Chapter 2, Problem 1CON

1.

To determine

Prepare the journal entries for the given events.

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.

Journal entries of Company P are as follows:

Issuance of common stock:

Date	Accounts title and explanation	Debit ($)	Credit ($)
	Cash	25,000
	Equipment	36,000
	Common stock (1)		200
	Additional paid-in capital  (2)		60,800
	(To record the issuance of common stock)

Table (1)

Working note:

(1) Calculate the value of common stock

$\begin{array}{c}\text{Common stock =}\left(\text{ Number of share}\times \text{Par value per share}\right)\\ \text{=4,000 shares}\times \text{\$0}\text{.05}\\ \text{=\$200}\end{array}$

(2) Calculate the value of additional paid in capital

$\begin{array}{c}\text{Additional paid-in capital = }\left(\begin{array}{l}\text{Total cash received}-\\ \text{Common stock value (1)}\end{array}\right)\\ =\left(\$61,000-\$200\right)\\ =\$60,800\end{array}$

Purchase of building and land on notes and in cash:

Date	Accounts title and explanation	Debit ($)	Credit ($)
	Land	18,000
	Building	72,000
	Cash		10,000
	Mortgage notes payable		80,000
	(To record purchase of land and building on note and in cash)

Table (2)

Purchase of equipment on notes and cash:

Date	Accounts title and explanation	Debit ($)	Credit ($)
	Equipment	6,500
	Cash		2,500
	Short-term notes payable		4,000
	(To record purchase of equipment on account and in cash)

Table (3)

Hiring of new employee:

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

Cash paid to bank:

Date	Accounts title and explanation	Debit ($)	Credit ($)
	Mortgage notes payable	1,000
	Cash		1,000
	(To record cash paid to creditors)

Table (4)

Purchase of short-term investment:

Date	Accounts title and explanation	Debit ($)	Credit ($)
	Short-term investments	5,000
	Cash		5,000
	(To record purchase of short-term investment)

Table (6)

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.

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 P are as follows:

Cash
Beg.	0
(a)	25,000	10,000	(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

Land
Beg.	0
(b)	18,000
	18,000

Buildings
Beg.	0
(b)	72,000
	72,000

Short-term Notes Payable
		0	Beg.
		4,000	(c)
		4,000

Mortgage Notes Payable
		0	Beg.
(e)	1,000	80,000	(b)
		79,000

Common Stock
		0	Beg.
		200	(a)
		200

Additional Paid-in Capital
		0	Beg.
		60,800	(a)
		60,800

3.

To determine

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

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
Particulars	Debit ($)	Credit ($)
Cash	$6,500
Short-term investments	5,000
Equipment	42,500
Land	18,000
Buildings	72,000
Short-term notes payable		$4,000
Mortgage notes payable		79,000
Common stock		200
Additional paid-in capital		60,800
Totals	$144,000	$144,000

Table (7)

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.

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 is as follows:

Company P
Balance Sheet
On March 31
Assets	$	$
Current Assets:
Cash	6,500
Short-term investments	5,000
Total current assets		11,500
Equipment		42,500
Land		18,000
Buildings		72,000
Total assets		144,000
Liabilities and Stockholder’s Equity
Current Liabilities:
Short-term notes payable	4,000
Total current liabilities		4,000
Mortgage notes payable		79,000
Total liabilities		83,000
Stockholder’s Equity:
Common stock ($0.05 par value)		200
Additional paid-in capital		60,800
Total stockholder’s equity		61,000
Total liabilities and stockholder’s equity		144,000

Table (8)

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).

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.

Transaction	Type of Activity	Effect on Cash
(a) Issuance of common stock	Financing activity	Increased by $25,000
(b) Purchase of land and buildings	Investing activity	Decreased by $3,400
(c) Purchase of new equipment and office furniture	Investing activity	Decreased by $2,500
(d) Hiring of new employee	No effect	No effect
(e) Cash paid to bank on notes playable	Financing activity	Decreased by $1,000
(f) Purchase of short-term investment	Investing activity	Decreased by $5,000
(g) Ordered inventory from Company P	No effect	No effect

Table (9)

6.

To determine

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

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 as follows:

Here,

Current assets     =     $11,500 (3)

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

$\begin{array}{c}\text{Current ratio=}\frac{\text{Current assets}}{\text{Current liabilities}}\\ \text{=}\frac{\text{ \$11,500}}{\text{\$4,000}}\\ \text{=2}\text{.875}\end{array}$

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:

(3) Calculate the value of current assets

$\begin{array}{c}\text{Total current assets = }\left(\text{Cash+Short-term investment}\right)\\ =\left(\$6,500+\$5,000\right)\\ =\$11,500\end{array}$