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1.CHAPTER2BASICACCOUNTINGCONCEPTS:THEBALANCESHEETChangesfromEleventhEditionTheChapterhasbeenupdated.
ApproachItishelpfulifstudentsunderstandfromtheoutsetthatfinancialaccountingisbeingdiscussedintwocycles.Inthefirstcycle,Chapters2
through4,wegothroughtheentireaccountingprocessquickly,toestablishanoverview.Wethengothroughtheprocessasecondtime,inChapters5
through14,andgointothesametopicsinmuchgreaterdepth.Thus,studentsshouldnotbeconcernediftheydonotunderstandallthefinepointsin
Chapters24,forthesewillbediscussedagaininsubsequentchapters.Neithershouldtheybepermittedtobelaborquestionsthatinvolvefine
distinctionstheobjectivehereistogetthebroad,overallpicture.Ourexperienceinvariablyhasbeenthatbeginningstudentsfindtheintroductionto
accountingquiteconfusing.Althoughtheymaybeabletodotheworkassignedeachday,theyareunabletovisualizethewholestructureofaccounts.
Thisleadstoafeelingoffrustrationthatmaylastseveralweeks.Then,allofasudden,thepiecesfallintoplace.Fromthattimeforwardtheyhaveno
specialtroubleandcanfiteachnewconceptintoitsproperplacewithoutdifficulty.Usually,the&#x201Cgreatawakening&#x201Dcomesby
Chapter6,butitmaynotcomeuntilevenlater.Wedonotknowofanywayofeliminatingthisinitialfrustration.Wegothroughthetextbriefly,mostly
toencouragequestionsthatwillhelpclearupobscurepoints.Weusuallyexplainthatwedonotexpectthatallmattersdiscussedinthischapterwill
immediatelybeclear.Forthisreason,studentsmaywishtoreferbacktothisandtootherchaptersinPart1,astheneedarises.Manyinstructorsliketo
emphasizethenotionofbalancesheetchanges,andthiscanbedonebyaddingmoretransactionstoMusicMart.Transactionscanbecalledoutasfast
astheinstructororstudentsthinkofthem,andstudentsshouldseethatitispossibletorecordanytransactionwhatsoeverintermsofitseffectonthe
balancesheet.Thislaysafoundationthatisoftenhelpfulwhencomplexormechanicalmattersarediscussedlateron.Inthisandthenexttwoorthree
chapters,afairlyuniformterminologyhasbeenusedinbothtextandcases.Thisisartificialsincepracticeincompaniesvarieswidely,butitservesto
reducesomeoftheinitialconfusiononthepartofthestudent.BeginningwithChapter6,variationsinterminologyappearwithincreasingfrequencyin
thecases,butthetextretainsterminologythatseemstobefavoredbytheFASB,sofaraswecangleanfromitspronouncementsandthoseof
predecessorbodies.Also,inthetext,wehavemadeanefforttousefinancialstatementformatsthatreflectFASBpreferences(although,unless
specificallynoted,thefinancialstatementscanbeconstructedequallywellwithotherformatsandformatshouldnotbeoverlyemphasized.)Some
readersofthismaterialhavesaidthatittendstobelittleaccountingandaccountants.Wecertainlydonotintendtogivesuchimpression.Itistruethat
thetextdoesattempttosetforththelimitationsonaccountinginformation,anditdoesnotimplythataccountingisanexactscience.Thisisnotdoneto
belittlethesubjectoritspractitioners,however.Studentswhoarepermittedtogettheimpressionthataccountingisexact,orthatitdoesgivean
accuratepictureofabusiness,areinforarudeawakeningwhentheygetoutintoactualbusinesssituations.Wethink,therefore,thatitismost
unfortunateifsuchan1
2.Accounting:TextandCases12e&#x2013Instructor&#x2019sManualAnthony/Hawkins/Merchantimpressionispermittedtodevelop.Several
CPAsandcontrollerswhohaveparticipatedinexecutivedevelopmentprogramshavesaidthatoneofthechiefvaluesofourapproachisthatitdoes
showthelimitationsaswellastheusefulnessofaccounting.Theysaythatoneoftheirprincipalpracticalproblemsisthatsomeuninformedpeople
expecttoomuchofaccountingandaredisappointedordisgruntledwhentheaccountantcannotfurnishthemwithpreciseorcompleteinformation.Itis
possiblethatmisconceptionsofthesepeoplearegeneratedfromexposuretoacourseinwhichthevalueofaccountingwasoveremphasizedandits
limitationsomitted.Theforegoingdoesnotmeanthatoneshouldeverapologizeforthelimitationsofaccounting.Fromtimetotimeitshouldbe
pointedoutthattheselimitationsareinherentinthejobofattemptingtoreducethecomplexitiesofanactualbusinesssituationtoafewmonetary
figures.Incidentally,weunderstandthatphysicsteachersgotthemselvesintoconsiderabletroublesomeyearsagobyoveremphasizingtheaccuracy
andcompletenessofourknowledgeaboutphysicalphenomena.Theircurrentpractice,weunderstand,istoexplainwhatisnotknown.CasesCases21
and22providepracticeworkforbeginningstudents.Thesetwoaremechanicalproblemstobeworkedasthetextmaterialisstudied.LonePineCafe
