Concept explainers
Recording Transactions (in a Journal and T-Accounts); Preparing and Interpreting the
Performance Plastics Company (PPC) has been operating for three years. The beginning account balances are:
During the year, the company had the following summarized activities:
- a. Purchased equipment that cost $21,000: paid $5,000 cash and signed a two-year note for the balance.
- b. Issued an additional 2,000 shares of common stock for $20,000 cash.
- c. Borrowed $50,000 cash from a local bank, payable June 30, in two years.
- d. Purchased supplies for $4,000 cash.
- e. Built an addition to the factory buildings for $41,000; paid $12,000 in cash and signed a three- year note for the balance.
- f. Hired a new president to start January I of next year. The contract was for $95,000 for each full year worked.
Required:
- 1. Analyze transactions (a)-(f) to determine their effects on the
accounting equation. TIP: You won’t need new accounts to record the transactions described above, so have a quick look at the ones listed in the beginning of this question before you begin.
TIP: In transaction (e), three different accounts are affected.
TIP: In transaction (f), consider whether PPC owes anything to its new president for the current year ended December 31.
- 2. Record the transaction effects determined in requirement 1 using journal entries.
- 3. Summarize the
journal entry effects from requirement 2. Use T-accounts if this requirement is being completed manually; if you are using the GL tool in Connect, the journal entries will have been posted automatically to general ledger accounts that are similar in appearance to Exhibit 2.9. - 4. Explain your response to event (f).
- 5. Prepare a classified balance sheet at December 31.
- 6. As of December 31, has the financing for PPC’s. investment in assets primarily come from liabilities or stockholders’ equity?
Requirement – 1
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:
Accounting equation for each transaction is as follows:
Figure (1)
Therefore, the total assets are equal to the liabilities and stockholder’s equity.
Requirement – 2
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 P are as follows:
a. Equipment purchased on account and in cash:
Date | Accounts title and explanation | Ref. | Debit ($) | Credit ($) |
Equipment (+A) | 21,000 | |||
Cash (-A) | 5,000 | |||
Notes payable (+L) | 16,000 | |||
(To record purchase of equipment on account and in cash) |
Table (1)
- Equipment is an assets account and it increased the value of asset by $21,000. Hence, debit the equipment account for $21,000.
- Cash is an assets account and it decreased the value of asset by $5,000. Hence, credit the cash account for $5,000.
- Notes payable is a liability account, and it increased the value of liabilities by $16,000. Hence, credit the notes payable for $16,000.
b. Issuance of common stock:
Date | Accounts title and explanation | Ref. | Debit ($) | Credit ($) |
Cash (+A) | 20,000 | |||
Common stock (+SE) | 20,000 | |||
(To record the issuance of common stock) |
Table (2)
- Cash is an assets account and it increased the value of asset by $20,000. Hence, debit the cash account for $20,000.
- Common stock is a component of stockholder’s equity and it increased the value of stockholder’s equity by $20,000, Hence, credit the common stock for $20,000.
c. Cash borrowed from bank (long term)
Date | Accounts title and explanation | Ref. | Debit ($) | Credit ($) |
Cash (+A) | 50,000 | |||
Notes payable (+L) | 50,000 | |||
(To record cash borrowed from bank) |
Table (3)
- Cash is an assets account and it increased the value of asset by $50,000. Hence, debit the cash account for $50,000.
- Notes payable is a liability account, and it increased the value of liabilities by $50,000. Hence, credit the notes payable for $50,000.
d. Supplies purchased in cash:
Date | Accounts title and explanation | Ref. | Debit ($) | Credit ($) |
Supplies (+A) | 4,000 | |||
Cash (-A) | 4,000 | |||
(To record purchase of supplies in cash) |
Table (4)
- Supplies are an assets account and it increased the value of asset by $4,000. Hence, debit the supplies account for $4,000.
- Cash is an assets account and it decreased the value of asset by $4,000. Hence, credit the cash account for $4,000.
e. Building purchased on account and in cash:
Date | Accounts title and explanation | Ref. | Debit ($) | Credit ($) |
Building (+A) | 41,000 | |||
Cash (-A) | 12,000 | |||
Notes payable (+L) | 29,000 | |||
(To record purchase of building on account and in cash) |
Table (5)
- Building is an assets account and it increased the value of asset by $41,000. Hence, debit the building account for $41,000.
- Cash is an assets account and it decreased the value of asset by $12,000. Hence, credit the cash account for $12,000.
