050
During 2017, Siraco earned $2,550, as shown below.
Revenues............................................................................................ $10,000
Expenses:
Wages expense ....................................................... $2,200
Supplies expense .................................................... 3,700
Miscellaneous expense .......................................... 1,550 7,450
Net income .................................................................... $ 2,550

2. The decision to pay dividends was probably a reasonable one. The earnings were
positive, and sufficient cash was available to cover the amount of dividends paid.

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P 2-3 (LO1) Balance Sheet Preparation with a Missing Element

1. Schubert Products Inc.

Balance Sheet
December 31, 2017
Assets
Cash ............................................................................... $ 7,500
Accounts receivable ..................................................... 20,000
Supplies......................................................................... 2,000
Buildings ....................................................................... 49,500
Land ............................................................................... 20,000
Total assets ............................................................. $99,000
Liabilities and Equity
Liabilities:
Accounts payable ................................................... $24,000
Equity:
Capital stock ............................................................ $42,000
Retained earnings ................................................... 33,000* 75,000
Total liabilities and equity ............................................ $99,000

*2. Assets – Liabilities = Equity – Capital stock = Retained earnings

$99,000 – $24,000 = $75,000 – $42,000 = $33,000

3. The balance sheet is a depiction of the accounting equation because

it shows total assets being equal to total liabilities and equity. Thus, A = L + E, as
shown on each balance sheet.

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 Chapter 2

P 2-4 (LO2) Statement of Comprehensive Income Preparation

1. Rulon Candies, Inc.

Comparative Statement of Comprehensive Income
For the Years Ended December 31, 2017 and 2016
2017 2016
Services revenue .......................................................... $185,000 $265,000
Operating expenses:
Employee salaries ................................................... $115,000 $110,000
Advertising expenses ............................................. 10,000 20,000
Utilities expenses .................................................... 15,000 8,500
Total operating expenses ............................................ $140,000 $138,500
Operating income ......................................................... $ 45,000 $126,500
Interest revenue ...................................................... 10,000 10,000
Interest expense ...................................................... (25,000) (15,000)
Income before income taxes ....................................... $ 30,000 $121,500
Income tax expense ................................................ 9,000 36,500
Net income .................................................................... $ 21,000 $ 85,000
Other comprehensive income 0 0
Comprehensive income $ 21,000 $ 85,000
Earnings per share ....................................................... $ 5.25 $ 21.25

2. From just the limited information on the statement of comprehensive income, the
following recommendations could be made to improve profitability for the year 2018:
 Increase sales of services. Sales of services dropped by 30% from 2016 to 2017.
 Why did employee salaries increase when both revenues and profits signifi-
cantly decreased? Instead of increasing salaries in 2018, give bonus incentives
to employees for reaching sales and cost-saving goals.
 Expenditures for advertising decreased 50% from 2016 to 2017. The decrease in
advertising may have caused the lower sales volume. Increase advertising ex-
penditures in the year 2017.
 Interest expense increased from $15,000 in 2016 to $25,000 in 2017, a 67% in-
crease. Did Rulon borrow a large amount in 2017? It may be a good idea to repay
some loans and increase owner investment.

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P 2-5 (LO2) Statement of Comprehensive Income Preparation

Wadley’s Car Wash

Statement of Comprehensive Income
For the Year Ended December 31, 2017
Service revenues ............................................. $210,000
Expenses:
Rent expense .............................................. $ 6,000
Salaries expense ........................................ 41,000
Utilities expense ......................................... 4,300
Supplies expense ....................................... 10,300
Miscellaneous expense ............................. 970 (62,570)
Income before income taxes .......................... $147,430
Income taxes .................................................... (45,000)
Net income ....................................................... $102,430
Other comprehensive income 0
Comprehensive income $102,430
Earnings per share ($102,430/3,000 shares). $ 34.14 (rounded)

P 2-6 (LO1, LO2) Expanded Accounting Equation

1. Compute net increase in assets:

Cash .................................................................................................... $ 12,500
Interest receivable ............................................................................. (7,500)
Accounts receivable .......................................................................... (11,750)
Building .............................................................................................. 157,500
Net increase in assets.................................................................. $150,750

2. Compute net increase in liabilities:

Accounts payable .............................................................................. $ 22,500
Mortgage payable .............................................................................. 87,500
Wages payable................................................................................... (35,250)
Net increase in liabilities ............................................................. $ 74,750

3. Figure overall increase in equity from net increases in assets and liabilities:
Net increase in assets ....................................................................... $150,750
Less: Net increase in liabilities ........................................................ 74,750
Net increase in equity .................................................................. $ 76,000

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 Chapter 2

P 2-6 (LO1, LO2) (Continued)

