Fundamentals Of Financial Accounting
Fundamentals Of Financial Accounting
6th Edition
ISBN: 9781259864230
Author: PHILLIPS, Fred, Libby, Robert, Patricia A.
Publisher: Mcgraw-hill Education,
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Chapter 11, Problem 1COP

Financial Reporting of Depreciation, Write-off, Bond Issuance and Common Stock Issuance, Purchase, Reissuance, and Cash Dividends (Chapters 4, 8, 9, 10, and 11)

American Laser, Inc., reported the following account balances on January 1.

Chapter 11, Problem 1COP, Financial Reporting of Depreciation, Write-off, Bond Issuance and Common Stock Issuance, Purchase,

The company entered into the following transactions during the year.

Jan. 15 Issued 5,000 shares of $1 par common stock for $50,000 cash.
Jan. 31 Collected $3,000 from customers on account.
Feb. 15 Reacquired 3,000 shares of $1 par common stock into treasury for $33,000 cash.
Mar. 15 Reissued 2,000 shares of treasury stock for $24,000 cash.
Aug. 15 Reissued 600 shares of treasury stock for $4,600 cash.
Sept. 15 Declared (but did not yet pay) a $1 cash dividend on each outstanding share of common stock.
Oct. 1 Issued 100, 10-year, $1,000 bonds, at a quoted bond price of 101.
Oct. 3 Wrote off a $2,000 balance due from a customer who went bankrupt.
Dec. 29 Recorded $230,000 of service revenue, all of which was collected in cash.
Dec. 30 Paid $200,000 cash for this year’s wages through December 31. Ignore payroll taxes and payroll deductions.
Dec. 31 Calculated $10,000 of depreciation for the year to be recorded. (Ignore accrual adjustments for interest and income taxes.)

Required:

  1. 1. Analyze the effects of each transaction on total assets, liabilities, and stockholders’ equity.
  2. 2. Prepare journal entries to record each transaction.
  3. 3. Enter the January 1 balances into T-accounts, post the journal entries from requirement 2, and determine ending balances.
  4. 4. Prepare a closing journal entry for the income statement accounts, assuming the events on December 29–31 were the only transactions to affect income statement accounts.
  5. 5. Prepare the closing entry for Dividends.
  6. 6. Prepare a classified balance sheet at December 31.
  7. 7. Calculate the debt-to-assets ratio at January 1 and December 31. Does the company rely more (or less) on debt financing at the end of the year than at the beginning of the year?

1.

Expert Solution
Check Mark
To determine

Analyze the effect of each transaction on total assets, liabilities and stockholder’s equity.

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:

Assets = Liabilities + Shareholders Equity

Analyze the effect of each transaction on total assets, liabilities and stockholder’s equity as follows:

Date of TransactionBalance Sheet
Assets ($)Liabilities ($)Stockholder’s Equity ($)
January 15Cash +50,000NE

Common Stock +5,000

Additional paid –in capital +45,000

January 31

Cash+3,000

AR-3,000

NENE
February 15Cash 33,000NETreasury stock (+ xSE) 33,000
March 15Cash +24,000NE

Treasury stock ( xSE) +22,000

Additional paid –in capital +2,000

August 15Cash +4,600NE

Treasury stock ( xSE) +6,600

Additional paid –in capital 2,000

September 15NE

Dividends payable +14,600

Dividends (+ D) 14,600
October 1Cash + 101,000

Bonds payable +100,000

Premium on bonds payable +1,000

 
October 3

AR 2,000

AFDA +2,000

NENE
December 29Cash +230,000NEService Revenue+230,000
December 30Cash +230,000NESalaries and Wages Expense (+E) -200,000
December 31Accumulated depreciation -10,000NEDepreciation Expense (+E) -10,000

(Table 1)

Note:

  • + Denotes increase in the value
  • Denotes increase in the value
  • NE: Denotes increase in the value
  • AR: Accounts Receivable
  • AFDA: Allowance for Doubtful Accounts (+ xA)

2.

Expert Solution
Check Mark
To determine

Prepare journal entries to record each transaction.

