EXERCISE 1
The following situations involve accounting principles and assumptions.
1. Rex Company owns buildings that are worth substantially more than they originally cost. To provide
more relevant information, Rex reports the buildings at fair value in its accounting reports.
Answer: Incorrect.
Explanation: In this case Cost Principle has been violated. According to Cost principal Cost should be
enlisted in real cost price.
2. Levi Company includes in its accounting records only transaction data that can be expressed in terms
of money.
Answer: Correct
Explanation: In this case Levi company following Monetary unit assumption. In accounting every
transaction should be expressed in terms of money.
3. Josh Borke, owner of Josh’s Photography, records his personal living costs as expenses of the business
Answer: Incorrect
Explanation: In this case Josh Borke violated Business Entity Assumption. According to Business Entity
Assumption Business & Business owner has separate existence.
Instructions
For each of the three situations, say if the accounting method used is correct or incorrect. If correct,
identify which principle or assumption supports the method used. If incorrect, identify which principle or
assumption has been violated.
EXERCISE 3
Thornton Computer Timeshare Company entered the following transactions during May 2012.
1. Purchased computer terminals for $20,000 from Digital Equipment on account.
Answer: (c) An increase in assets and an increase in liabilities.
2. Paid $4,000 cash for May rent on storage space.
Answer: (d) A decrease in assets and a decrease in owner’s equity.
3. Received $17,000 cash from customers for contracts billed in April.
Answer: (b) An increase in assets and an increase in owner’s equity.
4. Provided computer services to Fisher Construction Company for $3,000 cash.
Answer: (b) An increase in assets and an increase in owner’s equity
5. Paid Northern States Power Co. $11,000 cash for energy usage in May.
Answer: (d) A decrease in assets and a decrease in owner’s equity.
6. Thornton invested an additional $29,000 in the business.
Answer: (b) An increase in assets and an increase in owner’s equity.
7. Paid Digital Equipment for the terminals purchased in (1) above.
Answer: (e) A decrease in assets and a decrease in liabilities.
8. Incurred advertising expense for May of $1,200 on account.
Answer: (f) An increase in liabilities and a decrease in owner’s equity.
Instructions
Indicate with the appropriate letter whether each of the transactions above results in:
(a) An increase in assets and a decrease in assets.
(b) An increase in assets and an increase in owner’s equity.
(c) An increase in assets and an increase in liabilities.
(d) A decrease in assets and a decrease in owner’s equity.
(e) A decrease in assets and a decrease in liabilities.
(f) An increase in liabilities and a decrease in owner’s equity.
(g) An increase in owner’s equity and a decrease in liabilities.
EXERCISE 4
Analyze the transactions of a business organized as a proprietorship described below and
indicate their effect on the basic accounting equation. Use a plus sign (+) to indicate an increase
and a minus sign (–) to indicate a decrease.
Assets = Liabilities + Owner's Equity
1. Received cash for services rendered.
2. Purchased office equipment on credit.
3. Paid employees' salaries.
4. Received cash from customer in payment on account.
5. Paid telephone bill for the month.
6. Paid for office equipment purchased in transaction 2.
7. Purchased office supplies on credit.
8. Owner withdrew cash for personal expenses.
9. Obtained a loan from the bank.
10. Billed customers for services rendered.
Answer:
Transaction Assets = Liabilities + Owner's Equity
Received cash for services rendered. + = + +
Purchased office equipment on credit. + = + +
Paid employees' salaries - = + -
Received cash from customer in payment on account + = + +
Paid telephone bill for the month - = + -
Paid for office equipment purchased in transaction 2 - = - +
Purchased office supplies on credit + = + +
Owner withdrew cash for personal expenses. - = + -
Obtained a loan from the bank + = + +
Billed customers for services rendered This should not be included because no cash received yet
EXERCISE 5
Selected transactions for the Barden Company are listed below. List the number of the transaction and
then describe the effect of each transaction on assets, liabilities, and owner's equity.
Sample: Made initial cash investment in the business.
The answer would be—Increase in assets and increase in owner's equity.
1. Paid monthly utility bill.
Answer: Decrease Assets and Decrease Owner equity
2. Purchased new display case for cash.
Answer: Increase Assets and Decrease Assets same time
3. Paid cash for repair work on security system.
Answer: Decrease Assets and Decrease Owner equity
4. Billed customers for services performed.
Answer: No impact on equation because no transaction happened in term of money
5. Received cash from customers billed in 4.
Answer: Increase Assets and Owners equity
6. Withdrew cash for owner's personal use.
Answer: Decrease Assets and Owner equity
7. Incurred advertising expenses on account.
Answer: Increase Liabilities and decrease owners’ equity
8. Paid monthly rent.
Answer: Decrease Assets and owner equity
9. Received cash from customers when service was rendered
Answer: Increase Assets and owner equity
