Chapter 18 Acquiring Capital for Growth and Development • 541
Study
Guide
18
Part One—Identifying Accounting Terms
Directions: Select the one term in Column I that best fits each definition in
Column II. Print the letter identifying your choice in the Answers column.
Answers
1.
2.
3.
7.
8.
9.
10.
11.
12.
Column I
A. bond
B. bond issue
C. capital expenditures
G. equity financing
H. financial leverage
I. interest expense
J. issue date
K. line of credit
L. non-operating
expenses
Column II
1. The payment of an operating expense necessary to earn revenue.
(p. 552)
2. Obtaining capital by borrowing money for a period of time. (p. 552)
3. A bank loan agreement that provides immediate short-term access
to cash. (p. 552)
7. Purchases of plant assets used in the operation of a business.
(p. 558)
8. Assets pledged to a creditor to guarantee repayment of a loan.
(p. 559)
9. A long-term promise to pay a specified amount on a specified
date and to pay interest at stated intervals. (p. 562)
10. All bonds representing the total amount of a loan. (p. 562)
11. The interest rate used to calculate periodic interest payments on a
bond. (p. 562)
12. Obtaining capital by issuing additional stock in a corporation.
(p. 565)
Name Perfect
Score Your
Score
Identifying Accounting Terms 17 Pts.
Analyzing Accounting Concepts and Practices 22 Pts.
Analyzing Transactions Recorded in Journals 30 Pts.
Total 69 Pts.
P
F
K
C
D
A
B
Q
G
542 • Working Papers
Part Two—Analyzing Accounting Concepts and Practices
Directions: Place a T for True or an F for False in the Answers column to show whether
each of the following statements is true or false.
1. A line of credit provides a business with immediate access to cash to pay for unexpected
emergencies, such as repairs from storm damage. (p. 552)
2. Interest rates are often based on the prime interest rate. (p. 552)
3. A line of credit does not have to be repaid as long as the business pays its monthly interest.
(p. 552)
4. A business that is unable to pay its account when due may be asked to sign a promissory
note. (p. 554)
10. Bonds generally have extended terms such as 5, 10, or 20 years. (p. 562)
11. A corporation usually sells its bonds directly to individual investors on a public securities
exchange. (p. 562)
12. The face value is the amount to be repaid at the end of the bond term. (p. 562)
13. A corporation makes bond interest payments by writing a single check to its agent who
then writes individual checks to the bondholders. (p. 563)
14. An advantage of selling stock is that the additional capital becomes a part of a corporation’s
permanent capital. (p. 565)
15. A disadvantage of selling stock is that dividends must be paid to stockholders. (p. 565)
16. A disadvantage of selling stock is that the ownership is spread over more shares and more
owners. (p. 565)
17. Preferred stock is typically described by referring to the stock’s dividend rate and par value.
(p. 567)
Answers
1.
2.
3.
4.
10.
11.
12.
13.
14.
15.
16.
17.
TE
T
T
F
T
T
F
T
T
T
F
T
T
Chapter 18 Acquiring Capital for Growth and Development • 543
Part Three—Analyzing Transactions Recorded in Journals
Directions: In Answers Column l, print the abbreviation for the journal in which each transaction
is to be recorded. In Answers Columns 2 and 3, print the letters identifying the accounts to be
debited and credited for each transaction.
GJ—General journal; CPJ—Cash payments journal; CRJ—Cash receipts journal
Answers
1 2 3
Account Titles Transactions Journal Debit Credit
A. Accounts Payable 1-2-3. Drew cash on a line of credit. (p. 553) 1. 2. 3.
B. Bonds Payable 4-5-6. Signed a note to Stark Company for
an extension of time on its account
payable. (p. 554)
4. 5. 6.
C. Capital Stock—
Common
7-8-9. Paid cash for the maturity value of a
note. (p. 555)
7. 8. 9.
D. Capital Stock—
Preferred
10-11-12. Signed a bank note. (p. 560) 10. 11. 12.