(A)requiresthestudenttothinkabouttheapplicationofbasicconcepts.AdditionalCasesSomeinstructorsliketouseoneoftheChapter1caseswith
thischapter.Anyoftheconceptsdescribedcanbedealtwithinthecontextofthosecases.ProblemSolutionsProblem21Owners&#x2019equity
equals$55,000.Liabilitiesequal$25,000.Noncurrentassetsequal$70,000.Owners&#x2019equityis$73,000.Currentassets$33,000+Noncurrent
assets$55,000=Totalassets$88,000.Currentliabilitiesare$15,000($33,000/2.2)TotalliabilitiesandOwners&#x2019Equity=$88,000.
Owners&#x2019equity$73,000=TotalliabilitiesandOwners&#x2019equity$88,000Currentliabilities$15,000.Currentratiois1.4($35,000/
$25,000)Currentassets$35,000=Totalassets$95,000Noncurrentassets$60,000.Currentliabilities$25,000=Totalassets$95,000
Owner&#x2019sequity$70,000.Thisproblemtestsstudents&#x2019understandingofbalancesheetrelationshipsusingthebasicaccounting
equationandfinancialratio.2
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3.&#xA92007McGrawHill/IrwinChapter2Problem22J.L.GREGORYCOMPANYBALANCESHEET,JUNE30,.AssetsLiabilities
Cash...................................................................................................................................................................................$89,000Accounts
payable...................................................................$241,000Marketable
securities..........................................................................................................................................................379,000Taxes
payable.........................................................................125,000Accounts
receivable...........................................................................................................................................................505,000Accrued
expenses...................................................................107,000Inventories513,000Currentliabilities....................................................................473,000
Currentassets................................................................................................................................................................1,486,000Notes
payable.........................................................................200,000
Land...................................................................................................................................................................................230,000Bonds
payable........................................................................700,000
Buildings............................................................................................................................................................................1,120,000Total
liabilities.......................................................................1,373,000Accumulated
depreciation..................................................................................................................................................(538,000)
Equipment..........................................................................................................................................................................761,000Owners&#x2019Equity
Accumulateddepreciation..................................................................................................................................................(386,000)Capital
stock...........................................................................1,000,000
Investments........................................................................................................................................................................320,000Retained
earnings...................................................................620,000Totalassets$2,993,000Totalliabilitiesandowners&#x2019
equity............................................................$2,993,000Somestudentsmaywanttotestthenotespayableasacurrentliability.Notespayableare
usuallydebtinstrumentslongerthanoneyear,butintheabsenceofanydetailslistingthemasacurrentliabilityisacceptable.Problem23Cash+
$100,000Capitalstock+$100,000.Bondspayable$25,000Capitalstock+$25,000.Retainedearnings(Depreciationexpense)$8,500.
