BALANCE SHEET EQUATION
ASSETS = LIABILITIES + STOCKHOLDERS’ EQUITY
Hector Lopez opens his own bicycle shop, Biwheels Company on January 2, 2015. Show how the following transactions affect
the balance sheet:
1.
2.
3.
4.
5.
The first transaction was the investment by the owner of $400,000 in the business bank account.
Borrowed $100,000 from a bank by signing a promissory note.
Acquired store equipment for $15,000 cash.
Acquired bicycles for $120,000 cash from a manufacturer.
Bought bicycle parts for $10,000 from a manufacturer on Jan 5. The manufacturer requires $4,000 by Jan 10, balance in
30 days.
6. Bought more bicycles from another manufacturer for $30,000. He requires a cash down payment of $10,000 and
Biwheels must pay the remaining balance in 60 days.
7. Biwheels sells a store showcase (part of store equipment) to a business neighbor for cash, after Lopez decides he has no
use for it. Its selling price $1,000 is its cost.
8. Biwheels returns some inventory (which it had acquired on January 6 for $800) to the manufacturer for full credit
9. Paid $4,000 to the manufacturer described in transaction 5.
10. (a) Biwheels sales for the entire month of January amount to $160,000 on open account. (b)The cost of the inventory
sold (as given in the above transaction) is $100,000.
11.The company collects $5,000 of its accounts receivable in January.
12.Biwheels made a payment of $6,000 for its store rent covering Jan, Feb, Mar.
13.Recognize expiry of rental services for the month of January.
14. Recognize depreciation expenses for January $100.
15.Lopez remodels his home for $35,000 paying by cheque from his personal bank account.
The following transactions occurred during February:
16.Collections of accounts receivable $130,000.
17.Payments of accounts payable $15,000.
18.Acquisitions of inventory on open account, $80,000 and for cash $10,000.
19.Sales of merchandise for $176,000 of which $125,000 was on open account and $51,000 was for cash. Biwheels carried
the sold merchandise in inventory at a cost of 110,000.
20.Recognition of rent expense for February.
21.Recognition of depreciation expense for February.
22.Borrowing of $10,000 from a bank, which Biwheels used to buy store equipment on February 28.
Balance sheet of Biwheels company on Feb 28, 20X2 (before declaring dividend)
Statement of retained earnings for the month ended Feb 28, 20X2:
Key terms:
Stockholders' equity is owners' equity of a corporation, the excess of assets over liabilities. It may consist of paid-in capital,
security premium and retained earnings.
Paid-in capital is the total capital investment in a corporation by its owners. It includes capital invested at the time of inception
or subsequently too.
Security premium is excess of issue price over par value
Retained earnings is the amount of profits not distributed by the corporation as dividends to be used for future investment in the
business.
Par value is the nominal value or face value of a share that is printed on the share certificate.
Annual report is a document prepared by management and distributed to current and potential investors to inform them about
the company's past performance and future prospects. It consists of financial statements, a letter from the corporate
management, a discussion and analysis by management of recent economic events, footnotes that explain many elements of the
financial statements in more detail, the report of the independent auditors and other corporate information.
Biwheels Company had issued 10,000 shares each having a face value of $10 to the shareholders for their investment of
$400,000.
What is the par value of his share?
What is the total paid in capital in excess of par value (also called additional paid in capital)?
What is the issue price of the share?
If the company declares 20% dividend, how much would a shareholder who has 1,000 shares receive?
What total amount has been paid out as dividends to shareholders?
what is the return on investment on each share?