I'm using Financial Managerial Accounting by Williams, Kaka, Bettner & Carcello. Edition 15
I am having problems with question 2.9A on page 74.
I have to correct the given balance sheet.
Helen Berkeley is the founder and manager of Berkeley Playhouse. The business needs to obtain a bank loan to finance the production of its next play. As part of the loan application, Berkeley was asked to prepare a balance sheet for the business. She prepared the following balance sheet, which is arranged correctly but which contains several errors with respect to such concepts as the busi-ness entity and the valuation of assets, liabilities, and owner’s equity.

BERKELEY PLAYHOUSE Balance Sheet
September 30, 2009
Assets
Cash.. . $ 21,900
Accounts Receivable.. . 132,200
Props and Costumes.. . 3,000
Theater Building.. . 27,000
Lighting Equipment.. . 9,400
Automobile.. . 15,000
Total.. . $ 208,500

Liabilities & Owner’s Equity
Liabilities:
Accounts Payable.. . $ 6,000
Salaries Payable.. . 29,200
Total liabilities.. . $ 35,200

Owner’s equity:
Helen Berkeley,
Capital.. . 173,300
Total.. . $ 208,500

What I did was
1. given: breakdown of $21 900 cash: 15000 from company bank account, 1900 in company safe and 5000 from H. Berkeley's personal savings account. I subtracted 5000 since personal savings shouldn't be included. So the new cash total is $16900

2. given: accts receivable $132200 breakdown: $7200 from Artistic Tours and $125000 estimated future ticket sales from Sept 30 - Dec 31, 2005. I included both since it is what the company is expecting in future cash flow. 132,200

3. given: Props and costumes worth $18000 were purchased several days ago. She paid $3000 cash and wrote a note payable for the remaining $15000. She didn't include the note payable since it isn't due till January of the next year. I listed props and costumes as $3,000. I added a notes payable to liabilities of $15000

4. given: Berkeley Playhouse rents the theater building from Kievits International at $3000 per month. The $27000 in the bal sheet represents the rent paid through Sept 30 of the current year. I wasn't sure where to include the liability of $27,000 under notes payable or accounts payable.

5. given: the accounts payable include business debts of $3900 and $2100 balance of Berkeley's personal Visa card. I changed accounts payable to $3900

6. given: The automobile is Berkley's classic 1978 Jaguar which purchased two years ago for $9000. Value today is $15000 so that's the value she listed it as. She doesn't use it for the business. I took this asset out completely

7. given: Lighting equipment was purchased on September 26 at $9400 but the stage manager says that it isn't worth a dime. I kept it as it is

8. given: salaries payable include $25000 grand offered to an actor for a role in the December play and $4200 owed to the stagehands for work done though Sept 30. I kept it at a total of 29,200.

9. given: Berkeley invested $20 000 in the business when she started it years ago. Someone wants to buy it today for $50 000 so that's what she valued it as. I changed capital to $20 000

This is what my balance sheet looks like
Assets
Cash... 16,900
Accounts receivable... 132,200
Props and Costumes... 3,000
Lighting Equip... 9,400
Total... 161,500

Liablibities:
Notes payable... 15,000
Accounts payable... 3,900
Salaries payable... 29,200
Total liablilties... 48,100

Owners Equity
Helen Berkely, capital... 20,000
Total 68,100

What am I doing wrong? THank you so much.

Before going into specifics, let's go over a couple of basic ideas. First, receivables represents what someone else does owe you at this point in time, and there must be a substantiated reason why they owe it to you - and that reason cannot be that you "expect" to get some money. If you "expected" to get $100K off your grandfather when he dies, that isn't a receivable. It has to be due for a reason. Yes, there's an expectation that you will receive it - but the expectation alone doesn't make it a receivable... there still has to be a reason for it. Remember it's an asset and has to be something you have a legit claim on.

Same concept with a payable. It's something that you do actually owe for a legit reason.

Cost concept: we record assets at cost. You followed this rule sometimes, and sometimes not.

Business entity concept - you did pretty good on this one, knowing that personal things of the owner don't belong.

Equity - you need to learn the definition of this. It's the owner's net worth in the company, but mathematically it's coming from assets minus liabilities. The "worth" in the company is made up of the assets, and the "net" is subtracting out the value of the liabilities. The possible true worth of the company is a more advanced topic and nothing you will get into here.

OK, specifics:

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1. given: breakdown of $21 900 cash: 15000 from company bank account, 1900 in company safe and 5000 from H. Berkeley's personal savings account. I subtracted 5000 since personal savings shouldn't be included. So the new cash total is $16900

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Correct.

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2. given: accts receivable $132200 breakdown: $7200 from Artistic Tours and $125000 estimated future ticket sales from Sept 30 - Dec 31, 2005. I included both since it is what the company is expecting in future cash flow. 132,200

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See explanation of receivables above. "Estimated future ticket sales" gives no one an obligation to you. Receivables has to be someone else's actual obligation, because you either gave them an asset of value (lent money, sold them something), or because you provided services of value or sold them golds. There are no services in estimated future sales. So who has an obligation to the theatre and therefore where does the receivable come from?