Accumulateddepreciationonplantandequipment+$8,500.Cash$15,900Inventory+$15,900.Inventory+$9,400Accountspayable+$9,400.
Inventory$4,500Accountsreceivable+$7,200Retainedearnings+$2,700Cash+$3,500Accountsreceivable$3,500.Dividendspayable+
$3,000Retainedearnings$3,000.Cash$3,000Dividendspayable$3,000.Noeffect.Somestudentsmaysimplyshowtheneteffectonassets,
liabilities,andowners&#x2019equitywithoutreferencetothespecificaccounts.Whilethisisacceptable,studentsshouldbepushedtoidentifyboth
theneteffectandtheparticularaccountsinvolved.Thiswillhelpstudentstobecomefamiliar3
4.Accounting:TextandCases12e&#x2013Instructor&#x2019sManualAnthony/Hawkins/Merchantwiththebalancesheetaccountnames.
Problem24CARSONLEGATTPARTNERSHIPBALANCESHEETASOFJUNE1,.AssetsCapitalAccounts
Cash................................................................................................................................................................................................$50,000
Carson.................................................................................................$50,000
Inventory.........................................................................................................................................................................................50,000
Legatt..................................................................................................50,000Total
assets.................................................................................................................................................................................$100,000Total
capital....................................................................................$100,000CARSONLEGATTPARTNERSHIPBALANCESHEETASOFJUNE30,.
AssetsLiabilitiesCash................................................................................................................................................................................................$22,100
Bankloan............................................................................................$50,000
Inventory.........................................................................................................................................................................................58,500Capital
Carson..................................................................................51,550
Land................................................................................................................................................................................................25,000Capital
Legatt...................................................................................54,050
Building..........................................................................................................................................................................................50,000________$155,600
$155,600CARSONLEGATTPARTNERSHIPACCOUNTS,JUNE30,.CarsonCapitalJune
1........................................................................................................................$50,000
Additions..................................................................................................................................7,750
Withdrawals.............................................................................................................................(6,200)CapitalJune
30......................................................................................................................$51,550LegattCapitalJune
1........................................................................................................................$50,000
Additions..................................................................................................................................7,750
Withdrawals.............................................................................................................................(3,700)CapitalJune
30......................................................................................................................$54,050Problem25Jan.4:Retainedearnings(Sales)+$12,000Cash+
$12,000Inventory$7,000Retainedearnings(Costofgoodssold)$7,000Jan.6:Noeffect.Jan.8:Inventory+$7,000AccountsPayable+$7,000
Jan.11:Inventory$1,500Cash+$2,500Retainedearnings(Sales)+$2,500Retainedearnings(Costofgoodssold)$1,500Jan.16:Inventory
$2,000Retainedearnings(Costofgoodssold)$2,000Accountsreceivable+$3,400Retainedearnings(Sales)+$3,400Jan.26:Cash$4,200
Retainedearnings(Wages)$4,200Jan.29:Cash$20,000Land+$20,000Jan.31:Cash$2,800Prepaidinsurance+$2,8004
5.&#xA92007McGrawHill/IrwinChapter2MARVINCOMPANYBALANCESHEETASOFJANUARY31,.AssetsLiabilities
Cash...................................................................................................................................................................................$12,500Accounts
payable.............................................................$7,000Accounts
receivable...........................................................................................................................................................3,400Totalcurrent
liabilities.....................................................$7,000
Inventory............................................................................................................................................................................46,500Current
assets.....................................................................................................................................................................62,400Notes
payable..................................................................20,000
Land...................................................................................................................................................................................20,000Total
liabilities.................................................................27,000Prepaid
insurance...............................................................................................................................................................2,800Owner&#x2019sEquity
Capital.............................................................................55,000_______Retainedearnings............................................................3,200Total
