Question

Penny Cassidy has decided to start her business, Penny’s Pool Service & Supply, Inc. (PPSS). There is much to do when starting a new business. Here are some transactions that have occurred in the business in March 2013.
a. Received $25,000 cash and a large delivery van with a value of $36,000 from Penny, who was given 4,000 shares of $0.05 par value common stock in exchange.
b. Purchased land with a small office and warehouse by paying $10,000 cash and signing a 10-year mortgage note payable to the local bank for $80,000. The land has a value of $18,000 and the building’s value is $72,000. Use separate accounts for land and buildings.
c. Purchased a new computer from Dell for $2,500 cash and office furniture for $4,000, signing a short-term note payable in six months.
d. Hired a receptionist for the office at a salary of $1,500 per month, starting in April 2013.
e. Paid $1,000 on the note payable to the bank at the end of March 2013 (ignore interest).
f. Purchased short-term investments in the stock of other companies for $5,000 cash.
g. Ordered $10,000 in inventory from Pool Corporation, Inc., a pool supply wholesaler, to be received in April 2013.

Required:
1. For each of the events, prepare journal entries if a transaction of the business exists, checking that debits equal credits. If a transaction does not exist, explain why there is no transaction for the business.
2. Create T-accounts, and post each of the transactions to determine balances at March 31, 2013. Because this is a new business, beginning balances are $0.
3. Prepare a trial balance on March 31, 2013, to check that debits equal credits after the transactions are posted to the T-accounts.
4. From the trial balance, prepare a classified balance sheet (with current assets and current liabilities sections) at March 31, 2013 (before the beginning of operations in April).
5. For each of the events, indicate if it is an investing activity (I) or financing activity (F), and the direction (+ for increases; - for decreases) and amount of the effect on cash flows using the following structure. Write NE if there is no effect on cash flows.


6. Calculate the current ratio at March 31, 2013. What does this ratio indicate about the ability of PPSS to pay its currentliabilities?


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  • CreatedJuly 01, 2014
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