Chapter 2, Problem 1PB

Determining Financial Statement Effects of Various Transactions

Swish Watch Corporation manufactures, sells, and services expensive watches. The company has been in business for three years. At the end of the previous year, the accounting records reported total assets of $2,255,000 and total liabilities of $1,780,000. During the current year, the following summarized events occurred:

1. a. Issued additional shares of common stock, for $109,000 cash.
2. b. Borrowed $186,000 cash from the bank and signed a 10-year note.
3. c. A stockholder sold $5,000 of his stock in Swish Watch Corporation to another investor.
4. d. d. Built an addition on the factory buildings for $200,000 and paid cash to the contractor.
5. e. Purchased equipment for the new addition for $44,000, paying $12,000 in cash and signing a six-month note for the balance.
6. f. Returned a $4,000 piece of equipment, from (e), because it proved to be defective: received a cash refund.

Required:

1. 1. Complete the spreadsheet that follows, using plus ( + ) for increases and minus (−) for decreases for each account. The first transaction is used as an example.

1. 2. Did you include event (c) in the spreadsheet? Why?
2. 3. Based on beginning balances plus the completed spreadsheet, provide the following amounts (show computations):
   1. a. Total assets at the end of the year.
   2. b. Total liabilities at the end of the year.

  Total stockholders’ equity at the end of the year.

1. 4. At the end of the current year, has the financing for Swish Watch Corporation’s investment in assets primarily come from liabilities or stockholders’ equity?