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Solution Manual Financial Accounting 11th Edition By Libby Hodge

Complete Solution Manual With Answers

Sample Chapter Is Below

Chapter 2

Investing and Financing Decisions and

the Accounting System

1. (a) (b) (c) (d) ANSWERS TO QUESTIONS

The separate entity assumption requires that business transactions are

separate from the transactions of the owners. For example, the purchase of a

truck by the owner for personal use is not recorded as an asset of the

business.

The monetary unit assumption requires information to be reported in the

national monetary unit without any adjustment for changes in purchasing

power. That means that each business will account for and report its financial

results primarily in terms of the national monetary unit, such as Yen in Japan

and Australian dollars in Australia.

Under the going concern assumption, businesses are assumed to operate into

the foreseeable future. That is, they are not expected to liquidate.

The historical cost principle is a measurement model that requires assets to be

recorded at the cash-equivalent cost on the date of the transaction. Cash-

equivalent cost is the cash paid plus the dollar value of all noncash

considerations.

Accounting assumptions are necessary because they reflect the scope of accounting

and the expectations that set certain limits on the way accounting information is

reported.

(a) An asset is an economic resource owned or controlled by a company; it has

measurable value and is expected to benefit the company by producing cash

inflows or reducing cash outflows in the future.

A current asset is an asset that will be used or turned into cash within one year.

A liability is a measurable obligation resulting from a past transaction; it is

expected to be settled in the future by transferring assets or providing services.

A current liability is a short-term obligation that will be paid in cash (or other

current assets) within the current operating cycle or one year, whichever is

longer.

Additional paid-in capital is the owner-provided financing to the business that

represents the amount of contributed capital less the par value of the stock.

Financial Accounting, 11/e 2-1

2. 3. (b) (c) (d) (e) 4. (f) Retained earnings are the cumulative earnings of a company that are not

distributed to the owners and are reinvested in the business.

An account is a standardized format used by organizations to accumulate the dollar

effects of transactions on each financial statement item.

5. The accounting equation is: Assets = Liabilities + Stockholders’ Equity

6. A business transaction is:

(a) an exchange of resources (assets) and obligations (debts) between a business

and one or more outside parties, and

(b) a measurable internal event that directly affects the entity but where there is no

exchange with external parties.

7. 8. 9. 10. An example of situation (a) is the sale of goods or services to customers.

An example of situation (b) is the use of equipment in operations.

Debit is the left side of a journal entry and T-account and credit is the right side of a

journal entry and T-account. A debit is an increase in assets and a decrease in

liabilities and stockholders’ equity. A credit is the opposite — a decrease in assets and

an increase in liabilities and stockholders’ equity.

Transaction analysis is the process of studying a transaction to determine its

economic effect on the entity in terms of the accounting equation:

Assets = Liabilities + Stockholders’ Equity

The two principles underlying the process are:

* every transaction affects at least two accounts.

* the accounting equation must remain in balance after each

transaction.

The three steps in transaction analysis are:

(1) determine what the company received: identify and classify accounts

and the direction and amount of the effects.

(2) determine what the company gave: identify and classify accounts

and the direction and amount of the effects.

(3) determine that the accounting equation (A = L + SE) remains in

balance.

The equalities that must be maintained in transaction analysis are:

(a) Assets = Liabilities + Stockholders’ Equity

(b) Debits = Credits

A journal entry is an accounting method for expressing the effects of a transaction on

accounts in a debits-equal-credits format. The title(s) of the account(s) to be debited

is (are) listed first and the title(s) of the account(s) to be credited is (are) listed

underneath the debited accounts. The debited amounts are placed in a left-hand

column and the credited amounts are placed in a right-hand column.

2-2 Solutions Manual

© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.11. 12. 13. The T-account is a tool for summarizing transaction effects for each account,

determining balances, and drawing inferences about a company’s activities. It is a

simplified representation of a ledger account with a debit column on the left and a

credit column on the right.

The current ratio is computed as current assets divided by current liabilities. It

measures a company’s liquidity — the ability of the company to pay its short-term

obligations with current assets. A ratio above 1.0 normally suggests that the company

has sufficient current assets to settle short-term obligations. Sophisticated cash

management systems allow many companies to minimize funds invested in current

assets and have a current ratio below 1.0. However, a ratio that is too high in relation

to other competitors in the industry may indicate inefficient use of resources.

Investing activities on the statement of cash flows include the buying and selling of

productive assets and investments. Financing activities include borrowing and

repaying debt, issuing and repurchasing stock, and paying dividends.

Financial Accounting, 11/e 2-3

1. d 6. c

2. d 7. a

3. a 8. d

4. a 9. b

5. d 10. a

2-4 Solutions Manual

Mini-exercises Exercises Problems

Alternate

Problems

Cases and

Projects

No. Time No. Time No. Time No. Time No. Time

1 3 1 8 2 3 2 15 3 4 3 8 4 4 4 10 5 4 5 10 6 5 6 10 7 3 7 10 8 3 8 15 9 6 9 20 10 6 10 20

11 6 11 20

12 6 12 20 13 4 13 20 14 4 14 30 15 20

16 20

17 10

18 10

19 10

20 10

21 15

1 20 1 20 1 15

2 25 2 25 2 15

3 40 3 40 3 15

4 15 4 15 4 20

5 40 5 40 5 15

6 20

7 30

8 20

9 *

Continuing

Problem

1 40

* Due to the nature of these cases and projects, it is very difficult to estimate the amount of

time students will need to complete the assignment. As with any open-ended project, it is

possible for students to devote a large amount of time to these assignments. While students

often benefit from the extra effort, we find that some become frustrated by the perceived

difficulty of the task. You can reduce student frustration and anxiety by making your

expectations clear. For example, when our goal is to sharpen research skills, we devote

class time to discussing research strategies. When we want the students to focus on a real

accounting issue, we offer suggestions about possible companies or industries.

Financial Accounting, 11/e 2-5

M2–1.

F (1) Going concern assumption

H (2) Historical cost principle

G (3) Credits

A (4) Assets

I (5) Account

M2–2.

D (1) Journal entry

C (2) A = L + SE, and Debits = Credits

A (3) Assets = Liabilities + Stockholders’ Equity

I (4) Liabilities

B (5) Income statement, balance sheet, statement of stockholders’ equity, and

statement of cash flows

M2–3.

(1) N

(2) N

(3) Y

(4) Y

(5) Y

(6) N

2-6 Solutions Manual

CL (1) Accounts Payable

CA (2) Accounts Receivable

NCA (3) Buildings

CA (4) Cash

SE (5) Common Stock

NCA (6) Land

CA (7) Merchandise Inventory

CL (8) Income Taxes Payable

NCA (9) Long-Term Investments

NCL (10) Notes Payable (due in three years)

CA (11) Notes Receivable (due in six months)

CA (12) Prepaid Rent

SE (13) Retained Earnings

CA (14) Supplies

CL (15) Utilities Payable

CL (16) Wages Payable

M2–5.

SE (1) Additional Paid-in Capital

NCA (2) Buildings and Leased Assets

CL (3) Current Lease Liabilities

CL (4) Dividends Payable

NCA (5) Equipment

NCA (6) Intangible Assets

NCL (7) Long-Term Lease Liabilities

CL (8) Notes Payable (due in six months)

CA (9) Prepaid Insurance

CA (10) Short-Term Investments

CA (11) Trade Accounts Receivable

SE (12) Treasury Stock

CL (13) Unearned Revenue

Financial Accounting, 11/e 2-7

Assets = Liabilities + Stockholders’ Equity

a. Cash +30,000 Notes payable +30,000

b. Cash –10,000

Notes

receivable +10,000

c. Cash +500 Common stock

Additional paid-

in capital

+10

+490

d. Cash

Equipment

–5,000

+15,000

e. Dividends

Notes payable +10,000

payable +2,000

Retained

earnings –2,000

2-8 Solutions Manual

Debit Credit

Assets Increase Decrease

Liabilities Decrease Increase

Stockholders’ equity Decrease Increase

M2–8.

