Engineering E2261: Introduction to Accounting and Finance COLUMBIA UNIVERSITY, School of Engineering and Applied Science

Homework 1 Readings, Problems and Cases

1. Reading: Intro to Accounting, 1st ed (IA): Chapters 1 3.

2. Events impact on assets, liabilities and equity Provide an example of a transaction that creates the described effects for the separate cases a through e. a. b. c. d. e. Decreases an asset and decreases equity. Increases an asset and increases a liability. Decreases an asset and decreases a liability. Increases an asset and decreases an asset. (Consider two different assets). Increases an asset and increases equity.

3. Valuing Drilling Unlimited (DU) Drilling Unlimited (DU) specializes in exploring for, drilling for, and producing natural gas in the newly-rediscovered shale deposits of PA and NY. Review the following balance sheet for DU and note: GAAP rules for valuing natural gas reserves are considered inaccurate throughout the natural gas industry. Proved and Probable reserves, as estimated by a reliable engineering firm are the industy-standard measure for the amount of natural gas under a given piece of land. DU has sole development rights to 350 million (MM) cubic feet of reliablyestimated Proved and Probable natural gas in PA and NY. The rights could be sold today for at least $800MM. DUs Other Current Assets could be sold today for $400,000 and its Other Long-term Assets are worth $9,000,000.

Balance Sheet (000 UON) Balance Sheet (000) UON FOR PERIOD ENDING For Period Ending: Assets Current Assets Cash And Cash Equivalents Net Receivables Other Current Assets Total Current Assets Oil Development Rights Other Long-term Assets Total Assets

DU DU 6/30/08 6/30/20XX

1,159 3,968 876 6,003 387,584 8,624 402,211

Liabilities Accounts Payable Long Term Debt Other Liabilities Total Liabilities Stockholders' Equity Liabilities + Equity

62,230 274,759 4,225 341,214 60,997 402,211

Find: a. An estimate for the value of DU, using the Balance-Sheet Valuation method. Show all work. (Hint; use the techniques shown in Intro to Accounting and Finance ClassBook, 3rd Ed (IAF) on pages Ch01-37 and Ch02-26). b. There is a 10% chance that PA and NY will forbid development of the fields for which DU has sole rights. (The technique for extracting gas from this geology is environmentally damaging). In this case, the market value of DUs equity would be zero. Using this knowledge and your answer to a) above, what is the weightedaverage value of DU? {The formula for weighted average is: (Probability of case 1 * case 1 value) + (Probability of case 2 * case 2 value)}.

4. Cost Concept and Transaction Table Entries a. Review the discussion of the Cost Concept presented in IA, 1 st ed, Chapter 3. Consider the truck example starting on page CH03-3. Assume for this problem that the truck is purchased for $20,000 at EOY 20X0, and has an estimated useful life of just four years. The trucks value declines linearly over the four year period. What would be the book value of the truck on a balance sheet prepared: i. EOY 20X2 ii. BOY 20X3

iii. iv.

5.0 years after purchase 3.5 years after purchase. (Hint: the value of assets that wear out declines continuously). Review the discussion of Transaction Tables in IA, 1st ed, Chapter 2. Create Transaction Table entries for i. and iv. above.

b.

5. Various Questions. Select the correct answer from the given choices. A. A building is offered for sale at $300K but is currently assessed at $200K. The purchaser of the building believes the building is worth $275K, but ultimately purchases the building for $250K. The purchaser records the building at: a. $50K b. $200,000 c. $250K d. $275,000 e. $300K B. If the assets of a company increase by $200,000 during the year and its liabilities increase by $35,000 during the same year, then the change in equity of the company during the year must have been: f. An increase of $235,000. g. A decrease of $235,000. h. A decrease of $165,000. i. An increase of $165,000. j. An increase of $200,000. C. LeveredCo. borrows $75K cash from SoonToFail S&L. How does this transaction affect the accounting equation for LeveredCo.? k. Assets increase by $75K; liabilities increase by $75K; no effect on equity. l. Assets increase by $75K; no effect on liabilities; equity increases by $75K. m. Assets increase by $75K; liabilities decrease by $75K; no effect on equity. n. No effect on assets; liabilities increase by $75K; equity increases by $75K. o. No effect on assets; liabilities increase by $75K; equity decreases by $75K. D. Geek Squad performs services for a customer and bills the customer for $500. How would Geek Squad record this transaction? p. q. r. s. Accounts receivable increase by $500; revenues increase by $500. Cash increases by $500; revenues increase by $500. Accounts receivable increase by $500; revenues decrease by $500. Accounts receivable increase by $500; accounts payable increase by $500.

t. Accounts payable increase by $500; revenues increase by $500.

6. Applications of the Fundamental Accounting Equation a. Cadence Office Supplies has assets equal to $123,000 and liabilities equal to $47,000 at year-end. What is the total equity for Cadence at year-end? b. At the beginning of the year, Addison Companys assets are $300,000 and its equity is $100,000. During the year, assets increase $80,000 and liabilities increase $50,000. What is the equity at the end of the year? c. At the beginning of the year, Quasar Companys liabilities equal $70,000. During the year, assets increase by $60,000, and at year-end assets equal $190,000. Liabilities decrease $5,000 during the year. What are the beginning and ending amounts of equity?

7. BreakToMeasure Testing Lab After several months of planning, Denise Murphy started a structural lab-test business for the civil engineering and construction industries called BreakToMeasure. The following events occurred during its first month: a. On May 1, Murphy started the firm, investing $3,000 cash and $15,000 of equipment. b. On May 2, BreakToMeasure paid $600 cash for furniture for the shop. c. On May 3, BreakToMeasure paid $500 cash to rent space in a strip mall for May. d. On May 4, it purchased $1,200 of equipment on credit for the shop (using a long-term note payable). e. On May 5, BreakToMeasure opened for business. Cash received from services provided in the first week and a half of business (ended May 15) is $825. f. On May 15, it provided $100 of lab-test services on account (invoiced). g. On May 17, it received a $100 check for services previously rendered on account. h. On May 17, it paid $125 cash to an assistant for working during the grand opening. i. Cash received from services provided during the second half of May is $930. j. On May 31, it paid a $400 installment toward principal on the note payable entered into on May 4. k. On May 31, it paid $900 cash dividends to Murphy. Find: Create a Transaction Table for the above events. You may wish to use some or all of the following accounts: Cash; Accounts Receivable; Furniture; Store Equipment; Note Payable; Paid in Capital; Dividends; Revenues; and Expenses.

ii. Prepare a balance sheet as of May 31.