Demos Chapter 2 B Exercises 2-2B, 2-4B, 2-5B, 2-10B, 2-14B EXERCISE 2-2B Solution a. Crest Corporation Accounting Equation – Year 1 Event Assets = Liabilities + Stockholders’

Demos Chapter 2 B Exercises 2-2B, 2-4B, 2-5B, 2-10B, 2-14B

EXERCISE 2-2B Solution
a.
Crest Corporation Accounting Equation – Year 1
Event Assets
=
Liabilities
+
Stockholders’ Equity
Cash
=
Salaries Payable
+
Common Stock
+
Retained Earnings
Earned Rev. 5,000 5,000
Accrued Sal. (3,000) (3,000)
EXERCISE 2-2B a. (sol. cont. on next page)

EXERCISE 2-2B a. (sol. cont.)
Crest Corporation
Balance Sheet
As of December 31, Year 1
Assets
Cash $5,000
Total Assets $5,000
Liabilities
Salaries Payable $3,000
Total Liabilities $3,000
Stockholders’ Equity
Retained Earnings $2,000
Total Stockholders’ Equity 2,000
Total Liab. and Stockholders’ Equity $5,000
b.
Computation of Net Income
Revenue $5,000
Less: Expenses (3,000)
Net Income $2,000
EXERCISE 2-2B (cont. on next page)

EXERCISE 2-2B (cont.)
c.
Cash Flow from Operating Activities
Cash from Revenue $5,000
Net Cash Flow from Operating Act. $5,000
The salary expense is deducted from revenue in computing net income, but it has not been paid. This creates a difference of $3,000. The revenue is the same because it has been earned and collected.

EXERCISE 2-4B (Sol. on next page)

EXERCISE 2-4B SOLUTION

a.
Brown and Birgin
Horizontal Statements Model
Year 3
Balance Sheet Income Statement Statement of
Event Assets
=
Liabilities
+
Stk. Equity Rev.
–
Exp.
=
Net Inc. Cash Flows
No.
Cash
+
Accts.
Rec.
=
Acct.
Payable
+
Sal. Pay.
+
Retained Earnings
1. NA
96,000
NA
NA
96,000 96,000
NA
96,000 NA
2. 65,000
NA
NA
NA
65,000 65,000
NA
65,000 65,000 OA
3. NA
NA
45,000
NA
(45,000) NA
45,000
(45,000) NA
4. (26,000)
NA
NA
NA
(26,000) NA
26,000
(26,000) (26,000) OA
5. 70,000
(70,000)
NA
NA
NA NA
NA
NA 70,000 OA
6. (38,000)
NA
(38,000)
NA
NA NA
NA
NA (38,000) OA
7. (10,000)
NA
NA
NA
(10,000) NA
NA
NA (10,000) FA
8. NA
NA
NA
3,000
(3,000) NA
3,000
(3,000) NA
Totals 61,000
+
26,000
=
7,000
+
3,000
+
77,000 161,000
–
74,000
=
87,000 61,000 NC
EXERCISE 2-4B (Solution cont.)

EXERCISE 2-4B (Solution cont.)
b. Total assets: $87,000 ($61,000 + $26,000)
c. $26,000
d. $7,000
e. Accounts Receivable (an asset) is an amount owed to Brown and Birgin: $26,000;
Accounts Payable (a liability) is an amount that Brown and Birgin owes: $7,000.
f. $87,000
g. $71,000 ($65,000 – $26,000 + $70,000 – $38,000)

EXERCISE 2-5B SOLUTION
a.
Computation of Net Income
Revenue $77,000
Less: Expenses (51,000)
Net Income $26,000
b.
Cash Flow from Operating Activities
Cash from Revenue $55,000
Cash paid for expenses (49,000)
Net Cash Flow from Operating Act. $ 6,000

EXERCISE 2-10B
Purchase of land Asset
Payment of monthly utilities in administrative offices Expense
Supplies used in administrative offices. Expense
Purchase of equipment Expense
Purchase of supplies for future use Asset
Purchase of land Asset
EXERCISE 2-14B
Note: This exercise can be used to assess writing skills.
The tutoring fees of $800 received in advance by Kim Wong from Joe Pratt should be reported as a liability. Although Kim Wong has received the cash, it has not yet been earned. Wong has an obligation to either perform the services or refund the cash advance. When the tutoring service is provided to Joe, the unearned revenue should be recognized as revenue earned by Wong.

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