Increase Decrease

Assets Debit Credit

Liabilities Credit Debit

Stockholders’ equity Credit Debit

M2–9.

a. Cash (+A) ………………………………………………………………… 30,000

Notes payable (+L) ……………………………………………… 30,000

b. Notes receivable (+A) ………………………………………………… 10,000

Cash (A) ………………………………………………………….. 10,000

c. Cash (+A) ………………………………………………………………… 500

Common stock (+SE) …………………………………………..

Additional paid-in capital (+SE)………………………….

490

d. Equipment (+A) …………………………………………………………. 15,000

Cash (A) ………………………………………………………….. 5,000

Notes payable (+L) ……………………………………………… 10,000

e. Retained earnings (SE) ……………………………………………. 2,000

Dividends payable (+L) ……………………………………….. 2,000

Financial Accounting, 11/e 2-9

Cash Notes Receivable Equipment

Beg. 900 (a) 30,000 (c) 500 Beg. 1,000 10,000 (b) (b) 10,000 5,000 (d)

Beg. 15,100

(d) 15,000

16,400 11,000 30,100

Notes Payable Dividends Payable

3,000 Beg. 30,000 (a) 10,000 (d)

0 Beg.

2,000 (e)

43,000 2,000

Common Stock Additional Paid-in Capital Retained Earnings

1,000 Beg. 10 (c) 3,000 Beg. 490 (c) (e) 2,000

10,000 Beg.

1,010 3,490 8,000

M2-11.

JonesSpa Corporation

Trial Balance

January 31

Debit Credit

Cash 16,400

Notes receivable 11,000

Equipment 30,100

Notes payable 43,000

Dividends payable 2,000

Common stock 1,010

Additional paid-in capital 3,490

Retained earnings 8,000

Totals 57,500 57,500

2-10 Solutions Manual

JonesSpa Corporation

Balance Sheet

At January 31

Assets Liabilities

Current assets: Current liabilities:

Cash $ 16,400 Notes payable $ 43,000

Notes receivable 11,000 Dividends payable 2,000

Total current assets 27,400 Total current liabilities 45,000

Stockholders’ Equity

Equipment 30,100 Common stock 1,010

Additional paid-in capital

Retained earnings

3,490

8,000

Total stockholders’ equity 12,500

Total Liabilities &

Stockholders’ Equity $ 57,500

Total Assets $ 57,500

M2–13.

Current Ratio =

Current Assets ÷ Current Liabilities

2018 $280,000 ÷ $155,000 = 1.806

2019 $270,000 ÷ $ 250,000 = 1.080

This ratio indicates that Matteo’s Taco Company has sufficient current assets to settle

current liabilities, but that the ratio has also decreased between 2018 and 2019 by .726

(40%). Matteo’s Taco Company ratio of 1.080 is lower than Chipotle’s 2019 ratio of 1.609,

indicating that Matteo’s Taco Company appears to have weaker liquidity than Chipotle.

Because the restaurant industry typically has high immediate cash inflows from customers,

both companies can maintain a lower current ratio.

M2–14.

(a) F

(b) I

(d) I

Financial Accounting, 11/e 2-11

© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.Transaction (e) for the declaration of cash dividends creates an obligation. Thus, it would not

be included on the statement of cash flows because no cash was paid in January.

EXERCISES

E2–1.

E (1) Transaction

F (2) Going concern assumption

B (3) Balance sheet

P (4) Liabilities

K (5) Assets = Liabilities + Stockholders’ Equity

M (6) Notes payable

L (7) Common stock

H (8) Historical cost principle

I (9) Account

Q (10) Dual effects

O (11) Retained earnings

A (12) Current assets

C (13) Separate entity assumption

X (14) Par value

D (15) Debits

J (16) Accounts receivable

N (17) Monetary unit assumption

R (18) Stockholders’ equity

2-12 Solutions Manual

Req. 1

Received Given

(a) Cash (A) Common stock and Additional

paid-in capital (SE)

(b) Equipment (A) [or Delivery truck] Cash (A)

(d) Equipment (A) [or Computer equipment] Notes payable (current) (L)

(e) Building (A) [or Construction in progress] Cash (A)

(f) Intangibles (A) [or Copyright] Cash (A)

(g) Retained earnings (SE) [Received a reduction

Dividends payable (L) [a

in the owners’ claims to the company’s assets]

promise to pay]

(h) Land (A) Cash (A)

(i) Intangibles (A) [or Patents] Cash (A) and Notes payable

(current) (L)

(j) No exchange transaction —

(k) Investments (A) Cash (A)

(l) Cash (A) (m) Notes payable (L) [Received a reduction in its

promise to pay]

Notes payable (current) (L)

Cash (A)

Req. 2

The truck in (b) would be recorded as an asset of $18,000. The land in (h) would be

recorded as an asset of $50,000. These are applications of the historical cost principle.

Req. 3

The agreement in (c) involves no exchange or receipt of cash, goods, or services and thus is

not a transaction. Since transaction (j) occurs between the owner and others, there is no

effect on the business because of the separate entity assumption.

Financial Accounting, 11/e 2-13

Account

Balance Sheet

Classification

Debit or Credit

Balance

(1) Accounts Receivable CA Debit

(2) Retained Earnings SE Credit

(3) Accrued Expenses Payable CL Credit

(4) Prepaid Expenses CA Debit

(5) Common Stock SE Credit

(6) Long-Term Investments NCA Debit

(7) Plant, Property, and Equipment NCA Debit

(8) Accounts Payable CL Credit

(9) Short-Term Investments CA Debit

(10) Long-Term Debt NCL Credit

(11) Inventories CA Debit

(12) Additional Paid-in Capital SE Credit

(13) Current Lease Obligations CL Credit

(14) Operating Lease Right-of-Use Assets NCA Debit

(15) Treasury Stock SE Debit

2-14 Solutions Manual

Event Assets = Liabilities + Stockholders’ Equity

a. Cash +40,000 Common

stock

Additional

paid-in

capital

+1,000

+39,000

b. Operating

lease right-

of-use

assets

Cash

Long-term

lease

liabilities

+12,000

+15,000

–3,000

c. Cash +10,000 Notes payable +10,000

d. Note

Cash

receivable

+800

–800

e. Land

Cash

+13,000

–4,000

Notes payable +9,000

Financial Accounting, 11/e 2-15

Req. 1 (dollars in millions)

Event Assets = Liabilities + Stockholders’ Equity

a. Buildings

Equipment

Cash

+303

+1,202

– 432

Notes payable

(long-term) +1,073

b. Cash +885 Common stock

Additional paid-in

capital

+10

+875

c. Dividends

Retained

payable +1,491

earnings –1,491

d. Short-term

investments

Cash

+2,426

-2,426

e. No effects

f. Cash

Short-term

investments

+2,379

–2,379

g. Cash +6,134 Notes payable

(long-term) +6,134

h. Cash –3,067 Treasury stock –3,067

Req. 2

The separate entity assumption states that transactions of the business are separate from

transactions of the owners. Since transaction (e) occurs between the owners and others in

the stock market, there is no effect on the business.

2-16 Solutions Manual

a. Cash (+A) ………………………………………………………………… 40,000

Common stock (+SE)*

………………………………………….

Additional paid-in capital (+SE) …………………………

1,000

39,000

b. Operating lease right-of-use assets (+A) ………………………. 15,000

Cash (A) ………………………………………………………….. 3,000

Long-term lease liabilities (+L) …………………………….. 12,000

c. Cash (+A) ………………………………………………………………… 10,000

Notes payable (+L) ……………………………………………… 10,000

Notes receivable (+A) ………………………………………………..

Cash (A) …………………………………………………………..

800

Land (+A) ………………………………………………………………….

13,000

Cash (A) ………………………………………………………….. 4,000

Notes payable (+L) …………………………………………….. 9,000

*Common stock at par value: 1,000 shares x $1 par value = $1,000

Additional paid-in capital is the excess over market: 1,000 shares x $39 excess = $39,000

Financial Accounting, 11/e 2-17

Req. 1 (dollars in millions)

a. Buildings (+A) …………………………………………………………… 303

Equipment (+A) ………………………………………………………… 1,202

Cash (A) ………………………………………………………….. 432

Notes payable (+L) …………………………………………….. 1,073

b. Cash (+A) ………………………………………………………………… 885

Common stock (+SE) …………………………………………..

