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 1CC

1.

To determine

Prepare the journal entries for the given events.

1.

Expert Solution
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Explanation of Solution

Journal:

Journal is the method of recording monetary business transactions in chronological order. It records the debit and credit aspects of each transaction to abide by the double-entry system.

Rules of Debit and Credit:

Following rules are followed for debiting and crediting different accounts while they occur in business transactions:

  • Debit, all increase in assets, expenses and dividends, all decrease in liabilities, revenues and stockholders’ equities.
  • Credit, all increase in liabilities, revenues, and stockholders’ equities, all decrease in assets, expenses.

Journal entries of Company P are as follows:

a. Issuance of common stock:

DateAccounts title and explanationRef.Debit ($)Credit ($)
 Cash (+A) 25,000 
 Equipment (+A) 36,000 
 Common stock (+SE) (1)  200
 Additional paid-in capital (+SE) (2)  60,800
 (To record the issuance of common stock)   

Table (1)

  • Cash is an assets account and it increased the value of asset by $25,000. Hence, debit the cash account for $25,000.
  • Equipment is an assets account and it increased the value of asset by $36,000. Hence, debit the equipment account for $36,000.
  • Common stock is a component of stockholder’s equity and it increased the value of stockholder’s equity by $200. Hence, credit the common stock for $200.
  • Additional paid-in capital is a component of stockholder’s equity and it increased the value of stockholder’s equity by $60,800. Hence, credit the additional paid-in capital for $60,800.

Working note:

Calculate the value of common stock

Common stock =( Number of share×Par value per share)=4,000 shares×$0.05=$200 (1)

Calculate the value of additional paid in capital

Additional paid-in capital = (Total cash receivedCommon stock value (1))=($61,000$200)=$60,800 (2)

b. Purchase of building and land on notes and in cash:

DateAccounts title and explanationRef.Debit ($)Credit ($)
 Land (+A   
 Building (+A) 18,000 
 Cash (-A) 72,00010,000
 Mortgage notes payable (+L)  80,000
 (To record purchase of land and building on note and in cash)   

Table (2)

  • Land is an assets account and it increased the value of asset by $18,000. Hence, debit the land account for $18,000.
  • Building is an assets account and it increased the value of asset by $72,000. Hence, debit the building account for $72,000.
  • Cash is an assets account and it decreased the value of asset by $10,000. Hence, credit the cash account for $10,000.
  •  Mortgage notes payable is a liability account, and it increased the value of liabilities by $80,000. Hence, credit the mortgage notes payable for $80,000.

c. Purchase of equipment on notes and cash:

DateAccounts title and explanationRef.Debit ($)Credit ($)
 Equipment (+A) 6,500 
 Cash (-A)  2,500
 Short-term notes payable (+L)  4,000
 (To record purchase of equipment on account and in cash)   

Table (3)

  • Equipment is an assets account and it increased the value of asset by $6,500. Hence, debit the equipment account for $6,500.
  • Cash is an assets account and it decreased the value of asset by $2,500. Hence, credit the cash account for $2,500.
  • Short-term notes payable is a liability account, and it increased the value of liabilities by $4,000. Hence, credit the notes payable for $4,000.

d. Hiring of new employee:

In this case, journal entry is not required, because it is not a business transaction.

e. Cash paid to bank:

DateAccounts title and explanationRef.Debit ($)Credit ($)
 Mortgage notes payable (+L) 1,000 
 Cash (+A)  1,000
 (To record cash paid to creditors)   

Table (4)

  • Mortgage notes payable is a liability account, and it decreased the value of liabilities by $1,000. Hence, debit the mortgage notes payable for $1,000.
  • Cash is an assets account and it decreased the value of asset by $1,000. Hence, credit the cash account for $1,000.

f. Purchase of short-term investment:

DateAccounts title and explanationRef.Debit ($)Credit ($)
 Short-term investments (A+) 5,000 
 Cash (-A)  5,000
 (To record purchase of short-term investment)   

Table (5)

  • Short-term investment is an assets account and it increased the value of asset by $5,000. Hence, debit the short-term investment account for $5,000.
  • Cash is an assets account and it decreased the value of asset by $5,000. Hence, credit the cash account for $5,000.

g. Ordered inventory from Company PC:

In this case, journal entry is not required, because it is not a business transaction.

2.

To determine

Prepare T-account for the given transaction.

2.

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 P are as follows:

Cash
Beg.0
(a)25,00010,000(b)
2,500(c)
1,000(e)
5,000(f)
6,500
Short-term Investments
Beg.0
(f)5,000
5,000
Equipment
Beg.0
(a)36,000
(c)6,500
42,500
Land
Beg.0
(b)18,000
18,000
Buildings
Beg.0
(b)72,000
72,000
Short-term Notes Payable
0Beg.
4,000(c)
4,000
Mortgage Notes Payable
0Beg.
(e)1,00080,000(b)
79,000
Common Stock
0Beg.
200(a)
200
Additional Paid-in Capital
0Beg.
60,800(a)
60,800

3.

