Chapter 1 Demonstration Problems Accounting and the Business Environment Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall1-1

Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall1-2 Future Enterprise's balance sheet data at May 31, 2014, and June 30, 2014, follow: For each of the following situations with regard to common stock and dividends of a corporation, compute the amount of net income or net loss during June a.The company issued $20,000 of common stock and paid no dividends. b.The company issued no common stock. It paid cash dividends of $15,000. c.The company issued $18,000 of common stock and paid cash dividends of $25,000. Total assets May 31, 2014 $160,000 June 30, 2014 $225,000 Total liabilities120,000150,000 E1-21D

Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall1-3 Stockholders’ equity, May 31, 2014 $40,000($160,000 − $120,000) Total assets May 31, 2014 $160,000 June 30, 2014 $225,000 Total liabilities120,000150,000 E1-21D a.The company issued $20,000 of common stock and paid no dividends.

Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall1-4 Stockholders’ equity, May 31, 2014 $40,000($160,000 − $120,000) Add: Issuance of common stock 20,000 Total assets May 31, 2014 $160,000 June 30, 2014 $225,000 Total liabilities120,000150,000 E1-21D a.The company issued $20,000 of common stock and paid no dividends.

Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall1-5 Stockholders’ equity, May 31, 2014 $40,000($160,000 − $120,000) Add: Issuance of common stock 20,000 Stockholders’ equity, June 30, 2014 $75,000($225,000 − $150,000) Total assets May 31, 2014 $160,000 June 30, 2014 $225,000 Total liabilities120,000150,000 E1-21D a.The company issued $20,000 of common stock and paid no dividends.

Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall1-6 Stockholders’ equity, May 31, 2014 $40,000($160,000 − $120,000) Add: Issuance of common stock 20,000 Less: Dividends 0 Stockholders’ equity, June 30, 2014 $75,000($225,000 − $150,000) Total assets May 31, 2014 $160,000 June 30, 2014 $225,000 Total liabilities120,000150,000 E1-21D a.The company issued $20,000 of common stock and paid no dividends.

Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall1-7 Stockholders’ equity, May 31, 2014 $40,000($160,000 − $120,000) Add: Issuance of common stock 20,000 75,000($75,000 + $0) Less: Dividends 0 Stockholders’ equity, June 30, 2014 $75,000($225,000 − $150,000) Total assets May 31, 2014 $160,000 June 30, 2014 $225,000 Total liabilities120,000150,000 E1-21D a.The company issued $20,000 of common stock and paid no dividends.

Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall1-8 Stockholders’ equity, May 31, 2014 $40,000($160,000 − $120,000) Add: Issuance of common stock 20,000 Net income for the month 5,000($75,000 − $40,000 − $20,000) 75,000($75,000 + $0) Less: Dividends 0 Stockholders’ equity, June 30, 2014 $75,000($225,000 − $150,000) Total assets May 31, 2014 $160,000 June 30, 2014 $225,000 Total liabilities120,000150,000 E1-21D a.The company issued $20,000 of common stock and paid no dividends.

Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall1-9 Stockholders’ equity, May 31, 2014 $40,000($160,000 − $120,000) Total assets May 31, 2014 $160,000 June 30, 2014 $225,000 Total liabilities120,000150,000 E1-21D b.The company issued no common stock. It paid cash dividends of $15,000.

Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall1-10 Stockholders’ equity, May 31, 2014 $40,000($160,000 − $120,000) Add: Issuance of common stock 0 Total assets May 31, 2014 $160,000 June 30, 2014 $225,000 Total liabilities120,000150,000 E1-21D b.The company issued no common stock. It paid cash dividends of $15,000.

Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall1-11 Stockholders’ equity, May 31, 2014 $40,000($160,000 − $120,000) Add: Issuance of common stock 0 Stockholders’ equity, June 30, 2014 $75,000($225,000 − $150,000) Total assets May 31, 2014 $160,000 June 30, 2014 $225,000 Total liabilities120,000150,000 E1-21D b.The company issued no common stock. It paid cash dividends of $15,000.

Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall1-12 Stockholders’ equity, May 31, 2014 $40,000($160,000 − $120,000) Add: Issuance of common stock 0 Less: Dividends 15,000 Stockholders’ equity, June 30, 2014 $75,000($225,000 − $150,000) Total assets May 31, 2014 $160,000 June 30, 2014 $225,000 Total liabilities120,000150,000 E1-21D b.The company issued no common stock. It paid cash dividends of $15,000.

Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall1-13 Stockholders’ equity, May 31, 2014 $40,000($160,000 − $120,000) Add: Issuance of common stock 0 90,000($75,000 + $15,000) Less: Dividends 15,000 Stockholders’ equity, June 30, 2014 $75,000($225,000 − $150,000) Total assets May 31, 2014 $160,000 June 30, 2014 $225,000 Total liabilities120,000150,000 E1-21D b.The company issued no common stock. It paid cash dividends of $15,000.

Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall1-14 Stockholders’ equity, May 31, 2014 $40,000($160,000 − $120,000) Add: Issuance of common stock 0 Net income for the month 50,000($90,000 − $40,000) 90,000($75,000 + $15,000) Less: Dividends 15,000 Stockholders’ equity, June 30, 2014 $75,000($225,000 − $150,000) Total assets May 31, 2014 $160,000 June 30, 2014 $225,000 Total liabilities120,000150,000 E1-21D b.The company issued no common stock. It paid cash dividends of $15,000.

Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall1-15 Stockholders’ equity, May 31, 2014 $40,000($160,000 − $120,000) Total assets May 31, 2014 $160,000 June 30, 2014 $225,000 Total liabilities120,000150,000 E1-21D c.The company issued $18,000 of common stock and paid cash dividends of $25,000.

Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall1-16 Stockholders’ equity, May 31, 2014 $40,000($160,000 − $120,000) Add: Issuance of common stock 18,000 Total assets May 31, 2014 $160,000 June 30, 2014 $225,000 Total liabilities120,000150,000 E1-21D c.The company issued $18,000 of common stock and paid cash dividends of $25,000.

Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall1-17 Stockholders’ equity, May 31, 2014 $40,000($160,000 − $120,000) Add: Issuance of common stock 18,000 Stockholders’ equity, June 30, 2014 $75,000($225,000 − $150,000) Total assets May 31, 2014 $160,000 June 30, 2014 $225,000 Total liabilities120,000150,000 E1-21D c.The company issued $18,000 of common stock and paid cash dividends of $25,000.

Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall1-18 Stockholders’ equity, May 31, 2014 $40,000($160,000 − $120,000) Add: Issuance of common stock 18,000 Less: Dividends 25,000 Stockholders’ equity, June 30, 2014 $75,000($225,000 − $150,000) Total assets May 31, 2014 $160,000 June 30, 2014 $225,000 Total liabilities120,000150,000 E1-21D c.The company issued $18,000 of common stock and paid cash dividends of $25,000.

Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall1-19 Stockholders’ equity, May 31, 2014 $40,000($160,000 − $120,000) Add: Issuance of common stock 18, ,000($75,000 + $25,000) Less: Dividends 25,000 Stockholders’ equity, June 30, 2014 $75,000($225,000 − $150,000) Total assets May 31, 2014 $160,000 June 30, 2014 $225,000 Total liabilities120,000150,000 E1-21D c.The company issued $18,000 of common stock and paid cash dividends of $25,000.

Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall1-20 Stockholders’ equity, May 31, 2014 $40,000($160,000 − $120,000) Add: Issuance of common stock 18,000 Net income for the month 42,000($100,000 − $40,000 −$18,000) 100,000($75,000 + $25,000) Less: Dividends 25,000 Stockholders’ equity, June 30, 2014 $75,000($225,000 − $150,000) Total assets May 31, 2014 $160,000 June 30, 2014 $225,000 Total liabilities120,000150,000 E1-21D c.The company issued $18,000 of common stock and paid cash dividends of $25,000.

E1-31D Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall1-21 The account balances of Louis Computer Service at March 31, 2014, follow: Equipment $18,000Service Revenue $ 13,500 Office Supplies 900Accounts Receivable 7,600 Notes Payable 8,000Accounts Payable 3,500 Rent Expense 700Common Stock 3,000 Cash 2,500Salaries Expense 2,000 Dividends 1,300 Retained Earnings, Mar. 1, ,000 Requirements 1.Prepare the income statement for the month ending March 31, Prepare the statement of retained earnings for the month ending March 31, Prepare the balance sheet as of March 31, 2014.