Additional paid-in capital (+SE)

875

c. Retained earnings (SE) ……………………………………………. 1,491

Dividends payable (+L) ……………………………………….. 1,491

d. Short-term investments (+A) ……………………………………….. 2,426

Cash (A) ………………………………………………………….. 2,426

e. No journal entry required.

f. Cash (+A) ………………………………………………………………… 2,379

Short-term investments (A) …………………………………. 2,379

g. Cash (+A) ……………………………………………………………….. 6,134

Notes payable (+L) ……………………………………………. 6,134

h. Treasury stock (SE) ………………………………………………… 3,067

Cash (A) ………………………………………………………… 3,067

Req. 2

The separate entity assumption states that transactions of the business are separate from

transactions of the owners. Since transaction (e) occurs between the owners and others in

the stock market, there is no effect on the business.

2-18 Solutions Manual

Req. 1

a. Cash (+A) ……………………………………………………………….. 30,000

Notes payable (+L) ……………………………………………. 30,000

b. Cash (+A) (500 shares x $30 market value per share) ……. Common stock (+SE) (500 shares x $0.10 par value) .

Additional paid-in capital (+SE) (difference)…………….

15,000

14,950

c. Operating lease right-of-use assets (+A) ………………………. 115,000

Cash (A) ………………………………………………………….. 3,000

Long-term lease liabilities (+L) …………………………….. 112,000

d. Equipment (+A) …………………………………………………………. 20,000

Cash (A) …………………………………………………………. 4,000

Notes payable (+L) …………………………………………….. 16,000

e. Notes receivable (+A) ………………………………………………… 1,000

Cash (A) ………………………………………………………….. 1,000

f. Notes payable (L) ……………………………………………………. 2,000

Cash (A) ………………………………………………………….. 2,000

g. Short-term investments (+A) ……………………………………….. 10,000

Cash (A) ………………………………………………………….. 10,000

Financial Accounting, 11/e 2-19

Req. 1

Cash Notes Receivable Equipment

Beg. 0 (a) 70,000 (e) 3,000 Beg. 0 4,500 (c) (f) 2,500 2,500 (f)

Beg. 0

66,000 2,500 18,000

Land

Operating Lease

Right-of-Use Assets Notes Payable

Beg. 0 (e) 15,000 Beg. 0 (b) 150,000 0 Beg.

13,500 (c)

15,000 150,000 13,500

Long-term Lease Liabilities

Common Stock

Additional Paid-in Capital

0 Beg.

150,000 (b)

0 Beg.

5,040 (a)*

100 (e)

0 Beg.

64,960 (a)

17,900 (e)

150,000

5,140

82,860

*6 investors x 8,400 shares each = 50,400 shares issued

50,400 shares issued x $0.10 par value per share = $5,040 for common stock

Req. 2

Assets $ 251,500 = Liabilities $ 163,500 + Stockholders’ Equity $ 88,000

Req. 3

The agreement in (d) involves no exchange or receipt of cash, goods, or services and thus is

not a transaction. Since transaction (g) occurs between the owner and others, there is no

effect on the business due to the separate entity assumption.

2-20 Solutions Manual

Req. 1

Cash Notes Receivable Equipment

Beg. 0 (a) 60,000 Beg. 0 9,000 (b) (c) 2,500 2,500 (c)

12,000 (e)

Beg. 0

(b) 36,000

36,500 2,500 36,000

Land Notes Payable Common Stock

Beg. 0 (a) 35,000 (e) 12,000 0 Beg. 27,000 (b) 0 Beg.

300 (a)*

35,000 15,000 300

Additional Paid-in Capital

0 Beg.

94,700 (a)*

94,700

* Common Stock: 3 investors x 1,000 shares each = 3,000 shares issued

3,000 shares issued x $0.10 par value per share = $300 for common stock

Additional Paid-in Capital: $95,000 received – $300 par value = $94,700

Req. 2

Assets $ 110,000 = Liabilities $ 15,000 + Stockholders’ Equity $ 95,000

Req. 3

Since transaction (d) is a personal purchase, not purchased by Precision Builders, there is

no effect on the business due to the separate entity assumption.

Req. 4

Market value per share = Total assets received ÷ Number of shares issued

= $95,000 ÷ 3,000 shares issued

= $31.67 per shareFinancial Accounting, 11/e 2-21

Req. 1

Transaction Brief Explanation

1 Issued common stock to shareholders for $15,000 cash. (FastTrack

Sports Inc. is a corporation because it issues stock. Par value of the

stock was $0.10 per share because $1,500 common stock amount

divided by 15,000 shares issued equals $0.10 per share).

2 Borrowed $75,000 cash and signed a short-term note for this amount.

3 Leased assets for $135,000; paid $5,000 cash and signed a long-term

operating right-of-use lease for the balance.

4 Loaned $1,000 cash; borrower signed a short-term note for this amount

(Note Receivable).

5 Purchased store fixtures for $9,500 cash.

6 Repaid $4,000 cash on the notes payable.

Ending balances are reflected in the balance sheet in Requirement 2.

Req. 2

FastTrack Sports Inc.

Balance Sheet

At January 7

Assets Liabilities

Current Assets Current Liabilities

Cash $ 70,500 Notes payable $ 71,000

Notes receivable 1,000 Total Current Liabilities 71,000

Total Current Assets 71,500 Long-term lease liabilities 130,000

Total Liabilities 201,000

Store fixtures

Operating lease right-of-use assets

Stockholders’ Equity

Common stock

Additional paid-in capital

Total Stockholders’ Equity 15,000

Total Liabilities &

Stockholders’ Equity $216,000

9,500

135,000

1,500

13,500

Total Assets $216,000

Financial Accounting, 11/e 2-23

Req. 1

Transaction Brief Explanation

1 Issued common stock to shareholders for $45,000 cash. (Volz

Cleaning is a corporation because it issues stock. Par value is $2.00

per share; $6,000 common stock amount divided by 3,000 shares

issued equals $2.00 per share).

2 Purchased a delivery truck for $35,000; paid $8,000 cash and gave a

$27,000 long-term note payable for the balance.

3 Loaned $2,000 cash; borrower signed a short-term note for this

amount.

4 Purchased short-term investments for $7,000 cash.

5 Sold short-term investments at cost for $3,000 cash.

6 Purchased computer equipment for $4,000 cash.

Req. 2

Volz Cleaning, Inc.

Balance Sheet

At March 31

Assets Liabilities

Current Assets Notes payable $27,000

Cash $27,000 Total Liabilities 27,000

Investments 4,000

Notes receivable 2,000

Total Current Assets 33,000 Stockholders’ Equity

Common stock

Computer equipment 4,000

Additional paid-in capital

Delivery truck 35,000 Total Stockholders’ Equity 45,000

Total Liabilities &

Total Assets $72,000

Stockholders’ Equity $72,000

6,000

39,000

2-24 Solutions Manual

a. Cash (+A) …………………………………………………………………

Building (+A) ……………………………………………………………..

Common stock (+SE) …………………………………………..

Additional paid-in capital (+SE)…………………………..

