Chapter 2, Problem 2.2P

Determining Financial Statement Effects of Various Transactions

East Hill Home Healthcare Services was organized by four friends who each invested $10,000 in the company and, in turn, was issued 8,000 shares of $1.00 par value stock. To date, they are the only stockholders. At the end of last year, the accounting records reflected total assets of $700,000 ($50,000 cash; $500,000 land; $50,000 equipment; and $100,000 buildings), total liabilities of $200,000 (short-term notes payable $100,000 and long-term notes payable $100,000), and stockholders’ equity of $500,000 ($20,000 common stock. $80,000 additional paid-in capital, and $400,000 retained earnings). During the current year, the following summarized events occurred:

a. Sold 9,000 additional shares of stock to the original organizers for a total of $90,000 cash.

b. Purchased a building for $60,000.equipment for $15,000, and four acres of land for $14,000; paid $9,000 in cash and signed a note for the balance (due in 15 years). (Hint: Five different accounts are affected.)

c. Sold one acre of land acquired in (b) for $3,500 cash to another company.

d. Purchased short-term investments for $18,000 cash.

e. One stockholder reported to the company that 300 shares of his East Hill stock had been sold and transferred to another stockholder for $3,000 cash.

f. Lent one of the shareholders $5,000 for moving costs and received a signed six-month note from the shareholder.

Required:

1. Was East Hill Home Healthcare Services organized as a sole proprietorship, a partnership, or a corporation? Explain the basis for your answer.

2. During the current year, the records of the company were inadequate. You were asked to prepare the summary of transactions shown above. To develop a quick assessment of their economic effects on East Hill Home Healthcare Services, you have decided to complete the tabulation that follows and to use plus (+) for increases and minus (−) for decreases for each account. The first event is used as an example.

ASSETS

=

LIABILITIES

+

STOCKHOLDERS’ EQUITY

Cash

Short-Term Investments

Notes Receivable

Land

Buildings

Equipment

Short-Term Notes Payable

Long-Term Notes Payable

Common Stock

Additional Paid-in Capital

Retained Earnings

Beg. (a)

50,000 + 90,000

500,000

100,000

50,000

= =

100,000

100000

20,000 + +9,000

80,000 +81,000

400,000

3. Did you include the transaction between the two stockholders—event (e)—in the tabulation? Why?

4. Based only on the completed tabulation, 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.
3. c. Total stockholders’ equity at the end of the year.
4. d. Cash balance at the end of the year.
5. e. Total current assets at the end of the year.

5. Compute the current ratio for the current year. What does this suggest about the company?