Solution Manual for College Accounting 21st Edition Heintz Parry ISBN

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CHAPTER 2

ANALYZING TRANSACTIONS: THE ACCOUNTING EQUATION

REVIEW QUESTIONS

1. It is necessary to distinguish between business assets and liabilities and nonbusiness assets and
liabilities of a single proprietor because, according to the business entity concept, nonbusiness
assets and liabilities are not included in the business entity’s accounting records. These distinctions
allow the owner to make decisions based on the financial condition and results of the business
apart from nonbusiness activities.
2. The six major elements of the accounting equation are listed below.
a. Assets are items owned by a business that will provide future benefits.
b. Liabilities are items owed to another business.
c. Owner’s equity is the amount by which the business assets exceed the business liabilities. Other
terms used for owner’s equity include net worth and capital.
d. Revenues represent the amount a business charges customers for products sold or
services performed.
e. Expenses represent the decrease in assets (or increase in liabilities) as a result of efforts made
to produce revenues.
f. Withdrawals, or drawing, reduce owner’s equity as a result of the owner taking cash or
other assets out of the business for personal use.

3. The three basic questions that must be answered when analyzing the effects of a business
transaction on the accounting equation are as follows:
a. What happened?
b. Which accounts are affected?
c. How is the accounting equation affected?

4. The function of an income statement is to report the profitability of business operations for a specific
period of time.
5. The function of a statement of owner’s equity is to report the investments and withdrawals by the owner
and the profits and losses generated through operating activities for a specific period of time.

6. The function of a balance sheet is to report the assets, liabilities, and owner’s equity on a specific
date. It is called a balance sheet because it confirms that the accounting equation is in balance.

7. The three basic phases of the accounting process are listed below.
Input—Business transactions are used as input to the accounting process.
 Processing—The transactions are processed by recognizing their effects on assets,
liabilities, owner’s equity, revenues, and expenses.
Output—Output from the accounting process is provided in the form of financial statements.

5
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6 CHAPTER 2

Exercise 2-1A

Item Account Classification

Money in bank Cash A
Office supplies Supplies A
Money owed Accounts Payable L
Office chairs Office Furniture A

Net worth of owner John Smith, Capital OE

Money withdrawn by owner John Smith, Drawing OE
Money owed by customers Accounts Receivable A

Exercise 2-2A

Assets = Liabilities + Owner’s Equity

$44,000 = $ 27,000 + $17,000
$32,000 = $ 18,000 + $14,000
$27,000 = $ 7,000 + $20,000

Exercise 2-3A

Assets = Liabilities + Owner’s Equity

(a) 27,000 27,000

Bal. 27,000 27,000

(b) 7,500 7,500

Bal. 34,500 7,500 27,000

(c) (1,600)

1,600

Bal. 34,500 7,500 27,000

(d) (2,300) (2,300)

Bal. 32,200 5,200 27,000

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© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

CHAPTER 2
Exercise 2-4A
Owner’s Equity
Assets = Liabilities + Capital –Drawing+Revenues– Expenses Description
Bal.
from

E 2-3A
(d) 32,200 5,200 27,000

(e) 1,500 1,500 Service f

(f) (600) (600) Rent exp

g (64) (64) Telephon

(h) (1,000) (1,000)

(i) 750 750 Service f

(j) (1,200) (1,200) Wages e

(k) 400

(400)

Bal. 31,586 5,200 27,000 (1,000) 2,250 (1,864)

Total Assets $31,586 Total Liabilities $ 5,200

Capital 27,000
Drawing (1,000)
Revenues 2,250
Expenses (1,864)
Total Liabilities and Owner’s Equity $ 31,586

7
8 CHAPTER 2 CHAPTER 2 9

Exercise 2-5A 2-7A

Exercise
Betsy Ray’s Accounting Service
Account Classification Financial Statement
Cash A BS
Rent Expense E IS
Accounts Payable L BS
Service Fees R IS
Supplies A BS
Wages Expense E IS
Ramon Martinez, Drawing OE SOE
Ramon Martinez, Capital OE SOE, BS
Prepaid Insurance A BS
Accounts Receivable A BS