70,000

250,000

5,000

315,000

b. No transaction has occurred because there has been no

exchange or receipt of cash, goods, or services.

c. Cash (+A) ………………………………………………………………… 18,000

Notes payable (long-term) (+L) …………………………….. 18,000

d. Equipment (+A) …………………………………………………………. 11,000

Cash (A) ………………………………………………………….. 1,500

Notes payable (short-term) (+L) ……………………………. 9,500

e. Notes receivable (short-term) (+A) ………………………………. 2,000

Cash (A) ………………………………………………………….. 2,000

f. Store fixtures (+A) ……………………………………………………… 15,000

Cash (A) ………………………………………………………….. 15,000

Financial Accounting, 11/e 2-25

(in millions)

a. Cash (+A) ………………………………………………………………… 202

Common stock (+SE) ………………………………………….. 8

Additional paid-in capital (+SE) ……………………………. 194

b. No transaction has occurred because there has been no exchange or receipt of cash,

goods, or services.

c. Cash (+A) ………………………………………………………………… 1,419

Note receivable (A) …………………………………………… 1,419

d. Cash (+A) ………………………………………………………………… 4,291

Notes payable (+L) ……………………………………………… 4,291

e. Cash (+A) ………………………………………………………………… 73,959

Short-term investments (A) …………………………………. 73,959

f. Equipment (+A) …………………………………………………………. 6,540

Cash (A) ………………………………………………………….. 6,540

g. Treasury stock (SE) …………………………………………………. 4,846

Cash (A) ………………………………………………………….. 4,846

h. Notes payable (L) ……………………………………………………. 4,377

Cash (A) ………………………………………………………….. 4,377

2-26 Solutions Manual

Req. 1

Assets $ 10,500 = Liabilities $ 3,000 + Stockholders’ Equity $ 7,500

Req. 2

a. Cash (+A) 4,000

Notes payable (noncurrent) (+L) 4,000

b. Cash (+A) 1,500

Short-term investments (A) 1,500

c. Cash (+A) 1,500

Property and equipment (A) 1,500

d. Retained earnings (SE) 800

Dividends payable (+L) 800

e. Dividends payable (L) 800

Cash (A) 800

Req. 3

Cash

Short-Term

Investments

Property and Equipment

800 (e)

Beg. 5,000 (a) 4,000 (b) 1,500

1,500 (b) 1,500 (c)

End. 11,200 2,200 Beg. End. 1,000 Notes Payable

(current)

Dividends

Payable

(e) 800 0 Beg.

800 (d) End. 1,500

4,000 (a)

Notes Payable

(noncurrent)

0 End. 4,800 End.

Common Stock Additional Paid-in Capital Retained Earnings

500 Beg. 4,000 Beg. 3,000 Beg.

(d) 800

500 4,000 2,200

Financial Accounting, 11/e 2-27

Req. 4

Higgins Company

Trial Balance

For the Year Ended December 31

Debit Credit

Cash 11,200

Short-term investments 1,000

Property and equipment 1,500

Notes payable (current) 2,200

Dividends payable 0

Notes payable (noncurrent) 4,800

Common stock 500

Additional paid-in capital 4,000

Retained earnings 2,200

Totals 13,700 13,700

Req. 5

Higgins Company

Balance Sheet

At December 31

Assets

Current Assets:

Cash $11,200

Short-term investments 1,000

Total current assets 12,200

Property and equipment 1,500

Total assets $13,700

Liabilities and Stockholders’ Equity

Current Liabilities:

Notes payable $ 2,200

Total current liabilities 2,200

Notes payable 4,800

Total liabilities 7,000

Stockholders’ Equity

Common stock 500

Additional paid-in capital 4,000

Retained earnings 2,200

Total stockholders’ equity 6,700

2-28 Solutions Manual

Current Assets

E2–15. (continued)

Req. 6

Current

= $11,200 + $1,000 = $12,200 = 5.55

Ratio Current Liabilities $2,200 $2,200

This ratio indicates that, for every $1 of current liabilities, Higgins maintains approximately

$5.55 of current assets. Higgins’ ratio is higher than the industry average of 1.50, indicating

that Higgins maintains a lower level of short-term debt compared to its current assets and

has higher liquidity. However, maintaining such a high current ratio also suggests that the

company may not be using its resources efficiently. Increasing short-term obligations would

lower Higgins’ current ratio, but this strategy alone would not help its efficiency. Higgins

should consider investing more of its cash in order to generate future returns.

Financial Accounting, 11/e 2-29

Req. 1a.

Cash

Short-Term

Notes Receivable Land

Beg. 0 (a) 40,000 Beg. 0 4,000 (c) (e) 4,000 1,000 (d)

Beg. 0

(b) 16,000 4,000 (e)

35,000 4,000 Equipment

Short-Term

Notes Payable

Long-Term

Notes Payable

Beg. 0 (c) 20,000 (d) 1,000

0 Beg. 16,000 (b) 12,000

0 Beg.

16,000 (c)

21,000 16,000 16,000

Common Stock

Additional Paid-in Capital

0 Beg.

10,000 (a)

0 Beg.

30,000 (a)

10,000

30,000

Req. 1b.

Transaction (f) is not recorded by Bailey Delivery Company because it violates the separate

entity assumption that states that transactions of the business are to be kept separate from

transactions of the owners. Helen Bailey purchase the lot for her personal use; the business

is not involved.

2-30 Solutions Manual

Req. 2

Bailey Delivery Company, Inc.

Trial Balance

December 31, 2021

Debit Credit

Cash 35,000

Short-term notes receivable 4,000

Land 12,000

Equipment 21,000

Short-term notes payable 16,000

Long-term notes payable 16,000

Common stock 10,000

Additional paid-in capital 30,000

Totals 72,000 72,000

Req. 3

Bailey Delivery Company, Inc.

Balance Sheet

At December 31, 2021

Assets Liabilities

Current Assets Current Liabilities

Cash $35,000 Short-term notes payable $16,000

Short-term notes receivable 4,000 Total Current Liabilities 16,000

Total Current Assets 39,000 Long-term notes payable 16,000

Total Liabilities 32,000

Land 12,000

Equipment 21,000 Stockholders’ Equity

Common stock

Additional paid-in capital

Total Stockholders’ Equity 40,000

Total Liabilities &

Stockholders’ Equity $72,000

10,000

30,000

Total Assets $72,000

Financial Accounting, 11/e 2-31

Req. 4

Current Assets ÷ Current Liabilities = Current Ratio

2021 $39,000 ÷ $16,000 = 2.44

2022 $52,000 ÷ $23,000 = 2.26

2023 $47,000 ÷ $40,000 = 1.18

The current ratio has decreased over the years, suggesting that the company’s liquidity is

decreasing. Although the company still maintains sufficient current assets to settle the short-

term obligations, this steep decline in the ratio may be of concern – it may be indicative of

more efficient use of resources or it may suggest the company is having cash flow problems.

Req. 5

The management of Bailey Delivery Company has already been financing the company’s

development through additional short-term debt, from $16,000 in 2021 to $40,000 in 2023.

This suggests the company is taking on increasing risk. Additional lending to the company,

particularly short-term, may be too much risk for the bank to absorb. Should the bank lend

the $50,000, Bailey Delivery Company’s current ratio would be 1.08 ( 97,000 ÷ 90,000)

immediately after the financing. Based solely on the current ratio, the bank’s vice president

should consider not providing the loan to the company as it currently stands. Of course,

additional analysis would provide better information for making a sound decision.

2-32 Solutions Manual

Transaction Brief Explanation

(a) Issued 100,000 shares of common stock (par value $0.02 per share) to

shareholders in exchange for $20,000 cash and $5,000 of tools and

equipment.

(b) Loaned $1,800 cash; borrower signed a note receivable for this

amount.

$30,000 note payable for the balance.

(d) Sold tools and equipment for $900 cash (their original cost).

E2–18.

Req. 1

Increases with… Decreases with…

Equipment Purchases of equipment Sales of equipment

Notes receivable Additional loans to others Collection of loans

Notes payable Additional borrowings Payments of debt

Req. 2

Equipment Notes Receivable Notes Payable

1/1 500 250 1/1 150 650 245 225 110 100 1/1

170

12/31 100 12/31 170 160 12/31

Beginning

balance

+ “+” 

“



” = Ending

balance

Equipment $500 + $250  $ ? = $100

? = 650

Notes receivable 150 + ?  225 = 170

? = 245

Notes payable 100 + 170  ? = 160

? = 110

Financial Accounting, 11/e 2-33

Activity Type of

Effect on

Activity

Cash

(a) Capital expenditures I 

(b) Repurchases of common stock from investors F 

(d) Issuance of common stock F +

(e) Purchases of short-term investments I 

(f) Dividends paid on common stock. F 

E2–20.

Activity Type of

Effect on

Activity

Cash

(a) Additional borrowing from banks F +

(b) Purchase of investments I 

(d) Issuance of stock F +

(e) Purchases of property, plant, and equipment I 

(f) Payment of debt principal



(g) Dividends paid



(h) Receipt of principal payment on a note receivable

E2–21.

1. Current assets 2. Debt principal repaid 3. Significant accounting policies 4. Cash received from sales of

noncurrent assets

5. Dividends paid 6. Short-term obligations In the asset section of a classified balance sheet.

In the financing activities section of the statement of

cash flows.

