Recording Transactions in T-Accounts, Preparing the
Ethan Allen Interiors, Inc., is a leading manufacturer and retailer of home furnishings in the United States and abroad. The following is adapted from Ethan Allen’s recent annual financial report (fiscal year ending on June 30). Amounts are in thousands.
Cash and cash equivalents | $ 78,519 | Accounts payable | $26,958 |
Short-term investments | 12,909 | Accrued expenses payable | 127,639 |
15,036 | Long-term debt (includes the | ||
Inventories | 141,692 | current portion of $19) | 165,032 |
Prepaid expenses and other current assets | 20,372 | Other long-term liabilities | 27,009 |
Common stock ($0.01 par value) | 484 | ||
Property, plant, and equipment | 294,853 | Additional paid-in capital | 359,728 |
Intangibles | 45,128 | 501,908 | |
Other assets | 19,816 | Other stockholders’ equity items | (580,433) |
Assume that the following events occurred in the first quarter ended September 30 of the next fiscal yean
- a. Issued 1,600 additional shares of stock for $1,020 in cash.
- b. Purchased $3,400 in additional intangibles for cash.
- c. Ordered $43,500 in wood and other raw materials for the manufacturing plants.
- d. Sold equipment at its cost for $4,020 cash.
- e. Purchased $2,980 in short-term investments for cash.
- f. Purchased property, plant, and equipment: paid $1,830 in cash and signed additional long-term notes for $9,400.
- g. Sold at cost other assets for $310 cash.
- h. Declared $300 in dividends.
Required:
- 1. Create T-accounts for each of the accounts on the balance sheet, including a new account Dividends Payable: enter the balances at June 30 as the beginning balances for the quarter.
- 2. Record each of the transactions for the first quarter ended September 30 in the T-accounts (including referencing) and determine the ending balances.
- 3. Explain your response to event (c).
- 4. Prepare a
trial balance at September 30. - 5. Prepare a classified balance sheet at September 30.
- 6. Compute the current ratio for the quarter ended September 30. What does this suggest about Ethan Allen Interiors. Inc.?
1.
Open the T-accounts for each of the balance sheet accounts, and enter the beginning balance for the current year.
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:
- (a) The title of the account
- (b) The left or debit side
- (c) The right or credit side
T-accounts for each of the balance sheet accounts are as follows:
Cash and Cash Equivalents | |||
Beg. | 78,519 |
Short-Term Investments | |||
Beg. | 12,909 |
Inventories | |||
Beg. | 141,692 |
Accounts Receivable | |||
Beg. | 15,036 |
Prepaid Expenses and Other Current Assets | |||
Beg. | 20,372 |
Property, Plant, and Equipment | |||
Beg. | 294,853 |
Intangibles | |||
Beg. | 45,128 |
Other Assets | |||
Beg. | 19,816 |
Accounts Payable | |||
26,958 | Beg. |
Accrued Expenses Payable | |||
127,639 | Beg. |
Long-Term Debt | |||
165,032 | Beg. |
Other Long-Term Liabilities | |||
27,009 | Beg. |
Common Stock | |||
484 | Beg. |
Additional Paid-in Capital | |||
359,728 | Beg. |
Retained Earnings | |||
501,908 | Beg. |
Other Stockholders’ Equity Items | |||
Beg. | 580,433 |
2.
Prepare the T-account for the given balance sheet accounts, and to determine the ending balance of each account.