Exercise 2-6A
Betsy Ray’s A cco unt in g S e rvice
Statement of Owner’ s Equi t y
For Month Ended June 30, 20--

Betsy Ray, capital, June 1, 20-- $

Investment during June 20,000
Total investment $20,000
Net income for June $10,000
Less withdrawals for June 8,000
Increase in capital 2,000
Betsy Ray, capital, June 30, 20-- $22,000

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8 CHAPTER 2 CHAPTER 2 9

Exercise 2-5A 2-7A

Exercise
Betsy Ray’s Accounting Service
Statement of Owner’s Equity
For Month Ended June 30, 20--

Betsy Ray, capital, June 1, 20-- $

Investment during June 20,000
Total investment $20,000
Less: Net loss for June $3,000
Withdrawals for June 8,000
Decrease in capital (11,000)
Betsy Ray, capital, June 30, 20-- $ 9,000

Problem 2-8A
Assets = Liabilities + Owner’s Equity
1. $26,960 $ 7,550 $19,410
2. $35,500 $ 10,910 $24,590
3. $32,040 $ 12,910 $19,130

Problem 2-9A: See page 10

Problem 2-10A
Jay Pembroke
Income Statement
For Month Ended April 30, 20--

Revenues:
Service fees $3,300
Expenses:
Rent expense 750
Net income $2,550

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 Problem 2-9A
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Assets = Liabilities + Owner’s Equity

(Amts.
(Items Owned) Owed) (Owner’s Investment) (Earnings)
Accounts Office Prepaid Accounts J. Pembroke, J. Pembroke,
Cash + Receivable + Supplies + Insurance = Payable + Capital – Drawing + Revenues – Expenses Description

(a) 18,000 18,000

(b) (2,000) 4,600 2,600
c (1,200) 1,200
(d) 1,300 2,000 3,300 Service fees
(e) (2,300) (2,300)
(f) (750) 750 Rent exp.
(g) (100) 100
Bal. 12,950 2,000 4,600 1,200 300 18,000 100 3,300 750

Cash $12,950 Accounts Payable $ 300

Accounts Receivable 2,000 Jay Pembroke, Capital 18,000
Office Supplies 4,600 Jay Pembroke, Drawing (100)
Prepaid Insurance 1,200 Service Fees 3,300
Total Assets $20,750 Rent Expense (750)
Total Liabilities and Owner’s Equity $20,750

CHAPTER 2
10
12 CHAPTER 2 CHAPTER 2 11

Exercise 2-1B 2-11A

Problem
Jay Pembroke
Statement of Owner’s Equity
For Month Ended April 30, 20--

Jay Pembroke, capital, April 1, 20-- $

Investment during April 18,000
Total investment $18,000
Net income for April $2,550
Less withdrawals for April 100
Increase in capital 2,450
Jay Pembroke, capital, April 30, 20-- $20,450

Problem 2-12A
Jay Pembroke
Balance Sheet
April 30, 20--

Assets Liabilities
Cash $12,950 Accounts payable $ 300
Accounts receivable 2,000
Office supplies 4,600 Owner’s Equity Jay
Prepaid insurance 1,200 Pembroke, capital Total 20,450
Total assets $20,750 liab. & owner’s equity $20,750

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12 CHAPTER 2 CHAPTER 2 11

Exercise 2-1B 2-11A

Problem

Account Classification
Cash A
Accounts Payable L
Supplies A
Bill Jones, Drawing OE
Prepaid Insurance A
Accounts Receivable A
Bill Jones, Capital OE

Exercise 2-2B

Assets = Liabilities + Owner’s Equity

$25,000 = $20,000 + $ 5,000
$30,000 = $15,000 + $ 15,000
$20,000 = $10,000 + $ 10,000

