CP2-1 Determining Financial StatementEffects of Various Transactions Lester’s Ho

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CP2-1 Determining Financial StatementEffects of Various Transactions

Lester’s Home Healthcare Services (LHHS) was organized onJanuary 1, 2005, by four friends. Each organizer invested $10,000in the company and, in turn, was issued 8,000 shares of stock. Todate, they are the only stockholders. During the first month(January 2005), the company had the following six events:

a. Collected a total of $40,000 from the organizersand, in turn, issued the shares of stock.

b. Purchased a building for $65,000, equipment for$16,000, and three acres of land for $12,000;

paid $13,000 in cash and signed a note for the balance, which isdue to be paid in 15 years.

c. One stockholder reported to the company that 500shares of his Lester’s stock had been sold and transferred toanother stockholder for $5,000 cash.

d. Purchased supplies for $3,000 cash.

e. Sold one acre of land for $4,000 cash to anothercompany.

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

1. Was Lester’s Home Healthcare Servicesorganized as a partnership or corporation? Explain the basis foryour answer.

2. During the first month, the records of thecompany were inadequate. You were asked to prepare the summary ofthe preceding transactions. To develop a quick assessment of theireconomic effects on Lester’s Home Healthcare Services, youhave decided to complete the spreadsheet that follows and to useplus (_) for increases and minus (_) for decreases for eachaccount. The first transaction is used as an example.

Assets

= Liabilities

Stockholder’s Equity

Notes

Notes

Contributed                                            Retained

Cash Supplies Receivable Land Building Equipment

Payable

Capital                                                  Earnings

(a) + 40,000

+40,000

3. Did you include the transaction between thetwo stockholders—event c—in the spreadsheet?Why?

4. Based only on the completed spreadsheet,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 themonth.

d. Cash balance at the end of the month.

e. Total current assets at the end of the month.

5. As of January 31, 2005, has the financingfor LHHS’s investment in assets primarily come fromliabilities or stockholders’ equity?

Assets

= Liabilities

Stockholder’s Equity

Notes

Notes

Contributed                                            Retained

Cash Supplies Receivable Land Building Equipment

Payable

Capital                                                  Earnings

(a) + 40,000

+40,000

Explanation / Answer

No Effect.

Assets Liabilities Stock Holders' Equity Cash Supplies Notes Receivable Land Building Equipment Notes Payable Contributed Capital Retained Earnings a 40,000.00 40,000.00 12,000.00 65,000.00 16,000.00 80,000.00 b (13,000.00) c

No Effect.

d (3,000.00) 3,000.00 e 4,000.00 (4,000.00) f (5,000.00) 5,000.00 23,000.00 3,000.00 5,000.00 8,000.00 65,000.00 16,000.00 80,000.00 40,000.00 Total Assets Total Liabilities Cash 23,000.00 Notes Payable 80,000.00 Supplies 3,000.00 Contributed Capital 40,000.00 Notes Receivable 5,000.00 Land 8,000.00 Building 65,000.00 Equipment 16,000.00 Toal Assets 120,000.00 120,000.00

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