Question

Higgins Company began operations last year. You are a member of the management team investigating expansion ideas that will require borrowing funds from banks. On January 1, the start of the current year, Higgins' T-account balances were as follows: Assets: Cash 5,000 Short-Term Investments 2,500 Property and Equipment 3,000 | Liabilities: Notes Payable (current) Notes Payable (noncurrect) 2,200 800 Common Stock Retained Earnings Additional Paid-in Capital 4,000 500 3,000 Required: 1. Using the data from these T-accounts, determine the amounts for the following on January 1 of the current year: 2. Prepare journal entries for transactions (a) through (e) for the current year. a. Borrowed $4,000 from a local bank, signing a note due in three years. b. Sold $1,500 of the investments for $1,500 cash. C. Sold one-half of the property and equipment for $1,500 in cash. d. Declared $800 in cash dividends to stockholders. e. Paid dividends to stockholders. 3. Enter the effects of the transactions in Requirement 2 in the T-accounts. 4. Prepare a trial balance at December 31. 5. Prepare a classified balance sheet at December 31 of the current year in good form. 6. Calculate the current ratio at December 31 of the current year.

Answer 1

1 to 3) Credit No. a) Debit $4,000 $4,000 b) $1,500 c) Account Titles and Explanation Cash Note Payable Cash Investments Cash Property and Equipment Retained Earnings (or Dividends) Dividends Payable Dividends Payable Cash $1,500 $1,500 [No profit or loss as sale value = book value of P&E sold] $1,500 [$3,000 X (1/2)] d) $800 $800 e) $800 $800 Short Term Investments $2,500 $1,500 Property and Equipment $3,000 $1,500 c) Beg. Bal. Beg. Bal. b) Beg. Bal. Cash $5,000 $800 $4,000 $1,500 $1,500 End. Bal. $11,200 End. Bal. $1,000 End. Bal. $1,500 Notes Payable (Current) $2,200 Beg. Bal. Notes Payable (Noncurrent) $800 Beg. Bal. $4,000 a) $4,800 End. Bal. Common Stock $500 Beg. Bal. 000 $2,200 End. Bal. $500 End. Bal.

Additional Paid-in-Capital $4,000 Beg. Bal. Retained Earnings $800 $3,000 Beg. Bal. Dividends Payable $800 $0 $800 Beg. Bal. d) End. Bal. $4,000 End. Bal. $2,200 End. Bal. $0 Credit Higgins Company Trial Balance December 31 Account Titles Cash Short Term Investments Property and Equipment Notes Payable (Current) Notes Payable (Noncurrent) Common Stock Additional Paid-in-Capital Retained Earnings Totals Debit $11,200 $1,000 $1,500 $2,200 $4,800 $500 $4,000 $2,200 $13,700 $13,700

5) Assets Current Assets: Cash Accounts Receivable Total Current Assets $2,200 Higgins Company Classified Balance Sheet December 31 Liabilities & Shareholders' Equity Current Liabilities: $11,200 Notes Payable (Current) $1,000 Long-Term Liabilities: $12,200 Notes Payable (Noncurrent) Total Liabilities Shareholders' Equity: Common Stock $500 $1,500 Additional Paid-in-Capital $4,000 Retained Earnings $2,200 Total Shareholders' Equity $13,700 Total Liabilities & Shareholders' equity $4,800 $7,000 Plant, Property & Equipment: Property and Equipment $6,700 $13,700 Total Assets 6) Current Ratio = Current Assets / Current Liabilities Current Assets Current Liabilities Current Ratio $12,200 $2,200 5.55 ($12200 / $2200]