FINANCIAL ACCOUNTING - Twelfth Edition
S 1-1
(10 min.)
a. What forms of organization will enable the owners of Hudson Signs, Inc., to limit their risk of
loss to the amounts they have invested in the business?
b. What form of business organization will give Alley Hudson the most freedom to manage the
business as she wishes?
c. What form of organization will give creditors the maximum protection in the event that
Hudson Signs, Inc., fails and cannot pay its debts?
Solution:
a. Corporation, limited partners of a Limited-liability partnership (LLP) and Limited-liability
company (LLC). If any of these businesses fails and cannot pay its liabilities, creditors cannot
force the owners to pay the business’s debts from the owners’ personal assets. Creditors can
go after the general partner of a limited liability partnership.
b. Proprietorship. There is a single owner of the business, so the owner is answerable to no
other owner.
c. Partnership. If the partnership fails and cannot pay its liabilities, creditors
can force the partners to pay the business's debts from their personal
assets. A partnership affords more protection for creditors than a
proprietorship because there are two or more owners to share this liability.
Chapter 1: The Financial Statements Page 1 of 64
,FINANCIAL ACCOUNTING - Twelfth Edition
S 1-2
(5 min.)
1. Which accounting assumption governs this situation?
2. How can the proper application of this accounting assumption give Osmond and
others a realistic view of Simple Treats, Inc.? Explain in detail.
Solution:
1. The entity assumption applies.
2. Application of the entity assumption will separate Osmond’s personal
assets from the assets of Simple Treats, Inc. This will help Osmond,
investors, and lenders know how much assets, liabilities and equity the
business has, and this knowledge will help all parties evaluate the business
realistically.
Chapter 1: The Financial Statements Page 2 of 64
,FINANCIAL ACCOUNTING - Twelfth Edition
S 1-3
(5-10 min.)
a. Inflation has been about 2.5% for some time. Village Realtors is considering
measuring its land values in inflation-adjusted amounts.
b. You get an especially good buy on a laptop, paying only $300 when it normally costs
$800. What is your accounting value for this laptop?
c. Burger King, , the restaurant chain, sold a store location to McDonald’s. How can
Burger King determine the sale price of the store—by a professional appraisal, Burger
King’s original cost, or the amount actually received from the sale?
d. General Motors wants to determine which division of the company—Chevrolet or
Cadillac—is more profitable.
Solution:
a. Stable-monetary-unit assumption
b. Historical cost principle; $300 is the accounting value of the laptop
c. Historical cost principle; the sale price is the amount actually received
from the sale
d. Entity assumption
Chapter 1: The Financial Statements Page 3 of 64
, FINANCIAL ACCOUNTING - Twelfth Edition
S 1-4
(10 min.)
Identify the missing amount for each of the following situations:
Computed amounts in boxes
Total Assets = Total Liabilities + Stockholders’ Equity
a. $ 660,000 = $ 300,000 + $ 360,000
b. $ 85,000 = $ 50,000 + $ 35,000
c. $ 350,000 = $ 75,000 + $ 275,000
Chapter 1: The Financial Statements Page 4 of 64
S 1-1
(10 min.)
a. What forms of organization will enable the owners of Hudson Signs, Inc., to limit their risk of
loss to the amounts they have invested in the business?
b. What form of business organization will give Alley Hudson the most freedom to manage the
business as she wishes?
c. What form of organization will give creditors the maximum protection in the event that
Hudson Signs, Inc., fails and cannot pay its debts?
Solution:
a. Corporation, limited partners of a Limited-liability partnership (LLP) and Limited-liability
company (LLC). If any of these businesses fails and cannot pay its liabilities, creditors cannot
force the owners to pay the business’s debts from the owners’ personal assets. Creditors can
go after the general partner of a limited liability partnership.
b. Proprietorship. There is a single owner of the business, so the owner is answerable to no
other owner.
c. Partnership. If the partnership fails and cannot pay its liabilities, creditors
can force the partners to pay the business's debts from their personal
assets. A partnership affords more protection for creditors than a
proprietorship because there are two or more owners to share this liability.
Chapter 1: The Financial Statements Page 1 of 64
,FINANCIAL ACCOUNTING - Twelfth Edition
S 1-2
(5 min.)
1. Which accounting assumption governs this situation?
2. How can the proper application of this accounting assumption give Osmond and
others a realistic view of Simple Treats, Inc.? Explain in detail.
Solution:
1. The entity assumption applies.
2. Application of the entity assumption will separate Osmond’s personal
assets from the assets of Simple Treats, Inc. This will help Osmond,
investors, and lenders know how much assets, liabilities and equity the
business has, and this knowledge will help all parties evaluate the business
realistically.
Chapter 1: The Financial Statements Page 2 of 64
,FINANCIAL ACCOUNTING - Twelfth Edition
S 1-3
(5-10 min.)
a. Inflation has been about 2.5% for some time. Village Realtors is considering
measuring its land values in inflation-adjusted amounts.
b. You get an especially good buy on a laptop, paying only $300 when it normally costs
$800. What is your accounting value for this laptop?
c. Burger King, , the restaurant chain, sold a store location to McDonald’s. How can
Burger King determine the sale price of the store—by a professional appraisal, Burger
King’s original cost, or the amount actually received from the sale?
d. General Motors wants to determine which division of the company—Chevrolet or
Cadillac—is more profitable.
Solution:
a. Stable-monetary-unit assumption
b. Historical cost principle; $300 is the accounting value of the laptop
c. Historical cost principle; the sale price is the amount actually received
from the sale
d. Entity assumption
Chapter 1: The Financial Statements Page 3 of 64
, FINANCIAL ACCOUNTING - Twelfth Edition
S 1-4
(10 min.)
Identify the missing amount for each of the following situations:
Computed amounts in boxes
Total Assets = Total Liabilities + Stockholders’ Equity
a. $ 660,000 = $ 300,000 + $ 360,000
b. $ 85,000 = $ 50,000 + $ 35,000
c. $ 350,000 = $ 75,000 + $ 275,000
Chapter 1: The Financial Statements Page 4 of 64
