Chapter 11, Problem 1COP

Financial Reporting of Depreciation, Write-off, Bond Issuance and Common Stock Issuance, Purchase, Reissuance, and Cash Dividends (Chapters 4, 8, 9, 10, and 11)

American Laser, Inc., reported the following account balances on January 1.

The company entered into the following transactions during the year.

Jan. 15	Issued 5,000 shares of $1 par common stock for $50,000 cash.
Jan. 31	Collected $3,000 from customers on account.
Feb. 15	Reacquired 3,000 shares of $1 par common stock into treasury for $33,000 cash.
Mar. 15	Reissued 2,000 shares of treasury stock for $24,000 cash.
Aug. 15	Reissued 600 shares of treasury stock for $4,600 cash.
Sept. 15	Declared (but did not yet pay) a $1 cash dividend on each outstanding share of common stock.
Oct. 1	Issued 100, 10-year, $1,000 bonds, at a quoted bond price of 101.
Oct. 3	Wrote off a $2,000 balance due from a customer who went bankrupt.
Dec. 29	Recorded $230,000 of service revenue, all of which was collected in cash.
Dec. 30	Paid $200,000 cash for this year’s wages through December 31. Ignore payroll taxes and payroll deductions.
Dec. 31	Calculated $10,000 of depreciation for the year to be recorded. (Ignore accrual adjustments for interest and income taxes.)

Required:

1. 1. Analyze the effects of each transaction on total assets, liabilities, and stockholders’ equity.
2. 2. Prepare journal entries to record each transaction.
3. 3. Enter the January 1 balances into T-accounts, post the journal entries from requirement 2, and determine ending balances.
4. 4. Prepare a closing journal entry for the income statement accounts, assuming the events on December 29–31 were the only transactions to affect income statement accounts.
5. 5. Prepare the closing entry for Dividends.
6. 6. Prepare a classified balance sheet at December 31.
7. 7. Calculate the debt-to-assets ratio at January 1 and December 31. Does the company rely more (or less) on debt financing at the end of the year than at the beginning of the year?

To determine

Analyze the effect of each transaction on total assets, liabilities and stockholder’s equity.

Explanation of Solution

Accounting equation:

Accounting equation is an accounting tool expressed in the form of equation, by creating a relationship between the resources or assets of a company, and claims on the resources by the creditors and the owners. Accounting equation is expressed as shown below:

$\text{Assets = Liabilities + Shareholders Equity}$

Analyze the effect of each transaction on total assets, liabilities and stockholder’s equity as follows:

Date of Transaction	Balance Sheet
	Assets ($)	Liabilities ($)	Stockholder’s Equity ($)
January 15	Cash $+$50,000	NE	Common Stock $+$5,000 Additional paid –in capital $+$45,000
January 31	Cash+3,000 AR-3,000	NE	NE
February 15	Cash $-$33,000	NE	Treasury stock ($+$ xSE) $-$33,000
March 15	Cash $+$24,000	NE	Treasury stock ($-$ xSE) $+$22,000 Additional paid –in capital $+$2,000
August 15	Cash $+$4,600	NE	Treasury stock ($-$ xSE) $+$6,600 Additional paid –in capital $-$ 2,000
September 15	NE	Dividends payable $+$14,600	Dividends ($+$ D) $-$14,600
October 1	Cash $+$ 101,000	Bonds payable $+$100,000 Premium on bonds payable $+$1,000
October 3	AR $-$ 2,000 AFDA $+$2,000	NE	NE
December 29	Cash +230,000	NE	Service Revenue+230,000
December 30	Cash +230,000	NE	Salaries and Wages Expense (+E) -200,000
December 31	Accumulated depreciation -10,000	NE	Depreciation Expense (+E) -10,000

(Table 1)

Note:

• $+$ Denotes increase in the value
• $-$ Denotes increase in the value
• NE: Denotes increase in the value
• AR: Accounts Receivable
• AFDA: Allowance for Doubtful Accounts ($+$ xA)

To determine

Prepare journal entries to record each transaction.

Explanation of Solution

Prepare journal entries to record each transaction as follows:

