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Chapter 2: Q7BTN (page 95)

Question:Assume that Catherine Mahugu of Soko plans on expanding her business to accommodate more product lines. She is considering financing her expansion in one of two ways: (1) contributing more of her own funds to the business or (2) borrowing the funds from a bank.

Required

Identify at least two issues that Catherine should consider when trying to decide on the method for financing her expansion.

Short Answer

Expert verified

Answer

Issues related to contributing funds –

a) ROI and business return

b) Contingency funds

Issues related to borrowings –

a) Security

b) Interest payments

Step by step solution

01

Issues relating to method 1

A)ROI and return from business:Return on investment and return from business differs in terms of the corpus of funds that are compared with net income. Under ROI, the returns are compared with the invested capital. Whereas, the return from business is the percent of net income earned from the expanded business out of total income earned.

Ideally, the return from the business must be higher than the ROI to ensure the profitability of the expansion.

B) Contingency funds: Contingency funds are the savings for the difficult time. The contribution to the business from the personal funds reduces the contingency funds balance and the situation may arise when the owner may withdraw the invested amount or for personal use.

02

Issues relating to method 2

A) Security:The first issue relating to the borrowings are the security to be given to the lender. The security is given in the form of assets to be mortgaged or any other guarantee. Thus before taking any borrowing enough assets against the loan must be ensured.

B) Interest payments: Interest payments on loans must be paid even though the loan has not been utilized properly. So, this is an issue and risk associated with borrowings that must be taken into consideration before taking any loan.

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Most popular questions from this chapter

Question:Enter the number for the item that best completes each of the descriptions below.

1. Chart 2. General ledger

a. A __________ of accounts is a list of all accounts a company uses.

b. The __________ is a record containing all accounts used by a company, including account balances.

Roshaun Gould a web consulting firm called Gould Solutions. He began operations started and completed seven transactions in April that resulted in the following accounts, which all have normal balances.

Cash ………………………………………. $20,000

Office supplies ……………………………….. 750

Prepaid rent ………………………………… 1,800

Office equipment …………………………. 12,250

Accounts payable ………………………… 12,250

Common stock ……………………………. 15,000

Dividends ……………………………………. 5,200

Consulting fees earned ………………….. 20,400

Miscellaneous expenses ………………….. 7,650

Required

1. Prepare a trial balance for this business as of the end of April.

Nuncio Consulting completed the following transactions during June.

a. Armand Nuncio, the owner, invested \(35,000 cash along with office equipment valued at \)11,000 in the new company in exchange for common stock.

b. The company purchased land valued at \(7,500 and a building valued at \)40,000. The purchase is paid with \(15,000 cash and a long-term note payable for \)32,500.

c. The company purchased \(500 of office supplies on credit.

d. Nuncio invested his personal automobile in the company in exchange for more common stock. The automobile has a value of \)8,000 and is to be used exclusively in the business.

e. The company purchased \(1,200 of additional office equipment on credit.

f. The company paid \)1,000 cash salary to an assistant.

g. The company provided services to a client and collected \(3,200 cash.

h. The company paid \)540 cash for this month’s utilities.

i. The company paid \(500 cash to settle the payable created in transaction c.

j. The company purchased \)3,400 of new office equipment by paying \(3,400 cash.

k. The company completed \)4,200 of services for a client, who must pay within 30 days.

l. The company paid \(1,000 cash salary to an assistant.

m. The company received \)2,200 cash in partial payment on the receivable created in transaction k.

n. The company paid $1,100 cash in dividends.

Required

1. Prepare general journal entries to record these transactions (use account titles listed in part 2).

Question:Humble Management Services opened for business and completed these transactions in September.

Sep. 1 Henry Humble, the owner, invested \(38,000 cash along with office equipment valued at \)15,000 in the company in exchange for common stock.

2 The company prepaid \(9,000 cash for 12 months’ rent for office space. (Hint:Debit Prepaid Rent for \)9,000.)

4 The company made credit purchases for \(8,000 in office equipment and \)2,400 in office supplies. Payment is due within 10 days.

8 The company completed work for a client and immediately received \(3,280 cash.

12 The company completed a \)15,400 project for a client, who must pay within 30 days.

13 The company paid \(10,400 cash to settle the payable created on September 4.

19 The company paid \)1,900 cash for the premium on an 18-month insurance policy. (Hint:Debit Prepaid Insurance for \(1,900.)

22 The company received \)7,700 cash as partial payment for the work completed on September 12.

24 The company completed work for another client for \(2,100 on credit.

28 The company paid \)5,300 cash in dividends.

29 The company purchased \(550 of additional office supplies on credit.

30 The company paid \)860 cash for this month’s utility bill.

Required

1. Prepare general journal entries to record these transactions (use account titles listed in part 2).

Question:1. Prepare general journal entries for the following transactions of Valdez Services.

a. The company paid \(2,000 cash for payment on a 6-month-old account payable for office supplies.

b. The company paid \)1,200 cash for the just completed two-week salary of the receptionist.

c. The company paid \(39,000 cash for equipment purchased.

d. The company paid \)800 cash for this month’s utilities.

e. The company paid $4,500 cash in dividends to the owner (sole shareholder).

2. Transactions a, c,and edid not record an expense. Match each transaction (a, c,and e) with one of the following reasons for not recording an expense.

______This transaction is a distribution of cash to the owner. Even though equity decreased, that decrease did not occur in the process of providing goods or services to customers.

______This transaction decreased cash in settlement of a previously existing liability (equity did not change). Supplies expense is recorded when assets are used, not necessarily when cash is paid.

______This transaction involves the purchase of an asset. The form of the company’s assets changed, but total assets did not (and neither did equity).
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