E1-31D—Req.1 Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall1-22 LOUIS COMPUTER SERVICE Income Statement Month Ended March 31, 2014 Service Revenue$13,500 Service Revenue $13,500 Salaries Expense 2,000 Rent Expense 700

E1-31D—Req.1 Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall1-23 LOUIS COMPUTER SERVICE Income Statement Month Ended March 31, 2014 Service Revenue$13,500 Expenses: Salaries Expense$2,000 Service Revenue $13,500 Salaries Expense 2,000 Rent Expense 700

E1-31D—Req.1 Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall1-24 LOUIS COMPUTER SERVICE Income Statement Month Ended March 31, 2014 Service Revenue$13,500 Expenses: Salaries Expense$2,000 Rent Expense700 Service Revenue $13,500 Salaries Expense 2,000 Rent Expense 700

E1-31D—Req.1 Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall1-25 LOUIS COMPUTER SERVICE Income Statement Month Ended March 31, 2014 Service Revenue$13,500 Expenses: Salaries Expense$2,000 Rent Expense700 Total Expenses2,700 Service Revenue $13,500 Salaries Expense 2,000 Rent Expense 700

E1-31D—Req.1 Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall1-26 LOUIS COMPUTER SERVICE Income Statement Month Ended March 31, 2014 Service Revenue$13,500 Expenses: Salaries Expense$2,000 Rent Expense700 Total Expenses2,700 Net Income$10,800 Service Revenue $13,500 Salaries Expense 2,000 Rent Expense 700

E1-31D—Req.2 Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall1-27 LOUIS COMPUTER SERVICE Statement of Retained Earnings Month Ended March 31, 2014 Retained Earnings, Mar. 1, 2014$2,000 Retained Earnings, Mar. 1, 2014$2,000 Net Income10,800 Dividends1,300

E1-31D—Req.2 Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall1-28 LOUIS COMPUTER SERVICE Statement of Retained Earnings Month Ended March 31, 2014 Retained Earnings, Mar. 1, 2014$2,000 Net income for the month10,800 Retained Earnings, Mar. 1, 2014$2,000 Net Income10,800 Dividends1,300

E1-31D—Req.2 Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall1-29 LOUIS COMPUTER SERVICE Statement of Retained Earnings Month Ended March 31, 2014 Retained Earnings, Mar. 1, 2014$2,000 Net income for the month10,800 12,800 Retained Earnings, Mar. 1, 2014$2,000 Net Income10,800 Dividends1,300

E1-31D—Req.2 Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall1-30 LOUIS COMPUTER SERVICE Statement of Retained Earnings Month Ended March 31, 2014 Retained Earnings, Mar. 1, 2014$2,000 Net income for the month10,800 12,800 Less: Dividends1,300 Retained Earnings, Mar. 1, 2014$2,000 Net Income10,800 Dividends1,300

E1-31D—Req.2 Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall1-31 LOUIS COMPUTER SERVICE Statement of Retained Earnings Month Ended March 31, 2014 Retained Earnings, Mar. 1, 2014$2,000 Net income for the month10,800 12,800 Less: Dividends1,300 Retained Earnings, Mar. 31, 2014$11,500 Retained Earnings, Mar. 1, 2014$2,000 Net Income10,800 Dividends1,300

E1-31D—Req.3 Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall1-32 LOUIS COMPUTER SERVICE Balance Sheet March 31, 2014 Assets Liabilities Cash $2,500 Stockholders’ Equity Cash$2,500 Accounts Payable$3,500 Accounts Receivable7,600 Notes Payable8,000 Office Supplies900 Retained Earnings, Mar. 31, ,500 Equipment18,000Common Stock6,000

E1-31D—Req.3 Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall1-33 LOUIS COMPUTER SERVICE Balance Sheet March 31, 2014 Assets Liabilities Cash $2,500 Accounts Receivable 7,600 Stockholders’ Equity Cash$2,500 Accounts Payable$3,500 Accounts Receivable7,600 Notes Payable8,000 Office Supplies900 Retained Earnings, Mar. 31, ,500 Equipment18,000Common Stock6,000

