Chapter 1 and 2 practice exercise
Instructor: LaKeitha Givens
Exercise 1-2: Assume that Kennedy Company ... [Show More] acquires $1,600 cash from creditors and
$1,800 cash from investors.
a. Explain the primary differences between investors and creditors.
a) The primary difference between creditors and investors is a creditor you must pay
back the money borrowed and most of the time there is interest. An investor is
someone that is investing in the company and normally has stock from doing so.
If the company does not make it and dissolves creditors get paid first, and if there
is still money left, investors get it.
b. If Kennedy has a net loss of $1,600 cash and then liquidates, what amount of cash will
the creditors receive? What amount of cash will the investors receive?
b) The creditors will get $1,600, or all of their money, and the investors will get
c. If Kennedy has net income of $1,600 and then liquidates, what amount of cash will the
creditors receive? What amount of cash will the investors receive?
c) The creditors will get all of their money ($1,600), and the investors will get all of
the rest which is their original $1,800 + 1,600 = $3,400.
Exercise 1-4: Kenneth Chang recently started a business. During the first few days of
operation, Mr. Chang transferred $30,000 from his personal account into a business
account for a company he named Chang Enterprises. Chang Enterprises borrowed
$40,000 from First Bank. Mr. Chang’s father-in-law, Jim Harwood, invested $64,000 into
the business for which he received a 25 percent ownership interest. Chang Enterprises
acquired $13,000 cash from the issue of common stock. Classic Company paid an $8,000
cash dividend to the stockholders during 2013.
Answer: To determine the net income or loss Classic reported on its 2013 income
statement you have to take 53,400 – 13,000 + 8,000 which gives you 48,400.
Exercise 1-12: Marcum Company was started in 2012 when it issued a note to borrow
Write an accounting equation, and record the effects of the borrowing transaction under
the appropriate general ledger account headings.
Exercise 1-18: Davis Company was started on January 1, 2012. During the month of
January, Davis earned $4,600 of revenue and incurred $3,000 of expense. Davis closes its
books on December 31 of each year.
a) 4600 revenue – 3000 expenses = $1600
b) Retained earnings are a component of stockholders’ equity which is an element of
c) Nothing happens to the retained earnings account when the expenses are
recognized. This is a closing process and will be changed at closing of the books.
Exercise 2-1: Valmont, Inc. experienced the following events in 2012, in its first year of
1. Received $20,000 cash from the issue of common stock.
2. Performed services on account for $50,000.
3. Paid the utility expense of $12,500.
4. Collected $39,000 of the accounts receivable.
5. Recorded $9,000 of accrued salaries at the end of the year.
6. Paid a $5,000 cash dividend to the shareholders.
a. Record the events in general ledger accounts under an accounting equation. In the last
column of the table, provide appropriate account titles for the Retained Earnings
b. Prepare the income statement, statement of changes in stockholder's equity, balance
sheet, and statement of cash flows for the 2012 accounting period.
c. Why is the amount of net income different from the amount of net cash flow from
General Ledger Accounts
+ Stockholders’ Equity
For the Year Ended December 31, 2012
Statement of Changes in Stockholders’ Equity
For the Year Ended December 31, 2012
Beginning common stock
Plus: Common stock issued
Ending common stock
Beginning retained earnings
Plus: Net income
Ending retained earnings
Total stockholders’ equity
a. Write an accounting equation and record the effects of each accounting event under the
appropriate general ledger account headings.
b. Prepare an income statement and statement of cash flows for the 2012 accounting
c. Explain the difference between the amount of net income and amount of net cash flow
from operating activities.