Stock and Net Income

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Xytech was a high-tech company that had been started by three partners in early 20X0. Their successful product designs led to rapid growth of the company, with resulting needs for additional capital to support the growth. This case describes the major financing transactions entered into by Xytech in its first 10 years of existence. The firm’s earnings history also is given.

You are to write a journal entry for each transaction as it is described. You should be explicit about what noncurrent liability and owners’ equity – that is, invested capital – accounts are affected by the transactions, but effects on assets (including cash) and current liabilities can be recorded in a single account,”A&CL.”

20X0: The firm began as a partnership on January 10, with the equal partners, Able, Baker, and Cabot, each contributing $100,000 capital. The accountant set up a capital account for each of the three partners. On April 1 the partners arranged with a bank a $100,000, 8 percent, five-year ”balloon” note, which meant that only quarterly interest was payable for five years, with the principal due in full as a lump sum at the end of the fifth year. The firm’s net loss for 20X0 was $54,000. A salary for each partner was included in the calculation of net loss; no other payments were made to the partners.

20X1 to help the firm deal with a short-term liquidity problem, on April 26, Cabot liquidated some personal securities and loaned the firm the $50,000 proceeds. Cabot expected to be repaid these funds in no more than one year. In October baker’s ownership interest in the firm was sold out equally to Able and Cabot, with Baker receiving a total of $110,000 in notes and cash from Able and Cabot. The firm had $12,000 net income for the year. Able and Cabot planned to incorporate the firm as of January 1, 20X2. Prepare a statement of invested capital for the partnership as of December 31, 20X1.

20X2: The firm was incorporated on January 1, as planned. The articles of...
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