assets..................................................................................................................................................................$85,200Totalliabilitiesand
owners&#x2019equity...................................................$85,200Problem26BRIANCOMPANYCURRENTASSETSANDLIABILITIESASOF
DECEMBER31,.CurrentAssetsCurrentLiabilities
Cash...................................................................................................................................................................................$2,000Accounts
payable.............................................................$5,000Marketable
securities..........................................................................................................................................................3,500Wages
payable.................................................................1,500Accounts
receivable...........................................................................................................................................................7,000Bondsdue&#x2013current
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portion.............................................2,000Current
assets.....................................................................................................................................................................$12,500Current
liabilities.............................................................$8,500Currentratio
=....................................................................................................................................................................$12,500&#xF7$8,500=1.47Thecurrentratio
isanindicationofanentity&#x2019sabilitytomeetitscurrentobligations.CasesCase21:MaynardCompany(A)Note:Thiscaseisunchanged
fromEleventhEdition.AnswerstoQuestionsQuestion1TwosuggestedbalancesheetsasrequiredbyQuestion1areshownbelow.Question2This
questionprovidesanopportunityforstudentstostepbackandthinkabouttheinformationinafinancialstatement,ratherthanfocusingonthedetailsof
constructingafinancialstatement.Studentscanbegintoanalyzeandusetheinformationthatthefinancialstatementscontain.Studentscanbeaskedto
identifywhichaccountshavechangedsignificantlybetweenthebeginningandendingbalancesheets.Thesewouldincludeaccountsreceivable,note
receivable,equipment,accountspayable,taxespayable,andthebanknotepayable,inadditiontothecashaccount.TheonlyratioexplainedinChapter
2ofthetextisthecurrentratio,sostudentsshouldbeencouragedtoascertainwhathashappenedtothecurrentratiobetweenJune1andJune30.Cash
hasincreasedlargelyduetoincreasedaccountsandnotespayable,aswellascashgeneratedbyoperations.Cashappearstohavebeenincreasedbythe
collectionof5
6.Accounting:TextandCases12e&#x2013Instructor&#x2019sManualAnthony/Hawkins/Merchantthenotereceivable,butasexplainedin
Question3below,thiswasoffsetbythedeclarationofanidenticaldividend,sothattheneteffectoncashofthesetwotransactionswaszero.
Equipmentpurchaseswereamajoruseofcash.Asaresultoftheseevents,theJune30currentratiohasfallento2.15fromitsJune1levelof4.35.
Eventhoughtheleverageratioshavenotyetbeenintroducedinthetext,theinstructormightwanttoencouragestudentstoobservethattheproportion
ofliabilitiesontherighthandsideofthebalancesheethasincreased,withacomplementarydecreaseintheproportionofequities.Thecapitalization
ratioTotalLiabilities/TotalLiabilities+Equitieshasincreasedfrom4%onJune1to9%onJune30.Whiletheseratiosarestillverylow,studentscan
bemadeawareoftheimportanceofidentifyingtrendsearly.Question3RetainedEarningshasnotincreasedbytheamountofnetincomeforthe
month,$19,635,sinceDianeMaynardasthesoleshareholderdeclaredadividendof$11,700,whichshethenusedtocancelherloanof$11,700from
thecompany.Hence,RetainedEarningsincreasedby$7,935duringthemonthofJune.Question4Thisquestionisintendedtoemphasizeearlyinthe
coursethatshareholder&#x2019sequitydoesnotnecessarilyreflectwhattheentityisworth.Timepermitting,theinstructorcanhavestudentsestimate
thecashproceedsofpiecemealsaleoftheassetsbyaliquidationcompany,which,netofliabilities,willcertainlybelessthan$619,446.Thenthevalue
ofthecompanyasagoingconcerncanbediscussedifJune&#x2019s$19,635netincomeistypical,thefirmwouldbeworthmorethan$619,446asa
goingconcern.CapitalizingJune&#x2019snetincomeonanannualbasis($19,635x12)at10timesearninggivesthecompanyavalueinexcessof
$2million.Thecompany&#x2019sreturnonequityisveryhigh.Onanannualbasisitmaybeashighas32%.Thisfigureis12months&#x2019
income($19,635x12)dividedbyprojectedyearendequity($619,446+$19,635x6).Thisisnotatypicalbusiness.Itisbetter.MAYNARD
COMPANYBALANCESHEETSASOFJUNE1ANDJUNE30AssetsCurrentAssets:AsofJuneIAsofJune30:
Cash................................................................................................................................................................................................$34,983$66,660
Accountsreceivable........................................................................................................................................................................21,79826,505Note
receivable...............................................................................................................................................................................11,7000Merchandise
inventory....................................................................................................................................................................29,83526,520Supplieson
hand.............................................................................................................................................................................5,5596,630Prepaid
insurance............................................................................................................................................................................3,1502,826Totalcurrentassets
$107,025$129,141Noncurrentassets:
Land................................................................................................................................................................................................89,70089,700
Building..........................................................................................................................................................................................585,000585,000Less:
