Question 4The following items are taken from the financial s

Question 4The following items are taken from the financial statements of the Postal Service for the year ending December 31, 2012 Accounts payable Accounts receivable Accumulated depreciation equipment Advertising expense Cash Owners Capital or Shareholders Equity Owner\'s drawings for personal use Depreciation expense Equipment Short term Note payable Patents Prepaid insurance (12-month policy) $ 19,000 11,000 28,000 21,000 11,000 105,000 14,000 12,000 190,000 70,000 20,000 6,000 What is total liabilities and owner\'s equity at December 31, 2012? a. $194,000 b. $214,000 c. $228,000 d. $231,000

Solution

1. prepaid insurance = current asset

2.patents, cash , accounts receivable, equipment = asset

3. accumulated depreciation - equipment =  Accumulated depreciation is a contra-asset. A contra-asset is an account on the balance sheet of a corporation or entity that offsets the balance of a related and corresponding account. Two common examples are accumulated amortization that offsets intangible assets, such as goodwill, and accumulated depreciation that offsets fixed assets, such as equipment, machinery or computers.

4. depreciation expense = Depreciation expense is recorded as an expense account on the income statement, not a liability account on the balance sheet, although it\'s closely associated with the balance sheet account of accumulated depreciation, which is a contra-asset used to reduce the net value of a business\' fixed assets.

5. advertising expense = this is recorded again as an expense

6. owner\'s drawings for personal use = Drawings by the owner of the company will need to be recorded in the balance sheet as a reduction in the assets and a reduction in the owner’s equity as an accounting record needs to be maintained to track money withdrawn from the business by its owners.

thus, total liabilities and owner\'s equity = accounts payable + short term note payable + owner\'s capital

= 19000 + 70000 + 105000 = $194000 ( option a)

note: we have not subtracted drawings from owner\'s capital as then the total would be 180000 , which is not there in the options . hence , we consider that the owner\'s capital given is already been adjusted for drawings .