Chapter 1, Problem 34P

Prat Corp. started the 2018 accounting period with $30,000 of assets (all cash), $12,000 of liabilities, and $13,000 of common stock. During the year, the Retained Earnings account increased by $7,550. The bookkeeper reported that Pratt paid cash expenses of $26,000 and paid a $2,000 cash dividend to the stockholders, but she could not find a record of the amount of cash that Pratt received for performing services. Pratt also paid $3,000 cash to reduce the liability owed to the bank, and the business acquired $4,000 of additional cash from the issue of common stock.

Required

1. a. Prepare an income statement, statement of changes in stockholders’ equity, period-end balance sheet, and statement of cash flows for the 2018 accounting period. (Hint: Determine the amount of beginning retained earnings before considering the effects of the current period events. It also might help to record all events under an accounting equation before preparing the statements.)
2. b. Determine the percentage of total assets that were provided by creditors, investors, and earnings. Round to three decimal places.
3. c. Determine the balance in the Revenue, Expense, and Dividends accounts as of January 1, 2019.

To determine

Prepare the income statement, statement of changes in stockholders’ equity, Period-end-balance sheet and statement of cash flows of Corporation P for the year 2018.

Explanation of Solution

Income statement: Income statement is the financial statement of a company which shows all the revenues earned and expenses incurred by the company over a period of time.

Statement of changes in the stockholders’ equity: This statement reflects whether the components of stockholders’ equity have increased or decreased during the period.

Balance sheet: Balance Sheet is one of the financial statements that summarize the assets, the liabilities, and the Shareholder’s equity of a company at a given date. It is also known as the statement of financial status of the business.

Statement of cash flows: Statement of cash flows is one among the financial statement of a Company that shows aggregate data of all cash inflows and cash outflows that is received and paid by the Company from its ongoing business operations.

Prepare 2018 income statement of Corporation P:

Corporation P
Income Statement
For the Year Ended December 31, 2018
Particulars	Amount
Revenue (1)	$35,550
Less: Expenses	$26,000
Net income	$9,550

Table (1)

Working notes:

1. Calculate (sales) revenue:

$\begin{array}{c}\text{Revenue = Net income + Expenses}\\ \text{=}\text{\$9,550 +}\text{\$26,000}\\ \text{=}\text{\$35,550}\end{array}$

2. Calculate net income:

$\begin{array}{c}\text{Net income = }\left(\begin{array}{l}\text{Ending retained earnings + Cash }\\ \text{dividend }-\text{Opening retained earnings}\end{array}\right)\\ \text{=\$12,550}\text{+\$2,000}-\$5,000\\ =\$9,550\end{array}$

3. Calculate ending retained earnings:

$\begin{array}{c}\text{Ending retained earnings = Opening retained earnings + Increased in retained earnings}\\ \text{=}\text{\$5,000}\text{+\$7,550}\\ \text{=}\text{\$12,550}\end{array}$

Prepare the 2018 statement of changes in stockholders’ equity of Corporation P:

Corporation P
Statement of Changes in Stockholders' Equity
For the year Ended December 31,  2018
Particulars	Amount	Amount
Opening common stock	$13,000
Add: Issuance of common stock	$4,000
Ending Common stock		$17,000
Opening retained earnings	$5,000
Add: Net income	$9,550
Less: cash dividend	($2,000)
Ending retained earnings		$12,550
Total stockholders' equity		$29,550

Table (2)

Working note:

4. Calculate Opening common stock:

$\begin{array}{c}\text{Opening common stock = Assets }-\left(\text{Liabilites +}\text{Opening retained earnings}\right)\\ =\$30,000-\left(\$12,000+\$5,000\right)\\ =\$13,000\end{array}$

Prepare the 2018 balance sheet of Corporation P:

Corporation P
Balance Sheet
For the year Ended December 31,  2018
	Amount	Amount
Assets:
Assets		$38,550
Liabilities		$9,000
Stockholders' Equity:
Common stock	$17,000
Retained earnings	$12,550
Total stockholders' equity		$29,550
Total liabilities and Stockholders' equity		$38,550

Table (3)

Working notes:

5. Calculate total assets:

$\begin{array}{c}\text{Total assets =}\text{Openning cash + increased in cash}\\ \text{=}\text{\$30,000}\text{+\$8,550}\\ \text{=}\text{\$38,550}\end{array}$

6. Calculate total liabilities:

$\begin{array}{c}\text{Total liabilites = Opening liabilites }-\text{Partial payoff}\\ \text{=}\text{\$12,000}-\$3,000\\ =\$9,000\end{array}$

Prepare the 2018 statement of cash flows of Corporation P:

Corporation P
Statement of Cash Flows
For the year Ended December 31,  2018
Particulars	Amount	Amount
Cash flow from operating Activities:
Cash receipt from revenue	$35,550
Less: Cash payment for expense	($26,000)
Net cash flow from operating activates		$9,550
Cash flow from Investing Activities:
Net cash flow from investing activities		$0
Cash flow from Financing Activities:
Cash receipts from issuance of stock	$4,000
Cash payment to creditors	($3,000)
Cash dividend paid to stockholders	($2,000)
Net cash flow from financing activities		($1,000)
Net increase in cash		$8,550
Add: Opening cash balance		$30,000
Ending cash balance		$38,550

Table (4)

To determine

Determine the percentage of total assets that were provided by creditors, investors and earnings of Corporation P.

Explanation of Solution

Debt to Asset Ratio: Debt to asset ratio is the ratio that measures the difference between total asset and total liability of the company. Debt ratio reflects the finance strategy of the company. It is used to evaluate company’s ability to pay its debts. Higher debt ratio implies the higher financial risk.

Calculate the percentage of assets acquired from creditors of Corporation P:

$\begin{array}{c}\text{Percentage}\text{of}\text{total}\text{assets}\text{=}\frac{\text{Total liabilites}}{\text{Total}\text{assets}}\text{×100}\\ \text{=}\frac{\text{\$9,000}}{\text{\$38,550}}\text{×100}\\ \text{=23}\text{.35\%}\end{array}$

Stockholders’ equity to asset ratio: Stockholders ‘equity to asset ratio is the ratio that measures the difference between total asset and stockholders ‘equity of the company. Stockholders’ equity ratio reflects the amount of assets that can be claimed by the stockholders in proportion to the value of shares owned by them.

Calculate percentage of total assets acquired from investors of Corporation P:

$\begin{array}{c}\text{Percentage}\text{of}\text{total}\text{assets}\text{=}\frac{\text{Common stock}}{\text{Total}\text{assets}}\text{×100}\\ \text{=}\frac{\text{\$17,000}}{\text{\$38,550}}\text{×100}\\ \text{=44}\text{.10\%}\end{array}$

Retained earnings: Retained earnings are the portion of earnings kept by the business for the purpose of reinvestments, payment of debts, or for future growth.

Calculate percentage of total assets acquired from retained earnings of Corporation P:

  $\begin{array}{c}\text{Percentage}\text{of}\text{total}\text{assets}\text{=}\frac{\text{Retained}\text{earnings}}{\text{Total}\text{assets}}\text{×100}\\ \text{=}\frac{\text{\$12,550}}{\text{\$38,550}}\text{×100}\\ \text{=32}\text{.56\%}\end{array}$

To determine

Ascertain the balance in the revenue, expenses, and dividends accounts of January1, 2019.

Explanation of Solution

The balances of the temporary accounts, revenue, expenses and dividends will be zero on January 1, 2019, because they were closed to Retained Earnings at December 31, 2018.