Name Date Class
CRJ
GJ
CPJ
CRJ
E
A, J
H, F
E
G
H
E
H
544 • Working Papers
Across
1. The ratio of interest and dividend payments to
the proceeds from debt and capital financing.
5. All bonds representing the total amount of a loan.
7. The interest rate used to calculate periodic
interest payments on a bond.
Down
1. The field of accounting that identifies and
measures costs.
2. Purchases of plant assets used in the operation of
a business.
3. The date on which a business issues a note, bond,
12 3
65
7
8
9
11
10
4
TE
12 3
65
7
8
9
11
10
4
CO STOFC
A
P
I
AP ITAL I
SO
S
T
ASTAT
A
L
ED INTERE
D
A
ST
BON
O
DI SS
U
UE
RA
RP
R
IME
X
INTEREST
E
RATE
L
N
R
E
V
N
U
E
E
O
P
R
TE
C
C
O
U
Chapter 18 Acquiring Capital for Growth and Development • 545
Name Date Class
18-1 WORK TOGETHER, p. 557
Journalizing entries for short-term debt
NO. POST.
REF. DEBIT CREDIT
23 23
24 24
25 25
1234567
GENERAL ACCOUNTS
RECEIVABLE
CREDIT
SALES
CREDIT
SALES TAX
PAYABLE
CREDIT
SALES
DISCOUNT
DEBIT
DEBIT CREDIT
24 24
25 25
26 26
12345
NO. POST.
REF.
GENERAL ACCOUNTS
PAYABLE
DEBIT
PURCHASES
DISCOUNT
CREDIT
DEBIT CREDIT
20 20
21 21
22 22
23 23
4
546 • Working Papers
18-1 ON YOUR OWN, p. 557
Journalizing entries for short-term debt
NO. POST.
REF. DEBIT CREDIT
1234567
GENERAL ACCOUNTS
RECEIVABLE
CREDIT
SALES
CREDIT
CASH
DEBIT
DEBIT CREDIT
12345
NO. POST.
REF.
GENERAL ACCOUNTS
CASH
CREDIT
DEBIT CREDIT
TE
10
7
5
Chapter 18 Acquiring Capital for Growth and Development • 547
18-2 WORK TOGETHER, p. 564
Journalizing entries for long-term debt
1 2 3 4 5 6 7
GENERAL ACCOUNTS
RECEIVABLE
CREDIT
SALES
CREDIT
SALES TAX
PAYABLE
CREDIT
DEBIT CREDIT
12345
NO. POST.
REF.
GENERAL ACCOUNTS
PAYABLE
DEBIT
DEBIT CREDIT
Beginning
Balance Interest Principal Ending
Balance
548 • Working Papers
1 2 3 4 5 6 7
GENERAL ACCOUNTS
RECEIVABLE
CREDIT
SALES
CREDIT
CASH
DEBIT
DEBIT CREDIT
12345
NO. POST.
REF.
GENERAL ACCOUNTS
CASH
CREDIT
DEBIT CREDIT
18-2 ON YOUR OWN, p. 564
Journalizing entries for long-term debt
Beginning
Balance Interest Principal Ending
TE
15
8
Chapter 18 Acquiring Capital for Growth and Development • 549
Name Date Class
18-3 WORK TOGETHER, p. 568
1 2 3 4 5 6 7
GENERAL ACCOUNTS
RECEIVABLE
CREDIT
SALES
CREDIT
SALES TAX
PAYABLE
CREDIT
DEBIT CREDIT
10 10
11 11
12 12
13 13
14 14
15 15
16 16
17 17
18 18
19 19
20 20
21 21
22 22
550 • Working Papers
18-3 ON YOUR OWN, p. 568
Journalizing the sale of common and preferred stock
CASH RECEIPTS JOURNAL PAGE
DATE ACCOUNT TITLE DOC.
NO. POST.
REF.