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:
- (a) The title of the account
- (b) The left or debit side
- (c) The right or credit side
T-accounts for each of the balance sheet accounts are as follows:
Cash and Cash Equivalents | |||
Beg. | 78,519 | ||
(a) | 1,020 | 3,400 | (b) |
(d) | 4,020 | 2,980 | (e) |
(g) | 310 | 1,830 | (f) |
75,659 |
Short-Term Investments | |||
Beg. | 12,909 | ||
(e) | 2,980 | ||
15,889 |
Accounts Receivable | |||
Beg. | 15,036 | ||
15,036 |
Inventories | |||
Beg. | 141,692 | ||
141,692 |
Prepaid Expenses and Other Current Assets | |||
Beg. | 20,372 | ||
20,372 |
Property, Plant, and Equipment | |||
Beg. | 294,853 | ||
(f) | 11,230 | 4,020 | (d) |
302,063 |
Intangibles | |||
Beg. | 45,128 | ||
(b) | 3,400 | ||
48,528 |
Other Assets | |||
Beg. | 19,816 | ||
310 | (g) | ||
19,506 |
Accounts Payable | |||
26,958 | Beg. | ||
26,958 |
Accrued Expenses Payable | |||
127,639 | Beg. | ||
127,639 |
Dividends Payable | |||
. | 0 | Beg | |
300 | (h) | ||
300 |
Long-Term Debt | |||
165,032 | Beg. | ||
9,400 | (f) | ||
174,432 |
Other Long-Term Liabilities | |||
27,009 | Beg. | ||
27,009 |
Common Stock | |||
484 | Beg. | ||
16 | (a) | ||
500 |
Additional Paid-in Capital | |||
359,728 | Beg. | ||
1,004 | (a) | ||
360,732 |
Retained Earnings | |||
501,908 | Beg. | ||
(h) | 300 | ||
501,608 |
Other Stockholders’ Equity Items | |||
Beg. | 580,433 | ||
580,433 |
3.
Explain the response for event (c).
Explanation of Solution
Business transaction:
Business transaction is a record of any economic activity, resulting in the change in the value of the assets, the liabilities, and the stockholder’s equities, of a business. Business transaction is also referred to as financial transaction.
In this case, ordered wood and other raw material is not creating any impact on assets, liabilities and stockholder’s equity of the business, because it is not a business transaction.
4.
Prepare the trial balance of Company E at September 30.
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 E is as follows:
Company E | ||
Trial Balance | ||
At September 30 | ||
(in thousands of dollars) | ||
Particulars | Debit ($) | Credit ($) |
Cash and cash equivalents | 75,659 | |
Short-term investments | 15,889 | |
Accounts receivable | 15,036 | |
Inventories | 141,692 | |
Prepaid expenses and other current assets | 20,372 | |
Property, plant, and equipment | 302,063 | |
Intangibles | 48,528 | |
Other assets | 19,506 | |
Accounts payable | 26,958 | |
Accrued expenses payable | 127,639 | |
Dividends payable | 300 | |
Long-term debt (current portion, $19) | 174,432 | |
Other long-term liabilities | 27,009 | |
Common stock | 500 | |
Additional paid-in capital | 360,732 | |
Retained earnings | 501,608 | |
Other stockholders’ equity items | 580,433 | |
Totals | 1,219,178 | 1,219,178 |
Table (1)
Therefore, the total of debit, and credit columns of trial balance is $1,219,178 and agree.
5.
Prepare a classified balance sheet of Company E at September 30.
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 E on September 30 is as follows:
Company E | ||
Balance Sheet | ||
At September 30 | ||
(in thousands of dollars) | ||
Assets | $ | $ |
Current assets | ||
Cash and cash equivalents | 75,659 | |
Short-term investments | 15,889 | |
Accounts receivable | 15,036 | |
Inventories | 141,692 | |
Prepaid expenses and other current assets | 20,372 | |
Total current assets | 268,648 | |
Property, plant, and equipment | 302,063 | |
Intangibles | 48,528 | |
Other assets | 19,506 | |
Total Assets | 638,745 | |
Liabilities and stockholder's equity | ||
Liabilities | ||
Current liabilities | ||
Accounts payable | 26,958 | |
Accrued expenses payable | 127,639 | |
Dividends payable | 300 | |
Current portion of long-term debt | 19 | |
Total current liabilities | 154,916 | |
Long-term debt | 174,413 | |
Other long-term liabilities | 27,009 | |
Total Liabilities | 356,338 | |
Stockholders’ Equity | ||
Common stock ($0.01 par value) | 500 | |
Additional paid-in capital | 360,732 | |
Retained earnings | 501,608 | |
Other stockholders’ equity items | (580,433) | |
Total Stockholders’ Equity | 282,407 | |
Total Liabilities and Stockholders’ Equity | 638,745 |
Table (2)
Therefore, the total assets of Company E are $638,745, and the total liabilities and stockholders’ equity is $638,745.
6.
Calculate the current ratio of Company E 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 E as follows:
Here,
Current assets = $268,648
Current liabilities= $154,916
Therefore, the current ration of Company E is 1.73
Current ratio of Company E has sufficient liquidity, because for every one dollar of current liabilities, Company E has more than one dollar of current assets.
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