1.
Record the
1.
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 $21,000.
Working note:
Calculate the value of long-term investment
Calculate the value of short-term investment
c. Property, plant and equipment purchased on account and in cash:
Date | Accounts title and explanation | Ref. | Debit ($) | 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 ($) |
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.
Prepare T-accounts for the given accounts.
2.
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 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 |
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.
Prepare the
3.
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.
Calculate the
4.
Explanation of Solution
Current Ratio:
A part of
Calculate the current ratio of Company A as follows:
Here,
Current assets = $74,495
Current liabilities= $75,984
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.
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