Financial Accounting, 8th Edition
Financial Accounting, 8th Edition
8th Edition
ISBN: 9780078025556
Author: Robert Libby, Patricia Libby, Daniel Short
Publisher: McGraw-Hill Education
Question
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Chapter 2, Problem 5P

1.

To determine

Record the journal entries of Company D.

1.

Expert Solution
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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 ($ in million) are as follows:

a. Cash borrowed from banks:

DateAccounts title and explanationRef.Debit ($)Credit ($)
 Cash (+A) 50 
 Long-term liabilities (+L)  50
 (To record cash borrowed from bank)   

Table (1)

  • Cash is an assets account and it increased the value of asset by $50. Hence, debit the cash account for $50.
  • Notes payable is a liability account, and it increased the value of liabilities by $50. Hence, credit the notes payable for $50.

b. Cash paid on note

DateAccounts

Post

Ref.

Debit ($)Credit ($)
 Accounts receivable 300 
 Cash   300
 (To record cash paid on note)   

Table (2)

  • Accounts receivable is an assets account and it increased the value of asset by $300. Hence, debit the accounts receivable account for $300.
  • Cash is an assets account and it decreased the value of asset by $300. Hence, credit the cash account for $300.

c. Purchase of additional investment:

DateAccounts title and explanationRef.Debit ($)Credit ($)
 Long-term investment (+A) (1) 2,600 
 Short-term investment (+A) (2) 10,400 
 Cash (-A)  13,000
 (To record purchase of investment)   

Table (3)

  • Long-term investment is an assets account and it increased the value of asset by $2,600. Hence, debit the long-term investment account for $2,600.
  • Short-term investment is an assets account and it increased the value of asset by $10,400. Hence, debit the short-term investment account for $10,400.
  • Cash is an assets account and it decreased the value of asset by $13,000. Hence, credit the cash account for $13,000.

Working note:

Calculate the value of long-term investment

Long-term investment = Total investment value ×15=$13,000×15=$2,600 (1)

Calculate the value of short-term investment

Long-term investment = (Total investment value  Long-term investment )=$13,000$2,600=$10,400 (2)

d. Property, plant and equipment purchased on account and in cash:

DateAccounts title and explanationRef.Debit ($)Credit ($)
 Property, plant and equipment (+A) 2,285 
 Cash (-A)  875
 Long-term liabilities (+L)  1,410
 (To record purchase of property, plant and equipment on account and in cash)   

Table (4)

  • Property, plant and equipment are an assets account and it increased the value of asset by $2,285. Hence, debit the property, plant and equipment account for $2,285.
  • Cash is an assets account and it decreased the value of asset by $875. Hence, credit the cash account for $875.
  •  Long-term liabilities are a liability account, and it increased the value of liabilities by $1,410. Hence, credit the long-term liabilities for $1,410.

e. Issuance of common stock:

DateAccounts title and explanationRef.Debit ($)Credit ($)
 Cash (+A) 400 
 Common stock (+SE)  10
 Additional paid-in capital (+SE)  390
 (To record the issuance of common stock)   

Table (5)

  • Cash is an assets account and it increased the value of asset by $400. Hence, debit the cash account for $400.
  • Common stock is a component of stockholder’s equity and it increased the value of stockholder’s equity by $10. Hence, credit the common stock for $10.
  • Additional paid-in capital is a component of stockholder’s equity and it increased the value of stockholder’s equity by $390. Hence, credit the additional paid-in capital for $390.

f. Cash paid to invest short-term investment:

DateAccounts title and explanationRef.Debit ($)Credit ($)
 Short-term investment (+A) 11,000 
 Cash (-A)  11,000
 (To record cash paid to short-term investment)   

Table (5)

  • Short-term investment is an assets account and it increased the value of asset by $11,000. Hence, debit the short-term investment account for $11,000.
  • Cash is an assets account and it decreased the value of asset by $11,000. Hence, credit the cash account for $11,000.

g. Declared cash dividends:

DateAccounts title and explanationRef.Debit ($)Credit ($)
 Retained earnings (-SE) 60 
 Cash(-A)  60
 (To record dividends declared to the investors)   

Table (6)

  • Retained earnings are a component of stockholder’s equity and it decreased the value of stockholder’s equity by $60. Hence, debit retained earnings for $60.
  • Dividends payable is a liability account and it increased the value of liability by $60. Hence, credit the dividends payable for $60.

Requirement – 2

To determine

To prepare: T-accounts for the given accounts.

Requirement – 2

Expert Solution
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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.

