Concept explainers
Accounting for the Establishment of a Business
Nicole has decided that she is going to start her business. Nicole’s Getaway Spa (NGS). A lot has to be done when starting a new business. Here are some transactions that have occurred prior to April 30.
- a. Received 580,000 cash when issuing 8.000 new common shares.
- 1. h. Purchased land by paying $2,000 cash and signing a note payable for $7,000 due in three years.
- b. Hired a new aesthetician for a salary of $ l ,000 a month, starting next month,
- c. NGS purchased a company car for $18,000 cash (list price of $21,000) to assist in running errands for the business.
- d. Bought and received $1,000 in supplies for the spa on credit.
- e. Paid $350 of the amount owed in (e).
- f. Nicole sold 100 of her own personal shares to Raea Gooding for $300.
Required:
- 1. For each of the events, prepare
journal entries if a transaction exists, checking that debits equal credits. If a transaction does not exist, explain why there is no transaction. - 2. Assuming that the beginning balances in each of the accounts are zero, complete T-accounts to summarize the transactions (a)-(g).
- 3. Prepare a classified balance sheet at April 30 using the information given in the transactions.
- 4. Calculate the
current ratio at April 30. What does this ratio indicate about the ability of NGS to pay its current liabilities?
Requirement – 1
To record: The journal entries for given transactions.
Explanation of Solution
Journal:
Journal is the method of recording monetary business transactions in chronological order. It records the debit and credit aspects of each transaction to abide by the double-entry system.
Rules of Debit and Credit:
Following rules are followed for debiting and crediting different accounts while they occur in business transactions:
- Debit, all increase in assets, expenses and dividends, all decrease in liabilities, revenues and stockholders’ equities.
- Credit, all increase in liabilities, revenues, and stockholders’ equities, all decrease in assets, expenses.
Journal entries of Company N are as follows:
a. Issuance of common stock:
Date | Accounts title and explanation | Ref. | Debit ($) | Credit ($) |
Cash (+A) | 80,000 | |||
Common stock (+SE) | 80,000 | |||
(To record the issuance of common stock) |
Table (1)
- Cash is an assets account and it increased the value of asset by $80,000. Hence, debit the cash account for $80,000.
- Common stock is a component of stockholder’s equity and it increased the value of stockholder’s equity by $80,000. Hence, credit the common stock for $80,000.
b. Land purchased on account and in cash:
Date | Accounts title and explanation | Ref. | Debit ($) | Credit ($) |
Land (+A) | 9,000 | |||
Cash (-A) | 2,000 | |||
Notes payable (+L) | 7,000 | |||
(To record purchase of equipment on account and in cash) |
Table (2)
- Land is an assets account and it increased the value of asset by $9,000. Hence, debit the land account for $9,000.
- Cash is an assets account and it decreased the value of asset by $2,000. Hence, credit the cash account for $2,000.
- Notes payable is a liability account, and it increased the value of liabilities by $7,000. Hence, credit the notes payable for $7,000.
c. Hired a new aesthetician:
In this case, no entry required, because it is not a business transaction.
d. Equipment purchased in cash:
Date | Accounts title and explanation | Ref. | Debit ($) | Credit ($) |
Equipment (+A) | 18,000 | |||
Cash (-A) | 18,000 | |||
(To record purchase of equipment and in cash) |
Table (3)
- Equipment is an assets account and it increased the value of asset by $18,000. Hence, debit the equipment account for $18,000.
- Cash is an assets account and it decreased the value of asset by $18,000. Hence, credit the cash account for $18,000.
e. Purchase of supplies on account:
Date | Accounts title and explanation | Ref. | Debit ($) | Credit ($) |
Supplies (+A) | 1,000 | |||
Accounts payable (+L) | 1,000 | |||
(To record purchase of supplies on account) |
Table (4)
- Supplies are an assets account and it increased the value of asset by $1,000. Hence, debit the supplies account for $1,000.
- Accounts payable is a liability account and it increased the value of liability by $1,000. Hence, credit the liability account by $1,000.
f. Cash paid to creditors:
Date | Accounts title and explanation | Ref. | Debit ($) | Credit ($) |
Accounts payable (+A) | 350 | |||
Cash (+L) | 350 | |||
(To record cash paid to creditors) |
Table (5)
- Accounts payable is a liability account, and it decreased the value of liabilities by $350. Hence, debit the accounts payable for $350.
- Cash is an assets account and it decreased the value of asset by $350. Hence, credit the cash account for $350.
g. Stockholder sold their stock to another stockholder:
In this case, no entry required, because it is not a business transaction.
Requirement – 2
To prepare: T-account for each account listed in the requirement 1.
