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P2-
P2-
Oshkosh B’Gosh Inc.
Example: Issued 10,000 shares of stock for $2 per share.
Consolidated Balance Sheets
Aggregated
Assets
-^ Liabilities
=^ Equities
+20,000(Cash)
+20,000(Common Stock)
Liquid assets
Inventories
Other current assets
Comments:
Total current assets
Long-term assets
Frank’s receipt of $20,000 in cash is surely something that we would want torecord.
Recognition
is the
act
of
recording
an
item
in
the
accounting equation. So we want to recognize the $20,000 cash as an asset.
Total assets 174,
Current liabilities
To maintain the equation, we must increase something on the right-hand-side.So either Liabilities or Equities must go up by $20,000. This decision is one ofclassification.
Employee benefit plan liabilities
Total liabilities
Shareholders’ equity
Because the accounting equation is being formed from Frank’s point of view, weshould increase Equities, not Liabilities.
Total liabilities & shareholders’ equity
a.^
Borrowed $5,000 from State Bank
Oshkosh B’Gosh Inc.
Assets
-^ Liabilities
=^ Equities
+5,000 (Cash)
+5,000 (Bank Loan)
Consolidated Balance Sheets
Aggregated & rounded
Liquid assets
45.^
40.^
Comments:
Inventories
Other current assets
17.^
17.^
Surely
we
want
to^
recognize
Frank’s
receipt
of^
in^
cash.
So
Assets increase by $5,000. (Recognition)
Total current assets
Long-term assets
43.^
38.^
Because Frank has an obligation to repay the loan, we should maintain theequation by increasing Liabilities. (Classification)
Total assets 174.
Current liabilities
48.^
b.^
Purchased equipment, paying $3,000 cash
Employee benefit plan liabilities
13.^
Assets
-^ Liabilities
=^
Equities
–3,000(Cash) +3,000(Equipment)
Total liabilities
61.^
Shareholders’ equity
Total liabilities & shareholders’ equity
Aggregating makes it easy to identify that the decrease in total assets comesmostly from decreases in liquid assets, inventories and long-term assets. De-creases mostly in Shareholders’ equity maintain the balance in the balancesheet.
Comments:
Rounding makes these observations even easier to make.
The exchange of cash for equipment transforms one type of asset (cash) into
Solution-02-Problems
another (equipment). Therefore, total Assets will not change, nor will the sumof Liabilities and Equities. We would still want to recognize this event. It is probably very important tokeep track of how much cash Frank has, and it is now $3,000 less. (Recogni-tion) Since one asset, cash, is less, we must create another asset, equipment tomaintain the equation. (Classification) c.^
Purchased $8,000 of inventory on credit. Payment is due in 30 days. Assets
-^ Liabilities
=^ Equities
+8,000(Inventory)
+8,000(Accounts Payable)
Comments: We^
want
to recognize
Frank’s
receipt
of^
of^
inventory.
So
Assets increase by $8,000. (Recognition) Because Frank has an obligation to repay the account, we should maintain theequation by increasing Liabilities. (Classification) d.^
Sold inventory costing $4,000 to customers on credit. The sales price was $6,000, and payment is due in 30 days.^ Assets
–^
Liabilities
=^
Equities
–4,000(Inventory) +6,
(Accounts Receivable)
–4,000 (Retained Earn-ings) +6,
(Retained Earnings)
Comments: We want to recognize the movement of $4,000 inventory from Frank to cus-tomers. (Recognition) The most common course of events is that the customers will keep the inven-tory and pay their accounts. If so, the equation would be maintained by reduc-ing Equities by $4,000. Note: This is just the effect of the reduction in Frank’sinventory. (Classification) Again presuming the most common course of events, customers now owe Frank$6,000. Customers’ promises to pay, assuming they will be fulfilled, are an assetto Frank. Frank would create an asset, Accounts Receivable, to recognize thevalue of these rights to collect cash in the future. (Recognition and Classifica-
tion) To maintain the equation, Equities should be increased by $6,000. (Classifica-tion) Question: What if customers never paid their debts and it was impossible toretrieve the inventory from them? (This is the equivalent of shoplifting.) Thenno asset of $6,000 for the rights to try to collect should be recognized. Equitywould be reduced. (Recognition and Classification) Question: What if few customers paid their debts, but the inventory could beretrieved
from
them
at
no
cost
and
in
perfect
condition?