To determine

Prepare the trial balance of Company P on March 31, 2013.

3.

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 P is as follows:

Company P
Trial Balance
March 31, 2013
ParticularsDebit ($)Credit ($)
Cash$6,500
Short-term investments5,000
Equipment42,500
Land18,000
Buildings72,000
Short-term notes payable$4,000
Mortgage notes payable79,000
Common stock200
Additional paid-in capital60,800
Totals$144,000 $144,000

Table (6)

Therefore, the total of debit, and credit columns of trial balance is $144,000 and agree.

4.

To determine

Prepare the classified balance sheet of Company P on March 31, 2013.

4.

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 P on January 31, 2013 is as follows:

Company P
Balance Sheet
On March 31, 2013
Assets$$
Current Assets:
Cash6,500
Short-term investments5,000
Total current assets11,500
Equipment42,500
Land18,000
Buildings72,000
Total assets144,000
Liabilities and Stockholder’s Equity
Current Liabilities:
Short-term notes payable4,000
Total current liabilities4,000
Mortgage notes payable79,000
Total liabilities83,000
Stockholder’s Equity:
Common stock ($0.05 par value)200
Additional paid-in capital60,800
Total stockholder’s equity61,000
Total liabilities and stockholder’s equity144,000

Table (7)

Therefore, the total assets of Company P are $144,000, and the total liabilities and stockholders’ equity is $144,000.

5.

To determine

Indicate whether each of given item is an investing (I) or financing (F), also indicate effect on the cash flow (+ for increase, – for decrease and NE for no effect).

5.

Expert Solution
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Explanation of Solution

Statement of cash flows: Statement of cash flow is a financial statement that shows the cash and cash equivalents of a company for a particular period of time. It shows the net changes in cash, by reporting the sources and uses of cash as a result of operating, investing, and financing activities of a company.

TransactionType of Activity

Effect

on Cash

(a) Issuance of common stockFinancing activityIncreased by $25,000
(b) Purchase of land and buildingsInvesting activityDecreased by $3,400
(c) Purchase of new equipment and office furnitureInvesting activityDecreased by $2,500
(d) Hiring of new employeeNo effectNo effect
(e) Cash paid to bank on notes playableFinancing activityDecreased by $1,000
(f) Purchase of short-term investmentInvesting activityDecreased by $5,000
(g) Ordered inventory from Company PNo effectNo effect

Table (8)

(a) Issuance of common stock: In this transaction, issuance of common stock is the finance source of the company, and it is cash inflow of the company. So, issuance common stock is reported under financing activity section of cash flow statement and it increased the value of cash by $25,000.

(b) Purchase of land and buildings: In this transaction, company purchased land and building for investing purpose, and it decreased the value of cash. So, purchase of land and building is reported under investing activity section of cash flow statement, and it decreased the value of cash by $10,000.

(c) Purchase of new equipment and office furniture: In this transaction, company purchased new equipment and office furniture for investing purpose, and it decreased the value of cash. So, purchase of equipment is reported under investing activity section of cash flow statement, and it decreased the value of cash by $2,500.

(d) Hiring of new employee: In this case, ordered wood and raw materials is not creating any impact on assets, liabilities and stockholder’s equity of the business, because it is not a business transaction.

(e) Cash paid to bank on notes playable: In this transaction, company paid loan amount to bank for financing purpose, and it is cash outflow of the company. So, cash paid to bank is reported under financing activity section of cash flow statement and it decreased the value of cash by $1,000

(f) Purchase of short-term investment: In this transaction, company purchased short-term investment for investing purpose, and it decreased the value of cash. So, purchase of short-term investment is reported under investing activity section of statement of cash flow, and it decreased the value of cash by $5,000.

(g) Ordered inventory from Company P: In this case, ordered inventory is not creating any impact on assets, liabilities and stockholder’s equity of the business, because it is not a business transaction.

5.

To determine

Calculate the current ratio of Company P and evaluate the ratio.

5.

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.

Calculate the current ratio of Company P at 2013 as follows:

Here,

Current assets = $11,500 (3)

Current liabilities= $4,000 (short-term notes payable)

Current ratio=Current assetsCurrent liabilities= $11,500$4,000=2.875

Therefore, the current ration of Company P is 2.875

In this case, Company P has more current assets than current liabilities. Therefore, Company P has better position to repay the current liabilities.

Working note:

Calculate the value of current assets

Total current assets = (Cash+Short-term investment)=($6,500+$5,000)=$11,500 (3)

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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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