Determining Financial Statement Effects of Various Transactions

East Hill Home Healthcare Services was organized on January 1, 2011, by four friends. Each organizer invested $10,000 in the company and, in turn, was issued 8,000 shares of stock. To date, they are the only stockholders. At the end of 2012, the accounting records reflected total assets of $700,000 ($50,000 cash; $500,000 land; $50,000 equipment; and $100,000 buildings), total liabilities of $200,000 (shortterm notes payable of $100,000 and long-term notes payable of $100,000), and stockholders' equity of $500,000 ($100,000 contributed capital and $400,000 retained earnings). During the current year, 2013, the following summarized events occurred:

a. Sold 9,000 additional shares of stock to the original organizers for a total of $90,000 cash.

b. Purchased a building for $60,000, equipment for $15,000, and four acres of land for $14,000; paid $9,000 in cash and signed a note for the balance (due in 15 years).

c. Sold one acre of land acquired in (b) for $3,500 cash to another company.

d. Purchased short-term investments for $18,000 cash.

e. One stockholder reported to the company that 300 shares of his East Hill stock had been sold and transferred to another stockholder for $3,000 cash.

f. Lent one of the shareholders $5,000 for moving costs, receiving a signed six-month note from the shareholder.

Required:

1. Was East Hill Home Healthcare Services organized as a sole proprietorship, a partnership, or a corporation? Explain the basis for your answer.

2. During 2013, the records of the company were inadequate. You were asked to prepare the summary of the preceding transactions. To develop a quick assessment of their economic effects on East Hill Home Healthcare Services, you have decided to complete the tabulation that follows and to use plus (+) for increases and minus (−) for decreases for each account. The first event is used as an example.

3. Did you include the transaction between the two stockholders'event (e)'in the tabulation? Why?
4. Based only on the completed tabulation, provide the following amounts (show computations):
a. Total assets at the end of the month.
b. Total liabilities at the end of the month.
c. Total stockholders' equity at the end of the month.
d. Cash balance at the end of the month.
e. Total current assets at the end of the month.
5. Compute the current ratio for 2013. What does this suggest about thecompany?

Transcribed Image Text:

STOCKHOLDERS EQUITY LIABILITIES Long-Term Notes Payable Notes Payable ASSETS Notes Investments Receivable Short-Term Short-Term Contributed Retained Capital Cash Buildings Equipment Land Earnings 400,000 Beg. 100,000 !3! 50,000 500,000 100,000 50,000 100,000 100,000 + 90,000 (a) +90,000