CREDIT
SALES
CREDIT
SALES TAX
PAYABLE
CREDIT
1 1
2 2
3 3
4 4
5 5
6 6
7 7
8 8
9 9
10 10
11 11
12 12
13 13
14 14
15 15
16 16
17 17
18 18
19 19
20 20
21 21
22 22
TE
20–
Aug. 3Capital Stock—Common R311 40 0 0 0 00 40 0 0 0 00
14 Capital Stock—Preferred R325 100 0 0 0 00 100 0 0 0 00
21 Capital Stock—Common R330 8 0 0 0 00 11 2 0 0 00
Paid-in Capital in Excess of
Par—Common 3 2 0 0 00
29 Capital Stock—Common R338 6 0 0 0 00 9 6 0 0 00
Paid-in Capital in Excess of
Par—Common 3 6 0 0 00
Chapter 18 Acquiring Capital for Growth and Development • 551
Outcome
6.0% 7.0% 8.0%
Operating income
Interest expense
Net income (loss) before federal income tax
Name Date Class
18-4 WORK TOGETHER, p. 573
Analyzing the impact of financial leverage
1.
2.
$ 6,000.00 $ 7,000.00 $ 8,000.00
6,300.00 6,300.00 6,300.00
$ (300.00) $ 700.00 $ 1,700.00
KMT Stores will earn a positive return on its $10,000.00 investment if the renovation increases
operating income by 7% or 8% of the project cost.
552 • Working Papers
Outcome
7.6% 7.8% 8.0%
Operating income
Interest expense
Net income (loss) before federal income tax
18-4 ON YOUR OWN, p. 573
Analyzing the impact of financial leverage
1.
2.
TE
$38,000.00 $39,000.00 $40,000.00
39,360.00 39,360.00 39,360.00
$ (1,360.00) $ (360.00) $ 640.00
Daniel Electric’s operating income will only increase under the assumption that the company will
earn 8.0% of the project cost.
Chapter 18 Acquiring Capital for Growth and Development • 553
Name Date Class
18-1 APPLICATION PROBLEM (LO2), p. 577
Journalizing entries for short-term debt
GENERAL JOURNAL PAGE
DATE ACCOUNT TITLE DOC.
REF. DEBIT CREDIT
20 20
21 21
22 22
CASH RECEIPTS JOURNAL PAGE
DATE ACCOUNT TITLE DOC.
NO. POST.
REF.
RECEIVABLE
CREDIT
SALES
CREDIT
CASH
DEBIT
21 21
22 22
23 23
CASH PAYMENTS JOURNAL PAGE
12345
DATE ACCOUNT TITLE CK.
GENERAL ACCOUNTS
CASH
CREDIT
DEBIT CREDIT
17 17
18 18
19 19
20 20
29 Accounts Payable/Mann Co. M153 2 9 5 0 00
Notes Payable 2 9 5 0 00
24 Line of Credit R337 12 9 0 0 00 12 9 0 0 00
9
27 Notes Payable 669 2 9 5 0 00 3 0 6 0 63
Interest Expense 1 1 0 63
30 Line of Credit 674 2 4 0 0 00 2 5 0 8 90
Interest Expense 1 0 8 90
14
554 • Working Papers
18-2 APPLICATION PROBLEM (LO4), p. 577
Journalizing entries for long-term debt
1 2 3 4 5 6 7
GENERAL ACCOUNTS
RECEIVABLE
CREDIT
SALES
CREDIT
CASH
DEBIT
DEBIT CREDIT
12345
NO. POST.
REF.
GENERAL ACCOUNTS
CASH
CREDIT
DEBIT CREDIT
Beginning
Balance Interest Principal Ending
TE
7
14
Chapter 18 Acquiring Capital for Growth and Development • 555
Name Date Class
18-3 APPLICATION PROBLEM (LO5), p. 578
CASH RECEIPTS JOURNAL PAGE
1 2 3 4 5 6 7
DATE ACCOUNT TITLE DOC.
NO. POST.
REF.
