Chapter 2, Problem 16E

1.

To determine

Prepare T-accounts of Company S.

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 of company S are as follows:

Cash
Beg.	0
(a)	40,000	4,000	(c)
		1,000	(d)
	35,000

Short-Term Notes Receivable
Beg.	0
(e)	4,000
	4,000

Land
Beg.	0
(b)	16,000	4,000	(e)
	12,000

Equipment
Beg.	0
(c)	20,000
(d)	1,000
	21,000

Short-Term Notes Payable
		0	Beg.
		16,000	(b)
		16,000

Long-Term Notes Payable
		0	Beg.
		16,000	(c)
		16,000

Common Stock
		0	Beg.
		10,000	(a)
		10,000

Additional Paid-in Capital
			Beg.
		30,000	(a)
		30,000

2.

To determine

Prepare trial balance at December 31, 2018.

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, 2018
Particulars	Debit ($)	Credit ($)
Cash	35,000
Short-term notes receivable	4,000
Land	12,000
Equipment	21,000
Short-term notes payable		16,000
Long-term notes payable		16,000
Common stock		10,000
Additional paid-in capital		30,000
Totals	72,000	72,000

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.

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, 2018
Assets	$		Liabilities	$
Current assets:			Current liabilities:
Cash	35,000		Short-term notes payable	16,000
Short-term investments	4,000		Total current liabilities	16,000
Total current assets	39,000		Long-term notes payable	16,000
			Total liabilities (A)	32,000
Land	12,000		Stockholders' equity
Equipment	21,000		Common stock	10,000
			Additional paid-in capital	30,000
			Total stockholder's equity (B)	40,000
Total assets	72,000		Total liabilities and stockholder’s equity $\left(\text{A+B}\right)$	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 2018, 2019 and 2020, and also suggest about the company.

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:

Year	Current ratio
2018	2.44 (1)
2019	2.26 (2)
2020	1.18 (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 1:

Calculate current ratio for 2018

$\begin{array}{c}\text{Current ratio=}\frac{\text{Current assets}}{\text{Current liabilities}}\\ \text{=}\frac{\text{ \$39,000}}{\text{\$16,000}}\\ \text{=2}\text{.44}\end{array}$

Working note 2:

Calculate current ratio for 2019

$\begin{array}{c}\text{Current ratio=}\frac{\text{Current assets}}{\text{Current liabilities}}\\ \text{=}\frac{\text{ \$52,000}}{\text{\$23,000}}\\ \text{=2}\text{.26}\end{array}$

Working note 3:

Calculate current ratio for 2020

$\begin{array}{c}\text{Current ratio=}\frac{\text{Current assets}}{\text{Current liabilities}}\\ \text{=}\frac{\text{ \$47,000}}{\text{\$40,000}}\\ \text{=1}\text{.18}\end{array}$

5.

To determine

Describe the recommendation about lending money to Company S.

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.