4. Compute known net increase in equity:

Capital stock ...................................................................................... $ 26,250
Retained earnings (dividends paid) ................................................. (25,000)
Known net increase in equity...................................................... $ 1,250

5. Net increase of $76,000 in equity resulted from changes in (1) the known net increase
in equity and (2) net income. Thus, net income can be figured by:
Overall net increase in equity ........................................................... $ 76,000
Less: Known net increase in equity................................................. (1,250)
Net income for 2017 ..................................................................... $ 74,750

P 2-7 (LO2) Statement of Comprehensive Income Preparation

1. Precision Corporation
Statement of Comprehensive Income
For the Year Ended December 31, 2017
Services revenue .......................................................... $68,000
Expenses:
Advertising expense ............................................... $ 1,530
Delivery expense ..................................................... 8,410
Packaging expense ................................................. 355
Salaries expense ..................................................... 18,350
Supplies expense .................................................... 480 (29,125)
Income before income taxes ....................................... $38,875
Income taxes ................................................................. (4,360)
Net income .................................................................... $34,515
Other comprehensive income 0
Comprehensive income $34,515
Earnings per share ....................................................... $ 3.45

 $34,515 
2. 10,000 shares   10,004 shares * 
 $3.45 
*Rounded

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P 2-8 (LO2) Net Income

1. Streuling Company
Statement of Comprehensive Income
For the Year Ended May 31, 2017
Consulting fees................................................ $115,100
Expenses:
Advertising expense .................................. $ 2,760
Supplies expense ....................................... 37,820
Rent expense .............................................. 1,500
Salaries expense ........................................ 18,150
Miscellaneous expense ............................. 4,170
Administrative expense ............................. 7,250 (71,650)
Income before income taxes .......................... $ 43,450
Income taxes .................................................... (21,180)
Net income ....................................................... $ 22,270
Other comprehensive income 0
Comprehensive income $ 22,270
Earnings per share ($22,270/3,000 shares) ... $ 7.42 (rounded)

2. If Streuling Company had a loss, it may or may not be a good idea to pay dividends.
It would depend on the amount of cash available, whether the loss is considered only
a temporary situation, and the expectations of the shareholders. Many large compa-
nies do continue to pay dividends, even though they have a loss, in order to satisfy
both perceived and real shareholder expectations.

P 2-9 (LO1, 2, 3) Preparing Statement of Comprehensive Income, Statement of

Retained Earnings, and Balance Sheet

Please notice the revision of P 2-9 in 5th print of the textbook:

1. January 1 changed to May 1
2. investment of $45,000 changed to $90,000
3. January 31 in questions 1 and 2 changed to May 31

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Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
 Chapter 2

1. Muchon Flying Experience Ltd.

Statement of Comprehensive Income (in thousands)
For the Month Ended May 31, 2017

Revenues
Service revenue ....................................................... $13,600
Expenses
Gasoline expense .................................................... $5,000
Rent expense ........................................................... 2,000
Advertising expense ................................................ 1,000
Utilities expense ...................................................... 800
Maintenance and repairs expense ......................... 800
Total expenses ................................................ 9,600
Net income ........................................................................ 4,000
Other Comprehensive Income……………………………… 0
Comprehensive Income……………………………………… $4,000

Muchon Flying Experience Ltd.

Balance Sheet (in thousands)
May 31, 2017

Assets
Cash ………………………….. ..................................................................... $ 9,000
Accounts receivable ................................................................................. 14,840
Equipment ................................................................................................. 128,000
Total assets ...................................................................................... $151,840

Liabilities and Equity

Liabilities
Notes payable ............................................................... $56,000
Accounts payable ......................................................... 2,800
Total liabilities ........................................................................ $ 58,800

Equity
Capital stock ................................................................. $90,000
Retained earnings ......................................................... 3,040*
Total equity ............................................................................ $ 93,040
Total liabilities and equity ..................................................... $151,840

* Assets – Liabilities = Equity Equity – Capital stock = Retained earnings

$151,840 – $58,800 = $93,040 $93,040 – $90,000 = $3,040

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 Muchon Flying Experience Ltd.
Statement of Retained Earnings (in thousands)
For the Month Ended May 31, 2017

Retained Earnings, May 1 ................................................ $ 0

Add: Net income .............................................................. 4,000
4,000
Less: Dividends ............................................................... 960**
Retained Earnings, May 31 .............................................. $3,040

**$4,000-$3,040=$960

2. Muchon Flying Experience Ltd.

Statement of Comprehensive Income (in thousands)
For the Month Ended May 31, 2017

Revenues
Service revenue ($13,600 + $1,800) ........................ $15,400
Expenses
Gasoline expense ($5,000 + $3,000) ....................... $8,000
Rent expense ........................................................... 2,000
Advertising expense ................................................ 1,000
Utilities expense ...................................................... 800
Maintenance and repairs expense ......................... 800
Total expenses ................................................ (12,600)
Net income ........................................................................ 2,800
Other Comprehensive Income……………………………… 0
Comprehensive Income……………………………………… $ 2,800

Muchon Flying Experience Ltd.