No^
asset
of^
for
the
rights
to^
collect
should
be recognized.
To^
maintain
the
equation,
another
asset,
perhaps
called
“Inventory
in^ the^
hands
of potential
customers”
should
be
created
in the
amount of $4,000. Collection would be recognized when it occurred. (Classifica-tion) e.^
Paid^
cash
to^
suppliers
of^
inventory
in^ partial
fulfillment
of
amounts owed.^ Assets
-^ Liabilities
=^ Equities
–7,000(Cash)
–7,000(Accounts Payable)
Comments: Frank’s cash decreases by $7,000. (Recognition) Frank relieves part of a previously recognized obligation, therefore Liabilitiesdecrease by $7,000. (Recognition) f.^
Received $6,000 cash from customers for amounts owed by them. Assets
-^ Liabilities
=^ Equities
+6,000(Cash) –6,000(Receivables) Comments: If we recorded Accounts Receivable in d above, this collection of cash is thetransformation
of^
one^
type
of^
asset
(receivable)
into
Solution-02-Problems
P2-
D^
c^
G^
0 EB
EB
a.^
Current Assets
P2-4^ DAIMLERCHRYSLER AG^ Aggregated Balance Sheets – Asset Side Only^ (in millions)
Consolidated At December 31,
[EURO]
[EURO]
Fixed assets
Inventories
Receivables
Cash & securities
Other assets
Total assets
DAIMLERCHRYSLER AG Aggregated and Rounded Balance Sheets –Asset Side Only (in billions)
Consolidated At December 31,
[EURO]
[EURO]
Fixed assets
Inventories
Receivables
Cash & securities
Other assets
Total assets
Note the slight rounding errors in the rounded total assets. If this is trouble-some, we could round before we calculate totals.
Current Liabilities
=^ 1.
At December 31, 2000, Amazon.com had $1.40 in current assets for every dollarin current liabilities. At December 31, 2001, that number had fallen to $1.31 incurrent assets for every dollar of current liabilities. The ratio has deteriorated. b.^
Cash equivalents are highly liquid short-term investments. They would include items like bank accounts, treasury bills, and money market funds. Theyare included with cash because they can readily be converted to cash with littlerisk of loss of value. c.^
Marketable securities are short-term investments in financial assets, such as shares of stocks and bonds. Marketable securities are generally carriedon the balance sheet at their market values, meaning that the accounting valueis probably close to the market value on the balance sheet date. d.^
The debt-to-equity ratio is computed by dividing total liabilities by total stockholders’ equity. The ratio determines the relative amount of financing sup-plied by owners versus creditors. Since Amazon.com has negative total stock-holders’ equity, this ratio cannot be computed. This would indicate an extremelyrisky balance sheet, as Amazon.com’s creditors have actually supplied nearly$2.00 in financing for every $1.00 of assets. e.^
The^
total amounts
paid
by^
shareholders
to^
Amazon.com
was
$1,466,501,000 at December 31, 2001. This includes the totals of Commonstock ($3,732) and Additional paid-in-capital ($1,462,769) (000’s). f.^
The accounting value of the wealth of Amazon.com’s shareholders at December 31, 2001 was a deficit of $1,440,000,000.
Because Amazon.com’s
liabilitiesexceed its assets, shareholders had a negative accounting value. g.^
Total shares issued and outstanding at 12/31/01: 373,218,
Low value
High value
Shares outstanding
Market price per share
Total market value:
h.^
The market’s valuation of Amazon.com is significantly higher than its accounting valuation. This may be due to a significant value attached to Ama-zon.com’s
name
recognition,
a^ valuation
that
is^
not^
recognized
on^
Ama-
zon.com’s balance sheet.
In addition, market valuation is influenced by investor
perceptions
of
future events, rather than strictly a reflection of past transactions.
Solution-02-Problems
Because Antler has an obligation to repay the account, we should maintain theequation by increasing Liabilities. (Classification)
i.^
The increase in the accumulated deficit represents the net loss for
- Accumulated deficit at 12/31/2000:
Accumulated deficit at 12/31/01:
c.^
Borrowed $6,000 from State Bank.
