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Recording Transactions in T-Accounts, Preparing the Balance Sheet, and evaluating the Financial Leverage Ratio
Problem: P2-3


Patrie Plastics Company has been operating for three years. At December 31, 2003, the accounting records reflected the following:

Cash - $35,000
Short-term investments – 3,000
Accounts receivable – 5,000
Inventory – 40,000
Long-term note receivable – 2,000
Equipment – 80,000
Factory Building – 150,000
Intangibles – 5,000
Accounts payable – 25,000
Accrued liabilities payable – 3,000
Short-term note payable – 12,000
Long-term note payable – 80,000
Contributed capital – 150,000
Retained earnings – 50,000

#1 Create T-accounts for each of the accounts on the balance sheet and enter the balances at the end of 2003 as beginning balances for 2004
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#2 Record each of the events for 2004 in T-accounts (including referencing) and determine the ending balances
Assets and Non-current Assets
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#3 Explain your response to Event (h)
Since there was no effect recorded for hiring the new president it does not need to be recorded. In order for something to be recorded there has to be an exchange receipt of cash, goods, or services.



#4 Balance Sheet at December 31, 2004
Assets
Current Assets
Cash …………………………………………………… …………………… $ 19,000.00
Receivables and other assets…………………………………… …………19,000.00
Inventories……………………… …………………………………………... 40,000.00

Non-current Assets
Investments……………………… ………………………………………….. 18,000.00
Property, plant, and equipment…………………………… ………………… 300,000.00
Intangible assets…………………………………… ………………………... 11,000.00
Total assets…………………………………… ……………………………. 407,000.00


Liabilities And Stock holder’s Equity
Current Liabilities
Accounts payable………………………………… ………………………….. 135,000.00
Other short-term obligations……………………… ………………………..... 52,000.00
Long-term Liabilities
Stockholder’s Equity
Contributed Capital………………………………… ………………………… 170,000.00
Retained Earnings……………………………… …………………………….. 50,000.00
Total liabilities and stockholder’s equity…………………………………. .. 407,000.00


#5 Compute the financial leverage ratio for 2004. What does this suggest about Patrie Plastics?

Financial leverage ratio measures the relationship between total assets and the stockholder's capital that finances them. The higher the ratio, the more debt is assumed by the company to finance assets. It is computed as follows: Financial Leverage Ratio = Average Total Assets / Average Stockholders' Equity "Average" is (Last Year's Amount + This Year's Amount)/2

35,000+3,000+5,000+4 0,000+2,000+80,000+1 50,000+5,000=320,000 (2003 Assets)
150,000+50,000=200,0 00 (2003 Equity) 19,000+19,000+40,000 +18,000+300,000+11,0 00=407,000 (2004 Assets)
170,000+50,000=220,0 00 (2004 Equity)
(320,000+407,000)/2=363,500
(200,000+220,000)/2=210,000
363,500/210,000=1.73