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 N are as follows:
Cash (A) | |||
Beg. | 0 | ||
(a) | 80,000 | 2,000 | (b) |
18,000 | (d) | ||
350 | (f) | ||
End. | 59,650 |
Supplies (A) | |||
Beg. | 0 | ||
(e) | 1,000 | ||
End. | 1,000 |
Equipment (A) | |||
Beg. | 0 | ||
(c) | 18,000 | ||
End. | 18,000 |
Land (A) | |||
Beg. | 0 | ||
(b) | 9,000 | ||
End. | 9,000 |
Accounts payable (L) | |||
0 | Beg. | ||
(f) | 350 | 1,000 | (e) |
650 | End. |
Notes Payable (long-term) (L) | |||
0 | Beg. | ||
7,000 | (b) | ||
7,000 | End. |
Common stock (SE) | |||
0 | Beg. | ||
80,000 | (a) | ||
80,000 | End. |
Requirement – 3
To prepare: The classified balance sheet of Company N at December 31, 2013.
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 N is as follows:
Figure (1)
Therefore, the total assets of Company N are$87,650 and the total liabilities and stockholders’ equity is$87,650.
Requirement – 4
To calculate: The current ratio of Company N and indicate the ability to repay the liabilities.
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 N as follows:
Here,
Current assets = $60,650
Current liabilities= $650
Therefore, the current ratio of Company N is 93.31.
Above calculation clearly shows Company N has better position to repay the liabilities.
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Chapter 2 Solutions
Connect 1 Semester Access Card for Fundamentals of Financial Accounting
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In accordance with the contract, Peyton received 7,200 from KXMD as an advance payment for the first two months. 3. Paid 250 on account. 4. Paid an attorney 900 for reviewing the July 3 contract with KXMD. (Record as Miscellaneous Expense.) 5. Purchased office equipment on account from Office Mart, 7,500. 8. Paid for a newspaper advertisement, 200. 11. Received 1,000 for serving as a disc jockey for a party. 13. Paid 700 to a local audio electronics store for rental of digital recording equipment. 14. Paid wages of 1,200 to receptionist and part-time assistant. Enter the following transactions on lage 2 of the two-column journal: 16. Received 2,000 for serving as a disc jockey for a wedding reception. 18. Purchased supplies on account, 850. 21. Paid 620 to Upload Music for use of its current music demos in making various music sets. 22. Paid 800 to a local radio station to advertise the services of PS Music twice daily for the remainder of July. 23. Served as disc jockey for a party for 2,500. Received 750, with the remainder due August 4, 2018. 27. Paid electric bill, 915. 28. Paid wages of 1,200 to receptionist and part-time assistant. 29. Paid miscellaneous expenses, 540. 30. Served as a disc jockey for a charity ball for 1,500. Received 500, with the remainder due on August 9, 2018. 31. Received 3,000 for serving as a disc jockey for a party. July 31. Paid 1,400 royalties (music expense) to National Music Clearing for use of various artists music during July. 31. Paid dividends, 1,250. PS Musics chart of accounts and the balance of accounts as of July 1, 2018 (all normal balances), are as follows: 11 Cash 3,920 41 Fees Earned 6,200 12 Accounts Receivable 1,000 50 Wages Expense 400 14 Supplies 170 51 Office Rent Expense 800 15 Prepaid Insurance 52 Equipment Rent Expense 675 17 Office Equipment 53 Utilities Expense 300 21 Accounts Payable 250 54 Music Expense 1,590 23 Unearned Revenue 55 Advertising Expense 500 31 Common Stock 4,000 56 Supplies Expense 180 33 Dividends 500 59 Miscellaneous Expense 415 Instructions 1. Enter the July 1, 2018, account balances in the appropriate balance column of a four-column account. Write Balance in the Item column, and place a check mark () in the Posting Reference column. {Hint: Verify the equality of the debit and credit balances in the ledger before proceeding with the next instruction.) 2. Analyze and journalize each transaction in a two-column journal beginning on Page 1, omitting journal entry explanations. 3. Post the journal to the ledger, extending the account balance to the appropriate balance column after each posting. 4. Prepare an unadjusted trial balance as of July 31, 2018.arrow_forwardDuring December of this year, G. Elden established Ginnys Gym. The following asset, liability, and owners equity accounts are included in the chart of accounts: During December, the following transactions occurred: a. Elden deposited 35,000 in a bank account in the name of the business. b. Bought exercise equipment for cash, 8,150, Ck. No. 1001. c. Bought advertising on account from Hazel Company, 105. d. Bought a display rack on account from Cyber Core, 790. e. Bought office equipment on account from Office Aids, 185. f. Elden invested her exercise equipment with a fair market value of 1,200 in the business. g. Made a payment to Cyber Core, 200, Ck. No. 1002. h. Sold services for the month of December for cash, 800. Required 1. Write the account classifications (Assets, Liabilities, Capital, Drawing, Revenue, Expense) in the fundamental accounting equation, as well as the plus and minus signs and Debit and Credit. 2. Write the account names on the T accounts under the classifications, place the plus and minus signs for each T account, and label the debit and credit sides of the T accounts 3. Record the amounts in the proper positions in the T accounts. Write the letter next to each entry to identify the transaction. 4. Foot and balance the accounts.arrow_forwardThe transactions completed by PS Music during June 20Y5 were described at the end of Chapter 1. The following transactions were completed during July, the second month of the businesss operations: July 1. Peyton Smith made an additional investment in PS Music in exchange for common stock by depositing 5,000 in PS Musics checking account. 1. Instead of continuing to share office space with a local real estate agency, Peyton decided to rent office space near a local music store. Paid rent for July, 1,750. 1. Paid a premium of 2,700 for a comprehensive insurance policy covering liability, theft, and fire. The policy covers a one-year period. 2. Received 1,000 on account. 3. On behalf of PS Music, Peyton signed a contract with a local radio station, KXMD, to provide guest spots for the next three months. The contract requires PS Music to provide a guest disc jockey for 80 hours per month for a monthly fee of 3,600. Any additional hours beyond 80 will be billed to KXMD at 40 per hour. In accordance with the contract, Peyton received 7,200 from KXMD as an advance payment for the first two months. 3. Paid 250 on account. 4. Paid an attorney 900 for reviewing the July 3 contract with KXMD. (Record as Miscellaneous Expense.) 5. Purchased office equipment on account from Office Mart, 7,500. 8. Paid for a newspaper advertisement, 200. 11. Received 1,000 for serving as a disc jockey for a party. 13. Paid 700 to a local audio electronics store for rental of digital recording equipment. 14. Paid wages of 1,200 to receptionist and part-time assistant. Enter the following transactions on Page 2 of the two-column journal: 16. Received 2,000 for serving as a disc jockey for a wedding reception. 18. Purchased supplies on account, 850. 21. Paid 620 to Upload Music for use of its current music demos in making various music sets. 22. Paid 800 to a local radio station to advertise the services of PS Music twice daily for the remainder of July. 23. Served as disc jockey for a party for 2,500. Received 750, with the remainder due August 4, 20Y5. 27. Paid electric bill, 915. 28. Paid wages of 1,200 to receptionist and part-time assistant. 29. Paid miscellaneous expenses, 540. 30. Served as a disc jockey for a charity ball for 1,500. Received 500, with the remainder due on August 9, 20Y5. 31. Received 3,000 for serving as a disc jockey for a party. 31. Paid 1,400 royalties (music expense) to National Music Clearing for use of various artists music during July. 31. Paid dividends, 1,250. PS Musics chart of accounts and the balance of accounts as of July 1, 20Y5 (all normal balances), are as follows: Instructions 1. Enter the July 1, 20Y5, account balances in the appropriate balance column of a four-column account. Write Balance in the Item column, and place a check mark () in the Posting Reference column. (Hint: Verify the equality of the debit and credit balances in the ledger before proceeding with the next instruction.) 2. Analyze and journalize each transaction in a two-column journal beginning on Page 1, omitting journal entry explanations. 3. Post the journal to the ledger, extending the account balance to the appropriate balance column after each posting. 4. Prepare an unadjusted trial balance as of July 31, 20Y5.arrow_forward
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- P. Schwartz, Attorney at Law, opened his office on October 1. The account headings are presented below. Transactions completed during the month follow. a. Schwartz deposited 25,000 in a bank account in the name of the business. b. Bought office equipment on account from QuipCo, 9,670. c. Schwartz invested his personal law library, which cost 2,800. d. Paid the office rent for the month, 1,700, Ck. No. 2000. e. Bought office supplies for cash, 418, Ck. No. 2001. f. Bought insurance for two years, 944, Ck. No. 2002. g. Sold legal services for cash, 8,518. h. Paid the salary of the part-time receptionist, 1,820, Ck. No. 2003. i. Received and paid the telephone bill, 388, Ck. No. 2004. j. Received and paid the bill for utilities, 368, Ck. No. 2005. k. Sold legal services for cash, 9,260. l. Paid on account to QuipCo, 2,670, Ck. No. 2006. m. Schwartz withdrew cash for personal use, 2,500, Ck. No. 2007. Required 1. Record the transactions and the balance after each transaction. 2. Total the left side of the accounting equation (left side of the equal sign), then total the right side of the accounting equation (right side of the equal sign). If the two totals are not equal, check the addition and subtraction. If you still cannot find the error, re-analyze each transaction.arrow_forwardB. Kelso established Computer Wizards during November of this year. The accountant prepared the following chart of accounts: The following transactions occurred during the month: a. Kelso deposited 45,000 in a bank account in the name of the business. b. Paid the rent for the current month, 1,800, Ck. No. 2001. c. Bought office desks and filing cabinets for cash, 790, Ck. No. 2002. d. Bought a computer and printer from Cyber Center for use in the business, 2,700, paying 1,700 in cash and placing the balance on account, Ck. No. 2003. e. Bought a neon sign on account from Signage Co., 1,350. f. Kelso invested her personal computer software with a fair market value of 600 in the business. g. Received a bill from Country News for newspaper advertising, 365. h. Sold services for cash, 1,245. i. Received and paid the electric bill, 345, Ck. No. 2004. j. Paid on account to Country News, a creditor, 285, Ck. No. 2005. k. Sold services for cash, 1,450. l. Paid wages to an employee, 925, Ck. No. 2006. m. Received and paid the bill for the city business license, 75, Ck. No. 2007. n. Kelso withdrew cash for personal use, 850, Ck. No. 2008. o. Kelso withdrew cash for personal use, 850, Ck. No. 2008. Required 1. Record the owners name in the Capital and Drawing T accounts. 2. Correctly place the plus and minus signs for each T account and label the debit and credit sides of the accounts. 3. Record the transactions in T accounts. Write the letter of each entry to identify the transaction. 4. Foot the T accounts and show the balances. 5. Prepare a trial balance, with a three-line heading, dated November 30, 20--.arrow_forwardThe transactions completed by PS Music during June 2019 were described at the end of Chapter 1. The following transactions were completed during July, the second month of the businesss operations: July 1.Peyton Smith made an additional investment in PS Music by depositing 5,000 in PS Musics checking account. 1.Instead of continuing to share office space with a local real estate agency, Peyton decided to rent office space near a local music store. Paid rent for July, 1,750. 1.Paid a premium of 2,700 for a comprehensive insurance policy covering liability, theft, and fire. The policy covers a one-year period. 2.Received 1,000 cash from customers on account. 3.On behalf of PS Music, Peyton signed a contract with a local radio station, KXMD, to provide guest spots for the next three months. The contract requires PS Music to provide a guest disc jockey for 80 hours per month for a monthly fee of 3,600. Any additional hours beyond 80 will be billed to KXMD at 40 per hour. In accordance with the contract, Peyton received 7,200 from KXMD as an advance payment for the first two months. 3.Paid 250 to creditors on account. 4.Paid an attorney 900 for reviewing the July 3 contract with KXMD. (Record as Miscellaneous Expense.) 5.Purchased office equipment on account from Office Mart, 7,500. 8.Paid for a newspaper advertisement, 200. 11.Received 1,000 for serving as a disc jockey for a party. 13.Paid 700 to a local audio electronics store for rental of digital recording equipment. 14.Paid wages of 1,200 to receptionist and part-time assistant. Enter the following transactions on Page 2 of the two-column journal: 16.Received 2,000 for serving as a disc jockey for a wedding reception. 18.Purchased supplies on account, 850. July 21. Paid 620 to Upload Music for use of its current music demos in making various music sets. 22.Paid 800 to a local radio station to advertise the services of PS Music twice daily for the remainder of July. 23.Served as disc jockey for a party for 2,500. Received 750, with the remainder due August 4, 2019. 27.Paid electric bill, 915. 28.Paid wages of 1,200 to receptionist and part-time assistant. 29.Paid miscellaneous expenses, 540. 30.Served as a disc jockey for a charity ball for 1,500. Received 500, with the remainder due on August 9, 2019. 31.Received 3,000 for serving as a disc jockey for a party. 31.Paid 1,400 royalties (music expense) to National Music Clearing for use of various artists music during July. 31.Withdrew 1,250 cash from PS Music for personal use. PS Musics chart of accounts and the balance of accounts as of July 1, 2019 (all normal balances), are as follows: Instructions 1. Enter the July 1, 2019, account balances in the appropriate balance column of a four-column account. Write Balance in the Item column and place a check mark () in the Posting Reference column. (Hint: Verify the equality of the debit and credit balances in the ledger before proceeding with the next instruction.) 2. Analyze and journalize each transaction in a two-column journal beginning on Page 1, omitting journal entry explanations. 3. Post the journal to the ledger, extending the account balance to the appropriate balance column after each posting. 4. Prepare an unadjusted trial balance as of July 31, 2019.arrow_forward
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