Explanation of Solution

Prepare journal entries to record each transaction as follows:

DateAccount Title and ExplanationDebit ($)Credit ($)
January 15Cash 50,000 
 Common stock  5,000
 Additional paid –in capital 45,000
 (To record the issuance of  common stock)  
    
January 31 Cash3,000 
 Accounts Receivable 3,000
 (To record the cash received for customers)  
    
February 15Treasury stock33,000 
 Cash 33,000
 (To record the repurchase of common stock into  treasury stock )  
    
March 15Cash 24,000 
 Treasury Stock(2) 22,000
 Additional paid –in capital 2,000
 (To record the reissuance of treasury stock)  
    
August 15Cash 4,600 
 Additional paid-in capital2,000 
 Treasury stock(3) 6,600
 (To record the reissuance of 600 shares of  treasury stock)  
    
September 15Dividends (5)14,600 
 Dividends Payable 14,600
 (To record the sale of merchandise on account)  
    
October 1Cash(6)101,000 
 Bonds Payable (7) 100,000
 Premium on bonds payable 1,000
 (To record the issuance of bonds at a quoted bond price $101)  
    
October 3Allowance for doubtful accounts2,000 
 Accounts Receivable 2,000
 (To record the written off balance due from customer) 
    
December 29Cash230,000 
 Service Revenue 230,000
 (To record the service revenue earned)  
    
December 30Salaries and Wages Expense200,000 
 Cash 200,000
 (To record the payment of wages expenses)  
    
December 31Depreciation Expense10,000 
 Accumulated Depreciation 10,000
 (To record the depreciation expenses)  
    

Table (2)

Working notes (1):

Share price of a treasury stock = Purchase of teasury stock for cash No of shares purchased=$33,0003,000=$11

Working notes (2):

Reissuance of treasury stock = Shares issued × Share price= 2,000 shares × $11 (1)= $22,000

Working notes (3):

Reissuance of treasury on August 15}= Shares issued × Share price= 600 shares × $11= $6,600

Working notes (4):

(Treasury shares excluded from dividends payable)= Treasury issed on february 15Treasury issed on March 15= 3,0002,600 (2,000+600)= 400

Working notes (5):

Dividends = [Price of cash dividend] ×[Common shares issues at the beginning+ additionalTreasury shares (4)]=$1×[10,000+5000400]=$14,600

Working notes (6):

Cash paid on Bonds payable= Shares issused × Bonds price=101 × $1,000= $101,000

Working notes (7):

Bonds Payable = Shares issused × Bonds price=100 × $1,000= $100,000

3.

Expert Solution
Check Mark
To determine

Record the January 1 balance in the T-accounts and post the journal entries to the T-accounts.

Explanation of Solution

Record the January 1 balance in the T-accounts and post the journal entries to the T-accounts as follows:

Cash  (A)

Bal 10,000 
15-Jan50,00033,00015-Feb
31-Jan3,000200,00030-Dec
15-Mar24,000 
15-Aug4,600 
1- Oct   101,000   
29-Dec  230,000   
189,600 
Accounts Receivable (A)
Bal.5,0003,00031-Jan 
 2,0003-Oct
0  
Buildings
Bal.247,000  
  
247,000  
Allowance for Doubtful Accounts  (xA)
3-Oct2,0002,000Bal.
   
  0
Accumulated Dep.–Building(xA)
  30,000Bal.
    
  30,000 
Dividends Payable  (L)
  0Bal.
  14,60015-Sep
  14,600
Notes Payable  (L)
  10,000Bal.
    
  10,000
Bonds Payable  (L)
  0Bal.
  100,0001-Oct
  100,000 
Premium on Bonds Payable  (-L)
  0Bal.
  1,0001-Oct
  1,000 
Common Stock (SE)
  10,000Bal.
  5,00015-Jan
  15,000 
Additional Paid-In Capital (SE)
90,000Bal.
45,00015-Jan
15-Aug2,0002,00015-Mar
  135,000
Treasury Stock (xSE)
Bal.0 
15-Feb33,00022,00015-Mar
6,60015-Aug
4,400  
Dividends (D)
Bal.0  
15-Sep14,600  
14,600  
Service Revenue (R)
  0Bal.
   230,000 29-Dec
  230,000 
Salaries and Wages Expense (E)
Bal.0  
30-Dec200,000  
200,000 
Depreciation Expense (E)
Bal.0  
31-Dec10,000  
10,000 
Retained Earnings (SE)
  120,000Bal.
    
  120,000 

4.

Expert Solution
Check Mark
To determine

Prepare a closing journal entry for the income statement accounts, assume that the events occurred on December 29 to 31 were the only transactions to affect income statement accounts.

