Chapter 2, Problem 2.8E

Recording Investing and Financing Activities

Kelsey Baker founded GolfDeals.com at the beginning of February. GolfDeals.com sells new and used golf equipment online. The following events occurred in February.

1. a. Borrowed $30,000 cash from a bank, signing a note due in three years.
2. b. Received investment of cash by organizers and distributed to them 500 shares of $0.10 par value common stock with a market price of $30 per share.
3. c. Purchased a warehouse for $115,000, paying $23,000 in cash and signing a note payable for the balance on a 10-year mortgage.
4. d. Purchased computer and office equipment for $20,000. paying $4,000 in cash and owing the rest on accounts payable to the manufacturers.
5. e. Loaned $1,000 to an employee who signed a note due in three months.
6. f. Paid $2,000 to the manufacturers in (d) above.
7. g. Purchased short-term investments for $10,000 cash.

Required:

For each of the events (a) through (g), prepare journal entries, checking that debits equal credits.

To determine

Record the journal entries of Company G.

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 G are as follows:

a. Cash borrowed from banks:

Date	Accounts title and explanation	Ref.	Debit ($)	Credit ($)
	Cash (+A)		30,000
	Notes payable (+L)			30,000
	(To record cash borrowed from bank)

Table (1)

• Cash is an assets account and it increased the value of asset by $30,000. Hence, debit the cash account for $30,000.
• Notes payable is a liability account, and it increased the value of liabilities by $30,000. Hence, credit the notes payable for $30,000.

b. Issuance of common stock:

Date	Accounts title and explanation	Ref.	Debit ($)	Credit ($)
	Cash (+A)		15,000
	Common stock (+SE) (1)			50
	Additional paid-in capital (+SE) (2)			14,950
	(To record the issuance of common stock)

Table (2)

• Cash is an assets account and it increased the value of asset by $15,000. Hence, debit the cash account for $15,000.
• Common stock is a component of stockholder’s equity and it increased the value of stockholder’s equity by $50, Hence, credit the common stock for $50.
• Additional paid-in capital is a component of stockholder’s equity and it increased the value of stockholder’s equity by $14,950, Hence, credit the additional paid-in capital for $14,950.

Working note:

Calculate the value of common stock

$\begin{array}{c}\text{Common stock = Number of share}\times \text{Par value per share}\\ \text{=500 share}\times \text{\$0}\text{.10}\\ \text{=\$50}\end{array}$ (1)

Calculate the value of additional paid in capital

$\begin{array}{c}\text{Additional paid-in capital = Number of shares}\times \left(\begin{array}{l}\text{Market value of per share}-\\ \text{Par value of per share}\end{array}\right)\\ =500\text{ shares}\times \left(\$30-\$0.10\right)\\ =500\text{ shares }\times \text{\$29}\text{.9}\\ \text{=\$14,950}\end{array}$ (2)

c. Buildings purchased on account and in cash:

Date	Accounts title and explanation	Ref.	Debit ($)	Credit ($)
	Buildings (+A)		115,000
	Cash (-A)			23,000
	Notes payable (+L)			92,000
	(To record purchase of buildings on account and in cash)

Table (3)

• Building is an assets account and it increased the value of asset by $115,000. Hence, debit the building account for $115,000.
• Cash is an assets account and it decreased the value of asset by $23,000. Hence, credit the cash account for $23,000.
•  Notes payable is a liability account, and it increased the value of liabilities by $92,000. Hence, credit the notes payable for $92,000.

d. Equipment purchased on account:

Date	Accounts title and explanation	Ref.	Debit ($)	Credit ($)
	Equipment (+A)		20,000
	Cash (-A)			4,000
	Accounts payable (+L)			16,000
	(To record purchase of equipment on account and in cash)

Table (4)

• Equipment is an assets account and it increased the value of asset by $20,000. Hence, debit the equipment account for $20,000.
• Cash is an assets account and it decreased the value of asset by $4,000. Hence, credit the cash account for $4,000.
• Accounts payable is a liability account and it increased the value of liability by $16,000. Hence, credit the accounts payable account by $16,000.

e. Cash paid to employee on notes:

Date	Accounts title and explanation	Ref.	Debit ($)	Credit ($)
	Notes receivable (+A)		1,000
	Cash (-A)			1,000
	(To record cash paid to an employee on note)

Table (5)

• Notes receivable is an assets account and it increased the value of asset by $1,000. Hence, debit the notes receivable account for $1,000.
• Cash is an assets account and it decreased the value of asset by $1,000. Hence, credit the cash account for $1,000.

f. Cash paid to creditors:

Date	Accounts title and explanation	Ref.	Debit ($)	Credit ($)
	Accounts payable (-L)		2,000
	Cash (-A)			2,000
	(To record cash paid to creditors)

Table (6)

• Accounts payable is a liability account and it decreased the value of liability by $2,000. Hence, debit the notes payable account by $2,000.
• Cash is an assets account and it decreased the value of asset by $2,000. Hence, credit the cash account for $2,000.

g. Cash paid to invest short-term investment:

Date	Accounts title and explanation	Ref.	Debit ($)	Credit ($)
	Short-term investment (+A)		7,616
	Cash (-A)			7,616
	(To record cash paid to short-term investment)

Table (7)

• Short-term investment is an assets account and it increased the value of asset by $7,616. Hence, debit the short-term investment account for $7,616.
• Cash is an assets account and it decreased the value of asset by $7,616. Hence, credit the cash account for $7,616.