Chapter 2, Problem 5P

1.

To determine

Record the journal entries of Incorporation 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.

Journal entries of Incorporation A are as follows:

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)

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)

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)

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)

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 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)

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)

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.

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 Trial balance of Incorporation A.

Explanation of Solution

Prepare Trial balance of Incorporation A as shown below:

Incorporation A
Trial Balance
For the Year Ended September 29, 2018
(in millions)
Particulars	Debit	Credit
Cash	28,263
Short-term Investments	51,882
Accounts receivable	17,874
Inventories	4,855
Other current assets	31,735
Long-term investments	198,914
Property, plant, and equipment	44,764
Other noncurrent assets	18,177
Accounts payable		49,049
Accrued expenses		25,744
Unearned revenue		7,548
Short-term notes payable		19,883
Dividends payable		11,126
Long-term debt		115,473
Other noncurrent liabilities		43,251
Common stock		2
Additional paid-in capital		37,334
Retained earnings		87,054
Totals	396,464	396,464

Table (7)

4.

To determine

Prepare the balance sheet of Incorporation A at September 26, 2018.

Explanation of Solution

Balance Sheet:

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

Balance sheet of Incorporation A is as follows:

Incorporation A
Balance sheet
at September 26, 2018
(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 (8)

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

5.

To determine

Calculate the current ratio of Incorporation 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 Incorporation A as follows:

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

Therefore, the current ration of Incorporation A is 0.98

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