GENERAL ACCOUNTS
RECEIVABLE
CREDIT
SALES
CREDIT
DEBIT CREDIT
1 1
2 2
3 3
4 4
5 5
6 6
7 7
8 8
9 9
10 10
11 11
12 12
13 13
14 14
15 15
16 16
17 17
18 18
19 19
20 20
21 21
22 22
23 23
20–
Sept. 2Capital Stock—Preferred R525 35 0 0 0 00 35 0 0 0 00
8Capital Stock—Common R531 20 0 0 0 00 20 0 0 0 00
10 Capital Stock—Common R533 4 0 0 0 00 5 2 0 0 00
21 Capital Stock—Preferred R543 25 0 0 0 00 25 0 0 0 00
28 Capital Stock—Common R549 6 0 0 0 00 8 4 0 0 00
556 • Working Papers
18-4 APPLICATION PROBLEM (LO7), p. 578
Analyzing the impact of financial leverage
1.
Outcome
8.5% 9.0% 9.5%
Operating income
Interest expense
Net income (loss) before federal income tax
2.
TE
$2,550.00 $2,700.00 $2,850.00
2,520.00 2,520.00 2,520.00
$ 30.00 $ 180.00 $ 330.00
UpTown Café will earn 12.4% on its $2,000.00 investment. The $150.00 of operating income earned
between the 9.0% and 9.5% outcomes belongs to UpTown Café. This increase results in a return on
investment well above the 9.0% interest rate.
Chapter 18 Acquiring Capital for Growth and Development • 557
Name Date Class
18-M MASTERY PROBLEM (LO2, 4, 5), p. 579
Journalizing transactions related to debt and equity financing
CASH RECEIPTS JOURNAL PAGE
DATE ACCOUNT TITLE DOC.
RECEIVABLE
CREDIT
SALES
CREDIT
SALES TAX
PAYABLE
CREDIT
SALES
DISCOUNT
DEBIT
1 1
2 2
3 3
4 4
5 5
6 6
7 7
8 8
9 9
CASH PAYMENTS JOURNAL PAGE
12345
DATE ACCOUNT TITLE CK.
GENERAL ACCOUNTS
PAYABLE
DEBIT
PURCHASES
DISCOUNT
CREDIT
1 1
2 2
3 3
4 4
5 5
6 6
7 7
8 8
9 9
20–
July 1Bonds Payable R359 250 0 0 0 00 250 0 0 0 00
8Capital Stock—Common R362 200 0 0 0 00 200 0 0 0 00
12 Capital Stock—Preferred R370 25 0 0 0 00 25 0 0 0 00
18 Line of Credit R376 24 8 0 0 00 24 8 0 0 00
23 Capital Stock—Common R385 150 0 0 0 00 168 0 0 0 00
Paid-in Capital in Excess of
Par—Common 18 0 0 0 00
31 Long-term Notes Payable R392 45 0 0 0 00 45 0 0 0 00
20–
Dec. 1Long-term Notes Payable 745 6 2 4 77 9 1 2 44
Interest Expense 2 8 7 67
2Line of Credit 746 3 0 0 0 00 3 1 2 8 95
Interest Expense 1 2 8 95
30 Notes Payable 762 3 2 0 0 00 3 3 9 2 00
Interest Expense 1 9 2 00
31 Interest Expense 763 7 5 0 0 00 7 5 0 0 00
558 • Working Papers
Balance
18-M MASTERY PROBLEM (concluded)
NO. POST.
REF. DEBIT CREDIT
TE
7
Chapter 18 Acquiring Capital for Growth and Development • 559
Current
Debt
Financing
Equity
Financing
1.
2.
$ 15,000.00 $ 17,800.00
60,000.00 122,500.00
200,000.00 200,000.00
$225,000.00 371,200.00
$275,000.00 $225,000.00 $500,000.00
5,530 13,530
15,000 27,000
The Windsong family need to purchase at least 5,530 of the 15,000 shares to maintain a majority of
the stock voting rights.
Solutions may vary. A sample solution is presented.
