Chapter 2, Problem 2.5P

1.

To determine

Record the journal entries of Company A.

Explanation of Solution

Journal:

Journal is the method of recording monetary business transactions in chronological order. It records the debit and credit aspects of each transaction to abide by the double-entry system.

Rules of Debit and Credit:

Following rules are followed for debiting and crediting different accounts while they occur in business transactions:

• Debit, all increase in assets, expenses and dividends, all decrease in liabilities, revenues and stockholders’ equities.
• Credit, all increase in liabilities, revenues, and stockholders’ equities, all decrease in assets, expenses.

Journal entries of Company A are as follows:

a. Cash borrowed from banks:

Date	Accounts title and explanation	Ref.	Debit ($)	Credit ($)
	Cash (+A)		18,266
	Notes payable (+L)			18,266
	(To record cash borrowed from bank)

Table (1)

• Cash is an assets account and it increased the value of asset by $18,266. Hence, debit the cash account for $18,266.
• Notes payable is a liability account, and it increased the value of liabilities by $18,266. Hence, credit the notes payable for $18,266.

b. Purchase of additional investment:

Date	Accounts title and explanation	Ref.	Debit ($)	Credit ($)
	Long-term investment (+A) (1)		4,200
	Short-term investment (+A) (2)		16,800
	Cash (-A)			21,000
	(To record purchase of investment)

Table (2)

• Long-term investment is an assets account and it increased the value of asset by $4,200. Hence, debit the long-term investment account for $4,200.
• Short-term investment is an assets account and it increased the value of asset by $16,800. Hence, debit the short-term investment account for $16,800.
• Cash is an assets account and it decreased the value of asset by $21,000. Hence, credit the cash account for $21,000.

Working note:

Calculate the value of long-term investment

$\begin{array}{c}\text{Long-term investment = Total investment value }\times \frac{1}{5}\\ =\$21,000\times \frac{1}{5}\\ =\$4,200\end{array}$ (1)

Calculate the value of short-term investment

$\begin{array}{c}\text{Long-term investment = }\left(\begin{array}{l}\text{Total investment value }-\\ \text{Long-term investment }\end{array}\right)\\ =\$21,000-\$4,200\\ =\$16,800\end{array}$ (2)

c. Property, plant and equipment purchased on account and in cash:

Date	Accounts title and explanation	Ref.	Debit ($)	Credit ($)
	Buildings (+A)		10,981
	Cash (-A)			9,571
	Short-term notes payable (+L)			1,410
	(To record purchase of property, plant and equipment on account and in cash)

Table (3)

• Property, plant and equipment are an assets account and it increased the value of asset by $10,981. Hence, debit the building account for $10,981.
• Cash is an assets account and it decreased the value of asset by $9,571. Hence, credit the cash account for $9,571.
•  Notes payable is a liability account, and it increased the value of liabilities by $1,410. Hence, credit the notes payable for $1,410.

d. Issuance of common stock:

Date	Accounts title and explanation	Ref.	Debit ($)	Credit ($)
	Cash (+A)		1,469
	Common stock (+SE)			1
	Additional paid-in capital (+SE)			1,468
	(To record the issuance of common stock)

Table (4)

• Cash is an assets account and it increased the value of asset by $1,469. Hence, debit the cash account for $1,469.
• Common stock is a component of stockholder’s equity and it increased the value of stockholder’s equity by $1. Hence, credit the common stock for $1.
• Additional paid-in capital is a component of stockholder’s equity and it increased the value of stockholder’s equity by $1,468. Hence, credit the additional paid-in capital for $1,468.

e. Cash paid to invest short-term investment:

Date	Accounts title and explanation	Ref.	Debit ($)	Credit ($)
	Short-term investment (+A)		18,810
	Cash (-A)			18,810
	(To record cash paid to short-term investment)

Table (5)

• Short-term investment is an assets account and it increased the value of asset by $18,810. Hence, debit the short-term investment account for $18,810.
• Cash is an assets account and it decreased the value of asset by $18,810. Hence, credit the cash account for $18,810.

f. Declared cash dividends:

Date	Accounts title and explanation	Ref.	Debit ($)	Credit ($)
	Retained earnings (-SE)		11,126
	Dividends payable (+L)			11,126
	(To record dividends declared to the investors)

Table (6)

• Retained earnings are a component of stockholder’s equity and it decreased the value of stockholder’s equity by $11,126. Hence, debit retained earnings for $11,126.
• Dividends payable is a liability account and it increased the value of liability by $11,126. Hence, credit the dividends payable for $11,126.