Exercise 2-3B

Assets = Liabilities + Owner’s Equity

(a) 30,000 30,000

Bal. 30,000 30,000

(b) 4,500 4,500

Bal. 34,500 4,500 30,000

(c) 1,600

(1,600)

Bal. 34,500 4,500 30,000

(d) (2,000) (2,000)

Bal. 32,500 2,500 30,000

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CHAPTER 2
Exercise 2-4B
Owner’s Equity
Assets = Liabilities + Capital Drawing+Revenues Expenses Description
Bal.
from

E 2-3B
(d) 32,500 2,500 30,000

(e) 3,000 3,000 Servic

(f) (1,000) 1,000 Rent e

g (68) 68 Telep

(h) (800) 800

(i) 900 900 Servic

(j) (500) 500 Wage

(k) 500
(500)

Bal. 34,032 2,500 30,000 800 3,900 1,568

Total Assets $34,032 Total Liabilities $ 2,500

Capital 30,000
Drawing (800)
Revenues 3,900
Expenses (1,568)
Total Liabilities and Owner’s Equity $ 34,032

13
14 CHAPTER 2 CHAPTER 2 15

Exercise 2-5B

Account Classification Financial Statement

Cash A BS
Rent Expense E IS
Accounts Payable L BS
Service Fees R IS
Supplies A BS
Wages Expense E IS
Amanda Wong, Drawing OE SOE
Amanda Wong, Capital OE SOE, BS
Prepaid Insurance A BS
Accounts Receivable A BS

Exercise 2-6B
Lopez Financial Consulting
Statement of Owner’ s Equi t y
For Month Ended June 30, 20--

Efran Lopez, capital, June 1, 20-- $

Investment during June 15,000
Total investment $15,000
Net income for June $6,000
Less withdrawals for June 7,000
Decrease in capital (1,000)
Efran Lopez, capital, June 30, 20-- $14,000

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14 CHAPTER 2 CHAPTER 2 15

Exercise 2-5B
Exercise 2-7B
Lopez Financial Consulting
Statement of Owner’s Equity
For Month Ended June 30, 20--

Efran Lopez, capital, June 1, 20-- $

Investment during June 15,000
Total investment $15,000
Less: Net loss for June $2,000
Withdrawals for June 7,000
Decrease in capital (9,000)
Efran Lopez, capital, June 30, 20-- $ 6,000

Problem 2-8B

Assets = Liabilities + Owner’s Equity

1. $22,860 $ 4,605 $18,255
2. $27,425 $ 8,515 $18,910
3. $25,235 $ 10,165 $15,070

Problem 2-9B: See page 16

Problem 2-10B

David Segal
Income Statement
For Month Ended October 31, 20--

Revenues:
Service fees $2,700
Expenses:
Rent expense 650
Net income $2,050

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Problem 2-9B

Assets = Liabilities + Owner’s Equity

(Amts.
(Items Owned) Owed) (Owner’s Investment) (Earnings)
Accounts Office Prepaid Accounts D. Segal, D. Segal,
Cash + Receivable + Supplies + Insurance = Payable + Capital – Drawing + Revenues – Expenses Description
(a) 15,000 15,000
(b) (1,800) 3,800 2,000

c (1,000) 1,000
(d) 1,700 1,000 2,700 Service fees

(e) (1,800) (1,800)

(f) (650) 650 Rent expense

(g) (150) 150

Bal. 11,300 1,000 3,800 1,000 200 15,000 150 2,700 650

Cash $11,300 Accounts Payable $ 200

Accounts Receivable 1,000 David Segal, Capital 15,000
Office Supplies 3,800 David Segal, Drawing (150)
Prepaid Insurance 1,000 Service Fees 2,700
Total Assets $17,100 Rent Expense (650)
Total Liabilities and Owner’s Equity $17,100

CHAPTER 2
16
14 CHAPTER 2 CHAPTER 2 17

Problem 2-11B
David Segal
Statement of Owner’s Equity
For Month Ended October 31, 20--

