Engineering E2261: Introduction to Accounting and FinanceCOLUMBIA 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 theseparate cases a through e.

a. Decreases an asset and decreases equity.b. Increases an asset and increases a liability.c. Decreases an asset and decreases a liability.d. Increases an asset and decreases an asset. (Consider two different assets).e. Increases an asset and increases equity.

3. Valuing Drilling Unlimited (DU)

Drilling Unlimited (DU) specializes in exploring for, drilling for, and producing naturalgas 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 areliable engineering firm are the industy-standard measure for the amount ofnatural gas under a given piece of land.

· DU has sole development rights to 350 million (MM) cubic feet of reliably-estimated “Proved and Probable” natural gas in PA and NY. The rights could besold today for at least $800MM.

· DU’s “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) DUFOR PERIOD ENDING 6/30/08

AssetsCurrent AssetsCash And Cash Equivalents 1,159Net Receivables 3,968Other Current Assets 876Total Current Assets 6,003

Oil Development Rights 387,584Other Long-term Assets 8,624Total Assets 402,211

LiabilitiesAccounts Payable 62,230Long Term Debt 274,759Other Liabilities 4,225Total Liabilities 341,214

Stockholders' Equity 60,997Liabilities + Equity 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 forwhich DU has sole rights. (The technique for extracting gas from this geology isenvironmentally damaging). In this case, the market value of DU’s equity would bezero. Using this knowledge and your answer to a) above, what is the weighted-average 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 Entriesa. Review the discussion of the Cost Concept presented in IA, 1st ed, Chapter 3.

Consider the truck example starting on page CH03-3. Assume for this problemthat the truck is purchased for $20,000 at EOY 20X0, and has an estimateduseful life of just four years. The truck’s value declines linearly over the fouryear period.What would be the “book value” of the truck on a balance sheet prepared:

i. EOY 20X2ii. BOY 20X3

Balance Sheet (000) UON DUFor Period Ending: 6/30/20XX

iii. 5.0 years after purchaseiv. 3.5 years after purchase. (Hint: the value of assets that wear out declines

continuously).

b. Review the discussion of Transaction Tables in IA, 1st ed, Chapter 2.Create Transaction Table entries for i. and iv. above.

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. Thepurchaser of the building believes the building is worth $275K, but ultimatelypurchases the building for $250K. The purchaser records the building at:

a. $50Kb. $200,000c. $250Kd. $275,000e. $300K

B. If the assets of a company increase by $200,000 during the year and itsliabilities increase by $35,000 during the same year, then the change in equity ofthe 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 thistransaction 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. Accounts receivable increase by $500; revenues increase by $500.q. Cash increases by $500; revenues increase by $500.r. Accounts receivable increase by $500; revenues decrease by $500.s. 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 equalto $47,000 at year-end. What is the total equity for Cadence at year-end?

b. At the beginning of the year, Addison Company’s assets are $300,000 andits equity is $100,000. During the year, assets increase $80,000 andliabilities increase $50,000. What is the equity at the end of the year?

c. At the beginning of the year, Quasar Company’s 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 beginningand ending amounts of equity?

7. BreakToMeasure Testing LabAfter several months of planning, Denise Murphy started a structural lab-testbusiness for the civil engineering and construction industries calledBreakToMeasure. The following events occurred during its first month:

a. On May 1, Murphy started the firm, investing $3,000 cash and $15,000of 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 allof the following accounts: Cash; Accounts Receivable; Furniture; StoreEquipment; Note Payable; Paid in Capital; Dividends; Revenues; and Expenses.

ii. Prepare a balance sheet as of May 31.