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Chapter 2: Q1EI (page 117)

Better Days Ahead, a charitable organization, has a standing agreement with First National Bank. The agreement allows Better Days Ahead to overdraw its cash balance at the bank when donations are running low. In the past, Better Days Ahead managed funds wisely and rarely used this privilege. Jacob Henson has recently become the president of Better Days Ahead. To expand operations, Henson acquired office equipment and spent large amounts on fundraising. During Henson’s presidency, Better Days Ahead has maintained a negative bank balance of approximately $10,000.

What is the ethical issue in this situation, if any?

State why you approve or disapprove of Henson’s management of Better Days Ahead’s funds.

Short Answer

Expert verified

The decision is ethical if the bank allows and it is unethical when a bank does not allow for any overdraft. The decision will get approval only when gives consent and disapproval when a bank does not give approval.

Step by step solution

01

Ethical or not

This situation could be ethical or not; this depends on the clause of the bank determining the overdrafts. If the bank has the clause of agreeing to the overdrafts, then the decision of Mr. Henson is ethical.

If the bank allows overdraft only in the case of a crisis, then the decision of Mr. Henson will be unethical.

02

Approval or disapproval

If the bank allows the overdraft knowing that the business could deliver more income in the future, then the decisions are approved. If the bank does not approve, then decisions will get disapproval.

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Most popular questions from this chapter

Question:Preparing financial statements from the trial balance and calculating the debt ratio

The trial balance as of July 31, 2018, for Sara Simon, Registered Dietician, is presented below:

Account Title Debit Credit

Office Supplies 2,300

Cash 38,000

Accounts Receivable 9,000

Prepaid Insurance 2,400

Equipment 16,000

Accounts Payable 3,000

Unearned Revenue 3,912

Notes Payable 31,000

Common Stock 18,000

Dividends 2,800

Salaries Expense 1,700

Rent Expense 1,100

Utilities Expense 500

Service Revenue 17,888

Total Balance \( 73,800 \) 73,800

Requirements 1. Prepare the income statement for the month ended July 31, 2018.

Question:Preparing financial statements from the trial balance and calculating the debt ratio

The trial balance as of July 31, 2018, for Sara Simon, Registered Dietician, is presented below:

Account Title Debit Credit

Office Supplies 2,300

Cash 38,000

Accounts Receivable 9,000

Prepaid Insurance 2,400

Equipment 16,000

Accounts Payable 3,000

Unearned Revenue 3,912

Notes Payable 31,000

Common Stock 18,000

Dividends 2,800

Salaries Expense 1,700

Rent Expense 1,100

Utilities Expense 500

Service Revenue 17,888

Total Balance \( 73,800 \) 73,800

Requirements 3. Prepare the balance sheet as of July 31, 2018.

Identify the three categories of the accounting equation, and list at least four accounts associated with each category.

Journalizing transactions, posting to T-accounts, and preparing a trial balance

Problem P2-42 continues with the company introduced in Chapter 1, Canyon Canoe Company. Here you will account for Canyon Canoe Company’s transactions as it is actually done in practice. Begin by reviewing the transactions from Chapter 1. The transactions have been reprinted below.

Nov. 1 Received \(16,000 cash to begin the company and issued common stock to Amber and Zach.

2 Signed a lease for a building and paid \)1,200 for the first month’s rent.

3 Purchased canoes for \(4,800 on account.

4 Purchased office supplies on account, \)750.

7 Earned \(1,400 cash for rental of canoes.

13 Paid \)1,500 cash for wages.

15 Paid \(50 dividends to stockholders.

16 Received a bill for \)150 for utilities. (Use separate payable account.)

20 Received a bill for \(175 for cell phone expenses. (Use separate payable account.)

22 Rented canoes to Early Start Daycare on account, \)3,000.

26 Paid \(1,000 on account related to the November 3 purchase.

28 Received \)750 from Early Start Daycare for canoe rental on November 22.

30 Paid \(100 dividends to stockholders

In addition, Canyon Canoe Company completed the following transactions for December.

Dec. 1 Amber and Zack contributed land on the river (worth \)85,000) and a small building to use as a rental office (worth \(35,000) in exchange for common stock.

1 Prepaid \)3,000 for three months’ rent on the warehouse where the company stores the canoes.

2 Purchased canoes signing a note payable for \(7,200

4 Purchased office supplies on account for \)500.

9 Received \(4,500 cash for canoe rentals to customers.

15 Rented canoes to customers for \)3,500, but will be paid next month.

16 Received a \(750 deposit from a canoe rental group that will use the canoes next month.

18 Paid the utilities and telephone bills from last month.

19 Paid various accounts payable, \)2,000.

20 Received bills for the telephone (\(325) and utilities (\)295) which will be paid later.

31 Paid wages of \(1,800. 31 Paid cash dividend to stockholders, \)300.

Requirements

1. Journalize the transactions for both November and December, using the following accounts: Cash; Accounts Receivable; Office Supplies; Prepaid Rent; Land; Building; Canoes; Accounts Payable; Utilities Payable; Telephone Payable; Unearned Revenue; Notes Payable; Common Stock; Dividends; Canoe Rental Revenue; Rent Expense; Utilities Expense; Wages Expense; and Telephone Expense. Explanations are not required. (Hint: For November transactions, refer to your answer for Chapter 1.)

2. Open a T-account for each of the accounts.

3. Post the journal entries to the T-accounts, and calculate account balances. Formal posting references are not required.

4. Prepare a trial balance as of December 31, 2018.

5. Prepare the income statement of Canyon Canoe Company for the two months ended December 31, 2018.

6. Prepare the statement of retained earnings for the two months ended December 31, 2018.

7. Prepare the balance sheet as of December 31, 2018.

8. Calculate the debt ratio for Canyon Canoe Company at December 31, 2018

Question: Journalizing transactions, posting journal entries to T-accounts, and preparing a trial balance Victor Yang practices medicine under the business title Victor Yang, M.D. During March, the medical practice completed the following transactions:

Mar. 1 Yang contributed \(62,000 cash to the business in exchange for common stock.

5 Paid monthly rent on medical equipment, \)570.

9 Paid \(14,000 cash to purchase land to be used in operations.

10 Purchased office supplies on account, \)1,500.

19 Borrowed \(27,000 from the bank for business use.

22 Paid \)1,400 on account.

28 The business received a bill for advertising in the daily newspaper to be paid in April, \(220.

31 Revenues earned during the month included \)6,700 cash and \(5,800 on account.

31 Paid employees’ salaries \)2,100, office rent \(1,500, and utilities \)350. Record as a compound entry.

31 The business received \(1,000 for medical screening services to be performed next month.

31 Paid cash dividends of \)7,100.

The business uses the following accounts: Cash; Accounts Receivable; Office Supplies; Land; Accounts Payable; Advertising Payable; Unearned Revenue; Notes Payable; Common Stock; Dividends; Service Revenue; Salaries Expense; Rent Expense; Utilities Expense; and Advertising Expense. Requirements 1. Journalize each transaction. Explanations are not required.
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