Accumulateddepreciation.................................................................................................................................................(156,000)429,000(157,950)
427,050Equipment.......................................................................................................................................................................................13,26036,660
Less:Accumulateddepreciation.................................................................................................................................................(5,304)7,956(5,928)
30,732Othernoncurrentassets...................................................................................................................................................................4,8575,265Total
noncurrentassets...............................................................................................................................................................531,513552,747Total
assets...................................................................................................................................................................$638,538$681,8886
7.&#xA92007McGrawHill/IrwinChapter2LiabilitiesandShareholders&#x2019EquityCurrentliabilities:Accounts
payable...............................................................................................................................................................$8,517$21,315Banknotes
payable............................................................................................................................................................8,38529,250Taxes
payable.....................................................................................................................................................................5,7007,224Accruedwages
payable......................................................................................................................................................1,9742,202Totalcurrent
liabilities..................................................................................................................................................$24,576$59,991Othernoncurrent
liabilities.................................................................................................................................................2,4512,451Total
liabilities..............................................................................................................................................................27,02762,442Shareholders&#x2019
Equity:Capitalstock.......................................................................................................................................................................390,000390,000Retained
earnings...............................................................................................................................................................221,511229,446Total
shareholder&#x2019sequity.............................................................................................................................................611,511619,446Totalliabilities
andshareholders&#x2019equity..................................................................................................................$638,538$681,888Case22:MusicMart,Inc.
Note:ThiscaseisunchangedfromtheEleventhEdition.ApproachThisisavaluabletypeofproblem.Thestudentisineffectanalyzing,journalizing,
andpostingtransactionswithoutknowingthetechnicalities,andhencewithoutbeingencumberedbythem.Someinstructorsprefertomakeupsimilar
transactionsandgivetheminclass,ratherthan,orinadditionto,usingthesetgiveninthisproblem.Ifstudentscanhandletheseeventscomfortably,
theyreallyunderstandtheessentialsofthebalancesheetandofthebalancesheetequation.Theyareurgedtocrossoutoldbalances,ratherthanerasing
them,bothbecausethisaidsintracingerrors,andbecausethisisanalogoustowhatisdoneintheledger.Preservationoftheunderlyingequationin
eachtransactionandthebalancesheetshouldbeemphasizedthroughout.Fortheaccountsalreadyestablished(e.g.,NotesPayable),studentsshoulduse
theidenticalwording.Thishelpsavoidsloppyhabitswhentheystarttojournalizelateron.Fornewaccounts(e.g.,MortgagePayable),theyshouldbe
givenlatitudeinselectingatitle,buthavingselectedone,theymuststicktoit.7
8.Accounting:TextandCases12e&#x2013Instructor&#x2019sManualAnthony/Hawkins/MerchantMUSICMART,INC.BALANCESHEETAS
OF_____________________AssetsLiabilitiesandOwners&#x2019EquityCurrentassets:Currentliabilities:
Cash................................................................................................................................................................................................$25,636Notes
payable.........................................................................................$6,500Accounts
receivable........................................................................................................................................................................2,620Accounts
payable...................................................................................5,000
Inventory.........................................................................................................................................................................................4,700Totalcurrent
liabilities.......................................................................11,500Prepaid
insurance............................................................................................................................................................................1,224Totalcurrent
assets.....................................................................................................................................................................34,180Otherliabilities:Mortgage
payable...................................................................................9,000Totalliabilities...........................................................................20,500
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Owners&#x2019equityProperty:Paidincapital.........................................................................................25,000
Land................................................................................................................................................................................................12,000Retained