Usually the first note after the financial statements.

In the investing activities section of the statement of

cash flows.

In the financing activities section of the statement of

cash flows.

In the current liabilities section of a classified

balance sheet.

7. Date of the statement of

In the heading of the balance sheet.financial position

Financial Accounting, 11/e 2-35

P2–1.

Balance

Sheet

Classification

Debit or

Credit

Balance

(1) Notes and Loans Payable (short-term) CL Credit

(2) Materials and Supplies CA Debit

(3) Common Stock SE Credit

(4) Intangible Assets NCA Debit

(5) Income Taxes Payable CL Credit

(6) Long-Term Debt NCL Credit

(7) Property, Plant, and Equipment NCA Debit

(8) Retained Earnings SE Credit

(9) Notes and Accounts Receivable (short-term) CA Debit

(10) Investments (long-term) NCA Debit

(11) Cash and Cash Equivalents CA Debit

(12) Accounts Payable and Accrued Liabilities CL Credit

(13) Crude Oil, Products and Merchandise CA Debit

(14) Additional Paid-in Capital SE Credit

2-36 Solutions Manual

Req. 1

East Hill Home Healthcare Services was organized as a corporation. Only a corporation

issues shares of common stock to its owners in exchange for their investment, as in

transaction (a).

Req. 2 (On next page)

Req. 3

The transaction between the two stockholders (Event e) was not included in the tabulation.

Since the transaction in (e) occurs between the owners, there is no effect on the business

due to the separate entity assumption.

Req. 4

(a) (b) (c) (d) (e) Total assets = $119,500 + $18,000 + $5,000 + $510,500 + $160,000 + $65,000

= $878,000

Total liabilities = $108,000 + $180,000

= $288,000

Total stockholders’ equity = Total assets – Total liabilities

= $878,000 – $288,000 = $590,000

Cash balance = $50,000 + $90,000 – $9,000 + $3,500 – $18,000 – $5,000 + 8,000

= $119,500

Total current assets = Cash $119,500 + Short-Term Investments $18,000 + Notes

Receivable $5,000 = $142,500

= 1.32

Req. 5

Current

Current Assets

= $119,500+$18,000+$5,000 = $142,500

Ratio Current Liabilities $108,000 108,000

For every $1 in current liabilities, East Hill maintains approximately $1.32 in current assets.

The ratio suggests that East Hill is likely maintaining adequate liquidity and using resources

efficiently.

Financial Accounting, 11/e 2-37

Req. 2

Assets = Liabilities + Stockholders’ Equity

Cash

Short-Term

Investments

Notes

Receivable Land Buildings Equipment

ST Notes LT Notes

Payable Payable

Common

Stock

Additional

Paid-in

Capital

Retained

Earnings

Beg. 50,000 500,000 100,000 50,000 = 100,000

100,000

20,000 80,000 400,000

(a) +90,000 = +9,000 +81,000

(b) –9,000 +14,000 +60,000 +15,000 = +80,000

(d) –18,000 +18,000 =

(e) No effect

(f) –5,000 +5,000 =

(g) +8,000 = +8,000

+119,500 +18,000 +5,000 +510,500 +160,000 +65,000 = +108,000 +180,000 +29,000 +161,000 +400,000

$878,000 $288,000 $590,000

2-38 Solutions Manual

Req. 1 and 2

Cash Investments (short-term) Accounts Receivable

Beg. 22,000 (e) 11,000 (f) 9,000 (i) 1,000 Beg. 3,000

3,000

12,000 Beg. 3,000 10,000 (a) (a) 10,000

5,000 (b)

5,000 (c) 13,000 3,000 (g)

8,000 (h) Inventory Notes Receivable (long-term)

Beg. 20,000 20,000 Beg. 1,000

(b) 5,000

6,000

Equipment Factory Building Operating Lease ROU Assets

Beg. 50,000 Beg. 90,000 1,000 (i) (h) 24,000 Beg. 140,000

End. 49,000 End. 114,000 End. 158,000

Intangible Assets Accounts Payable Accrued Liabilities Payable

Beg. 5,000 (g) 3,000

15,000 Beg. 4,000 Beg.

8,000 15,000 4,000

Notes Payable (current) Notes Payable (noncurrent) Long-term Lease Liabilities

7,000 Beg. 9,000 (f) 87,000 Beg. 16,000 (h) 63,000 Beg.

13,000 (c)

16,000 103,000 76,000

Common Stock Additional Paid-in Capital Retained Earnings

10,000 Beg. 1,000 (e) 117,000 Beg. 10,000 (e)

31,000 Beg.

11,000 127,000 31,000

Financial Accounting, 11/e 2-39

Req. 3

No effect was recorded for (d). The agreement in (d) involves no exchange or receipt of

cash, goods, or services and thus is not a transaction.

Req. 4

Jaguar Plastics Company

Trial Balance

At December 31

Debit Credit

Cash 12,000

Investments (short-term) 13,000

Accounts receivable 3,000

Inventory 20,000

Notes receivable (long-term) 6,000

Equipment 49,000

Factory building 114,000

Operating lease right-of-use assets 158,000

Intangible assets 8,000

Accounts payable 15,000

Accrued liabilities payable 4,000

Notes payable (short-term) 16,000

Notes payable (long-term) 103,000

Long-term lease liabilities 76,000

Common stock 11,000

Additional paid-in capital 127,000

Retained earnings 31,000

Totals 383,000 383,000

2-40 Solutions Manual

Req. 5

Jaguar Plastics Company

Balance Sheet

At December 31

Assets

Current Assets

Cash $ 12,000

Investments 13,000

Accounts receivable 3,000

Inventory 20,000

Total Current Assets 48,000

Notes receivable 6,000

Equipment 49,000

Operating lease right-of-use assets 158,000

Factory building 114,000

Intangible assets 8,000

Total Assets $383,000

Liabilities

Current Liabilities

Accounts payable $ 15,000

Accrued liabilities payable 4,000

Notes payable 16,000

Total Current Liabilities 35,000

Notes payable 103,000

Long-term lease liabilities 76,000

Total Liabilities 214,000

Stockholders’ Equity

Common stock 11,000

Additional paid-in capital 127,000

Retained earnings 31,000

Total Stockholders’ Equity 169,000

Total Liabilities & Stockholders’ Equity $383,000

Req. 6

Current

Current Assets

= $48,000 = 1.37

Ratio Current Liabilities $35,000

Financial Accounting, 11/e 2-41

© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.This ratio indicates that Jaguar Plastics has sufficient liquidity to pay short-term

liabilities with current assets. For every $1 of current liabilities, Jaguar Plastics

maintains $1.37 of current assets.

2-42 Solutions Manual

Transaction Type of Activity Effect on Cash

(a) I –

(b) I –

(c) I –

(d) NE NE

(e) F +

(f) F +

(g) I –

(h) I –

(i) I +

P2–5. (dollars in millions)

Req. 1

a. Cash (+A) …………………………………………………………………. 18,266

Long-term debt (+L) …………………………………………….. 18,266

b. Long-term investments (+A) ………………………………………… 4,200

Short-term investments (+A) ……………………………………….. 16,800

Cash (A) …………………………………………………………… 21,000

c. Property, plant, and equipment (+A) …………………………….. 10,981

Cash (A) …………………………………………………………… 9,571

Short-term debt (+L) …………………………………………….. 1,410

d. Cash (+A) …………………………………………………………………. 1,469

Common stock (+SE) …………………………………………… 1

Additional paid-in capital (+SE) …………………………….. 1,468

e. Cash (+A) …………………………………………………………………. 18,810

Short-term investments (A) …………………………………. 18,810

f. Retained earnings (SE) …………………………………………….. 11,126

Dividends payable (+L) ………………………………………… 11,126

Financial Accounting, 11/e 2-43

Req. 2

Cash

Short-Term

Investments Accounts Receivable

Beg. 48,844 (a) 18,266 (d) 1,469 (e) 18,810

Beg. 51,713 21,000 (b) (b) 16,800 Beg. 22,926

18,810 (e)

9,571 (c) 49,703 22,926

56,818

Inventories Other Current Assets

4,106 Long-Term

Investments

Property, Plant, and

Equipment

Beg. 105,341 (b) 4,200 109,541 46,236 Accounts

Payable

46,236 Beg. Short-term Debt

10,260 1,410 (c) 11,670 Beg. 4,106 Beg. 37,378 (c) 10,981

48,359 43,700 0 Beg.

