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CH 3 Exhibit 4, 5

1) The document describes transactions that occurred at G. Miller Corporation in January and records them using T-accounts and journal entries. 2) It then provides an example of reconstructing a balance sheet from incomplete information using percentages and ratios for Chuck's Char-broiler restaurant. 3) The transactions included stock and equipment purchases, inventory purchases on account, cash payments, stock used for payment, prepaid insurance, and cash advances from customers. T-accounts and journal entries recorded the effects of each transaction.

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40 views5 pages

CH 3 Exhibit 4, 5

1) The document describes transactions that occurred at G. Miller Corporation in January and records them using T-accounts and journal entries. 2) It then provides an example of reconstructing a balance sheet from incomplete information using percentages and ratios for Chuck's Char-broiler restaurant. 3) The transactions included stock and equipment purchases, inventory purchases on account, cash payments, stock used for payment, prepaid insurance, and cash advances from customers. T-accounts and journal entries recorded the effects of each transaction.

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ЭниЭ.
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Exhibit 4.

Dual effects of various transactions on the balance sheet equation


Show the balance sheet equations of the following transactions for G. Miller Corporation
during January:
1. On January 1, the firm issues 10,000 shares of $10 par value common stock
for $100,000 cash.
2. It purchases equipment costing $60,000 for cash on January 5.
3. Purchase of merchandise inventory costing $15,000 from a supplier on
account on January 15.
4. On January 21, it pays the supplier in (3) $8,000 of the amount due.
5. The supplier in (3) accepts 700 share of common stock at par value in
settlement of the $7,000 amount still owed.
6. On January 31, the firm pays $600 cash for an insurance policy covering the
month of February
7. On January 31, the firm receives $3,000 from a customer for merchandise to
be delivered during February.
Solution
Transaction Assets = Liabilities + Shareholders’
Equity
1. Stock issue + $100,000 = $ 0 + $100,000
(increase CA and SE)
Subtotal $100,000 $ 0 $100,000
2. Purchase of equipment + 60,000
(increase NA, decrease CA) - 60,000
Subtotal $100,000 = $ 0 + $100,000
3. Inventory purchase
on account + 15,000 = + $ 15,000
(increase CA and CL)
Subtotal $115,000 = $15,000 + $100,000
4. Payment to supplier - 8,000 = - 8,000
(decrease CA and CL)
Subtotal $107,000 = $ 7,000 + $100,000
5. Stock issue as settlement - 7,000 + 7,000
(decrease CL, increase SE)
Subtotal $107,000 = $ 0 + $107,000
6. Prepaid insurance
(increase CA and + 600
decrease CA) - 600
Subtotal $107,000 = $ 0 + $107,000
7. Cash collected as advance + 3,000 + 3,000
(increase CA and CL)
Total January 31 $110,000 = $ 3,000 + $107,000

Abbreviations:
CA = Current Assets NA = Non-current Assets
CL = Current Liabilities SE = Shareholders’ Equity

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The Use of Accounts
For practical reasons the balance sheet items are shown separately on the so called “accounts”.
Each account represents a balance sheet item. Any changes during the period are recorded on the
accounts, rather than preparing a balance sheet after every transaction. The common form of an
account is the T-account. The left side is called Debit (Dr), and the right side is called Credit (Cr).

Dr Any Asset Account Cr Dr Any Liability/Shareholders’ Equity Cr


Beginning balance Beginning balance
Increases (+) Decreases (-) Decreases (-) Increases (+)
_____________________________________ ____________________________________

Ending balance Ending balance

G. Miller Corporation transactions recorded on T-accounts:

Dr Cash (CA) Cr Dr Accounts Payable (CL) Cr


1) 100,000 2) 60,000 4) 8,000 3) 15,000
7) 3,000 4) 8,000 5) 7,000
6) 600 Balance 0
Balance 34,400

Dr Merchandise Inventory (CA) Cr Dr Advance from Customer (CL) Cr


3) 15,000 7) 3,000
Balance 15,000 Balance 3,000

Dr Prepaid Insurance (CA) Cr Dr Common Stock (SE) Cr


6) 600 1) 100,000
Balance 600 5) 7,000
Balance 107,000

Dr Equipment (NA) Cr
2) 60,000
Balance 60,000

T-accounts show the actual balance of individual accounts at a given date.

