Chapter 1, Problem 42E

To determine

Concept Introduction:

Balance Sheet: The Balance sheet is a summary of Assets, Liabilities and equity accounts that reports the financial position of the business as on a specific date. Assets are further classifies into Current Assets, Long Term Investments, Plant Assets and Intangible assets. And Liabilities are further classified into Current Liabilities and Long term liabilities.

Income Statement:

Income Statement is the part of the financial statement which is prepared to calculate the net income earned by the organization. In the income statement, all expenses are subtracted from the revenues to calculate the net income. It is prepared for a particular period.

Requirement-1:

To Prepare:

The classified balance sheet for College Spirit at Dec. 31, 2019.

Answer to Problem 42E

The classified balance sheet for College Spirit at Dec. 31, 2019 is as follows:

College Spirit
Balance Sheet
As on Dec. 31, 2019
ASSETS
Current Assets:
Cash	$ 13,300
Accounts Receivables	$ 6,700
Prepaid Rent	$ 54,000
Inventory	$ 481,400	$ 555,400
Long Term Investment		$ 110,900
Property, Plant and Equipment:
Furniture	$ 88,000
Less: Accumulated depreciation	$ (23,700)	$ 64,300
Total Assets		$ 730,600
LIABILITIES AND EQUITY
LIABILITIES
Current Liabilities:
Income Taxes Payable	$ 11,400
Accounts Payable	$ 104,700
Notes Payable	$ 50,000
		$ 166,100
Long Term Liabilities:
Bonds Payable		$ 180,000
Equity:
Common Stock	$ 300,000
Retained earnings	$ 84,500	$ 384,500
Total Liabilities and Equity		$ 730,600

Explanation of Solution

Balance sheet is a summary of Assets, Liabilities and equity accounts that reports the financial position of the business as on a specific date. Assets are further classifies into Current Assets, Long Term Investments, Plant Assets and Intangible assets. And Liabilities are further classified into Current Liabilities and Long term liabilities.

The classified balance sheet for College Spirit at Dec. 31, 2019 is prepared as follows;

College Spirit
Balance Sheet
As on Dec. 31, 2019
ASSETS
Current Assets:
Cash	$ 13,300
Accounts Receivables	$ 6,700
Prepaid Rent	$ 54,000
Inventory	$ 481,400	$ 555,400
Long Term Investment		$ 110,900
Property, Plant and Equipment:
Furniture	$ 88,000
Less: Accumulated depreciation	$ (23,700)	$ 64,300
Total Assets		$ 730,600
LIABILITIES AND EQUITY
LIABILITIES
Current Liabilities:
Income Taxes Payable	$ 11,400
Accounts Payable	$ 104,700
Notes Payable	$ 50,000
		$ 166,100
Long Term Liabilities:
Bonds Payable		$ 180,000
Equity:
Common Stock	$ 300,000
Retained earnings	$ 84,500	$ 384,500
Total Liabilities and Equity		$ 730,600

To determine

Concept Introduction:

Balance Sheet: The Balance sheet is a summary of Assets, Liabilities and equity accounts that reports the financial position of the business as on a specific date. Assets are further classifies into Current Assets, Long Term Investments, Plant Assets and Intangible assets. And Liabilities are further classified into Current Liabilities and Long term liabilities.

Income Statement:

Income Statement is the part of the financial statement which is prepared to calculate the net income earned by the organization. In the income statement, all expenses are subtracted from the revenues to calculate the net income. It is prepared for a particular period.

Requirement-2:

To Calculate:

The working capital and current ratio for the company.

Answer to Problem 42E

The working capital and current ratio for the company is as follows:

Working Capital		$ 389,300
Current Ratio		3.34

Explanation of Solution

The working capital and current ratio for the company is calculated as follows:

Current Assets:
Cash	$ 13,300
Accounts Receivables	$ 6,700
Prepaid Rent	$ 54,000
Inventory	$ 481,400
Total Current Assets (A)		$ 555,400
Current Liabilities:
Income Taxes Payable	$ 11,400
Accounts Payable	$ 104,700
Notes Payable	$ 50,000
Total Current Liabilities (B)		$ 166,100
Working Capital (A-B)		$ 389,300
Current Ratio (A/B)		3.34

To determine

Concept Introduction:

Balance Sheet: The Balance sheet is a summary of Assets, Liabilities and equity accounts that reports the financial position of the business as on a specific date. Assets are further classifies into Current Assets, Long Term Investments, Plant Assets and Intangible assets. And Liabilities are further classified into Current Liabilities and Long term liabilities.

Income Statement:

Income Statement is the part of the financial statement which is prepared to calculate the net income earned by the organization. In the income statement, all expenses are subtracted from the revenues to calculate the net income. It is prepared for a particular period.

Requirement-3:

To Discuss:

The liquidity of the company.

Answer to Problem 42E

The firm is more liquid because its current ratio is higher than 2.

Explanation of Solution

The working capital and current ration as on Dec. 31, 2019 is calculated as follows:

Current Assets:
Cash	$ 13,300
Accounts Receivables	$ 6,700
Prepaid Rent	$ 54,000
Inventory	$ 481,400
Total Current Assets (A)		$ 555,400
Current Liabilities:
Income Taxes Payable	$ 11,400
Accounts Payable	$ 104,700
Notes Payable	$ 50,000
Total Current Liabilities (B)		$ 166,100
Working Capital (A-B)		$ 389,300
Current Ratio (A/B)		3.34

The firm is more liquid because its current ratio is higher than 2.