Question

E2-15 (Static) Analyzing the Effects of Transactions Using T-Accounts and Interpreting the Current Ratio as a Manager of the Company LO2-4, 2-5

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)
	2,200

Notes Payable (noncurrect)
	800

Common Stock
	500

Additional Paid-in Capital
	4,000

Retained Earnings
	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.

1. Borrowed $4,000 from a local bank, signing a note due in three years.
2. Sold $1,500 of the investments for $1,500 cash.
3. Sold one-half of the property and equipment for $1,500 in cash.
4. Declared $800 in cash dividends to stockholders.
5. 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

Prepare journal entries for transactions (a) through (e) for the current year as follows:

Credit Account Title Cash Note payable (non current) Debit $4.000 $4,000 $1,500 Cash Short term-Investment $1,500 $1.500 Cash Property and equipment $1,500 $800 Retained earnings Dividend payable $800 $800 Dividend payable Cash $800

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Prepare T-accounts as follows:

Note payable (Current) Beg. Bal. | $2.200 Beg. Bal. S800 Cash $5,000 $4,000 $1,500 $1.500 End. Bal. $2,200 End. Bal. $11,200 Note payable (NonCurrent) Beg Bal $800 $4,000 Short-Term Investment $2,500 b Beg. Bal. $1.500 End. Bal. $4,800 End. Bal. $1,000 Common stock Beg. Bal. $500 Beg. Bal. Property and Equipment $3,000 C $1.500 End. Bal. $500 End. Bal. $1,500

Additional paid-in capital Beg. Bal. Retained Earnings $800 Beg. Bal. $4.000 $3,000 End. Bal. $4,000 End. Bal. $2,200 Dividend payable $800 d $800 End. Bal.

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Req. 4

Prepare Trial Balance as follows:

Credit Trial balance Debit $11.200 $1,000 $1,500 Cash Short-term investment Property and Equipment Note payable (current) Note payable (noncurrent) Common stock Additional paid-in capital Retained earnings Total $2,200 $4,800 $500 $4,000 $2.200 $13,700 $13.700

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Req. 5

Prepare Balance Sheet as follows:

Higgins Company
Balance Sheet
December 31
Assets
Current Assets:
Cash	$11,200
Short-term investment	$1,000
Total Current assets		$12,200
PPE:
Property and Equipment		$1,500
Total Assets		$13,700
Liabilities and Stockholders' equity
Current liabilitiies:
Note payable (current)	$2,200
Total current liabilities		$2,200
Note payable (noncurrent)		$4,800
Total Liabilities		$7,000
Stockholders' equity:
Common stock
Common stock	$500
Additional paid-in capital	$4,000
Retained earnings	$2,200
Total SE		$6,700
Total Liabilities & SE		$13,700

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Req. 6

Compute Current ratio as follows:

Current ratio = Total Current assets  $\div$ Total Current liabilities

=$12,200 $\div$ $2,200

=5.54

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