Chapter 2 Accounting 211

Sigma Motors has assets of $5,000,000, liabilities of $1,200,000, and retained earnings of $1,500,000. What is the amount for common stock?

$2,300,000 Common stock is calculated using the formula: Common stock equals assets minus retained earnings minus liabilities or $5,000,000 - $1,500,000 - $1,200,000 = $2,300,000.

Elizabeth Coal Ltd has total assets of $8,000,000, common stock of $4,200,000, and liabilities of $1,200,000. What is the amount for retained earnings?

$2,600,000.00 The formula for Stockholders Equity (SE) is SE = Common Stock + Retained Earnings; however SE can also be found using this formula, Stockholders Equity = Assets - Liabilities. Therefore, Elizabeth Coal Ltd would calculate Retained Earning (RE) using a combination of both SE formulas. RE = Assets - Liabilities - Common Stock. Using this formula, Elizabeth Coal Ltd's Retained Earnings are $8,000,000 - $1,200,000 - $4,200,000 = $2,600,000.

On July 1, Cooper Corporation received $20,000 from Smith Industries in exchange for services performed. What accounting entries should Cooper make to record this event, and why?

Cooper should record a $20,000 increase in revenue along with a $20,000 increase in cash, because this way the firm's retained earnings will increase by the same amount as its assets. Cooper will record the $20,000 payment as an increase in revenue, as this payment was for services performed. Revenue is an element of retained earnings, therefore the firm's retained earnings, and thus its stockholders' equity, will increase by $20,000. Cooper must also record a $20,000 increase in the asset account 'Cash' to record the receipt of the payment. Analyzing the expanded accounting equation, both assets and revenue increased by $20,000 creating a balanced equation: Assets = Liabilities + Common Stock + Revenue - Expenses - Dividends. ($20,000 = $0 + $0 + $20,000 -$0 - $0)

Two foreign companies want to trade shares of their stock on U.S. stock exchanges. One company follows IFRS but the other company does not. If the FASB changes an accounting standard for GAAP, how will this affect each foreign company?

Only the company that does not conform to IFRS will have to change their accounting practices to conform to GAAP The SEC recently announced that foreign companies who have their shares traded on U.S. stock exchanges no longer need to conform to GAAP as long as they conform to IFRS. Therefore, changes in GAAP will only affect foreign companies that do not conform to IFRS.

Which of the following events would lead to a decrease in a firm's retained earnings, and why?

Payment of $10,000 in employee salaries, because salaries are considered an expense, and an increase in expenses will reduce a firm's retained earnings Retained earnings is affected when a company recognizes revenue, incurs expenses, or pays dividends; it is not affected by changes in a firm's liabilities. Here, payment of employee salaries increases the firm's expenses, while issuance of the note payable increases the firm's liabilities. The salary-related increase in expenses is what causes the decrease in the firm's retained earnings

JT Engineering currently has two debts: a $9,000 debt due in 9 months and a $7,000 debt due in 14 months. JT prepares a classified balance sheet and has an operating cycle of less than one year. How should these debts be classified?

The $9,000 should be classified as a current liability, and the $7,000 should be classified as a long-term liability. Current liabilities are liabilities that a company has to pay within one year or less, and long-term liabilities are those obligations that a company expects to pay after a year. Therefore, JT Engineering would classify the $9,000 debt as a short term/current liability, and the $7,000 debt as a long-term liability.

What happens when a portion of an account payable is paid?

There is no effect on stockholders' equity Upon payment of the liability, the balance of the liability account decreases and the asset account 'Cash' decreases proportionally. Therefore, stockholders' equity remains unchanged while assets and liabilities both decrease proportionally.

Of the following sets of accounting entries, which one correctly records the purchase of a piece of equipment?

a $5,000 decrease in cash, a $15,000 increase in notes payable, and a $20,000 increase in equipment, all entered on the same date The purchase of a piece of equipment will increase a company's equipment asset account. Payment for that equipment can be in the form of a decrease (credit) to Cash, an increase (credit) to Accounts Payable, or a combination of both. An entry of a debit (increase) to Equipment of $20,000 along with a credit (decrease) to Cash of $5,000 and a credit (increase) to Accounts Payable of $15,000 creates a balanced accounting equation and fits the parameters for recording the purchase of equipment.

When a company performs a service for which it has not been paid, it will create a(n)

account receivable. An account receivable represents an amount owed to the company from an outside source, often a customer.

An investment by the stockholders in a business causes an increase in which of the following?

assets and stockholders' equity First, analyze the event to determine if it impacts areas related to the basic accounting equation: Assets = Liabilities + Stockholders' Equity. In this example, an investment in the company by its stockholders would increase the stockholders' equity in the company and would also increase the assets in the company. For example, if the stockholders contributed $500 cash, the asset account 'Cash' would increase by $500 and the stockholders' equity account would likewise increase by $500.

In their financial statements, Gordon Electronics groups all their current assets together, all their property, plant, and equipment together, all their current liabilities together, all their long-term liabilities together, and all their stockholders'; equity together. This is an example of a

classified balance sheet. A classified balance sheet groups together similar assets, liabilities, and stockholder's equity accounts in order to have a better understanding of the financial position of the company.

In 2022, Wagner Industries purchased a piece of equipment with an estimated useful life of 10 years. Each year, Wagner expenses 1/10 of the equipment's cost. This is an example of

depreciation. Depreciation is allocating the cost of an asset over its useful life. Wagner Industries allocated the cost of the piece of equipment over a ten year period, depreciating 1/10 of the cost each year.

If an asset has a readily available and reliable market price, which measurement principle is most appropriate for recording the value of that asset?

fair value principle Using the historical cost principle, companies record their assets at cost even if the market price changes. Assets that use the historical cost principle have unknown or unreliable market prices. In contrast, assets valued by the fair value principle have market price information that is readily available and accurate.

.According to the ________ principle, a company can purchase an asset for $1,000 and, despite an increase in value over time, can continue to report the asset for $1,000.

historical cost The historical cost principle dictates that a company needs to record assets at their original cost. This remains true not only at the time of purchase but also over the time the asset is held. Therefore, a company can purchase an asset for $1,000, and, despite an increase in value over time, a company can continue to report the asset for $1,000.

Which concept helps a company decide on a case-by-case basis which items or events should be included in their financial statements in order to comply with the full disclosure principle?

materiality Materiality is a company-specific aspect of relevance that helps a company decide if the information would influence the decisions of an investor or creditor based on the size of the item or event. Items or events that are material should be disclosed in order to comply with the full disclosure principle.

Within the past two weeks, Fanny's Flowers has completed each of the activities listed below. Of these activities, which should be recorded in the company's accounting records?

purchased a new walk-in cooler Each activity should be analyzed to determine its effects on the accounts and the accounting equation assets = liabilities + stockholders' equity. If accounts are affected, the activity should be recorded. Assuming a cash purchase, a new walk-in cooler's purchase decreases the asset account cash and increases the asset account equipment. Hiring and/or firing employees does not affect the accounts. Likewise, contract negotiations do not affect the accounts.