earnings...................................................................................680Total
assets.................................................................................................................................................................................$46,180Totalliabilitiesand
owners&#x2019equity$46,180AnswerstoQuestions1.IncreaseInventory,$5,000increaseAccountsPayable,$5,0002.DecreaseInventory,
$1,500increaseCash,$2,300increaseRetainedEarnings,$8003.DecreaseInventory,$1,700increaseAccountsReceivable,$2,620increase
RetainedEarnings,$920(NotethatRetainedEarningsincreaseswhetherornottheproceedsofthesalearereceivedincash.)4.IncreasePrepaid
Insurance(orsimilar),$1,224decreaseCash,$1,224(Notethatcurrentpracticeistotreatthisasacurrentasseteventhoughthepolicyisineffectthree
yearsthebasisismateriality.)5.IncreaseLand,$24,000decreaseCash,$6,000increaseMortgagepayable(noncurrent),$18,000(Inviewofwhat
happenssubsequently,itcanbearguedthatthelandisacurrentasset,orthat$12,000ofitis.ItdependsonwhetherSmithplanstoretainortosellit.
Thispointshouldbebroughtout,toavoidthetendencytoclassifylandasafixedassetwithoutthinking.)6.IncreaseCash,$3,000decreaseMortgage
Payable,$9,000decreaseLand,$12,000Notethedecreaseintheliabilityeventhoughitwasnot&#x201Cpaidoff&#x201Dincash.)7.Noentry.
Goodwillisrecognizedonlywhenitispaidfor.8.DecreaseRetainedEarnings,$1,000decreaseCash,$1,000.9.DecreaseRetainedEarnings,$750
decreaseInventory,$750.(Notethebasicsimilaritybetween#8and#9theequityofSmithinthebusinessdecreaseswheneverhe,asanindividual,
takesoutassetsofthebusiness.Studentscanofcoursehandlethiswithadrawingaccountiftheywishtogetfancy.)8
9.&#xA92007McGrawHill/IrwinChapter210.Noentry,inaccordancewiththebasicprincipleofvalue.Ithinkstudentswhoargueforappreciation
areonweakground.Theyhavenosupportfromthetext.This,togetherwith#6maybeusedtocontrastaccountingwithwhatsomewouldsayisthe
&#x201Ccommonsense&#x201Dor&#x201Clogical&#x201Dwaytorecordtheevents,althoughitistoomuchtoexpectthattheargumentsin
favorofthecostbasisofvaluationwillbefullycomprehendedatthispoint.11.DecreaseNotesPayable,$6,000decreaseCash,$6,000.12.Noentry.
Thisisnotatransactionofthecorporation,butratheratransactionbetweentwooutsideparties.Notealsothatthebookvalueoftheequityisnot
changed,eventhoughthereisclearevidencethatbookvalueislessthanmarketvalueor&#x201Creal&#x201Dvalue.13.DecreaseInventory,$850
increaseCash,$1,310increaseRetainedEarnings,$460.Thefinalbalancesheetisshownonthepreviouspage,classifiedinperhapsmoredetailthan
iswarrantedforthissimplesetofitems.Case23:LonePineCafe(A)Note:ThiscaseanditssequelinChapter3areunchangedfromtheEleventh
Edition.LONEPINECAF&#xC9BALANCESHEETASOFNOVEMBER2,2005AssetsCurrentassets:
Cash..........................................................................................................................................................$10,172
Inventory..................................................................................................................................................2,800Prepaid
expense........................................................................................................................................1,428Tota1current
assets.............................................................................................................................$14,440Cafe
equipment.........................................................................................................................................54,600Total
assets..........................................................................................................................................$69,000LiabilitiesandOwners&#x2019EquityNote
payable.............................................................................................................................................$21,000Owners&#x2019
equity:........................................................................................................................................Mrs.Landers$16,000Mr.Antoine16,000Mrs.Antoine
16,00048,000Totalliabilitiesandowners&#x2019equity......................................................................................................$69,0009
10.Accounting:TextandCases12e&#x2013Instructor&#x2019sManualAnthony/Hawkins/MerchantApproachLONEPINECAF&#xC9
BALANCESHEETASOFMARCH30,2006AssetsCurrentassets:
Cash........................................................................................................................................................................$1,341Accounts
receivable...............................................................................................................................................870
Inventory................................................................................................................................................................2,430Prepaid
expense......................................................................................................................................................833Totalcurrent
assets............................................................................................................................................$5,474Noncurrentassets:Cafe
equipment......................................................................................................................................................54,600Less:Accumulated
depreciation.............................................................................................................................(2,445)52,155Total
assets........................................................................................................................................................$57,629LiabilitiesandOwners&#x2019Equity
Currentliabilities:Accountspayable...................................................................................................................................................$1,583Otherliabilities:
Notepayable...........................................................................................................................................................18,900Total
liabilities...................................................................................................................................................20,483Owners&#x2019equity:Mrs.
