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Effect on Accounting Equation

Selected amounts at December 31, 2003 from the Hay and Barnabas Company's information system appear as follows:

Cash paid employees for salaries and wages
300,000

Cash collected from sales customers

1,850,000

Bonds payable

500,000

Cash

150,000

Common stock

60,000

Equipment

840,000

Prepaid insurance

30,000

Inventory

250,000

Prepaid rent

140,000

Retained earnings

130,000

Salaries and wages expense

328,000

Sales

2,000,000

You are to complete each of the following tasks.

Part A

There are five adjustments that need to be made before the financial statements can be prepared at year end. Show the effect of each of the following (a - e) on the accounting equation.

The equipment (purchased on January 1, 2003) has a useful life of 12 years with no salvage value (Straight-line method is used).
Interest accrued on the bonds payable is $20,000 as of December 31, 2003.
Unexpired insurance at December 31, 2003 is $7,000.
The rent payment of $140,000 covered the four months from December 1, 2003 through March 31, 2004.
Salaries and wages of $28,000 were earned but unpaid at December 31, 2003.
Part B

Indicate the proper balance sheet classification of each of the preceding 12 financial statement items on the December 31, 2003 balance sheet. If the account title would not appear on the balance sheet, indicate the financial statement on which it would be found.

Current assets
Property, plant and equipment
Current liabilities
Long-term liabilities
Stockholders' equity

Solution Preview

1.

Assets = Liabilities + Owners Equity
a. -70,000 -70,000
b. +20,0000 -20,000
c.-23,000 -23,000
d. -35,000 -35,000
+28,000 -28,000
Explanations -
a. The depreciation would reduce the equipment value ( asset reduced) and the expense would reduce the owners equity. The depreciation amount is 840,000/12=70,000 under ...

Solution Summary

The solution explains the effect on the accounting equation of the given transactions.

$2.19