Chapter 2, Problem 15E

1.

To determine

Discuss the accounting equation effect based on the given T-accounts.

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:

$\text{Assets = Liabilities + Stockholder's Equity}$

Accounting equation effect for given accounts is as follows:

Figure (1)

Therefore, the total assets are equal to the liabilities and stockholder’s equity.

2.

To determine

Prepare journal entries to record the transactions from (a) through (e).

Explanation of Solution

Prepare journal entries to record the transactions as shown below:

No.	Account titles and Explanation	Debit	Credit
a.	Cash (+A)	$4,000
	Notes payable (+L)		$4,000
b.	Cash (+A)	$1,500
	Investments (-A)		$1,500
c.	Cash (+A)	$1,500
	Property and Equipment (-A)		$1,500
d.	Retained earnings (-SE)	$800
	Dividends payable (+L)		$800
e.	Dividends payable (-L)	$800
	Cash (-A)		$800

Table (1)

3.

To determine

Prepare T-accounts and also report the given transactions for the current year.

Explanation of Solution

T-account: T-account refers to an individual account, where the increases or decreases in the value of specific asset, liability, stockholder’s equity, revenue, and expenditure items are recorded.

T-accounts for the given accounts are as follows:

Cash
Beg.	5,000
(a)	4,000
(b)	1,500
(c)	1,500	800	(d)
End.	11,200

Short-Term Investments
Beg.	2,500
		1,500	(b)
End.	1,000

Property & Equipment
Beg.	3,000
		1,500	(c)
End.	1,500

Short-Term Notes Payable
		2,200	Beg.
		2,200	End.

Long-Term Notes Payable
		800	Beg.
		4,000	(a)
		4,800	End.

Common Stock
		500	Beg.
		500

Additional Paid-in Capital
		4,000	Beg.
		4,000

Retained Earnings
		3,000	Beg.
(d)	800
		2,200

4.

To determine

Prepare trial balance account.

Explanation of Solution

Trail balance is given below:

Company H
Trial Balance
For the Year Ended December 31
Particulars	Debit	Credit
Cash	$11,200
Short-term investments	$1,000
Property and equipment	$1,500
Notes payable (current)		$2,200
Notes payable (noncurrent)		$4,800
Dividends payable		$0
Common stock		$500
Additional paid-in capital		$4,000
Retained earnings		$2,200
Totals	$13,700	$13,700

Table (2)

5.

To determine

Prepare a classified balance sheet.

Explanation of Solution

Prepare a classified balance sheet.

Company H
Balance Sheet
At December 31
Assets
Current Assets:
Cash	$11,200
Short-term investments	1,000
Total current assets	12,200
Property and equipment	1,500
Total assets	$13,700
Liabilities and Stockholders’ Equity
Current Liabilities:
Notes payable	$2,200
Total current liabilities	2,200
Notes payable	4,800
Total liabilities	7,000
Stockholders’ Equity
Common stock	500
Additional paid-in capital	4,000
Retained earnings	2,200
Total stockholders’ equity	6,700
Total liabilities and stockholders’ equity	$13,700

Table (3)

6.

To determine

Calculate the current ratio at December 31 and also suggest about Company H.

Explanation of Solution

Current Ratio: A part of liquidity ratios, current ratio reflects the ability to oblige the short term debts of a company. It is calculated based on the current assets and current liabilities; a company has in an accounting period. A current ratio is a useful tool for analysis of financials of a company.

Calculate the current ratio of Company H:

$\begin{array}{c}\text{Current ratio=}\frac{\text{Current assets}}{\text{Current liabilities}}\\ \text{=}\frac{\text{ \$12,200}}{\text{\$2,200}}\\ \text{=5}\text{.55}\end{array}$

Therefore, the current ration of Company H during the current year is 5.55.

In this case, Company H’s current ratio is more than the industrial average. It indicates Company H has better position to repay the current liabilities.