Chapter 2, Problem 3AP

1.

To determine

Open the T-accounts for each of the balance sheet accounts, and enter the beginning balance for the current year.

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 each of the balance sheet accounts are as follows:

Cash and Cash Equivalents
Beg.	57,701

Inventories
Beg.	149,483

Accounts Receivable
Beg.	12,293

Prepaid Expenses and Other Current Assets
Beg.	23,621

Property, Plant, and Equipment
Beg.	270,198

Intangibles
Beg.	45,128

Other Assets
Beg.	2,468

Long-Term Investments
Beg.	7,330
Accounts Payable
		16,961	Beg.

Accrued Expenses Payable
		43,793	Beg.

Long-Term  Debt
		14,339	Beg.

Other Long-Term Liabilities
		29,273	Beg.

Common Stock
		490	Beg.

Additional  Paid-in Capital
		377,740	Beg.

Retained  Earnings
		657,845	Beg.

Unearned Revenue
		62,960	Beg.

Dividend Payable
		0	Beg.
Treasury Stock
Beg.	635,179

2.

To determine

Prepare the T-account for the given balance sheet accounts, and to determine the ending balance of each account.

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 each of the balance sheet accounts are as follows:

Cash and Cash Equivalents
Beg.	57,701
(a)	1,020	3,400	(b)
(d)	4,020	2,980	(e)
(g)	310	1,830	(f)
	54,841

Accounts Receivable
Beg.	12,293
	12,293

Inventories
Beg.	149,483
	149,483

Prepaid Expenses and Other Current Assets
Beg.	23,621
	23,621

Property, Plant, and Equipment
Beg.	270,198
(f)	11,230	4,020	(d)
	277,408

Intangibles
Beg.	45,128
(b)	3,400
	48,528

Other Assets
Beg.	2,468
		310	(g)
	2,158

Long term Investmetns
Beg.	7,330
(e)	2,980
	10,310
Accounts Payable
		16,961	Beg.
		16,961

Accrued Expenses Payable
		43,793	Beg.
		43,793

Dividends Payable
.		0	Beg
		300	(h)
		300

Long-Term  Debt
		14,339	Beg.
		9,400	(f)
		23,739

Other Long-Term Liabilities
		29,273	Beg.
		29,273

Common Stock
		490	Beg.
		16	(a)
		506

Additional  Paid-in Capital
		377,740	Beg.
		1,004	(a)
		378,744

Retained  Earnings
		657,845	Beg.
(h)	300
		657,545

Treasury Stock
Beg.	635,179
	635,179

Dividend Payable
		0	Beg.
		300	(h)
		300

3.

To determine

Explain the response for event (c).

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, ordered wood and other raw material is not creating any impact on assets, liabilities and stockholder’s equity of the business, because it is not a business transaction.

4.

To determine

Prepare the trial balance of Company E at September 30.

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 E is as follows:

Incorporation E
Trial Balance
At September 30
(in thousands of dollars)
	Debit	Credit
Cash and cash equivalents	54,841
Accounts receivable	12,293
Inventories	149,483
Prepaid expenses and other current assets	23,621
Property, plant and equipment	277,408
Intangible assets	48,528
Long-term investments	10,310
Other assets	2,158
Accounts payable		16,961
Unearned revenue		62,960
Accrued expenses payable		43,793
Dividends payable		300
Long-term debt (current portion, $2,731)		23,739
Other long-term liabilities		29,273
Common stock		506
Additional paid-in capital		378,744
Treasury stock	635,179
Retained earnings		657,545
Totals	1,213,821	1,213,821

Table (1)

Therefore, the total of debit, and credit columns of trial balance is $1,213,821 and agree.

5.

To determine

Prepare a classified balance sheet of Company E at September 30.

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 E on September 30 is as follows:

Incorporation E
Balance Sheet
At September 30
(in thousands of dollars)
Assets
Current assets
Cash and cash equivalents	$54,841
Accounts receivable	12,293
Inventories	149,483
Prepaid expenses and other current assets	23,621
Total current assets	240,238
Property, plant, and equipment	277,408
Intangible assets	48,528
Long-term investments	10,310
Other assets	2,158
Total Assets	$578,642
Liabilities
Current liabilities
Accounts payable	$16,961
Unearned revenue	62,960
Accrued expenses payable	43,793
Dividends payable	300
Current portion of long-term debt	2,731
Total current liabilities	126,745
Long-term debt	21,008
Other long-term liabilities	29,273
Total Liabilities	177,026
Stockholders’ Equity
Common stock ($0.01 par value)	506
Additional paid-in capital	378,744
Treasury stock	-635,179
Retained earnings	657,545
Total Stockholders’ Equity	401,616
Total Liabilities and Stockholders’ Equity	$578,642

Table (2)

Therefore, the total assets of Company E are $578,642, and the total liabilities and stockholders’ equity is $578,642.

6.

To determine

Calculate the current ratio of Company E and evaluate the ratio.

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; a company has in an accounting period. A current ratio is a useful tool for analysis of financials of a company.

Calculate the current ratio of Company E as follows:

$\begin{array}{c}\text{Current ratio=}\frac{\text{Current assets}}{\text{Current liabilities}}\\ \text{=}\frac{\$240,238}{\$126,745}\\ \text{=1}\text{.895}\end{array}$

Therefore, the current ration of Company E is 1.895

Current ratio of Company E has sufficient liquidity, because for every one dollar of current liabilities, Company E has more than one dollar of current assets.