Chapter 2, Problem 2.1CP

Determining Financial Statement Effects of Various Transactions

Ag Bio Tech (ABT) was organized on January 1 by four friends. Each organizer invested $10,000 in the company and, in turn, was issued 8,000 shares of common stock. To date, they are the only stockholders. During the first month (January), the company had the following Five events:

1. a. Collected a total of $40,000 from the organizers and. in turn, issued common stock.
2. b. Purchased a building for $65,000, equipment for $16,000, and three acres of land for $18.000; paid $13,000 in cash and signed a note for the balance, which is due to be paid in 15 years.
3. c. One stockholder reported to the company that 500 shares of his ABT stock had been sold and transferred to another stockholder for $5,000 cash.
4. d. Purchased supplies for $3,000 cash.
5. e. Sold one acre of land for $6,000 cash to another company.

Required:

1. 1. Was ABT organized as a partnership or corporation? Explain the basis for your answer.
2. 2. During the first month, the records of the company were inadequate. You were asked to pre­pare a summary of the preceding transactions. To develop a quick assessment of their eco­nomic effects on ABT, you have decided to complete the spreadsheet that follows and to use plus (+) for increases and minus (−) for decreases for each account.

TIP: Transaction (a) is presented below as an example.

1. 3. Did you include the transaction between the two stockholders—event (c)—in the spreadsheet? Why?

TIP: Think about whether this event caused ABT to receive or give up anything.

1. 4. Based only on the completed spreadsheet, provide the following amounts (show computations):
   1. a. Total assets at the end of the month.
   2. b. Total liabilities at the end of the month.
   3. c. Total stockholders’ equity at the end of the month.
   4. d. Cash balance at the end of the month.
   5. e. Total current assets at the end of the month.
2. 5. As of January 31, has the financing for ABT’s investment in assets primarily come from liabilities or stockholders’ equity?