Date	Account Title and Explanation	Debit ($)	Credit ($)
January 15	Cash	50,000
	Common stock		5,000
	Additional paid –in capital		45,000
	(To record the issuance of  common stock)
January 31	Cash	3,000
	Accounts Receivable		3,000
	(To record the cash received for customers)
February 15	Treasury stock	33,000
	Cash		33,000
	(To record the repurchase of common stock into  treasury stock )
March 15	Cash	24,000
	Treasury Stock(2)		22,000
	Additional paid –in capital		2,000
	(To record the reissuance of treasury stock)
August 15	Cash	4,600
	Additional paid-in capital	2,000
	Treasury stock(3)		6,600
	(To record the reissuance of 600 shares of  treasury stock)
September 15	Dividends (5)	14,600
	Dividends Payable		14,600
	(To record the sale of merchandise on account)
October 1	Cash(6)	101,000
	Bonds Payable (7)		100,000
	Premium on bonds payable		1,000
	(To record the issuance of bonds at a quoted bond price $101)
October 3	Allowance for doubtful accounts	2,000
	Accounts Receivable		2,000
	(To record the written off balance due from customer)
December 29	Cash	230,000
	Service Revenue		230,000
	(To record the service revenue earned)
December 30	Salaries and Wages Expense	200,000
	Cash		200,000
	(To record the payment of wages expenses)
December 31	Depreciation Expense	10,000
	Accumulated Depreciation		10,000
	(To record the depreciation expenses)

Table (2)

Working notes (1):

$\begin{array}{c}\text{Share price of a treasury stock = }\frac{\text{Purchase of teasury stock for cash }}{\text{No of shares purchased}}\\ =\text{}\frac{\$33,000}{3,000}\\ =\$11\end{array}$

Working notes (2):

$\begin{array}{c}\text{Reissuance of treasury stock = Shares issued }\times \text{ Share price}\\ \text{= 2,000 shares }\times \text{ \$11 (1)}\\ \text{= \$22,000}\end{array}$

Working notes (3):

$\begin{array}{c}\begin{array}{l}\text{Reissuance of treasury}\\ \text{ on August 15}\end{array}\}=\text{ Shares issued }\times \text{ Share price}\\ \text{= 600 shares }\times \text{ \$11}\\ \text{= \$6,600}\end{array}$

Working notes (4):

$\begin{array}{c}\left(\begin{array}{l}\text{Treasury shares excluded }\\ \text{from dividends payable}\end{array}\right)\text{= Treasury issed on february 15}-\text{Treasury issed on March 15}\\ \text{= 3,000}-2,600\text{ (2,000+600)}\\ \text{= 400}\end{array}$

Working notes (5):

$\begin{array}{c}\text{Dividends = }\left[\begin{array}{l}\text{Price of}\\ \text{ cash dividend}\end{array}\right]\times \left[\begin{array}{l}\text{Common shares issues at the beginning}\\ +\text{ additional}-\text{Treasury shares (4)}\end{array}\right]\\ =\$1\times \left[10,000+5000-400\right]\\ =\$14,600\end{array}$

Working notes (6):

$\begin{array}{c}\text{Cash paid on Bonds payable= Shares issused }\times \text{ Bonds price}\\ =\text{101 }\times \text{ \$1,000}\\ \text{= \$101,000}\end{array}$

Working notes (7):

$\begin{array}{c}\text{Bonds Payable = Shares issused }\times \text{ Bonds price}\\ =\text{100 }\times \text{ \$1,000}\\ \text{= \$100,000}\end{array}$

To determine

Record the January 1 balance in the T-accounts and post the journal entries to the T-accounts.

Explanation of Solution

Record the January 1 balance in the T-accounts and post the journal entries to the T-accounts as follows:

Cash  (A)
Bal	10,000
15-Jan	50,000	33,000	15-Feb
31-Jan	3,000	200,000	30-Dec
15-Mar	24,000
15-Aug	4,600
1- Oct	101,000
29-Dec	230,000
	189,600

Accounts Receivable (A)
Bal.	5,000	3,000	31-Jan
		2,000	3-Oct
	0

Buildings
Bal.	247,000
	247,000

Allowance for Doubtful Accounts  (xA)
3-Oct	2,000	2,000	Bal.
		0

Accumulated Dep.–Building(xA)
		30,000	Bal.
		30,000

Dividends Payable  (L)
		0	Bal.
		14,600	15-Sep
		14,600

Notes Payable  (L)
		10,000	Bal.
		10,000

Bonds Payable  (L)
		0	Bal.
		100,000	1-Oct
		100,000

Premium on Bonds Payable  (-L)
		0	Bal.
		1,000	1-Oct
		1,000

Common Stock (SE)
		10,000	Bal.
		5,000	15-Jan
		15,000

Additional Paid-In Capital (SE)
		90,000	Bal.
		45,000	15-Jan
15-Aug	2,000	2,000	15-Mar
		135,000

Treasury Stock (xSE)
Bal.	0
15-Feb	33,000	22,000	15-Mar
		6,600	15-Aug
	4,400

Dividends (D)
Bal.	0
15-Sep	14,600
	14,600

Service Revenue (R)
		0	Bal.
		230,000	29-Dec
		230,000

Salaries and Wages Expense (E)
Bal.	0
30-Dec	200,000
	200,000

Depreciation Expense (E)
Bal.	0
31-Dec	10,000
	10,000

Retained Earnings (SE)
		120,000	Bal.
		120,000

To determine

Prepare a closing journal entry for the income statement accounts, assume that the events occurred on December 29 to 31 were the only transactions to affect income statement accounts.