E1-31D—Req.3 Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall1-34 LOUIS COMPUTER SERVICE Balance Sheet March 31, 2014 Assets Liabilities Cash $2,500 Accounts Receivable 7,600 Office Supplies 900 Stockholders’ Equity Cash$2,500 Accounts Payable$3,500 Accounts Receivable7,600 Notes Payable8,000 Office Supplies900 Retained Earnings, Mar. 31, ,500 Equipment18,000Common Stock6,000

E1-31D—Req.3 Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall1-35 LOUIS COMPUTER SERVICE Balance Sheet March 31, 2014 Assets Liabilities Cash $2,500 Accounts Receivable 7,600 Office Supplies 900 Equipment 18,000 Stockholders’ Equity Cash$2,500 Accounts Payable$3,500 Accounts Receivable7,600 Notes Payable8,000 Office Supplies900 Retained Earnings, Mar. 31, ,500 Equipment18,000Common Stock6,000

E1-31D—Req.3 Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall1-36 LOUIS COMPUTER SERVICE Balance Sheet March 31, 2014 Assets Liabilities Cash $2,500 Accounts Payable$3,500 Accounts Receivable 7,600 Office Supplies 900 Equipment 18,000 Stockholders’ Equity Cash$2,500 Accounts Payable$3,500 Accounts Receivable7,600 Notes Payable8,000 Office Supplies900 Retained Earnings, Mar. 31, ,500 Equipment18,000Common Stock6,000

E1-31D—Req.3 Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall1-37 LOUIS COMPUTER SERVICE Balance Sheet March 31, 2014 Assets Liabilities Cash $2,500 Accounts Payable$3,500 Accounts Receivable 7,600 Note Payable8,000 Office Supplies 900 Equipment 18,000 Stockholders’ Equity Cash$2,500 Accounts Payable$3,500 Accounts Receivable7,600 Notes Payable8,000 Office Supplies900 Retained Earnings, Mar. 31, ,500 Equipment18,000Common Stock6,000

E1-31D—Req.3 Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall1-38 LOUIS COMPUTER SERVICE Balance Sheet March 31, 2014 Assets Liabilities Cash $2,500 Accounts Payable$3,500 Accounts Receivable 7,600 Note Payable8,000 Office Supplies 900 Total Liabilities11,500 Equipment 18,000 Stockholders’ Equity Cash$2,500 Accounts Payable$3,500 Accounts Receivable7,600 Notes Payable8,000 Office Supplies900 Retained Earnings, Mar. 31, ,500 Equipment18,000Common Stock6,000

E1-31D—Req.3 Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall1-39 LOUIS COMPUTER SERVICE Balance Sheet March 31, 2014 Assets Liabilities Cash $2,500 Accounts Payable$3,500 Accounts Receivable 7,600 Note Payable8,000 Office Supplies 900 Total Liabilities11,500 Equipment 18,000 Stockholders’ Equity Common Stock6,000 Cash$2,500 Accounts Payable$3,500 Accounts Receivable7,600 Notes Payable8,000 Office Supplies900 Retained Earnings, Mar. 31, ,500 Equipment18,000Common Stock6,000

E1-31D—Req.3 Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall1-40 LOUIS COMPUTER SERVICE Balance Sheet March 31, 2014 Assets Liabilities Cash $2,500 Accounts Payable$3,500 Accounts Receivable 7,600 Note Payable8,000 Office Supplies 900 Total Liabilities11,500 Equipment 18,000 Stockholders’ Equity Common Stock6,000 Retained Earnings11,500 Cash$2,500 Accounts Payable$3,500 Accounts Receivable7,600 Notes Payable8,000 Office Supplies900 Retained Earnings, Mar. 31, ,500 Equipment18,000Common Stock6,000

