Recording Transactions in T-Accounts, Preparing the Balance Sheet, and Evaluating the Current Ratio
Cougar Plastics Company has been operating for three years. At December 31, 2011, the accounting records reflected the following:
Cash $19,000 Intangibles $ 3,000
Investments (short-term) 2,000 Accounts payable 15,000
Accounts receivable 3,000 Accrued liabilities payable 2,000
Inventory 24,000 Notes payable (short-term) 7,000
Notes receivable (long-term) 1,000 Long-term notes payable 46,000
Equipment 48,000 Contributed capital 90,000
Factory building 90,000 Retained earnings 30,000
During the year 2012, the company had the following summarized activities:
a. Purchased short-term investments for $9,000 cash.
b. Lent $7,000 to a supplier who signed a two-year note.
c. Purchased equipment that cost $18,000; paid $6,000 cash and signed a one-year note for the balance.
d. Hired a new president at the end of the year. The contract was for $85,000 per year plus options to purchase company stock at a set price based on company performance.
e. Issued an additional 2,000 shares of capital stock for $12,000 cash.
f. Borrowed $12,000 cash from a local bank, payable in three months.
g. Purchased a patent (an intangible asset) for $3,000 cash.
h. Built an addition to the factory for $25,000; paid $9,000 in cash and signed a three-year note for the balance.
i. Returned defective equipment to the manufacturer, receiving a cash refund of $1,000.
Required:
1. Create T-accounts for each of the accounts on the balance sheet and enter the balances at the end of 2011 as beginning balances for 2012.
2. Record each of the events for 2012 in T-accounts (including referencing) and determine the ending balances.
3. Explain your response to event (d).
4. Prepare a classified balance sheet at December 31, 2012.
5. Compute the current ratio for 2012. What does this suggest about Cougar Plastics?