Explanation of Solution

Closing entries: The journal entries prepared to close the temporary accounts to Retained Earnings account are referred to as closing entries. The revenue, expense, and dividends accounts are referred to as temporary accounts because the information and figures in these accounts is held temporarily and consequently transferred to permanent account at the end of accounting year.

Prepare a closing journal entry for the income statement accounts, assume that the events occurred on December 29 to 31 were the only transactions to affect income statement accounts.

DateAccount Title and ExplanationDebit ($)Credit ($)
December 31Service Revenue 230,000 
 Salaries and Wages Expense 200,000
 Depreciation Expense  10,000
 Retained Earnings  20,000
 (To record the closure of expense account to income summary)  

(Table 3)

Revenue account:

In this closing entry, service revenue account is closed by transferring the amount of service revenue to the retained earnings account in order to bring the revenue account balance to zero. Hence, debit the service revenue account and credit retained earnings account.

Expenses account:

In this closing entry, expenses account is closed by transferring the amount of expenses to the retained earnings in order to bring the expenses account balance to zero. Hence, debit the retained earnings account and credit all expenses account.

5.

Expert Solution
Check Mark
To determine

Prepare the closing entry for dividends.

Explanation of Solution

DateAccount Title and ExplanationDebit ($)Credit ($)
December 31Retained Earnings14,600 
 Dividends (5) 14,600
 (To record the closing entry of dividends)  

(Table 4)

  • Retained earnings are a component of stockholder’s equity and there is a decrease in the value of equity. Hence, it is debited.
  • Dividend is a component of stockholder’s equity and there is an increase in the value of dividend. Hence, it is credited.

6.

Expert Solution
Check Mark
To determine

Prepare a classified balance sheet at December 31.

Explanation of Solution

Classified balance sheet: The main elements of balance sheet assets, liabilities, and stockholders’ equity are categorized or classified further into sections, and sub-sections in a classified balance sheet. Assets are further classified as current assets, long-term investments, property, plant, and equipment (PPE), and intangible assets. Liabilities are classified into two sections current and long-term. Stockholders’ equity comprises of common stock and retained earnings. Thus, the classified balance sheet includes all the elements under different sections.

Prepare a classified balance sheet at December 31:

Incorporation A
Classified Balance Sheet
At December 31
Assets  
  Current Assets:  
     Cash$189,600  
      Accounts Receivable0 
      Allowance for Doubtful Accounts0 
Total Current Assets 189,600
  Buildings247,000 
  Less: Accumulated Depreciation-40,000 
 207,000
Total Assets$396,600
Liabilities and Stockholders’ Equity  
Liabilities  
Current Liabilities  
    Dividends Payable$14,600  
    Total Current Liabilities14,600
    Noncurrent Liabilities:  
    Notes Payable (long-term)10,000 
    Bonds Payable100,000 
    Premium on Bonds Payable1,000 
    Total Noncurrent Liabilities111,000
Total Liabilities (a)125,600
Stockholders’ Equity  
     Contributed Capital:  
     Common Stock, 15,000 
     Additional Paid-in Capital135,000 
     Total Contributed Capital150,000 
     Retained Earnings (8)125,400 
     Less: Treasury Stock, at cost-4,400 
Total Stockholders’ Equity  (b)271,000
Total Liabilities and Stockholders’ Equity (a+b)$396,600

(Table 5)

Working notes (8):

Retained earnings = Beginning retained earnings+Net incomeDividend =$120,000+$20,000$14,600= $125,400

7.

Expert Solution
Check Mark
To determine

Calculate the debt-to-assets ratio at January 1 and December 31. Describe whether the company rely more (or less) on debt financing at the end of the year than at the beginning of the year.

Explanation of Solution

Calculate the debt-to-assets ratio at January 1:

Debt to assets for January 1=Total debtTotal assets=$10,000$230,000 (9)=4.35%

Calculate the debt-to-assets ratio at December 31

Debt to assets for December 31=Total debtTotal assets=$125,600$396,600=31.67%

Working notes (9):

Compute the total assets at January 1:

Particulars$
Cash$10,000
Accounts Receivable5,000
Less: Allowance for doubtful accounts-2,000
Buildings247,000
Less: Accumulated  Depreciation-30,000
Total$230,000

(Table 6)

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