Journalizing
Another form of recording transactions is the journal entry. The standard format is the following:

Date Account Debited Debit Amount


Account Credited Credit Amount
Explanation of the event
____________ ____________
Total XXX = XXX

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The journal entries for Miller Corporation during January are as follows:

1. Jan. 1. Cash $100,000


Common Stock $100,000
Issue of 10,000 shares, $10 par

2. Jan. 5. Equipment 60,000


Cash 60,000
Purchase of equipment

3. Jan. 15. Merchandise Inventory 15,000


Accounts Payable 15,000
Purchase of merchandise inventory

4. Jan. 21. Accounts Payable 8,000


Cash 8,000
Payment to supplier

5. Jan. 21. Accounts Payable 7,000


Common Stock 7,000
Issue of 700 shares, $10 par to settle supplier

6. Jan. 31. Prepaid Insurance 600


Cash 600
Insurance premium for the next month

7. Jan. 31. Cash 3,000


Advance from Customers 3,000
Received cash for goods to be delivered
in February __________________________
$193,600 $193,600

The journal shows the transactions on a specified date.

Exhibit 5.
Reconstructing a balance sheet from incomplete information and the common-size
balance sheet
A fire occurred in Chock’s Char-broiler restaurant overnight on December 31, Year 4 and
many of the accounting records were lost. However, Chuck was able to save some
documents and obtain other information from outside sources for Year 4, ending on
December 31. The information is listed below:
 The year-end bank balance was $763, and at the time of the fire there was $1,000
in cash in the restaurant’s safe.
 The inventory value was $4,915.
 Employees had been paid up to and including the night of the fire.
 Suppliers contacted indicate that in total they were owed $3,210 at December 31,
Year 4.
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 The bank indicated that it is owed $23,000 on a long-term loan, from which
current portion due in Year 5 is $3,414.
 Chuck remembered that his accountant had forecast that the December 31, Year 4
current ratio was 1.25 ÷ 1.
 The balance sheet for Chuck’s restaurant for the last three years shows that
current assets represented 25 percent of total assets. Assume that this relationship
stayed the same for December 31, Year 4.

Required:
a. Calculate the total current assets.
b. Calculate the accounts receivable amount (current assets were cash, accounts
receivable and inventory only).
c. Calculate the total assets.
d. Reconstruct Char-broiler’s restaurant balance sheet at December 31, Year 4,
Show it in dollars and in common-size format.

Solution
a. Current liabilities: suppliers $3,210 + current portion of loan $3,414 = $6,624
Total current assets: $6,624 × 1.25* = $8,280
*Current ratio = current assets ÷ current liabilities
b. Total current assets $8,280 – cash $1,763 – inventory $4,915 = accounts
receivable $ 1,602
c. Total assets: $8,280 ÷ 0.25 = $33,120
d. In a common-size balance sheet each item is expressed as a percentage of total
. assets, and liabilities plus equities are also calculated as proportions of the
balance sheet total.

Cash $ 1,763 5%
Accounts Receivable 1,602 5%
Inventory 4,915 15%
Current Assets $ 8,280
Property, Plant and Equipment 24,840* 75%
Total Assets $33,120 100%

*Current assets represent 25% of total assets, then property, plant


and equipment correspond to 75 %.

Accounts Payable $ 3,210 10%


Current Portion of Loan 3,414 10%
Current Liabilities $ 6,624
Loan Payable 19,586 59%
Owner’s Equity 6,910* 21%
Total Liabilities & Owner’s Equity $33,120 100%

*Owner’s Equity is calculated as a plug (difference between balance


sheet total and total liabilities.

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