Chapter 2, Problem 2.3P

1.

To determine

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:

1. (a) The title of the account
2. (b) The left or debit side
3. (c) The right or credit side

T-accounts for each of the balance sheet accounts are as follows:

Cash
Beg.	22,000

Investments (short-term)
Beg.	3,000

Accounts Receivable
Beg.	3,000

Equipment
Beg.	50,000

Factory Building
Beg.	90,000

Intangibles
Beg.	5,000

Accounts Payable
		15,000	Beg.

Accrued Liabilities Payable
		4,000	Beg.

Notes Payable (short-term)
		7,000	Beg.

Long-Term Notes Payable
		47,000	Beg.

Common Stock
		10,000	Beg.

Additional Paid-in Capital
		80,000	Beg.

Retained Earnings
		31,000	Beg.

2.

To determine

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:

1. (a) The title of the account
2. (b) The left or debit side
3. (c) The right or credit side

T-accounts for each of the balance sheet accounts are as follows:

Cash
Beg.	22,000
(e)	11,000	10,000	(a)
(f)	9,000	5,000	(b)
(i)	1,000	5,000	(c)
		3,000	(g)
		8,000	(h)
	12,000

Investments (short-term)
Beg.	3,000
(a)	10,000
	13,000

Accounts Receivable
Beg.	3,000
	3,000

Inventory
Beg.	20,000
	20,000

Notes Receivable (long-term)
	Beg.	1,000
	(b)	5,000
		6,000

Equipment
Beg.	50,000
(c)	18,000	1,000	(i)
End.	67,000

Factory Building
Beg.	90,000
(h)	24,000
End.	114,000

Intangibles
Beg.	5,000
(g)	3,000
End.	8,000

Notes Payable (short-term)
		7,000	Beg.
		13,000	(c)
		9,000	(f)
		29,000

Accounts Payable
		15,000	Beg.
		15,000

Accrued Liabilities Payable
		4,000	Beg.
		4,000

Long-Term Notes Payable
		47,000	Beg.
		16,000	(h)
		63,000

Common Stock
		10,000	Beg.
		1,000	(e)
		11,000

Additional Paid-in Capital
		80,000	Beg.
		10,000	(e)
		90,000

Retained Earnings
		31,000	Beg.
		31,000

3.

To determine

Explain the response for event (d).

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, hiring a new president is not creating any impact on assets, liabilities and stockholder’s equity of the business, because it is not a business transaction.

4.

To determine

Prepare the trial balance of Company C at December 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 C is as follows:

Company C
Trial balance
At December 31
Particulars	Debit ($)	Credit ($)
Cash	12,000
Investments (short-term)	13,000
Accounts receivable	3,000
Inventory	20,000
Notes receivable (long-term)	6,000
Equipment	67,000
Factory building	114,000
Intangibles	8,000
Accounts payable		15,000
Accrued liabilities payable		4,000
Notes payable (short-term)		29,000
Notes payable (long-term)		63,000
Common stock		11,000
Additional paid-in capital		90,000
Retained earnings		31,000
Total	243,000	243,000

Table (1)

Therefore, the total of debit, and credit columns of trial balance is $243,000 and agree.

5.

To determine

Prepare a classified balance sheet of Company C.

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 C on December, 31 is as follows:

Company C
Balance sheet
December, 31
Assets	$		Liabilities	$
Current assets:			Current liabilities:
Cash	12,000		Accounts payable	15,000
Investment	13,000		Accrued liabilities payable	4,000
Accounts receivable	3,000		Notes payable	29,000
Inventory	20,000		Total current liabilities	48,000
Total current assets	48,000		Long-term notes payable	63,000
			Total liabilities (A)	111,000
Notes receivable	6,000		Stockholders' equity
Equipment	67,000		Common stock	11,000
Factory building	114,000		Additional paid-in capital	90,000
Intangibles	8,000		Retained earnings	31,000
			Total stockholder's equity (B)	132,000
Total assets	243,000		Total liabilities and stockholder’s equity  $\left(\text{A+B}\right)$	243,000

Table (2)

Therefore, the total assets of Company C are $243,000, and the total liabilities and stockholders’ equity is $243,000.

6.

To determine

Calculate the current ratio of Company C 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 C as follows:

Here,

Current assets = $48,000

Current liabilities= $48,000

$\begin{array}{c}\text{Current ratio=}\frac{\text{Current assets}}{\text{Current liabilities}}\\ \text{=}\frac{\text{ \$48,000}}{\text{\$48,000}}\\ \text{=1}\text{.00}\end{array}$

Therefore, the current ration of Company C is 1.00

Current ratio of Company C has relatively low liquidity, because for every one dollar of current liabilities, Company C has only equal amount of one dollar of current assets.