Accounting - Plastics Company, Pete's Pest Control

Week 2 practice Text Assignments

1. Define the following:
a. Asset d. Current liability
b. Current asset e. Contributed capital
c. Liability f. Retained earnings

2. What is the basic accounting equation?

3. Explain what debit and credit mean.

4. CP2-2 Recording Transactions (in a Journal and T-Accounts), Preparing and Interpreting the Balance Sheet
Patrie Plastics Company (PPC) has been operating for three years. The December 31, 2005,
account balances are:

Cash $ 35,000 Other assets $ 5,000
Accounts receivable 5,000 Accounts payable 37,000
Inventory 40,000 Notes payable (due 2008) 80,000
Notes receivable 2,000 Contributed capital 150,000
Equipment 80,000 Retained earnings 50,000
Factory building 150,000

During the year 2006, the company had the following summarized activities:

a. Purchased equipment that cost $30,000; paid $10,000 cash and signed a two-year note for the
balance.
b. Issued an additional 2,000 shares of stock for $20,000 cash.
c. Lent $12,000 to a supplier who signed a six-month note.
d. Borrowed $20,000 cash from a local bank, payable June 30, 2008.
e. Purchased an "other asset" for $6,000 cash.
f. Built an addition to the factory for $42,000; paid $15,000 in cash and signed a three-year note
for the balance.
g. Hired a new president on the last day of the year. The contract was for $85,000 for each full
year worked.
h. Returned $2,000 of defective equipment to the manufacturer, receiving a cash refund.

Required:

1. Prepare journal entries to record transactions a-h.
2. Create T-accounts for each of the accounts on the balance sheet and enter the balances at the
end of 2005 as beginning balances on January 1, 2006.
3. Enter the effects of the transactions in T-accounts (including referencing) and determine the
December 31, 2006, balances.
4. Explain your response to event g.
5. Prepare a classified balance sheet at December 31, 2006.
6. As of December 31, 2006, has the financing for PPC's investment in assets primarily come
from liabilities or stockholders' equity?

5. EXERCISE 1-12B Effect of Transactions on General Ledger Accounts

At the beginning of 2001, Pete's Pest Control's accounting records had the following general ledger accounts
and balances.

Pets's Pest Control
Accounting Equation
Event Assets = Liabilities + Stockholders' Equity Acct. Titles for RE
CASH LAND Notes Payable Common Stock / Retained Earning
Balance
1/1/2001 15,000 20,000 15,000 7,000 13,000

Pete's completed the following transactions during 2001.
1. Purchased land for $5,000 cash.
2. Acquired $25,000 cash from the issue of common stock.
3. Received $65,000 cash for providing services to customers.
4. Paid cash operating expenses of $42,000.
5. Borrowed $10,000 cash from the bank.
6. Paid a $2,500 cash dividend to the stockholders.
7. Determined that the market value of the land is $30,000.

Required

a. Record the transactions in the appropriate general ledger accounts. Record the amounts of revenue,
expense, and dividends in the Retained Earnings column. Provide the appropriate titles for these accounts
in the last column of the table.
b. Determine the net cash flow from financing activities.
c. What is the balance in the Retained Earnings Accounts as of January 1, 2002?

PETE'S PEST CONTROL
Accounting Equation
Acct. Titles
Event Assets _ Liabilities _ Stockholders' Equity for RE
Notes Common Retained
Cash Land Payable Stock Earnings