Explanation of Solution

Closing entries: The journal entries prepared to close the temporary accounts to Retained Earnings account are referred to as closing entries. The revenue, expense, and dividends accounts are referred to as temporary accounts because the information and figures in these accounts is held temporarily and consequently transferred to permanent account at the end of accounting year.

Prepare a closing journal entry for the income statement accounts, assume that the events occurred on December 29 to 31 were the only transactions to affect income statement accounts.

Date	Account Title and Explanation	Debit ($)	Credit ($)
December 31	Service Revenue	230,000
	Salaries and Wages Expense		200,000
	Depreciation Expense		10,000
	Retained Earnings		20,000
	(To record the closure of expense account to income summary)

(Table 3)

Revenue account:

In this closing entry, service revenue account is closed by transferring the amount of service revenue to the retained earnings account in order to bring the revenue account balance to zero. Hence, debit the service revenue account and credit retained earnings account.

Expenses account:

In this closing entry, expenses account is closed by transferring the amount of expenses to the retained earnings in order to bring the expenses account balance to zero. Hence, debit the retained earnings account and credit all expenses account.

To determine

Prepare the closing entry for dividends.

Explanation of Solution

Date	Account Title and Explanation	Debit ($)	Credit ($)
December 31	Retained Earnings	14,600
	Dividends (5)		14,600
	(To record the closing entry of dividends)

(Table 4)

• Retained earnings are a component of stockholder’s equity and there is a decrease in the value of equity. Hence, it is debited.
• Dividend is a component of stockholder’s equity and there is an increase in the value of dividend. Hence, it is credited.

To determine

Prepare a classified balance sheet at December 31.

Explanation of Solution

Classified balance sheet: The main elements of balance sheet assets, liabilities, and stockholders’ equity are categorized or classified further into sections, and sub-sections in a classified balance sheet. Assets are further classified as current assets, long-term investments, property, plant, and equipment (PPE), and intangible assets. Liabilities are classified into two sections current and long-term. Stockholders’ equity comprises of common stock and retained earnings. Thus, the classified balance sheet includes all the elements under different sections.

Prepare a classified balance sheet at December 31:

Incorporation A
Classified Balance Sheet
At December 31
Assets
Current Assets:
Cash	$189,600
Accounts Receivable	0
Allowance for Doubtful Accounts	0
Total Current Assets		189,600
Buildings	247,000
Less: Accumulated Depreciation	-40,000
		207,000
Total Assets		$396,600
Liabilities and Stockholders’ Equity
Liabilities
Current Liabilities
Dividends Payable	$14,600
Total Current Liabilities		14,600
Noncurrent Liabilities:
Notes Payable (long-term)	10,000
Bonds Payable	100,000
Premium on Bonds Payable	1,000
Total Noncurrent Liabilities		111,000
Total Liabilities (a)		125,600
Stockholders’ Equity
Contributed Capital:
Common Stock,	15,000
Additional Paid-in Capital	135,000
Total Contributed Capital	150,000
Retained Earnings (8)	125,400
Less: Treasury Stock, at cost	-4,400
Total Stockholders’ Equity  (b)		271,000
Total Liabilities and Stockholders’ Equity $\left(\text{a}+\text{b}\right)$		$396,600

(Table 5)

Working notes (8):

$\begin{array}{c}\text{Retained earnings = Beginning retained earnings}+\text{Net income}-\text{Dividend }\\ =\$120,000+\$20,000-\$14,600\\ \text{= \$125,400}\end{array}$

To determine

Calculate the debt-to-assets ratio at January 1 and December 31. Describe whether the company rely more (or less) on debt financing at the end of the year than at the beginning of the year.

Explanation of Solution

Calculate the debt-to-assets ratio at January 1:

$\begin{array}{c}\text{Debt to assets for January 1}=\frac{\text{Total debt}}{\text{Total assets}}\\ =\frac{\$10,000}{\$230,000(9)}\\ =4.35\%\end{array}$

Calculate the debt-to-assets ratio at December 31

$\begin{array}{c}\text{Debt to assets for December 31}=\frac{\text{Total debt}}{\text{Total assets}}\\ =\frac{\$125,600}{\$396,600}\\ =31.67\%\end{array}$

Working notes (9):

Compute the total assets at January 1:

Particulars	$
Cash	$10,000
Accounts Receivable	5,000
Less: Allowance for doubtful accounts	-2,000
Buildings	247,000
Less: Accumulated  Depreciation	-30,000
Total	$230,000

(Table 6)