For this exercise, we start with the Year 1 totals from the example in Commentary 3 and expand our example into Year 2.

INSTRUCTIONS TO CANDIDATES

ANSWER ALL QUESTIONS

"Exercise 3:  Understanding the Impact of Transactions on the Financial Statements

For this exercise, we start with the Year 1 totals from the example in Commentary 3 and expand our example into Year 2.

 (Reminder of the transactions from the Week 1 Commentary Three document)

Event 1: The first transaction for January, Acme Company was started when it acquired $9,000 cash by issuing common stock. The initial owners' contribution would appear as follows:

Event 2: In the next transaction, there is a receipt of $1,000 cash in exchange for a short-term line of credit.  The effects of this transaction would appear as follows:

Event 3: Acme purchased land for 8,000:

Event 4: Acme provided services to customers and received $4,000.

Event 5: In the next transaction, Acme paid operating expenses of $2,900:

Event 6: The company used the land as collateral for a 5,000 10-year loan with the bank.  Payments on the loan will start in year 4.   

Event 7: In our final example transaction, Acme paid $500 in dividends to its stockholders

Year 1 Assets = Liab. + Equity Rev. − Exp. = Net Inc.

Events Cash + Land = Liab. + Contributed + Ret. Earn.

Capital

Beg. bal. 0 + 0 = 0 + 0 + 0 – =

1 9,000 + = + 9,000 + – =

2 1,000 + = 1,000 + + – =

3 -8,000 + 8,000 = + + – =

4 4,000 + = + + 4,000 4,000 – = 4,000

5 -2,900 + = + + -2,900 – 2,900 = -2,900

6 5,000 5,000 =

7 -500 + = + + -500 – =

Totals 7,600 + 8,000 = 6,000 + 9,000 + 600 4,000 – 2,900 = 1,100

Part 1:  Plot the Year 2 transactions into the financial statements effects model:

Transactions for the Year 2:

Event 1: Acme borrowed an additional $10,000 on their existing 10 year bank loan with the same terms.

Event 2: Acme paid off its current line of credit and immediate took out a new $3,000 Line of credit.

Event 3: Acme provided services to customers and received $6,700.

Event 4: Acme paid operating expenses of $4,300.

Event 5: Acme paid $900 total for interest that had accumulated on their long-term bank loan & line of credit.

Event 6: Acme paid $700 in dividends to its stockholders.

 

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