E1-31D—Req.3 Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall1-41 LOUIS COMPUTER SERVICE Balance Sheet March 31, 2014 Assets Liabilities Cash $2,500 Accounts Payable$3,500 Accounts Receivable 7,600 Note Payable8,000 Office Supplies 900 Total Liabilities11,500 Equipment 18,000 Stockholders’ Equity Common Stock6,000 Retained Earnings11,500 Total Stockholders’ Equity17,500 Cash$2,500 Accounts Payable$3,500 Accounts Receivable7,600 Notes Payable8,000 Office Supplies900 Retained Earnings, Mar. 31, ,500 Equipment18,000Common Stock6,000

E1-31D—Req.3 Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall1-42 LOUIS COMPUTER SERVICE Balance Sheet March 31, 2014 Assets Liabilities Cash $2,500 Accounts Payable$3,500 Accounts Receivable 7,600 Note Payable8,000 Office Supplies 900 Total Liabilities11,500 Equipment 18,000 Stockholders’ Equity Common Stock6,000 Retained Earnings11,500 Total Stockholders’ Equity17,500 Total Assets $29,000 Total Liabilities and Stockholders’ Equity $29,000 Cash$2,500 Accounts Payable$3,500 Accounts Receivable7,600 Notes Payable8,000 Office Supplies900 Retained Earnings, Mar. 31, ,500 Equipment18,000Common Stock6,000

E1-39D Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall1-43 Star Motor Service had net income for the year of $30,000. In addition, the balance sheet reports the following balances: Jan.1, 2014 Dec.31, 2014 Notes Payable$28,000 $35,000 Cash10,000 22,000 Office Furniture25,000 30,000 Building100,000 Accounts Payable8,000 6,000 Total Stockholders’ Equity130, ,000 Accounts Receivable2,000 12,000 Equipment25,000 35,000 Office Supplies4,0002,000 Calculate the return on assets (ROA) for Star Motor Service for the year ending December 31, 2014.

E1-39D Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall1-44 Jan.1, 2014Dec.31, 2014 Cash$10,000$22,000 Accounts Receivable2,00012,000 Office Supplies4,0002,000 Equipment25,00035,000 Office Furniture25,00030,000 Building100,000 Average Total Assets = (Beginning total assets + ending total assets) / 2

E1-39D Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall1-45 Jan.1, 2014Dec.31, 2014 Cash$10,000$22,000 Accounts Receivable2,00012,000 Office Supplies4,0002,000 Equipment25,00035,000 Office Furniture25,00030,000 Building100,000 Average Total Assets = (Beginning total assets + ending total assets) / 2 Beginning total assets ═ $10,000 + $2,000 + $4,000 + $25,000 + $25,000 + $100,000 ═ $166,000

E1-39D Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall1-46 Jan.1, 2014Dec.31, 2014 Cash$10,000$22,000 Accounts Receivable2,00012,000 Office Supplies4,0002,000 Equipment25,00035,000 Office Furniture25,00030,000 Building100,000 Average Total Assets = (Beginning total assets + ending total assets) / 2 Beginning total assets ═ $10,000 + $2,000 + $4,000 + $25,000 + $25,000 + $100,000 ═ $166,000 Ending total assets ═ $22,000 + $12,000 + $2,000 + $35,000 + $30,000 + $100,000 ═ $201,000

E1-39D Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall1-47 Beginning total assets$166,000 Ending total assets$201,000 Average Total Assets ═ (Beginning total assets + ending total assets) / 2 ═ $166,000 + $201,000 ∕ 2

E1-39D Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall1-48 Beginning total assets$166,000 Ending total assets$201,000 Average Total Assets ═ (Beginning total assets + ending total assets) / 2 ═ $166,000 + $201,000 ∕ 2 ═ $183,500

E1-39D Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall1-49 Net income$30,000 Average total assets$183,500 Return on Assets ═ Net income Average total assets

E1-39D Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall1-50 Net income$30,000 Average total assets$183,500 Return on Assets ═ Net income Average total assets ═ $30,000 ∕ $183,500

E1-39D Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall1-51 Net income$30,000 Average total assets$183,500 Return on Assets ═ Net income Average total assets ═ $30,000 ∕ $183,500 ═ 0.163

E1-39D Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall1-52 Net income$30,000 Average total assets$183,500 Return on Assets ═ Net income Average total assets ═ $30,000 ∕ $183,500 ═ ═ 1.63%

End of Chapter Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall