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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Accounts Payable and Cash Discounts Byrd Company had the following transactions during 2019 and 2020:

On December 24, 2019, a computer was purchased on account from Computers International for $60,000. Terms of the sale were 2/10, n/30.

Byrd calculated that to forgo the discount for the computer would be the equivalent of paying 36% interest annually for the extra 20 days. Therefore, Byrd went to First Local Bank and signed a $60,000, 30-day note at 12% in order to take advantage of the discount terms. This transaction took place on December 29, 2019. (The account payable was paid on January 2, 2020, and the note was paid at maturity. Assume a 360-day year.)

On December 30, 2019, Byrd declared a $2.00 cash dividend to the common shareholders. Ten thousand shares were outstanding on this date. The dividend is to be paid on January 5, 2020.

Required:

Prepare the journal entries for Byrd for both 2019 and 2020. Assume that the net price method is used to account for the credit terms.

Show how the preceding items would be reported in the current liabilities section of Byrd’s December 31, 2019, balance sheet.

Next Level Assuming Byrd’s current assets were $1,200,000 and its current ratio was 2.4 at the end of 2018, compute the current ratio at the end of 2019 (based solely on the effects of the preceding transactions).

1.

To determine

Prepare necessary journal entry to record the given transaction for the year 2019 and 2020 by assuming that net price method is used to account for the credit terms.

Explanation

Liabilities:

The claims creditors have over assets or resources of a company are referred to as liabilities. These are the debt obligations owed by company to creditors. Liabilities are classified on the balance sheet as current liabilities and long-term liabilities.

Prepare necessary journal entry to record the given transaction for the year 2019 and 2020.

DateAccount Titles and explanationDebit ($)Credit ($)
December 24, 2019Equipment [$60,000($60,000×2%)] 58,800 
      Accounts payable 58,800
 (To record the cash discount purchase of equipment on account)  
    
December 29, 2019Cash60,000 
      Notes  payable  60,000
 (To record the purchase of equipment on account)  
    
December 30, 2019Retained earnings 20,000 
      Dividend payable  [$10,000×$2.00]  20,000
 (To record the cash dividend of $2

2.

To determine

Show the effect of given transaction in the balance sheet of Company B as on December 31, 2019.

3.

To determine

Calculate the current  ratio for the year  ended 2019 by assuming that  Company B current assets were $1,200,000 and its current ratio was 2.4 at  the year  ended 2018.

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