2.

To determine

Prepare T-accounts for the given accounts.

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 the given accounts are as follows:

Cash
Beg.	13,844
(a)	18,266	21,000	(b)
(d)	1,469	9,571	(c)
(e)	18,810
	21,818

Short-Term Investments
Beg.	11,233
(b)	16,800	18,810	(e)
	9,223

Accounts Receivable
Beg.	17,460
	17,460

Inventories
Beg.	2,111
	2,111

Other Current Assets
Beg.	23,883
	23,883

Long-term investments
Beg.	130,162
(b)	4,200
	134,362

Property, Plant, and Equipment
Beg.	20,624
(c)	10,981
	31,605

Other Non-current Assets
Beg.	12,522
	12,522

Accounts Payable
		30,196	Beg.
		30,196

Accrued  Expenses
		18,453	Beg.
		18,453

Unearned  Revenue
		8,491	Beg.
		8,491

Short-term Notes Payable
		6,308
		1,410	(c)
		7,718

Dividends Payable
		0	Beg.
		11,126	(f)
		11,126

Long-term Debt
		28,987	Beg.
		18,266	(a)
		47,253

Other Non-current Liabilities
		27,857	Beg.
		27,857

Common  Stock
		1	Beg
		1	(d)
		2

Additional Paid-in Capital
		23,312	Beg.
		1,468	(d)
		24,780

Retained Earnings
		88,234	Beg.
(f)	11,126
		77,108

3.

To determine

Prepare the balance sheet of Company A at September 26, 2015.

Explanation of Solution

Balance Sheet:

Balance Sheet summarizes the assets, the liabilities, and the Stockholder’s equity of a company at a given date. It is also known as the statement of financial status of the business.

Balance sheet of Company A is as follows:

Company A
Balance sheet
at September 26, 2015
(in millions)
Assets	$ (in millions)	$ (in million)
Current Assets:
Cash	21,818
Short-term investments	9,223
Accounts receivable	17,460
Inventories	2,111
Other current assets	23,883
Total current assets		74,495
Long-term investments		134,362
Property, plant and equipment		31,605
Other noncurrent assets		12,522
Total assets		252,984
Liabilities and Stockholders’ Equity
Current Liabilities:
Accounts payable	30,196
Accrued expenses	18,453
Unearned revenue	8,491
Dividends payable	11,126
Short-term notes payable	7,718
Total current liabilities		75,984
Long-term debt		47,253
Other noncurrent liabilities		27,857
Total liabilities		151,094
Stockholders’ Equity:
Common stock		2
Additional paid-in capital		24,780
Retained earnings		77,108
Total stockholders’ equity		101,890
Total liabilities and stockholders’ equity		252,984

Table (7)

Therefore, the total assets of Company A are $252,984, and the total liabilities and stockholders’ equity is $252,984.

4.

To determine

Calculate the current ratio of company A, and also suggest about the company.

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 of company. A current ratio is a useful tool for analysis of financials of a company.

Calculate the current ratio of Company A as follows:

Here,

Current assets = $74,495

Current liabilities= $75,984

$\begin{array}{c}\text{Current ratio=}\frac{\text{Current assets}}{\text{Current liabilities}}\\ \text{=}\frac{\text{ \$74,495}}{\text{\$75,984}}\\ \text{=0}\text{.98}\end{array}$

Therefore, the current ration of Company A is 0.98

Current ratio of Company A has relatively low liquidity, because for every one dollar of current liabilities, Company C has less than one dollar of current assets.