11,126 (f)

11,126

Beg. 35,230

35,230

Other

Noncurrent Assets

Beg. 32,978

32,978

Accrued

Expenses

Unearned

Revenue

43,700 Beg. 5,522 Beg.

5,522

Dividends

Payable

Long-term Debt

Other

Noncurrent Liabilities

91,807 Beg. 18,266 (a)

50,503 Beg.

110,073 50,503

Common

Stock

Additional

Paid-in Capital

Retained

Earnings

1 Beg 1 (d) 45,173 Beg. 1,468 (d) (f) 11,126

2 46,641 45,314 Beg.

34,188

2-44 Solutions Manual

Req. 3

Apple Inc.

Trial Balance

At September 26, 2020

(in millions)

Debit Credit

Cash 56,818

Short-term Investments 49,703

Accounts receivable 22,926

Inventories 4,106

Other current assets 35,230

Long-term investments 109,541

Property, plant, and equipment 48,359

Other noncurrent assets 32,978

Accounts payable 46,236

Accrued expenses 43,700

Unearned revenue 5,522

Dividends payable 11,126

Short-term debt 11,670

Long-term debt 110,073

Other noncurrent liabilities 50,503

Common stock 2

Additional paid-in capital 46,641

Retained earnings 34,188

Totals 359,661 359,661

Financial Accounting, 11/e 2-45

Req. 4

Apple Inc.

Balance Sheet

At September 26, 2020

(in millions)

ASSETS

Current Assets:

Cash $ 56,818

Short-term investments 49,703

Accounts receivable 22,926

Inventories 4,106

Other current assets 35,230

Total current assets 168,783

Long-term investments 109,541

Property, plant, and equipment, net 48,359

Other noncurrent assets 32,978

Total assets $359,661

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current Liabilities:

Accounts payable $ 46,236

Accrued expenses 43,700

Unearned revenue 5,522

Dividends payable 11,126

Short-term debt 11,670

Total current liabilities 118,254

Long-term debt 110,073

Other noncurrent liabilities 50,503

Total liabilities 278,830

Stockholders’ Equity:

Common stock 2

Additional paid-in capital 46,641

Retained earnings 34,188

Total stockholders’ equity 80,831

Total liabilities and stockholders’ equity $359,661

2-46 Solutions Manual

P2–5. (continued)

Req. 5

Current

= $168,783 = 1.43

Ratio Current Liabilities $118,254

For every $1 of short-term liabilities, Apple Inc. has approximately $1.43 of current

assets. This suggests that Apple has sufficient current resources to pay current

liabilities. Apple has a very efficient cash management system and keeps its current

resources at lower levels to maximize investment opportunities.

Financial Accounting, 11/e 2-47

AP2–1.

Balance

Sheet

Classification

Debit or

Credit

Balance

(1) Prepaid Expenses CA Debit

(2) Inventories CA Debit

(3) Accounts Receivable CA Debit

(4) Long-Term Debt NCL Credit

(5) Treasury Stock SE Debit

(6) Right-of-Use Assets NCA Debit

(7) Accounts Payable CL Credit

(8) Income Taxes Payable CL Credit

(9) Property, Plant, and Equipment NCA Debit

(10) Retained Earnings SE Credit

(11) Additional Paid-in Capital SE Credit

(12) Noncurrent Lease Liabilities NCL Credit

(13) Accrued Liabilities CL Credit

(14) Common Stock SE Credit

2-48 Solutions Manual

Req. 1

Russeck Incorporated was organized as a corporation. Only a corporation issues

shares of common stock to its owners in exchange for their investment, as Russeck did

in transaction (c).

Req. 2 (On next page)

Req. 3

Since the transaction in (g) occurs between the owners and others outside the

company, there is no effect on the business due to the separate entity assumption.

Req. 4

(a) (b) (c) (d) (e) Total assets = $56,000 + $2,000 + $85,000 + $110,000 + $310,000 = $563,000

Total liabilities = $32,000 + $211,000 = $243,000

Total stockholders’ equity = Total assets – Total liabilities

= $563,000 – $243,000 = $320,000

Cash balance = $120,000 + $11,000 – $3,000 + $20,000 – $5,000 – $2,000

– $85,000 = $56,000

Total current assets = $56,000 + $2,000 = $58,000

Req. 5

Current

Current Assets

= $56,000 + $2,000 = $58,000 = 1.81

Ratio Current Liabilities $32,000 $32,000

This suggests that Russeck has sufficient liquidity to cover its current obligations. For

every $1 of current liabilities, Russeck has $1.81 in current assets.

Financial Accounting, 11/e 2-49

Req. 2

Assets = Liabilities + Stockholders’ Equity

Cash

Short-Term

Notes

Receivable

Long-Term

Investments Equipment Buildings

Long-Term

Notes

Payable

Common

Stock

Additional

Paid-in

Capital

Retained

Earnings

Short-Term

Notes

Payable

Beg. 120,000 70,000 310,000 = 200,000 20,000 200,000 80,000

(a) +11,000 = +11,000

(b) –3,000 +30,000 = +27,000

(d) –5,000 +10,000 = +5,000

(e) –2,000 +2,000 =

(f) –85,000 +85,000 =

(g) No effect =

+56,000 +2,000 +85,000 +110,000 +310,000 = +32,000 +211,000 +30,000 +210,000 +80,000

$563,000 $243,000 $320,000

2-50 Solutions Manual

Req. 1 and 2

Cash Accounts Receivable Inventories

Beg. 14,247 3,400 (b)

2,980 (e) 14,247 1,830 (f)

Beg. 20,824 (a) 1,020 (d) 4,020 (g) 310 Beg. 162,389

162,389

Prepaid Expenses and

Other Current Assets

Beg. 18,830

17,964 18,830

Property, Plant

and Equipment

Intangible

Assets

Long-Term

Investments

Beg. 245,246 (f) 11,230 Beg. 45,128 4,020 (d) (b) 3,400 Beg. 2,108

(e) 2,980

252,456 48,528 5,088

Other

Assets

Accounts

Payable

Unearned

Revenue

Beg. 1,579 35,485 Beg. 56,714 Beg.

310 (g)

1,269 35,485 56,714

Accrued Expenses

Payable

Dividends

Payable

30,077 Beg. 0 Beg.

300 (h)

30,077 300

Long-Term Debt

(current portion is $550)

Other Long-Term

Liabilities

Common

Stock

1,066 Beg. 9,400 (f) 23,080 Beg. 491 Beg.

16 (a)

10,466 23,080 507

Additional

Paid-in Capital

Treasury

Stock*

Retained

Earnings

377,913 Beg.

1,004 (a)

Beg. 656,597

642,122 Beg.

(h) 300

378,917

656,597

641,822

* Reported as a reduction in Stockholders’ Equity (similar to Chipotle in Exhibit 2.1).

Financial Accounting, 11/e 2-51

Req. 3

No effect was recorded for (c). Ordering goods involves no exchange or receipt of

cash, goods, or services and thus is not a transaction.

Req. 4

Ethan Allen Interiors Inc.

Trial Balance

At September 30

(in thousands of dollars)

Debit Credit

Cash 17,964

Accounts receivable 14,247

Inventories 162,389

Prepaid expenses and other current assets 18,830

Property, plant and equipment 252,456

Intangible assets 48,528

Long-term investments 5,088

Other assets 1,269

Accounts payable 35,485

Unearned revenue 56,714

Accrued expenses payable 30,077

Dividends payable 300

Long-term debt (current portion, $550) 10,466

Other long-term liabilities 23,080

Common stock 507

Additional paid-in capital 378,917

Treasury stock 656,597

Retained earnings 641,822

Totals 1,177,368 1,177,368

2-52 Solutions Manual

Req. 5

Ethan Allen Interiors Inc.