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 for the given accounts are as follows:

Cash
Beg.13,852
(a)50300(b)
(e)40013,000(c)
(f)11,000875(d)
60(g)
11,067
Short-Term Investments
Beg.966
(c)10,40011,000(f)
366
Receivables and other Assets
Beg.9,803
(b)300
10,103
Inventories
Beg.1,404
1,404
Other Current Assets
Beg.3,423
3,423
Property, Plant, and Equipment
Beg.2,124
(d)2,285
4,409
Long-Term Investments
Beg.3,404
(c)2,600
6,004
Other Noncurrent Assets
Beg.9,557
9,557
Accounts Payable
11,656Beg.
11,656
Other Short-term Obligations
10,345Beg.
10,345
Long-Term Liabilities
13,615Beg.
50(a)
1,410(d)
15,075
Common Stock
34
10(e)
44
Additional Paid-in Capital
12,153Beg.
390(e)
12,543
Retained  Earnings
28,236Beg.
(g)60
28,176
Other Stockholders’ Equity Items
Beg.31,506
31,506

Requirement – 3

To determine

To prepare: The balance sheet of Company D at February 1, 2013.

Requirement – 3

Expert Solution
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Explanation of Solution

Balance Sheet:

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

Balance sheet of Company D is as follows:

Company D
 Balance sheet
 at February 1, 2013
 (in millions)
Assets$ (in millions)$ (in million)
 Current Assets:
Cash11,067
Short-term investments366
Accounts receivable10,103
Inventories1,404
Other current assets3,423
Total current assets26,363
Long-term investments6,004
Property, plant and equipment4,409
Other noncurrent assets9,557
Total assets46,333
Liabilities and Stockholders’ Equity
Current Liabilities:
Accounts payable11,656
Other short-term obligation10,345
Total current liabilities22,001
Long-term debt15,075
Total liabilities37,076
Stockholders’ Equity:
Common stock44
Additional paid-in capital12,543
Retained earnings28,176
Other stockholder’s equity items(31,506)
Total stockholders’ equity9,257
 Total liabilities and stockholders’ equity46,333

Table (7)

Therefore, the total assets of Company D are $46,333, and the total liabilities and stockholders’ equity is $46,333.

5.

To determine

Calculate the current ratio of Company D, and also suggest about the company.

5.

Expert Solution
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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 Company D as follows:

Here,

Current assets = $26,363

Current liabilities= $22,001

Current ratio=Current assetsCurrent liabilities= $26,363$22,001=1.20

Therefore, the current ration of Company D is 1.20

Current ratio of Company D has high liquidity, because for every one dollar of current liabilities, Company C has more than one dollar of current assets.

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Chapter 2 Solutions

Financial Accounting, 8th Edition

Ch. 2 - Prob. 11QCh. 2 - Prob. 12QCh. 2 - How is the current ratio computed and interpreted?Ch. 2 - Prob. 14QCh. 2 - Prob. 1MCQCh. 2 - Which of the following is not an asset? a....Ch. 2 - Total liabilities on a balance sheet at the end of...Ch. 2 - The dual effects concept can best be described as...Ch. 2 - The T-account is a tool commonly used for...Ch. 2 - Prob. 6MCQCh. 2 - The Cash T-account has a beginning balance of...Ch. 2 - Prob. 8MCQCh. 2 - At the end of a recent year, The Gap, Inc.,...Ch. 2 - Prob. 10MCQCh. 2 - Prob. 1MECh. 2 - Matching Definitions with Terms Match each...Ch. 2 - Identifying Events as Accounting Transactions...Ch. 2 - Classifying Accounts on a Balance Sheet The...Ch. 2 - Prob. 5MECh. 2 - Prob. 6MECh. 2 - Prob. 7MECh. 2 - Prob. 8MECh. 2 - Prob. 9MECh. 2 - Prob. 10MECh. 2 - Prob. 11MECh. 2 - Prob. 12MECh. 2 - Prob. 13MECh. 2 - Prob. 1ECh. 2 - Prob. 2ECh. 2 - Prob. 3ECh. 2 - Prob. 4ECh. 2 - Determining Financial Statement Effects of Several...Ch. 2 - Prob. 6ECh. 2 - Prob. 7ECh. 2 - Analyzing the Effects of Transactions In...Ch. 2 - Prob. 9ECh. 2 - Prob. 10ECh. 2 - Prob. 11ECh. 2 - Prob. 12ECh. 2 - Prob. 13ECh. 2 - Prob. 14ECh. 2 - Prob. 15ECh. 2 - Prob. 16ECh. 2 - Inferring Typical Investing and Financing...Ch. 2 - Prob. 18ECh. 2 - Prob. 19ECh. 2 - Prob. 20ECh. 2 - Identifying Accounts on a Classified Balance Sheet...Ch. 2 - Prob. 2PCh. 2 - Prob. 3PCh. 2 - Prob. 4PCh. 2 - Prob. 5PCh. 2 - Prob. 6PCh. 2 - Prob. 1APCh. 2 - Prob. 2APCh. 2 - Prob. 3APCh. 2 - Prob. 4APCh. 2 - Prob. 1CPCh. 2 - Prob. 2CPCh. 2 - Prob. 3CPCh. 2 - Prob. 4CPCh. 2 - Prob. 5CPCh. 2 - Prob. 6CPCh. 2 - Prob. 7CPCh. 2 - Prob. 8CPCh. 2 - Prob. 1CC
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