Question

Required information

Assume Down, Inc., was organized on May 1 to compete with Despair, Inc.—a company that sells de-motivational posters and office products. Down, Inc., encountered the following events during its first month of operations.

1. Received $43,000 cash from the investors who organized Down, Inc.
2. Borrowed $16,000 cash and signed a note due in two years.
3. Ordered equipment costing $25,000.
4. Purchased $7,000 in equipment, paying $3,000 in cash and signing a six-month note for the balance.
5. Received the equipment ordered in (c), paid for half of it, and put the rest on account.

3. Prepare a classified balance sheet at May 31. Include Retained Earnings with a balance of zero.

Answer 1

DOWN. INC
Balance sheet
At May 31
Assets:		Liabilities and stockholders' equity:
Current assets:		Current liabilities:
Cash	43500	Accounts payable	12500
Total current assets	43500	Short-term notes payable	4000
		Total current liabilities	16500
		Long-term liabilities:
Fixed assets		Long-term notes payable	16000
Equipment	32000	Total liabilities	35000
Total fixed assets	32000
		Stockholders' equity:
		Common stock	43000
		Retained earnings	0
		Total stockholders' equity	43000
Total assets	75500	Total liabilities and stockholders' equity	75500

Working note:

Transaction	General Journal	Debit	Credit
a	Cash	43,000
	Common stock		43,000
b	Cash	16000
	Long-term Note payable		16000
c	No entry required
d	Equipment	7,000
	Cash		3,000
	Short-term note payable		4,000
e	Equipment	25,000
	Cash		12500
	Accounts payable		12500

Each account's balance at the end of period:
Cash (43,000+16,000-3000-12500)	43500
Equipment (7,000+25,000)	32000
Common stock	43,000
Short-term notes payable	4000
Long-term notes payable	16000
Accounts payable	12500