Balance Sheet

At September 30

(in thousands of dollars)

Assets

Current assets

Cash $ 17,964

Accounts receivable 14,247

Inventories 162,389

Prepaid expenses and other current assets 18,830

Total current assets 213,430

Property, plant and equipment 252,456

Intangible assets 48,528

Long-term investments 5,088

Other assets 1,269

Total Assets $520,771

Liabilities

Current liabilities

Accounts payable $ 35,485

Unearned revenue 56,714

Accrued expenses payable 30,077

Dividends payable 300

Current portion of long-term debt 550

Total current liabilities 123,126

Long-term debt 9,916

Other long-term liabilities 23,080

Total liabilities 156,122

Stockholders’ Equity

Common stock ($0.01 par value) 507

Additional paid-in capital 378,917

Treasury stock (656,597)

Retained earnings 641,822

Total Stockholders’ Equity 364,649

Total Liabilities and Stockholders’ Equity $520,771

Req. 6

Current

Total Current Assets

= $213,430 = 1.733

Ratio Total Current Liabilities $123,126

Ethan Allen maintains a relatively high current ratio, indicating that the company has

almost $2 in current assets to pay each dollar of current obligations.Financial Accounting, 11/e 2-53

Transaction Type of Activity Effect on Cash

(a) F +1,020

(b) I 3,400

(c) NE NE

(d) I +4,020

(e) I 2,980

(f) I 1,830

(g) I +310

(h) NE NE

AP2-5

Req. 1

a. Cash (+A) …………………………………………………………………. 18,296

Long-term debt (+L) …………………………………………….. 18,296

b. Long-term investments (+A) ………………………………………… 4,760

Short-term investments (+A) ……………………………………….. 19,040

Cash (A) …………………………………………………………… 23,800

c. Property, plant, and equipment (+A) …………………………….. 11,043

Cash (A) …………………………………………………………… 9,603

Short-term notes payable (+L) ………………………………. 1,440

d. Cash (+A) …………………………………………………………………. 1,500

Common stock (+SE) …………………………………………… 1

Additional paid-in capital (+SE) …………………………….. 1,499

e. Cash (+A) …………………………………………………………………. 19,038

Short-term investments (A) …………………………………. 19,038

f. Retained earnings (SE) …………………………………………….. 11,156

Dividends payable (+L) ………………………………………… 11,156

Financial Accounting, 11/e 2-55

Req. 2

Cash

Short-Term

Investments Accounts Receivable

Beg. 14,004 (a) 18,296 (d) 1,500 (e) 19,038

Beg. 11,361 23,800 (b) (b) 19,040 Beg. 17,656

19,038 (e)

9,603 (c) 11,363 17,656

19,435

Inventories Other Current Assets

2,131 Long-Term

Investments

Property, Plant, and

Equipment

Accounts

Payable

Beg. 131,546 (b) 4,760 136,306 30,520 6,376 1,440 (c) 7,816 30,520 Beg. Short-term

Notes Payable

Beg. 2,131 Beg. 20,844 (c) 11,043

31,887 18,653 0 Beg.

11,156 (f)

11,156

Beg. 24,107

24,107

Other

Noncurrent Assets

Beg. 12,658

12,658

Accrued

Expenses

Unearned

Revenue

18,653 Beg. 8,587 Beg.

8,587

Dividends

Payable

Long-term Debt

Other

Noncurrent Liabilities

29,303 Beg. 18,296 (a)

28,157 Beg.

47,599 28,157

Common

Stock

Additional

Paid-in Capital

Retained

Earnings

1 Beg 1 (d) 25,112 Beg. 1,499 (d) (f) 11,156

2 26,611 87,598 Beg.

76,442

2-56 Solutions Manual

Req. 3

Kiwi Inc.

Trial Balance

At June 30, 2023

(in thousands)

Debit Credit

Cash 19,435

Short-term Investments 11,363

Accounts receivable 17,656

Inventories 2,131

Other current assets 24,107

Long-term investments 136,306

Property, plant, and equipment 31,887

Other noncurrent assets 12,658

Accounts payable 30,520

Accrued expenses 18,653

Unearned revenue 8,587

Short-term notes payable 7,816

Dividends payable 11,156

Long-term debt 47,599

Other noncurrent liabilities 28,157

Common stock 2

Additional paid-in capital 26,611

Retained earnings 76,442

Totals 255,543 255,543

Financial Accounting, 11/e 2-57

Req. 4

Kiwi Inc.

Balance Sheet

At June 30, 2023

(in thousands)

ASSETS

Current assets:

Cash $ 19,435

Short-term investments 11,363

Accounts receivable 17,656

Inventories 2,131

Other current assets 24,107

Total current assets 74,692

Long-term investments 136,306

Property, plant, and equipment 31,887

Other noncurrent assets 12,658

Total assets $255,543

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:

Accounts payable $ 30,520

Accrued expenses 18,653

Unearned revenue 8,587

Dividends payable 11,156

Short-term notes payable 7,816

Total current liabilities 76,732

Long-term debt 47,599

Other noncurrent liabilities 28,157

Total liabilities 152,488

Stockholders’ equity:

Common stock 2

Additional paid-in capital 26,611

Retained earnings 76,442

Total stockholders’ equity 103,055

Total liabilities and stockholders’ equity $255,543

2-58 Solutions Manual

AP2–5. (continued)

Req. 5

Current

= $74,692 = 0.97

Ratio Current Liabilities $76,732

For every $1 of short-term liabilities, Kiwi Inc. has approximately $0.97 of current

assets. This suggests that Kiwi has nearly sufficient current resources to pay current

liabilities. It is likely that Kiwi has a very efficient cash management system and keeps

its current resources at lower levels to maximize investment opportunities.

Financial Accounting, 11/e 2-59

CON2–1.

Req. 1

Debit Credit

a. Cash (+A)

25,000

………………………………………………….

Equipment (+A) …………………………………………. 36,000

Common stock (+SE)……………………. 200

Additional paid-in capital (+SE)………… 60,800

b. Land (+A)………………………………………… 18,000

Buildings

72,000

(+A)……………………………………..

Cash (A)…………………………………. 10,000

Notes payable (noncurrent) (+L)…..…… 80,000

c. Equipment (+A)…………………………………. 6,500

Cash (A)…………………………………. 2,500

Notes payable (current) (+L)……………. 4,000

d. No transaction – no exchange; just a promise of service by the

receptionist for a promise to pay cash for the service by PPSS.

e. Notes payable (noncurrent) (L)…..…………… 1,000

Cash (A)………………………………… 1,000

f. Short-term investments (+A)…………………… 5,000

Cash (A)…………………………………. 5,000

g. No transaction – ordering goods involves no exchange or receipt of

cash, goods, or services (a promise to deliver for a promise to pay

when delivered – an exchange of promises is not a transaction).

2-60 Solutions Manual

Req. 2

Cash Short-term Investments Equipment

Beg. 0 (a) 25,000 Beg. 0

(a) 36,000

Beg. 0 10,000 (b) (f) 5,000 2,500 (c) 5,000 1,000 (e) 42,500

5,000 (f)

6,500

Land Buildings

Beg. 0 (b) 18,000 Beg. 0

(b) 72,000

18,000 72,000

Notes Payable

(current)

Notes Payable

(noncurrent)

0 Beg. 4,000 (c) (e) 1,000 0 Beg.

80,000 (b)

4,000 79,000

Common Stock Additional Paid-in Capital

0 Beg. 200 (a) 0 Beg.

60,800 (a)

200 60,800

Financial Accounting, 11/e 2-61

Req. 3

Penny’s Pool Service & Supply, Inc.

Trial Balance

March 31

Debit Credit

Cash 6,500

Short-term investments 5,000

Equipment 42,500

Land 18,000

Buildings 72,000

Notes payable (current) 4,000

Notes payable (noncurrent) 79,000

Common stock 200

Additional paid-in capital 60,800

Totals 144,000 144,000

2-62 Solutions Manual

Req. 4

Penny’s Pool Service & Supply, Inc.