- Notes payable is a liability account, and it increased the value of liabilities by $29,000. Hence, credit the notes payable for $29,000.
f. Hired a new president:
In this case, no entry required, because it is not a business transaction.
Requirement – 3
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:
- (a) The title of the account
- (b) The left or debit side
- (c) The right or credit side
T-accounts of company P are as follows:
Cash (A) | |||
Beg. Bal. | 35,000 | ||
(b) | 20,000 | 5,000 | (a) |
(c) | 50,000 | 4,000 | (d) |
12,000 | (e) | ||
End. Bal. | 84,000 |
Accounts receivable (A) | |||
Beg. Bal. | 5,000 | ||
End. Bal. | 5,000 |
Inventory (A) | |||
Beg. Bal. | 40,000 | ||
End. Bal. | 40,000 |
Supplies (A) | |||
Beg. Bal. | 5,000 | ||
(d) | 4,000 | ||
End. Bal. | 8,000 |
Equipment (A) | |||
Beg. Bal. | 80,000 | ||
(a) | 21,000 | ||
End. Bal. | 101,000 |
Building (A) | |||
Beg. Bal. | 120,000 | ||
(e) | 41,000 | ||
End. Bal. | 161,000 |
Notes receivable (A) | |||
Beg. Bal. | 2,000 | ||
End. Bal. | 2,000 |
Land (A) | |||
Beg. Bal. | 30,000 | ||
End. Bal. | 30,000 |
Accounts payable (L) | |||
37,000 | Beg. Bal. | ||
37,000 | End. Bal. |
Notes payable (L) | |||
80,000 | Beg. Bal. | ||
16,000 | (a) | ||
50,000 | (c) | ||
29,000 | (e) | ||
175,000 | End. Bal. |
Common stock (SE) | |||
150,000 | Beg. Bal | ||
20,000 | (b) | ||
170,000 | End. Bal. |
Retained earnings(SE) | |||
50,000 | Beg. Bal | ||
50,000 | End. Bal. |
Requirement – 4
To explain: The response for event (f).
Explanation of Solution
Business transaction:
Business transaction is a record of any economic activity, resulting in the change in the value of the assets, the liabilities, and the stockholder’s equities, of a business. Business transaction is also referred to as financial transaction.
In this case, hiring of new president is not creating any impact on assets, liabilities and stockholder’s equity of the business, because it is not a business transaction.
Requirement – 5
To prepare: The classified balance sheet of Company P at December 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 P is as follows:
Figure (2)
Therefore, the total assets of Company P are$432,000, and the total liabilities and stockholders’ equity are $432,000.
Requirement – 6
Explanation of Solution
The invested amount of assets are primarily come from stockholder’s’ equity of Company P, because the stockholder’s equity (common stock) financed $220,000 of the Company P’s total assets, and liabilities financed $212,000.
Want to see more full solutions like this?
Chapter 2 Solutions
Fundamentals of Financial Accounting
- nces Blooming Flower Company was started in Year 1 when it acquired $60,500 cash from the issue of common stock. The following data summarize the company's first three years' operating activities. Assume that all transactions were cash transactions. Purchases of inventory Sales Cost of goods sold Selling and administrative expenses Income Statements Required: Prepare an income statement (use multistep format) and balance sheet for each fiscal year. (Hint: Record the transaction data for each accounting period in the accounting equation before preparing the statements for that year.) Complete this question by entering your answers in the tabs below. Balance Sheets Assets Cash Merchandise inventory Prepare a balance sheet for each fiscal year. (Hint: Record the transaction data for each accounting period in the accounting equation before preparing the statements for that year.) Total assets Liabilities Stockholders' equity Common stock Retained earnings Year 1 $ 22,200 26,400 12,500…arrow_forwardUse the horizontal model, or write the journal entry, for each of the following transactions and adjustments that occurred during the first year of operations at Kissick Co. Issued 220,000 shares of $5-par-value common stock for $1,100,000 in cash. Borrowed $540,000 from Oglesby National Bank and signed a 13% note due in two years. Incurred and paid $400,000 in salaries for the year. Purchased $700,000 of merchandise inventory on account during the year. Sold inventory costing $620,000 for a total of $960,000, all on credit. Paid rent of $330,000 on the sales facilities during the first 11 months of the year. Purchased $140,000 of store equipment, paying $53,000 in cash and agreeing to pay the difference within 90 days. Paid the entire $87,000 owed for store equipment and $590,000 of the amount due to suppliers for credit purchases previously recorded. Incurred and paid utilities expense of $37,000 during the year. Collected $875,000 in cash from customers during the year for credit…arrow_forwardUse the horizontal model, or write the journal entry, for each of the following transactions and adjustments that occurred during the first