Landers..........................................................................................................................................................$12,382Mr.
Antoine............................................................................................................................................................12,382Mrs.
Antoine..........................................................................................................................................................12,38237,146Totalliabilitiesand
owners&#x2019equity....................................................................................................................$57,62910
11.&#xA92007McGrawHill/IrwinChapter2Thiscasecanbehandledineitheroftwodistinctlydifferentways:1)Itcanbeplayedstraightthatis,
studentscanberequiredtogivetheanswerstoquestions,andtheycanbediscussed.2)ThebalancesheetforNovember2canbedeveloped,andthen
thesecondbalancesheetcanbearrivedatbychangingtheoriginalbalancesheetforeachtransaction.Whenthelatterapproachisused,thebeginning
balancesheetisputontheboard(oronaVugraph)leavingenoughroombetweenitemssothattheadditionalaccountscanbeaddedasneeded.Then
eachfactdescribedinthecaseisdiscussedinorder,intermsofitseffectonthebalancesheet.Theappropriatefiguresontheoriginalbalancesheetare
erasedandnewfiguresareputin.(Or,insteadoferasingthefiguresforeachtransaction,increasesanddecreasescanbeshownoppositetheproper
item,thuslayingthegroundworkfortheideaoftheaccount.)AseparateitemshouldbesetupforRetainedEarnings,inwhichallprofitandlossitems
areentered.Thebalanceinthisaccountissplitamongthethreepartnersasthefinalstepintheprocess.Thisisaloteasierthanattemptingtospliteach
revenueorexpenseitemamongthethreepartnersasitisrecordedinitially.Thesecondapproachismuchmoredifficultthanthefirst,butithasthe
advantageofemphasizingtheeffectofindividualtransactionsonthebalancesheet.Itisparticularlydifficulttoseethatthedecreaseof$8,831thatis
necessarytobringCashdowntoitsknownbalanceof$1,341isaccompaniedbya$6,731decreaseinRetainedEarnings.Thisisasubtlepoint.Someof
thepointsthatarebroughtoutbythecase,andwhicheithercanbesummedupexplicitlybytheinstructororleftforthestudentstoseeforthemselves,
arethefollowing:Evenatthebeginningofourstudyofaccounting,thestudentcanprepareabalancesheet.Thedualaspectconcept.Therearea
numberofplacesinwhichdifferentwordscanbeusedtodescribethesamebasicfact.(Ithinkitisunwisetorequireorevensuggestthegenerally
approvedlanguageforanyitem.Anytermthatthestudentwantstoproposethatisanadequatedescriptionoftheitemshould,Ithink,beacceptedand
givenasmuchpraiseasamorecustomaryterm.Forexample,ifastudentwantstosay&#x201Cowedtovendors&#x201Dinsteadof
&#x201Caccountspayable,&#x201DIwouldn&#x2019tquarrelwiththatatthispoint.)Thereisalsoroomfordifferencesininterpretationofthe
facts.Evenexperiencedaccountantswoulddisagreeonhowsomeoftheitemsshouldbehandled.Thesearementionedbelow.Thebusinesshas
incurredalargeloss,butthereisnowayfromtheinformationwehaveoffindingoutwhythislosscameabout,andthereforenowayofsuggestingany
correctiveaction.Thisleadsintotheusefulnessofanincomestatement,whichisthesubjectofthenextchapter.Itiseasytogetintoadiscussionofthe
businessentityidea(e.g.,howaboutaccountingforthevalueoftheboardandroomofthepartners?),butIdoubtthatitisdesirabletotakemuchtime
forthisatthisstage.InstructorsmayfinditinterestingtoreadtheactualcasefromwhichLonePineCafewasconstructed.ThenameisDuncanv.