Balance Sheet

March 31

Assets

Current Assets:

Cash $ 6,500

Short-term investments 5,000

Total current assets 11,500

Equipment 42,500

Land 18,000

Buildings 72,000

Total assets $144,000

Liabilities and Stockholder’s Equity

Current Liabilities:

Notes payable $ 4,000

Total current liabilities 4,000

Notes payable 79,000

Total liabilities 83,000

Stockholder’s Equity:

Common stock ($0.05 par value) Additional paid-in capital 60,800

Total stockholder’s equity 61,000

Total liabilities and stockholder’s equity 200

$144,000

Req. 5

Type of Activity

(I, F, or NE)

Effect on Cash Flows

(+ or – and amount)

(a) F + 25,000

(b) I – 10,000

(d) NE NE

(e) F – 1,000

(f) I – 5,000

(g) NE NE

Financial Accounting, 11/e 2-63

Req. 6

Current Assets ÷ Current Liabilities = Current Ratio

On March 31 $11,500 ÷ $4,000 = 2.875

With a current ratio of 2.875, PPSS has liquidity with sufficient current assets to settle

short-term obligations. However, this may change as the inventory is received in April

and operations begin requiring paying cash for inventory purchases from suppliers,

advertising, utilities, employee salary, and other operating needs, and paying notes

payable when due. One of the most significant problems for new small businesses is

generating sufficient cash from operations to pay obligations and maintain liquidity.

2-64 Solutions Manual

ANNUAL REPORT CASES

CP2-1.

1. b.

2. d.

3. b.

4. c.

5. c.

CP2–2.

1. $282

2. $164,965

3. 0.97

4. No

5. b.

CP2–3.

1. Current ratios  Target = 1.03 Walmart = 0.97

2. b.

3. a.

4. c.

5. d.

Financial Accounting, 11/e 2-65

Current Liabilities $723,178

CP2–4.

Dollars are in thousands:

1. (a) Chipotle’s total assets for the quarter ended June 30, 2020 are $5,370,129.

(b) Current liabilities increased over six months from $666,593 at December 31,

2019, to $723,178 on June 30, 2020.

Ratio at

6/30/20

Chipotle’s current ratio decreased from the level of 1.609 on December 31, 2019

(as discussed in the chapter) to 1.591 on June 30, 2020. This indicates that,

between December 31, 2019, and June 30, 2020, Chipotle decreased its

liquidity slightly. Current assets increased by 7.3% while current liabilities

increased by a greater percentage of 8.5%. When the denominator increases at

a higher rate that the numerator, the ratio decreases.

2. (a) For the six months ended June 30, 2020, Chipotle spent $165,455 on the

purchase of leasehold improvements, property, and equipment.

(b) The total cash flows used in financing activities was a cash outflow of $104,203,

over half of which was from the $54,501 repurchase of Chipotle’s stock from

investors (called “treasury stock”).

CP2–5.

The major deficiency in this balance sheet is the inclusion of the owner’s personal

residence as a business asset. Under the separate entity assumption, each business

must be accounted for as an individual organization, separate and apart from its

owners. The improper inclusion of this asset as part of Frances Sabatier’s business:

 Overstates total assets by $300,000; total assets should be $105,000 rather

than $405,000, and

 Overstates stockholders’ equity that should be only $5,000, rather than

$305,000.

Since current assets and current liabilities were not affected, the current ratio remains

the same. However, other ratios involving long-term assets and/or stockholders’

equity will be affected.

2-66 Solutions Manual

Dollars are in thousands:

1. The company is a corporation because its owners are referred to as “stockholders.”

2. Assets = Liabilities + Stockholders’ Equity

$12,703,389 = $3,999,003 + $8,704,386

3. Current Assets ÷ Current Liabilities = Current Ratio

5. 2019 $7,620,075 $ 832,476 9.154

2018 $7,111,036 $1,516,311 4.690

In 2019, for every $1 of current liabilities, Twitter maintained approximately $9.15 of

current assets, suggesting that Twitter is highly liquid and has the ability to pay its

short-term obligations with current assets in the upcoming year. Since 2018, the

current ratio has increased from 4.69. The interpretation of this ratio would be more

useful given information on the company’s current ratio compared to the current

ratio for the industry and/or competitors and additional years of data to observe

trends.

4. Accounts payable (L) ……………………………………………….. 161,148

Cash (A) ………………………………………………………….. 161,148

Until 2019, Twitter reported an Accumulated Deficit, suggesting that the company

was not profitable through 2018. It appears that Twitter was profitable in 2019,

based on a positive amount in Retained Earnings of $11,586. Note that the

Accumulated Deficit account in 2018 represented the cumulative losses of the firm

since the business began, assuming no dividends were declared (likely given its

deficit position). The current year’s retained earnings represents the cumulative

earnings of the company that are not distributed to the stockholders and are

reinvested in the business.

In addition, Twitter appears profitable in the most recent year because the

company’s Accumulated Deficit became retained earnings (due to further profits). It

is possible to determine the amount of net income by using the following equation,

assuming no dividends were declared:

(in thousands)

Beginning For the Year Ending

Accum. Deficit + Net Income(Loss) – Dividends declared = Retained Earnings

$(1,454,073) + $ ? – $ 0 = $11,586

Thus, net income for the most recent year was $1,465,659.

Financial Accounting, 11/e 2-67

CP2–7.

Req. 1

LettuceDoThis.Com, Inc.

Balance Sheet

December 31

Assets

Current Assets:

Cash $ 1,000

Accounts receivable 8,000

Inventory 8,000

Total current assets 17,000

Furniture and fixtures 52,000

Delivery truck (net) 12,000

Buildings (net) 60,000

Total assets $141,000

Liabilities

Current Liabilities:

Accounts payable $ 16,000

Payroll taxes payable 13,000

Total current liabilities 29,000

Notes payable (due in three years) 15,000

Mortgage payable 50,000

Total liabilities 94,000

Stockholders’ Equity

Common stock 4,000

Additional paid-in capital 76,000

Accumulated deficit (33,000)

Total stockholders’ equity 47,000

Total liabilities and stockholders’ equity $141,000

2-68 Solutions Manual

Req. 2

Dear ___________,

I corrected the balance sheet for LettuceDoThis.Com, Inc. Primarily, I reduced

the amount reported for buildings to $60,000, which is the historical cost less any

depreciation. Estimated market value is not a generally accepted accounting principle

for recording property, plant, and equipment. The $38,000 difference ($98,000 –

$60,000) reduces total assets and reduces retained earnings. In fact, retained

earnings becomes negative suggesting that there may have been several years of

operating losses.

Before making a final decision on investing in this company, you should examine

the past three years of audited income statements and the past two years of audited

balance sheets to identify positive and negative trends for this company. You can also

compare this company’s current ratio to that of the industry to assess trends in liquidity,

and compare how this company’s long-term debt as a proportion of stockholders’ equity

has changed over time. You should also learn as much about the industry as you can

by reviewing recent articles on economic and technological trends that may have an

impact on this company.

Financial Accounting, 11/e 2-69

1. The most obvious parties harmed by the fraud at Celadon Group, Inc., were the

stockholders and creditors. Stockholders were purchasing shares of stock that

were inflated due to the fraud. Creditors were lending funds to the company based

on inflated income statement and balance sheet information. When the fraud was

discovered, the stock price dropped causing the stockholders to lose money on their

investments. In addition, the creditors have a lower probability of receiving full

payment on their loans.

Those who were helped initially by the fraud included the former executives who

were able to receive substantial bonuses based on the inflated results of

operations. However, several of the top executives at Celadon and its subsidiaries

have been charged with fraud and other violations.

2. Celadon likely set certain financial goals and tied the former executives’ bonuses to

meeting the goals. Adopting targets is a good tool for monitoring progress toward

goals and identifying problem areas, such as rising costs or sagging sales. Better

decision making can result by heading off potential problems before they grow too

large. However, setting unrealistic financial targets, especially in poor economic

times, can result in those responsible for meeting the targets circumventing

appropriate procedures and policies for their own benefit.

YOU AS ANALYST: ONLINE COMPANY RESEARCH (an individual or team project)

CP2–9.

The solution to this project will depend on the company(ies) and/or accounting

period selected for analysis.

BUSINESS ANALYTICS AND DATA VISUALIZATION IN EXCEL AND

TABLEAU

The solutions to these exercises are auto graded on Connect, as assigned by the

instructor.

2-70 Solutions Manual

Solution Manual Financial Accounting 11th edition By Libby Hodge

Solution Manual Financial Accounting 11th Edition By Libby Hodge

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