year of operations at Kissick Co. Issued 210,000 shares of $6-par-value common stock for $1,260,000 in cash. Borrowed $540,000 from Oglesby National Bank and signed a 13% note due in two years. Incurred and paid $420,000 in salaries for the year. Purchased $650,000 of merchandise inventory on account during the year. Sold inventory costing $630,000 for a total of $980,000, all on credit. Paid rent of $110,000 on the sales facilities during the first 11 months of the year. Purchased $170,000 of store equipment, paying $50,000 in cash and agreeing to pay the difference within 90 days. Paid the entire $120,000 owed for store equipment and $610,000 of the amount due to suppliers for credit purchases previously recorded. Incurred and paid utilities expense of $44,000 during the year. Collected $845,000 in cash from customers during…arrow_forward
- Following are the transactions of JonesSpa Corporation, for the month of January. a Borrowed $30,000 from a local bank; the loan is due in 9 months. b. Lent $10,000 to an affiliate; accepted a note due in one year. c. Sold to investors 100 additional shares of stock with a par value of $0.10 per share and a market price of $5 per share; received cash. d. Purchased $15,000 of equipment, paying $5,000 cash and signing a note for the rest due in one year. e. Declared $2,000 in cash dividends to stockholders, to be paid in February. Prepare the journal entry to record each of the above transactions for the month of January, Note: If no entry is required for a transaction/event, select "No journal entry required" in the first account field. View transaction list Journal entry worksheet Record the receipt of the bank loan of $30,000. Note: Enter debits before credits Transaction 5 Record entry General Journal Clear entry Debit Credit View general journalarrow_forwardX Company, a manufacturer, prepares monthly financial statements. On May 1, total equities were $115,574. The following transactions occurred during May: Issued additional shares of stock for $104,000. Acquired $8,000 of direct materials, $3,920 of it paid for with cash, the rest bought on open account. • A one year rental agreement was signed for $7,900 per month. Rent for the first three months was paid in advance. • Product sales were $116,000, $23,112 of which were on account; the rest were cash sales. Product costs were $71,920. • Paid wages and salaries of $11,882. • Paid $23,591 to suppliers for materials that X Company had previously purchased on account. • Collected $23,112 from customers who had previously purchased products from X Company on account. What would total equities be on May 31? [Ignore adjusting entries.] A: $98,724 B: $131,303 Oc: $174,632| OD: $232,261 OE: $308,907 OF: $410,846arrow_forwardAssume that Denis Savard Inc. has the following accounts at the end of the current year. 1. Common Stock. 2. Discount on Bonds Payable. 3. Treasury Stock (at cost). 4. Notes Payable (short-term). 5. Raw Materials. 6. Preferred Stock Investments (long-term). 7. Unearned Rent Revenue. 8. Work in Process. 9. Copyrights. 10. Buildings. 11. Notes Receivable (short-term). 12. Cash. 13. Salaries and Wages Payable. 14. Accumulated Depreciation—Buildings. 15. Restricted Cash for Plant Expansion. 16. Land Held for Future Plant Site. 17. Allowance for Doubtful Accounts. 18. Retained Earnings. 19. Paid-in Capital in Excess of Par—Common Stock. 20. Unearned Subscriptions Revenue. 21. Receivables—Officers (due in one year). 22. Inventory (finished goods). 23. Accounts Receivable. 24. Bonds Payable (due in 4 years). 25. Noncontrolling Interest. Instructions Prepare a classified balance sheet in good form. (No monetary amounts…arrow_forward
- create a income statement for: The following transactions apply to Ozark Sales for Year 1: The business was started when the company received $50,000 from the issue of common stock. Purchased equipment inventory of $380,000 on account. Sold equipment for $510,000 cash (not including sales tax). Sales tax of 8 percent is collected when the merchandise is sold. The merchandise had a cost of $330,000. Provided a six-month warranty on the equipment sold. Based on industry estimates, the warranty claims would amount to 2 percent of sales. Paid the sales tax to the state agency on $400,000 of the sales. On September 1, Year 1, borrowed $50,000 from the local bank. The note had a 4 percent interest rate and matured on March 1, Year 2. Paid $6,200 for warranty repairs during the year. Paid operating expenses of $78,000 for the year. Paid $250,000 of accounts payable. Recorded accrued interest on the note issued in transaction no. 6.arrow_forwardFollowing are the transactions of JonesSpa Corporation, for the month of January. a. Borrowed $30,000 from a local bank; the