Chapter 2, Problem 2PA

Recording Transactions (in a Journal and T-Accounts); Preparing a Trial Balance; Preparing and Interpreting the Balance Sheet

Deliberate Speed Corporation (DSC) was incorporated as a private company. The company’s accounts included the following at June 30:

During the month of July, the company had the following activities:

1. a. Issued 4,000 shares of common stock for $400,000 cash.
2. b. Borrowed $100,000 cash from a local bank, payable in two years,
3. c. Bought a building for $182,000; paid $82,000 in cash and signed a three-year note for the balance,
4. d. Paid cash for equipment that cost $200,000.
5. e. Purchased supplies for $30,000 on account.

Required:

1. 1. Analyze transactions (a)-(e) to determine their effects on the accounting equation, similar to Exhibit 2.5.
2. 2. Record the transaction effects determined in requirement 1 using a journal entry format.
3. 3. Summarize the journal entry effects from requirement 2 using T-accounts.
4. 4. Prepare a trial balance at July 31,
5. 5. Prepare a classified balance sheet at July 31.
6. 6. As of July 31, has the financing for DSC’s investment in assets primarily come from liabilities or stockholders’ equity?

To determine

To analyze: The given transaction, and explain their effect on the accounting equation.

Explanation of Solution

Accounting equation:

Accounting equation is an accounting tool expressed in the form of equation, by creating a relationship between the resources or assets of a company, and claims on the resources by the creditors and the owners. Accounting equation is expressed as shown below:

$\text{Assets = Liabilities + Stockholder's Equity}$

Accounting equation for each transaction is as follows:

Figure (1)

Therefore, the total assets are equal to the liabilities and stockholder’s equity.

To determine

To record: The journal entries based on requirement 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 D are as follows:

a. Issuance of common stock:

Date	Accounts title and explanation	Ref.	Debit ($)	Credit ($)
	Cash (+A)		400,000
	Common stock (+SE)			400,000
	(To record the issuance of common stock)

Table (1)

• Cash is an assets account and it increased the value of asset by $400,000. Hence, debit the cash account for $400,000.
• Common stock is a component of stockholder’s equity and it increased the value of stockholder’s equity by $400,000, Hence, credit the common stock for $400,000.

b. Cash borrowed from bank (long term)

Date	Accounts title and explanation	Ref.	Debit ($)	Credit ($)
	Cash (+A)		100,000
	Notes payable (+L)			100,000
	(To record cash borrowed from bank)

Table (2)

• Cash is an assets account and it increased the value of asset by $100,000. Hence, debit the cash account for $100,000.
• Notes payable is a liability account, and it increased the value of liabilities by $100,000. Hence, credit the notes payable for $100,000.

c. Building purchased on account and in cash:

Date	Accounts title and explanation	Ref.	Debit ($)	Credit ($)
	Building (+A)		182,000
	Cash (-A)			82,000
	Notes payable (+L)			100,000
	(To record purchase of building on account and in cash)

Table (3)

• Building is an assets account and it increased the value of asset by $182,000. Hence, debit the building account for $182,000.
• Cash is an assets account and it decreased the value of asset by $82,000. Hence, credit the cash account for $82,000.
• Notes payable is a liability account, and it increased the value of liabilities by $100,000. Hence, credit the notes payable for $100,000.

d. Equipment purchased:

Date	Accounts title and explanation	Ref.	Debit ($)	Credit ($)
	Equipment (+A)		200,000
	Cash (-A)			200,000
	(To record purchase of equipment in cash)

Table (4)

• Equipment is an assets account and it increased the value of asset by $200,000. Hence, debit the equipment account for $200,000.
• Cash is an assets account and it decreased the value of asset by $200,000. Hence, credit the cash account for $200,000.

e. Purchase of supplies on account:

Date	Accounts title and explanation	Ref.	Debit ($)	Credit ($)
	Supplies (+A)		30,000
	Accounts payable (+L)			30,000
	(To record purchase of supplies on account)

Table (5)

• Supplies are an assets account and it increased the value of asset by $30,000. Hence, debit the supplies account for $30,000.
• Accounts payable is a liability account and it increased the value of liability by $30,000. Hence, credit the liability account by $30,000.

To determine

To prepare: T-account for each account listed in the requirement 2.

Explanation of Solution

T-account:

T-account refers to an individual account, where the increasesor 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 of company D are as follows:

Cash (A)
Beg.	36,000
(a)	400,000	82,000	(c)
(b)	100,000	200,000	(d)
End.	254,000

Supplies (A)
Beg.	7,000
(e)	30,000
End.	37,000

Equipment (A)
Beg.	118,000
(d)	200,000
End.	318,000

Buildings (A)
Beg.	100,000
(c)	182,000
End.	282,000

Land (A)
Beg.	200,000
End.	200,000

Accounts payable (L)
		20,000	Beg.
		30,000	(e)
		50,000	End.

Note payable (L)
		2,000	Beg.
		100,000	(b)
		100,000	(c)
		202,000	End.

Common stock (SE)
		180,000	Beg.
		400,000	(a)
		580,000	End.

Retained earnings (SE)
		259,000	Beg.
		259,000	End.

To determine

To prepare: The trial balance of Company D at July 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 D is as follows:

Company D
Adjusted Trial Balance
At July, 31
Accounts	Debit ($)	Credit ($)
Cash	254,000
Supplies	37,000
Equipment	318,000
Building	282,000
Land	200,000
Accounts payable		50,000
Notes payable		202,000
Common stock		580,000
Retained earnings		259,000
Totals	$1,091,000	$1,091,000

Table (6)

Therefore, the total of debit, and credit columns of trial balance is $1,091,000 and agree.

To determine

To prepare: The classified balance sheet of Company D at July 31.

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 D is as follows:

Figure (2)

Therefore, the total assets of Company D are$1,091,000, and the total liabilities and stockholders’ equity are $1,091,000.

To determine

Whether the assets amount of Company D is primarily come from liabilities or stockholders’ equity.

Explanation of Solution

The invested amount of assets are primarily come from stockholder’s’ equity of Company D, because the stockholder’s equity (common stock) financed $839,000 of the Company D’s total assets, and liabilities financed $252,000.