Adamson Inc is a small manufacturing company that makes model
Adamson Inc. is a small manufacturing company that makes model trains to sell to toy stores. It has a small service department that repairs customers’ trains for a fee. The company has been in business for five years. At December 31, 2013 (the company’s fiscal year- end), the accounting records reflected total assets of $ 500,000 (cash, $ 120,000; equipment, $ 70,000; buildings, $ 310,000), total liabilities of $ 200,000 (short- term notes payable, $ 140,000; long term notes payable, $ 60,000), and total shareholders’ equity of $ 300,000 (contributed capital, $ 220,000; retained earnings, $ 80,000). During the current year, 2014, the following summarized events occurred:
a. Borrowed $ 110,000 cash from the bank and signed a 10- year note.
b. Purchased equipment for $ 30,000, paying $ 3,000 in cash and signing a note due in six months for the balance.
c. Issued 10,000 shares for $ 100,000 cash.
d. Purchased a delivery truck (equipment) for $ 10,000; paid $ 5,000 cash and signed a short- term note payable for the remainder.
e. Lent $ 2,000 cash to the company president, Clark Adamson, who signed a note promising to pay the amount and annual interest at the rate of 10 percent in one year.
f. Built an addition on the factory for $ 200,000 and paid cash to the contractor.
g. Purchased $ 85,000 in long- term investments.
h. Returned a $ 3,000 piece of equipment purchased in (b) because it proved to be defective; received a reduction of the note payable equal to the value of the defective equipment.
i. A shareholder sold $ 5,000 of his shares in Adamson Incorporated to her neighbour for $ 6,400.
1. Prepare a summary of the preceding transactions. To develop a quick assessment of the transaction effects on Adamson Incorporated, you have decided to complete the tabulation that follows and to use plus (1) for increases and minus (2) for decreases for each account. The first transaction is used as an example.
2. Did you include all transactions in the tabulation? If not, which one did you exclude and why?
3. Based on beginning balances plus the completed tabulation, calculate the following amounts at the end of 2014 (show computations):
a. Total assets
b. Total liabilities
c. Total shareholders’ equity
d. Cash balance
e. Total current assets
4. Compute the company’s current ratio at the end of the year. What does this ratio suggest to you about Adamson Incorporated?
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