Net loss for 2001:
Assets
-^ Liabilities
=^
Equities
+6,000(Cash)
+6,000(Note
payable
to State Bank)
j.^
The gain is the difference between the value of the asset written off ($14 million) and the value of the liability removed from the balance sheet ($20million).
Since the liability to living.com exceeded the asset value of the in- vestment, the transaction resulted in a net gain to Amazon.com. k.^
ASSETS
=^
LIABILITIES
+^
EQUITY
Comments:
–$14 Million
=^
–$20 Million
+^
$6 Million
Surely
we
want
to^
recognize
Antler’s
receipt
of^
in^
cash.
So
Assets increase by $6,000. (Recognition) Because Antler has an obligation to repay the loan, we should maintain theequation by increasing Liabilities. (Classification)
P2-6 a.^
Issued 15,000 shares of common stock for $3 per share.
k.^
ASSETS
=^
LIABILITIES
+^
EQUITY
Assets
–^
Liabilities
=^
Equities
+45,000(Cash)
+45,000(Common Stock)
–$14 Million
=^
–$20 Million
+^
$6 Million
d.Purchased canvass sheets, paying $500 cash.
Assets
–^
Liabilities
=^
Equities
Comments:
–500(Cash)
Antler’s receipt of $45,000 in cash is surely something that we would want torecord.
Recognition
is
the
act
of
recording
an
item
in
the
accounting equation. So we want to recognize the $45,000 cash as an asset.
+500 (Supplies – Canvass sheets)
To maintain the equation, we must increase something on the right-hand-side.So either Liabilities or Equities must go up by $45,000. This decision is one ofclassification.
Comments:
Because the accounting equation is being formed from Antler’s point of view,we should increase Equities, not Liabilities.
The exchange of cash for equipment transforms one type of asset (cash) intoanother (canvass). Therefore, total Assets will not change, nor will the sum ofLiabilities and Equities. We would still want to recognize this event. It is probably very important tokeep track of how much cash Antler has, and it is now $500 less. (Recognition)
b.^
Purchased $9,000 of inventory on credit. Assets
–^
Liabilities
=^
Equities
+9,000(Inventory)
+9,000(Accounts Payable)
Since
one
asset,
cash,
is^
less,^
we^
must
create
another
asset,
Supplies—Canvass sheets to maintain the equation. (Classification) e.^
Paid^
cash
to^
suppliers
of^
inventory
in^ partial
fulfillment
of
amounts owed.
Comments:
Assets
-^ Liabilities
=^
Equities
We^
want
to recognize
Antler’s
receipt
of^
of^
inventory.
So
Assets increase by $9,000. (Recognition)
Solution-02-Problems
Cash
Equities by $3,000. (Classification)
t-accounts through January 31
Cash
Supplies
BB^
BB^
a^ 45,
d^
d^
c^ 6,
e^
g
f 3,
i 30 j
EB^
Inventory
Note Receivable
Equipment
BB^
BB^
BB^
b^
g^
e^
EB^
EB^
EB^
Accountspayable
Bank loan—short-term
Bank loan—long-term
0 BB
0 BB
e^
c^
h
h^
EB^
0 EB
EB
Retainedearnings
Common stock
B
0 BB
0 B
I^ 3,
a
J^
EB^
EB
j.^
Paid $30 in interest to State Bank.^ Assets
–^
Liabilities
=^
Equities
–30 (Cash)
(Retained Earnings) Comments: Antler’s cash decreases by $300. (Recognition) Antler had not recorded the Interest payable, so this payment does not reducethe liability of $6,000. Therefore, it decreases Equities by $3,000. (Classification) P2-7 a.
