Question 8.

T-account entries and balance sheet preparation

Patterson Manufacturing Corporation begins operation on January 1. See hints at the end
of the list. The firm engages in the following transactions during January:
1. Issues 15,000 shares of $10 par value common stock for $210,000 in cash.
2. Issues 28,000 shares of common stock in exchange for land, building, and
equipment. The land costs $80,000, the building $220,000, and the equipment
$92,000.
3. Issues 2,000 shares of common stock to an attorney in payment for legal services
rendered in obtaining the corporate charter.
4. Acquires raw materials with a list price of $75,000 on account from two suppliers,
Corn Co. $15,000 and Flake Co. $60,000.
5. Acquires manufacturing equipment with a list price of $6,000. It deducts a $600
discount and pays the net amount in cash. The firm treats cash discounts as a
reduction in the purchase price of equipment.
6. Pays $350 for installation of the equipment in (5).
7. Discovers that raw materials with a list price of $800 are defective and returns
them to Corn Co. for full credit. The raw materials had been purchased on account
(4), and no payment had been made as of the time that the goods were returned.
8. Signs a contract for the rental of a fleet of cars beginning February 1. Pays the
rental for February of $1,400 in advance.
9. Pays invoices for $60,000 of raw materials purchased in (4) from Flake Co. with
an original list price of $60,000, after deducting a discount of 3 percent. The firm
treats cash discounts as a reduction in the acquisition cost of raw materials.
10. Obtains fire and liability insurance coverage from Southwest Insurance
Company. The two-year policy, beginning February 1, carries a $400 premium
that has not yet been paid.
11. Signs a contract with a customer for $20,000 of merchandise that Patterson plans
to manufacture. The customer advances $4,500 toward the contract price.
12. Acquires a warehouse costing $60,000. The firm makes a down payment of
$7,000 and assumes a long-term mortgage for the balance.
13. Discovers that raw materials with an original list price of $1,500 are defective and
returns them to Flake Co. This inventory was paid for in (9). The returned raw
materials are the only items purchased from this particular supplier during
January. A cash refund has not yet been received from the supplier.
14. The firm purchases 6,000 shares of $10 par value common stock of the General
Cereal Corporation for $95,000. This purchase is a short-term use of excess cash.
The shares of General Cereal Corp. trade on the New York Stock Exchange.

Assumptions to help you resolve certain accounting uncertainties:

(i) transactions (2) and (3) occur on the same day as transaction (1);
(ii) the invoices paid in (9) are the only purchases for which suppliers
made discounts available to the purchaser.

Required:
a. Enter the transactions in T-accounts. Indicate which account is an asset, a liability, or
a shareholders’ equity item. Cross-reference each entry to the appropriate transaction
number.
b. Prepare a balance sheet as of January 31.

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Question 9. Understanding the balance sheet content.
A friend of yours has prepared the following balance sheet for his business, but he has a
problem with it. He has looked at the balance sheet and simply cannot make it balance.
He has asked you to take a look at this statement and help him out.
Show in the ‘Correction’ column the adjusted amounts!

Correction
Cash $15,000

Supplies Inventory 30,000

Prepaid Insurance 1,000

Advances from Customers 1,000

Total Current Assets $47,000

Plant and Equipment 8,000

Total Assets $55,000

Accounts Payable $ 2,000

Rent Payable 1,000

Total Current Liabilities $ 3,000

Common Stock 2,200 shares, $10 par $20,000

Additional Paid-in Capital 12,000

Retained Earnings 16,000

Total Shareholders’ Equity $48,000

Total Liabilities & Shareholders’ Equity $51,000

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