Bartleandthereferenceis216P2d1005.Itshouldbenoted,however,thattheactualcaseisnotidenticalwithLonePineCafesinceseveralofthefacts
havebeenomittedforpurposesofsimplification,andothershavebeenchangedinordertomakecertainteachingpoints.Therefore,onecannotgoby
theactualdecisionindetermininga&#x201Crightanswer&#x201Dtothecase.CommentsonQuestionsThefollowingnotesapplytothebalance
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AccountingTextandCases12Ed.Chapter2

sheetasofMarch30,2006:Thenetlossfortheperiodwas$10,854.Thiswasdividedonethirdtoeachofthepartners.11
12.Accounting:TextandCases12e&#x2013Instructor&#x2019sManualAnthony/Hawkins/MerchantThe$1,428paidforlocaloperatinglicenses
issetupasaprepaidexpensewith5/12ofitsoriginalcostbeingamortizedtothepartnership.Duetothequestionabilityofthepartnershipbeingableto
securearefundontheunusedportionfromthelocalmunicipality,andtheimmaterialityofthefee,somestudentsmayarguethatthetotalcostshould
betreatedasanexpense.Mr.Antoine&#x2019sclothesarenotanassettothebusinessentity,andthereforearenotincludedonthebalancesheet.It
mightbeargued,however,thattheseclothesincludedhiscook&#x2019suniforms,whichcouldbeacafeassetbutthereisnowayfromthe
informationgiventoassignavaluetosuchuniforms,eveniftheydidexist.Accountingforthecashregisterwillbetroublesometosomestudents,since
itanditscontentshavebeenremovedfromthecaf&#xE9premises.Regardlessofwheretheseitemsareandthattheywereimproperlyremoved,they
neverthelessarestillassetsoftheentity.ThebalancesheetasofMarch30showninthemanualismoredetailedinformatthanthesituationrequires.
Question3raisestheissueofbalancesheetvaluesversusrealvalues.Ifthebusinessisnotliquidated,Mrs.Antoinemayhavenochoicebuttogivethe
othertwopartnerstheamountshownastheirequity,sinceotherwisetheymightforceliquidation,whichMrs.Antoinedoesnotwant.Thisisagood
timetomakethepointthatowners&#x2019equity,whichmanypeoplestillrefertoas&#x201Cnetworth,&#x201Disatbestonlyarough
approximationofthetrueworthofabusiness.Ifthecafeweresoldasagoingconcern(whichinthiscasewouldmeantransferringtheentityname,
tangibleassets,licenseandfacilitieslease),itmightbeworthmorethantheindicated&#x201Cbookvalue&#x201D(assumingithadgaineda
reputationforservingtastyfood).Ontheotherhand,inliquidationtheinventoryisprobablyvirtuallyworthless,theprepaidexpensehasnovalue,and
usedrestaurantequipmenthasanotoriouslylowvaluewhensoldatauction.Thus,inliquidation,theassetsmightscarcelybringenoughcashtopaythe
liabilities.NotealsothatitwillbedifficultforMrs.Antoinetopayeachoftheotherpartnershisorher$12,382equity.Theymayhavetotakeanote
payablefromMrs.Antoineandhopeforthebest.Ifthecafeassets&#x2019liquidationvalueisonlyabout$20,500(enoughtopaytheliabilities),then
Mr.AntoineandMrs.Landersarenoworseoffwithanotethaniftheyforcedliquidation.12
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