Here are journal entries. The students have not yet been introduced to them. Therefore, they will use t-accounts like the second answer below.^ 1.^
Cash
Common stock
2.^
Inventory
Accounts payable
3.^
Cash
Note payable to State Bank—short-term
4.^
Supplies—Canvass sheets
Cash
5.^
Accounts payable
Cash
6.^
Equipment
Cash
7.^
Note receivable
Supplies—Canvass sheets
8.^
payable to State Bank—short-term
Note payable to State Bank—long-term
9.^
Retained earnings
t-accounts through January 16
Cash
Cash
Supplies
10.^
Retained earnings
Solution-02-Problems
BB^
BB^
a^ 45,
d^
d^
c^ 6,000 EB^ 50,
Inventory
Note Receivable
Equipment
BB^
BB^
BB^
b^
EB^
EB^
EB
Accounts payable
Bank loan—short-term
Bank loan—long-term
0 BB
0 BB
b^
c
EB^
EB^
EB
Retained earnings
Common stock
0 BB
0 BB
a
0 EB
EB
b.^
Antler Corp. Balance Sheet
as of January
Cash
Accounts payable
Inventory
Bank loan—short-term
Supplies
Common stock
Total assets
Total liab. & equities
c. Antler Corp. Balance Sheet as of January 31, 2004
Cash
Accounts payable
Inventory
Bank loan—long-term
Note receivable
Common stock
Equipment
Retained earnings
Total assets
Total liab. & equities
d.^
Only if Antler has taken steps toward the eventual earning of a profit. Based on the evidence in the problem, the best answer is no, the owners arenot better off. Antler hasn’t done anything to earn a profit. There are no sales tocustomers. The only sale is of supplies, and Antler is not in the business of sell-ing canvass sheets. P2-8^ Transac-tion
Account(s) deb-ited
Amount
Account(s)credited
Amount
1.^
Cash
Commonstock^ Additionalpaid-in-capital
2.^
Cash
Notes Payable
3.^
Marketablesecurities
Cash
4.^
Equipment
Cash^ Accounts pay-able
5.^
Inventory
Accounts pay-able
6.^
Cash
Unearnedrevenue
7.^
Leaseholdimprovements
Cash
8.^
Trademarks
Cash
9.^
Accounts payable
Cash
P2-9 a.
Solution-02-Problems
Accounts Payable
Unearned Revenue
Total Current Liabilities
Long-term Liabilities: Notes Payable
Total Liabilities:
EQUITY Common Stock, $1 Par Value
Additional Paid-in-Capital
Total Equity
Total Liabilities and Equity
d.^
Current ratio:
Current Assets
=^
/ Current Liabilities
Debt-to-Equity ratio:
Total Liabilities
/ Total Equity
Both the current ratio and the debt-to-equity ratio are unusually good.
The
current ratio of 71 means that, at January 31, 2003, the company has $71 incurrent assets for every dollar of current liabilities. The debt-to-equity ratioof.017 means that for every dollar of financing supplied by owners, an addi-tional 1.7 cents is supplied by creditors. The ratios are not meaningful at thispoint in time because A&E has not begun operations. As a start-up, the com-pany may not be profitable for several years. Much of the capital supplied bythe initial investors will be used to operate the business.^ EP2-
Cash
Accounts Rec.
BB^
BB^
a^
e
b^
c^
I
d
e^
f
g
Def Tx’s & Other
h^ BB
1,072 1,072^ Accounts Payable
BB
f^
Bank Loan
Accrued Liab’s
BB–
BB
a 200
Note receivable(related party)
Inventory
BB^
BB^
d^
Property &equipment
Other Assets
BB^
BB^
c^
150 16,^
Accrued Compensation
Note receivable
BB
BB
Solution-02-Problems
h^
I^
Solution-02-Problems
Cache, Inc. Balance Sheet as of 12/30/00 Cash equivalents
Accounts payable
Accounts receivable
Accrued compensa-tion
Note receivable fromcustomer
Bank loan
Note receivable fromrelated party
Accrued liabilities
Inventory
Total Current Liabili-ties
Deferred taxes & otherassets
Prepaid expenses
Other liabilities
Total Current Assets
Total Liabilities
Shareholders’ Equity
Property & equipment
Common Stock
Other assets
Add’l Paid-in Capital
Deferred income taxes
Retained Earnings
Total Non-current As-sets
Total Shareholders’Equity
Total Assets
Total Liabilities &Shareholders’ Equity
Other Liabilities
BB
Prepaid Expenses
BB^
g^
40946 Deferred Inc Taxes
BB^
757757 Common Stock
Add’l Paid-in
Capital
BB^
BB
Retained Earnings
BB
