Accounting - Solutions to Exercises

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solutions to exercises

|Ex. 2–1 |a. |Assets are economic resources owned by the business entity. | | | |1. |Among the assets of American Airlines we might expect to find investments, accounts receivable (say, from travel | | | | |agents), fuel (in storage), maintenance supplies, aircraft, and various types of equipment. The company also owns | | | | |land and buildings—as, for example, its corporate headquarters. | | | |2. |Among the assets of a professional sports team are investments (in stocks and bonds), notes receivable (often from | | | | |players), training equipment, supplies, and office furniture. (The balance sheet of a professional sports team | | | | |usually does not include land or buildings, as they generally do not own the stadiums in which they play.) | |Note to instructor: You may wish to expand this solution to include intangible assets, such as the team’s league franchise, and player | |contracts, the right to receive the future services of a given player. (Player contracts only appear as an asset if they have a cost—that is, | |if they were purchased from other teams. Advance payments to players usually are shown as prepaid expenses.) We address intangible assets in | |Chapter 9, but the concept is consistent with the discussion of assets in Chapter 2. | | |b. |Liabilities are existing debts and other obligations of the entity. | | | |1. |Among the liabilities of American Airlines, we might expect to find accounts payable, notes payable (or mortgages or | | | | |bonds payable) stemming from purchases of aircraft, salaries payable, interest payable, rent payable (for space in | | | | |airports), and income taxes payable. | | | |2. |The balance sheet of a professional sports team might include accounts payable, rent payable (for the stadium), | | | | |salaries payable, interest payable, and income taxes payable. | |Note to instructor: In a classroom discussion, you might want to point out that both an airline and a professional sports team may have | |liabilities for unearned revenue. The airline sells many tickets in advance, thus incurring an obligation to render services (flights) or to | |refund the customers’ money. A sports team has a similar obligation with respect to advance sales of season tickets. We discuss unearned | |revenue in Chapter 4, but the concept can be introduced earlier at the instructor’s discretion. |

|Ex. 2–2 |DIXIE TRANSPORTATION SERVICE | | |Balance Sheet | | |February 28, 2005 | | |Assets | |Liabilities & Owners’ Equity | | |Cash | $ 69,000 | |Liabilities: | | | |Accounts receivable | 70,000 | | |Notes payable | $ 288,000 | | |Supplies | 14,000...
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