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3. given: Props and costumes worth $18000 were purchased several days ago. She paid $3000 cash and wrote a note payable for the remaining $15000. She didn't include the note payable since it isn't due till January of the next year. I listed props and costumes as $3,000. I added a notes payable to liabilities of $15000

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Cost concept: the assets are recorded at their cost, NOT at what cash happened to have been paid on them. They don't own 3000 worth of props and costumes just because that's all that was paid. They own 18,000 worth. The note is fine.

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4. given: Berkeley Playhouse rents the theater building from Kievits International at $3000 per month. The $27000 in the bal sheet represents the rent paid through Sept 30 of the current year. I wasn't sure where to include the liability of $27,000 under notes payable or accounts payable.

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OK, you removed the building - correct. However, you're over-thinking this one. If the rent was paid (past tense, already paid), how did it get to be a liability? You're assuming a liaiblity that doesn't exist.

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5. given: the accounts payable include business debts of $3900 and $2100 balance of Berkeley's personal Visa card. I changed accounts payable to $3900

6. given: The automobile is Berkley's classic 1978 Jaguar which purchased two years ago for $9000. Value today is $15000 so that's the value she listed it as. She doesn't use it for the business. I took this asset out completely

7. given: Lighting equipment was purchased on September 26 at $9400 but the stage manager says that it isn't worth a dime. I kept it as it is

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All correct. And methinks the stage manager is exaggerating a bit. ;)

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8. given: salaries payable include $25000 grand offered to an actor for a role in the December play and $4200 owed to the stagehands for work done though Sept 30. I kept it at a total of 29,200.

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Again, you can't have a payable for something that doesn't even exist yet. An offer to pay someone for future work doesn't create a liability. Even if you have a contract, it doesn't create a liability. (There's a difference between a legal liability and an accounting liability. That legal liability includes them completing their end of the bargain as well, which has not occurred yet.) The actor hasn't done the work yet and the theatre therefore has no expense to record and no attached liability. You had to have gotten something for the liability, which you didn't. (Kinda like what I explain for #2, only backwards.)

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9. given: Berkeley invested $20 000 in the business when she started it years ago. Someone wants to buy it today for $50 000 so that's what she valued it as. I changed capital to $20 000

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Capital isn't the value of someone's offer, nor is it the amount the owner invested if we assume changes have been made in the meantime. Investments and revenues increase capital. Withdrawals and expenses decrease it. Those are 4 items that affect it. Only knowing one doesn't tell you what's in there. The offer doesn't count. The capital will be a "forced" number. That is, you have no info to tell you what everything was that ever happened to that account, so it's going to be assets less liabilities.

Wow thank you so much for taking the time out to explain this to me. I understand it better due to your explanation.
However I am still a little confused about number 9. So does this mean I am not going to include 20,000 of her investment in the capital and that I should only subtract the liablities from the assets to get the answer for her capital.

The 20,000 is included because that amount was invested in the business by the owner.

The 20,000 is only "included" from the point of view that it is part of ongoing transactions that would have affected the account while the theatre was in business. i.e. it would have been the first entry into the account.

However, it is not included on the balance sheet because that number in and of itself does not exist anymore. For instance, if you deposited $500 into a bank account when you opened it, that number would have been part of a calculation to get to the next balance and so on. But your current balance would not be the $500 you started with, right? If you were unaware of every transaction that happened, you would be incapable of actually calculating a current balance.

Same deal here. We don't know the transactions affecting that account to be able to calculate a current balance. It's going to be a forced number: yes, subtract the liabilities from the assets. There's no other info to tell you what capital will be.

Oh, and you're welcome. :-)

Thanks for all your help.

Quoting :
3. given: Props and costumes worth $18000 were purchased several days ago. She paid $3000 cash and wrote a note payable for the remaining $15000. She didn't include the note payable since it isn't due till January of the next year. I listed props and costumes as $3,000. I added a notes payable to liabilities of $15000

Cost concept: the assets are recorded at their cost, NOT at what cash happened to have been paid on them. They don't own 3000 worth of props and costumes just because that's all that was paid. They own 18,000 worth. The note is fine.

-Does it mean that I should put $18000 under assets? Or should I put $3000 under assets and $15000 under liabilities since in the given it is stated that it is a note payable that is due until January of the next year?

The correct journal entry will be:
Debit Props and Costumes for 18,000
Credit Cash for 3,000
Credit Notes Payable for 15,000

Because the props cost you 18,000 and you paid cash for 3,000 with the remaining amount you signed a note stating you will pay 15,000 plus interest.

I'm $4300 short under Owner's Equity to the same question. According to the accounting equation (asset = liabilities + owner's equity), the equity should be $28400 after $51500 minus $23100. I currently have $24100 ($21900-5000+7200). What am I missing? Anyone shed some light to this question?