Let's start with the things that Mary Jo had encountered in her first year of operations that she also encountered in her second year of operations. You'll find those in transactions 1 through 7 of the case. Take a few minutes, give them all a try. It might take more than a few minutes, but give them all a try and then come back and we'll work through all seven of those together and see how you did. How did it go? I'm curious to see. But I bet you were able to do pretty well with these. Let's start with the first one? A colleague of Mary Jo's, Jake Lawrence, invested $20,000 in The Garden Spot in exchange for shares of common stock. Mary Jo saw that same transaction in the first year, it was just that she and Josh were the ones that had invested in the company at that time. So, we see an increase to cash, left-hand side, or debit to cash for the $20,000 in cash that the company received from Jake Lawrence. An increasing capital stock, which is an owner's equity account for 20,000. We can post each of those to the T accounts. Now, one thing I want to call your attention to, before we move to the second transaction, is that the beginning balance in the T accounts for this year is not zero. You'll notice that the beginning balance in the cash T account is $3,010. The beginning balance in the capital stock T account is $60,000. Those are exactly the same as the ending balance at the end of year one of operations. Remember, the balance sheet accumulates over time. So, the beginning balance at the beginning of year two, is the accumulation of everything that's happened up to the beginning of year two at The Garden Spot, okay? Let's move to the second transaction. The company bought some land next to their current property. They bought it on July 1st, paid $100,000. They got a $90,000 loan and paid the remaining $10,000 with cash. It was going to be repaid in equal principle payments over 10 years. The interest rate was 8%. The interest rate was to be paid at the end of the first year of the loan term, and each year of the loan term at the same time the principle payment is made. Okay, the company acquired an asset, so we see an increase in an asset account. We'll call that Land, that's a new account, we haven't seen that one before at The Garden Spot. It increases by the cost of the land of $100,000. The company paid $10,000 in cash, so we have a right-hand side to cash because it decreases. And a right hand-side to loan payable because it increases, it's a liability. Note that I just called it loan payable for land. We could just simply call it loan payable, but we all ready had an account called loan payable. And I'm just interested in trying to differentiate this from that other loan payable account. We post these to the, ,we'll create a new T account for land, with a beginning balance of 0, because even though this is the second year of operations, we did not have this account prior to this year. Loan payable for land is also a new T account, 0 beginning balance for that one as well. Let's post to the T account. Left-hand side to the land account goes into the left-hand side of the T account marked transaction 2. The right-hand side to the cash account goes into the right side of the cash T account, transaction 2. And the loan payable for the land goes into the right side of the loan payable T account, transaction 2. Very similar to what we've seen before. Let's take a look at transaction 3. The company bought inventory throughout the year, cost of $310,000. Paid part of it in cash, part of it was purchased on account. The company acquired inventory, so that's an asset. So left-hand side entry or a debit, because the asset increased. It paid for part of it in cash, so that's a right-hand side entry to that asset account, which goes down by 240, 240,000. Increase into the account's payable account, the liability for 70,000 which is how they purchased the remaining inventory. All these three accounts are accounts that we've used before, so each of those has a beginning balance that's the same as the ending balance at the end of the prior year. Inventory goes up, by 310, so left side entry, denoted transaction 3. Right side entry posted the cash. Transaction 3, right side entry to accounts payable, transaction 3. Okay, good, let's move. Transaction 4. This is where we're recording sales. We've done this before as well. We have sales of 500,000. 400,000 were cash sales. 100,000 were on account. The inventory had originally cost $300,000. You might remember that we treated this as two separate entries when we tackled this in year one, we'll do the same in year two. We often have information to record sales and the cost of the inventory sold at the same time. But we typically record those in two separate entries. Let's start with the revenue portion. We're recording revenues, that's a right side to retained earnings. And we're going to record a left side entry to the two asset accounts that it received in return for those revenues, cash and a promise to pay, or an accounts receivable. The cash gets posted as an increase to the cash account on the left side, we're going to call it 4a. Receivable left-hand side, 4a. Revenues, right-hand side to the retained earnings, 4a. And remember we're going to make a notation out here that that was for revenues so that when we get to the point we're preparing our income statement it will be a piece of cake. Let's record the second part of this, before B, the cost of the inventory. So here, we're going to be looking at this. The company sees inventory go out the door. Its inventory goes down because it sold it. The cost of that inventory was $300,000. We're going to record the cost of goods sold expense to capture the expense, which was essentially a using up of the asset or a giving away of the asset. Retained earnings cost of goods sold expense, it's a decrease of $300,000. Post to the T accounts, retained earnings, a left-hand side entry, transaction 4b. We're going to make a note of what type of expense that is. Inventory goes down, that's a right side entry in that asset account, transaction 4b. How's it going? Everything okay? Great. The company incurred operating expenses of $150,000 all paid with cash. Just like what we saw on the first year, left-hand side to retained earnings operating expense, right-hand side to cash. We're posting those in the T accounts. Nothing to do there. Same old, same old. Transaction 6. The company made a payment to National Bank for $13,000, $10,000 of that was for repayment of the loan principal and 3,000 of which was payment for interest. These were related to the original loan of $40,000 the company had taken out when it first started operations. Same entry that we had made for year one, just slightly different amount, cash goes down for $13,000, in year one it was 14,000. And then the loan payable balance goes down for $10,000. We're paying at equal principle payments over the four years, that's why we've got a $10,000 payment, the original loan was $40,000. Interest on the loan is $3,000. Remember, the interest rate was 10% and the loan balance at the beginning of the year was $30,000. So, 10% times the $30,000 balance that was outstanding at the beginning of the year gives us the $3,000 in interest expense for the current year. We reduce the balance in the loan payable account. We reduce retained earnings. And we reduce the cash account, all denoted transaction 6. Transaction 7. As planned, the $5,000 of the wages payable from the prior December were included in the employees' paychecks in January of the current year. Let's take a look. So we eliminate the liability, we pay it off. So, that goes down by $5,000 and we've paid the cash of $5,000. So, the way just payable liability ,which started at $5,000, now decreases by that 5, cash is down by $5,000, both are denoted with transaction 7. Notice that payment for all the work employees did December the second year were included in the paychecks during December. So, they did not have any wages to accrue for, for the second year. They had all been paid before the year was over. So, that's transactions 1 through 7. Nice work. Very similar to what we saw in the first year, opportunity practice again and we've done a very, very nice job.