loan is due in 9 months. b. Lent $10,000 to an affiliate; accepted a note due in one year. c. Sold to investors 100 additional shares of stock with a par value of $0.10 per share and a market price of $5 per share; received cash. d. Purchased $15,000 of equipment, paying $5,000 cash and signing a note for the rest due in one year. e. Declared $2,000 in cash dividends to stockholders, to be paid in February. For each of the above transactions, indicate the accounts and amounts. A sample is provided. Note: Enter decreases to an element of the balance sheet with a minus sign. a. Cash b. Notes receivable b. C. C. d. d. e. e. Assets Accounts payable Accounts receivable Accrued liabilities payable Additional paid-in-capital 30,000 = Notes payable 10,000 = = = = = = = Liabilities 30,000 + + + + + + + + + Stockholders' Equityarrow_forwardFollowing are the transactions and adjustments that occurred during the first year of operations at Kissick Company. Issued 220,000 shares of $6 - par - value common stock for $1,320,000 in cash. Borrowed $ 560,000 from Oglesby National Bank and signed a 12% note due in three years. Incurred and paid $430,000 in salaries for the year. Purchased $730,000 of merchandise inventory on account during the year. Sold inventory costing $660,000 for a total of $970, 000, all on credit. Paid rent of $220,000 on the sales facilities during the first 11 months of the year. Purchased $160,000 of store equipment, paying $53,000 in cash and agreeing to pay the difference within 90 days. Paid the entire $107,000 owed for store equipment and $ 630,000 of the amount due to suppliers for credit purchases previously recorded. Incurred and paid utilities expense of $45,000 during the year. Collected $835,000 in cash from customers during the year for credit sales previously recorded. At year - end, accrued…arrow_forward
- Malco Enterprises issued $10,000 of common stock when the company was started. In addition, Malco borrowed $36,000 from a local bank on July 1, Year 1. The note had a 6 percent annual interest rate and a one-year term to maturity. Malco Enterprises recognized $72,500 of revenue on account in Year 1 and $85,200 of revenue on account in Year 2. Cash collections of accounts receivable were $61,300 in Year 1 and $71,500 in Year 2. Malco paid $39,000 of other operating expenses in Year 1 and $45,000 of other operating expenses in Year 2. Malco repaid the loan and interest at the maturity date. What amount of total liabilities would be reported on the December 31, Year 1, balance sheet? What amount of retained earnings would be reported on the December 31, Year 1, balance sheet? What amount of cash flow from financing activities would be reported on the Year 1 statement of cash flows?arrow_forwardMalco Enterprises issued $10,000 of common stock when the company was started. In addition, Malco borrowed $36,000 from a local bank on July 1, Year 1. The note had a 6 percent annual interest rate and a one-year term to maturity. Malco Enterprises recognized $72,500 of revenue on account in Year 1 and $85,200 of revenue on account in Year 2. Cash collections of accounts receivable were $61,300 in Year 1 and $71,500 in Year 2. Malco paid $39,000 of other operating expenses in Year 1 and $45,000 of other operating expenses in Year 2. Malco repaid the loan and interest at the maturity date. What amount of interest expense would be reported on the Year 2 income statement? What amount of cash flows from operating activities would be reported on the Year 2 cash flow statement? What amount of assets would be reported on the December 31, Year 2, balance sheet?arrow_forwardMalco Enterprises issued $10,000 of common stock when the company was started. In addition, Malco borrowed $36,000 from a local bank on July 1, Year 1. The note had a 6 percent annual interest rate and a one-year term to maturity. Malco Enterprises recognized $72,500 of revenue on account in Year 1 and $85,200 of revenue on account in Year 2. Cash collections of accounts receivable were $61,300 in Year 1 and $71,500 in Year 2. Malco paid $39,000 of other operating expenses in Year 1 and $45,000 of other operating expenses in Year 2. Malco repaid the loan and interest at the maturity date. Organize the information in accounts under an accounting equation. What amount of net cash flow from operating activities would be reported on the Year 1 cash flow statement? What amount of interest expense would be reported on the Year 1 income statement?arrow_forward
- Financial Accounting: The Impact on Decision Make...AccountingISBN:9781305654174Author:Gary A. Porter, Curtis L. NortonPublisher:Cengage LearningExcel Applications for Accounting PrinciplesAccountingISBN:9781111581565Author:Gaylord N. SmithPublisher:Cengage Learning