Reference no: EM132613159

Exercise 1: Effect of accrued expenses on the accounting equation and financial statements

During Year 1, expense. Chung Corporation earned $8,000 of cash revenue and accrued $5,000 of salaries

Required
Record the events in general ledger accounts under an accounting equation before satisfying the requirements.) Based on this information alone:
a. Prepare the December 31, Year I, balance sheet.
b. Determine the amount of net income that Chung would report on the Year 1 income statement.
c. Determine the amount of net cash flow from operating activities that Chung would report on the Year 1 statement of cash flows.
d. Why are the answers to Requirements b and c different?

Exercise 2: Effect of accounts receivable and accounts payable transactions on financial statements

The following events apply to Lewis and Harper, a public accounting firm, for the Year 1 accounting period:

1. Performed $70,000 of services for clients on account.

2. Performed $40,000 of services for cash.

Exercise 3: Effects of recognizing accrued interest on financial statements

Ben Bradley started Bradley Company on January 1, Year 1. The company experienced the following
events during its first year of operation:
1. Earned $2,000 of cash revenue for performing services.
2. Borrowed $8,000 cash from the bank.
3. Adjusted the accounting records to recognize accrued interest expense on the bank note. The note, issued on August 1, Year 1, had a one-year term and a 6 percent annual interest rate.

Required
a. What is the amount of interest expense in Year 1?
b. What amount of cash was paid for interest in Year 1?
c. Use a horizontal financial statements model to show how each event affects the balance sheet, in¬come statement, and statement of cash flows. Indicate whether the event increases (I), decreases (0), or does not affect (NA) each element of the financial statements. Also, in the Statement of Cash Flows column, designate the cash flows as operating activities (OA), investing activities (IA), or financing activities (FA). The first transaction has been recorded as an example.

Exercise 4: Recognizing accrued interest expense

Leach Company borrowed $80,000 cash by issuing a note payable on June 1, Year 1. The note had an 8 percent annual rate of interest and a one-year term to maturity.

Required
a. What amount of interest expense will Leach recognize for the year ending December 31, Year 1?
b. Show how the recognition of interest on December 31, Year 1, affects the accounting equation.
c. What amount of cash will Leach pay for interest expense in Year I?
d. What is the amount of interest payable as of December 31, Year 1?
e. What amount of cash will Leach pay for interest expense in Year 2?

f. What amount of interest expense will Leach recognize in Year 2?

g. What is the amount of interest payable as of December 31, Year 2?