Statement of Retained Earnings (in thousands)
For the Month Ended May 31, 2017

Retained Earnings, May 1 ................................................ $ 0

Add: Net income ............................................................. 2,800
2,800
Less: Dividends ............................................................... 960
Retained Earnings, May 31 .............................................. $1,840

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 Chapter 2

P 2-10 (LO2, LO3) Net Income and Statement of Retained Earnings

1. Quincy Company
Statement of Comprehensive Income
For the Year Ended May 31, 2017
Consulting fees ............................................... $176,400
Expenses:
Advertising expense .................................. $ 4,650
Supplies expense....................................... 38,410
Rent expense ............................................. 2,400
Salaries expense ........................................ 25,340
Miscellaneous expense ............................. 10,200
Administrative expense............................. 13,900 (94,900)
Income before income taxes .......................... $ 81,500
Income taxes ................................................... (20,760)
Net income ....................................................... $ 60,740
Other comprehensive income 0
Comprehensive income $60,740
Earnings per share ($60,740/8,000 shares) ... $ 7.59 (rounded)

2. Quincy Company
Statement of Retained Earnings
For the Year Ended May 31, 2017
Retained earnings, June 1, 2016 ....................................................... $175,670
Add net income for the year .............................................................. 60,740
$236,410
Less dividends ................................................................................... 19,500
Retained earnings, May 31, 2017 ...................................................... $216,910

3. Quincy Company
Statement of Retained Earnings
For the Year Ended May 31, 2017
Retained earnings, June 1, 2016 ................................. $175,670
Less: Net loss for year .............................................. $38,000
Dividends......................................................... 19,500 57,500
Retained earnings, May 31, 2017 ................................ $118,170

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the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
P 2-10 (LO2, LO3) (Continued)

4. If Quincy Company had a loss, as in (3) above, it may or may not be a good
idea to pay dividends. It would depend on the amount of cash available,
whether the loss is considered only a temporary situation, and the expecta-
tions of the shareholders. Many large companies do continue to pay dividends,
even though they have a loss, in order to satisfy both perceived and real share-
holder expectations.

P 2-11 (LO1, LO2) Comprehensive Financial Statement Preparation

1. Wilcox, Inc.
Statement of Comprehensive Income
For the Year Ended December 31, 2017
Revenues ...................................................................... $389,950
Expenses:
Salaries expense ..................................................... $125,350
Utilities expense ..................................................... 5,250
Supplies expense.................................................... 110,600
Rent expense .......................................................... 21,200
Other expenses ....................................................... 11,250 (273,650)
Income before income taxes ....................................... $116,300
Income taxes ................................................................ (35,000)
Net income .................................................................... $ 81,300
Other comprehensive income 0
Comprehensive income $ 81,300
Earnings per share ($81,300/2,000 shares) ................ $ 40.65

© 2017 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from
the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
 Chapter 2

P 2-11 (LO1, LO2) (Continued)

2. Wilcox, Inc.
Balance Sheet
December 31, 2017
Assets
Current assets:
Cash ......................................................................... $ 61,100*
Accounts receivable ............................................... 90,000
Supplies ................................................................... 72,500
Total current assets .......................................... $223,600
Non-current assets:
Land ......................................................................... $ 42,500
Buildings ................................................................. 197,550
Total non-current assets ................................... 240,050
Total assets .................................................................. $463,650
Liabilities and Equity
Current liabilities:
Accounts payable ................................................... $ 38,050
Non-current liabilities:
Notes payable ......................................................... 63,800
Total liabilities.................................................... $101,850
Equity:
Capital stock ........................................................... $ 65,000
Retained earnings ................................................... 296,800*
Total equity ........................................................ 361,800
Total liabilities and equity ........................................... $463,650

*Computations:
Retained earnings, December 31, 2017 ($296,800) = Retained earnings, Janu-
ary 1, 2016 ($311,000) + Net income ($81,300) – Dividends ($95,500)
Total current assets ($223,600) = Total assets ($463,650) – Total non-current
assets ($240,050)
Cash ($61,100) = Total current assets ($223,600) – Accounts receivable
($90,000) – Supplies ($72,500)

3. The company has been profitable over the past several years, even though
more was paid out in dividends this year than was earned. The company ap-
parently has retained most of the past years' earnings in the business.

© 2017 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be di fferent from
the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.