Financial Accounting, 8th Edition
Financial Accounting, 8th Edition
8th Edition
ISBN: 9780078025556
Author: Robert Libby, Patricia Libby, Daniel Short
Publisher: McGraw-Hill Education
Question
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Chapter 2, Problem 15E

1.

To determine

Prepare T-accounts of Company S.

1.

Expert Solution
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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.

This account is referred to as the T-account, because the alignment of the components of the account resembles the capital letter ‘T’.’ An account consists of the three main components which are as follows:

  1. (a) The title of the account
  2. (b) The left or debit side
  3. (c) The right or credit side

T-accounts of company S are as follows:

Cash
Beg.0
(a)40,0004,000(c)
1,000(d)
35,000
Short-Term Notes Receivable
Beg.0
(e)4,000
4,000
Land
Beg.0
(b)16,0004,000(e)
12,000
Equipment
Beg.0
(c)20,000
(d)1,000
21,000
Short-Term Notes Payable
0Beg.
16,000(b)
16,000
Long-Term Notes Payable
0Beg.
16,000(c)
16,000
Common Stock
0Beg.
10,000(a)
10,000
Additional Paid-in Capital
Beg.
30,000(a)
30,000

2.

To determine

Prepare the trial balance at December 31, 2014.

2.

Expert Solution
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Explanation of Solution

Trial balance:

Trial balance is the summary of accounts, and their debit and credit balances at a given time. It is usually prepared at end of the accounting period.  Debit balances are listed in left column and credit balances are listed in right column.  The totals of debit and credit column should be equal.  Trial balance is useful in the preparation of the financial statements.

Trial balance of Company S is as follows:

Company S
Trial Balance
December 31, 2014
Particulars

Debit

($)

Credit

($)

Cash35,000
Short-term notes receivable4,000
Land12,000
Equipment21,000
Short-term notes payable16,000
Long-term notes payable16,000
Common stock10,000
Additional paid-in capital30,000
Totals72,00072,000

Table (1)

Therefore, the total of debit, and credit columns of trial balance is $72,000 and agree.

3.

To determine

Prepare the balance sheet of Company S.

3.

Expert Solution
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Explanation of Solution

Classified balance sheet:

This is the financial statement of a company which shows the grouping of similar assets and liabilities under subheadings.

Classified balance sheet of Company S is as follows:

Company S
 Balance sheet
 December 31, 2014
 Assets $ Liabilities $
 Current assets:  Current liabilities:
Cash35,000Short-term notes payable16,000
Short-term investments4,000Total current liabilities16,000
Total current assets 39,000Long-term notes payable 16,000
 Total liabilities (A) 32,000
Land12,000 Stockholders' equity
Equipment21,000 Common stock 10,000
 Additional paid-in capital 30,000
 Total stockholder's equity (B) 40,000
 Total assets72,000Total liabilities and stockholder’s equity (A+B)72,000

Table (2)

Therefore, the total assets of Company S are $72,000, and the total liabilities and stockholders’ equity is $72,000.

4.

To determine

Calculate the current ration of Company S for 2014, 2015 and 2016, and also suggest about the company.

4.

Expert Solution
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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.

Current ratio of Company S is as follows:

YearCurrent ratio
20142.44 (1)
20152.26 (2)
20161.18 (3)

Table (3)

In this case, the liquidity of Company S decreased over the three years, because the current ratio of company has decreasing tendency. So, company has difficult situation to repay the current obligation.

Working note:

Calculate current ratio for 2014

Current ratio=Current assetsCurrent liabilities= $39,000$16,000=2.44 (1)

Calculate current ratio for 2015

Current ratio=Current assetsCurrent liabilities= $52,000$23,000=2.26 (2)

Calculate current ratio for 2016

Current ratio=Current assetsCurrent liabilities= $47,000$40,000=1.18 (3)

5.

To determine

Describe the recommendation about lending money to Company S.

5.

Expert Solution
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Explanation of Solution

The bank’s vice president should not lend loan to Company S, because current ratio of company has decreasing tendency over the three years. It indicates company S has difficult situation to repay the current obligation of business, and it creates problem to repay the loan. So, the vice president of bank should not provide loan to Company S.

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Chapter 2 Solutions

Financial Accounting, 8th Edition

Ch. 2 - Prob. 11QCh. 2 - Prob. 12QCh. 2 - How is the current ratio computed and interpreted?Ch. 2 - Prob. 14QCh. 2 - Prob. 1MCQCh. 2 - Which of the following is not an asset? a....Ch. 2 - Total liabilities on a balance sheet at the end of...Ch. 2 - The dual effects concept can best be described as...Ch. 2 - The T-account is a tool commonly used for...Ch. 2 - Prob. 6MCQCh. 2 - The Cash T-account has a beginning balance of...Ch. 2 - Prob. 8MCQCh. 2 - At the end of a recent year, The Gap, Inc.,...Ch. 2 - Prob. 10MCQCh. 2 - Prob. 1MECh. 2 - Matching Definitions with Terms Match each...Ch. 2 - Identifying Events as Accounting Transactions...Ch. 2 - Classifying Accounts on a Balance Sheet The...Ch. 2 - Prob. 5MECh. 2 - Prob. 6MECh. 2 - Prob. 7MECh. 2 - Prob. 8MECh. 2 - Prob. 9MECh. 2 - Prob. 10MECh. 2 - Prob. 11MECh. 2 - Prob. 12MECh. 2 - Prob. 13MECh. 2 - Prob. 1ECh. 2 - Prob. 2ECh. 2 - Prob. 3ECh. 2 - Prob. 4ECh. 2 - Determining Financial Statement Effects of Several...Ch. 2 - Prob. 6ECh. 2 - Prob. 7ECh. 2 - Analyzing the Effects of Transactions In...Ch. 2 - Prob. 9ECh. 2 - Prob. 10ECh. 2 - Prob. 11ECh. 2 - Prob. 12ECh. 2 - Prob. 13ECh. 2 - Prob. 14ECh. 2 - Prob. 15ECh. 2 - Prob. 16ECh. 2 - Inferring Typical Investing and Financing...Ch. 2 - Prob. 18ECh. 2 - Prob. 19ECh. 2 - Prob. 20ECh. 2 - Identifying Accounts on a Classified Balance Sheet...Ch. 2 - Prob. 2PCh. 2 - Prob. 3PCh. 2 - Prob. 4PCh. 2 - Prob. 5PCh. 2 - Prob. 6PCh. 2 - Prob. 1APCh. 2 - Prob. 2APCh. 2 - Prob. 3APCh. 2 - Prob. 4APCh. 2 - Prob. 1CPCh. 2 - Prob. 2CPCh. 2 - Prob. 3CPCh. 2 - Prob. 4CPCh. 2 - Prob. 5CPCh. 2 - Prob. 6CPCh. 2 - Prob. 7CPCh. 2 - Prob. 8CPCh. 2 - Prob. 1CC
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