David Segal, capital, October 1, 20-- $

Investment during October 15,000
Total investment $15,000
Net income for October $2,050
Less withdrawals for October 150
Increase in capital 1,900
David Segal, capital, October 31, 20-- $16,900

Problem 2-12B

David Segal
Balance Sheet
October 31, 20--

Assets Liabilities
Cash $11,300 Accounts payable $ 200
Accounts receivable 1,000
Office supplies 3,800 Owner’s Equity
Prepaid insurance 1,000 David Segal, capital 16,900
Total assets $17,100 Total liab. & owner’s equity $17,100

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15 CHAPTER 2 CHAPTER 2 17

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16 CHAPTER 2 CHAPTER 2 17

MANAGING YOUR WRITING

The students should focus on the following differences:
1. An expense is an outflow of assets or increase in liabilities as a result of the efforts made to earn
revenues. A withdrawal is an outflow of assets for the owner’s personal use. The withdrawal is not
related to the earning process.
2. A withdrawal that increases a liability would be unusual. Expenses often increase liabilities.
The student should focus on the following similarity:
1. Expenses and withdrawals reduce owner’s equity.

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Mastery Problem

CHAPTER 2
1.

Assets = Liabilities + Owner’s Equity

(Amts.
(Items Owned) Owed) (Owner’s Investment) (Earnings)
Accts. Sup- Prepaid Accts. L. Vozniak, L. Vozniak,
Cash + Rec. + plies + Ins. + Tools + Van = Payable + Capital – Drawing + Rev. – Exp. Description

(a) 8,000 8,000

(b) (150) 150 Rent exp.

c (5,000) 5,000

(d) 600 600

(e) (200) 300 100

(f) (100) 100 Wages exp.

(g) (75) 75 Adver. exp.

(h) (480) 480

(i) 800 800 Cleaning fees

(j) 500 500 Cleaning fees

(k) (40) 40 Telephone exp.

(l) 200 (200)

(m) (150) 150 Wages exp.

n (200) (200)

(o) 600 200 800 Cleaning fees

(p) (100) 100

2.
Bal. 3,105 500 300 480 600 5,000 500 8,000 100 2,100 515

19
20 CHAPTER 2 CHAPTER 2 21

Mastery Problem (Continued)

3.
We Do Windows
Income Statement
For Month Ended July 31, 20--

Revenues:
Cleaning fees $2,100
Expenses:
Wages expense $250
Rent expense 150
Advertising expense 75
Telephone expense 40
Total expenses 515
Net income $1,585

4.
We Do Windows Statement of
Owner’s Equity For Month
Ended July 31, 20--

Lisa Vozniak, capital, July 1, 20-- $

Investment in July 8,000
Total investment $8,000
Net income for July $1,585
Less withdrawals for July 100
Increase in capital 1,485
Lisa Vozniak, capital, July 31, 20-- $9,485

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21 CHAPTER 2 CHAPTER 2 21

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22 CHAPTER 2 CHAPTER 2 21

Mastery Problem (Concluded)

5.
We Do Windows
Balance Sheet
July 31, 20--

Assets Liabilities
Cash $3,105 Accounts payable $ 500
Accounts receivable 500
Supplies 300
Prepaid insurance 480
Tools 600 Owner’s Equity
Van 5,000 Lisa Vozniak, capital 9,485
Total assets $9,985 Total liab. & owner’s equity $9,985

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22 CHAPTER 2

Challenge Problem

Cash from customers $3,700

Cash paid for wages $450
Cash paid for rent 300
Cash paid for utilities 50
Cash paid for insurance 600
Cash paid for supplies 100
Cash paid for telephone 35
Total cash paid for operating items 1,535
Difference between cash received from customers and
cash paid for goods and services $2,165

Yes, there is a difference of $2,000. Net income does a better job of measuring profits because it offers a
better matching of revenues and expenses. However, cash flows are important. If you don’t have enough
cash to pay your bills, you will go out of business.

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