Financial Accounting

Exercise 3-1 Types of Events, p. 129

1. E

2. E

3. NR

4. E

5. I

6. NR

7. E

8. I

Exercise 3-3. The Effect of Transactions on the Accounting Equation, p. 129

Question | Asset = | Liabilities + | Stockholders’ Equity |

1 | NE | NE | NE |

2 | I | NE | I |

3 | I | NE | I |

4 | D | D | NE |

5 | NE | NE | NE |

6 | I | I | NE |

7 | D | NE | D |

8 | D | NE | D |

9 | I | NE | I |

Problem 3-2 Transaction Analysis and Financial Statements, p. 134

1. Prepare a table

2. Prepare an income statement for the month of May.

3. Prepare a classified balance sheet at May 31.

4. Why do you think the two college students decided to incorporate their business rather than operate it as a partnership?

There are several good reasons why they would choose to incorporate rather than become a partnership. In a partnership each owner will be responsible to file taxes on their part of the earnings with their personal income taxes. This also means each owner is responsible for business debts. If the assets of the partnership cannot satisfy the debt, creditors can go after each owner's personal bank account, house, and personal property to make up the difference.

As a corporation, the company has many avenues to raise capital such as selling shares of stock. Plus, investors can rest assured knowing they are not personally liable for corporate debts. Ownership in a corporation may be sold to third parties without disrupting the continued operation of the business.