Chapter 5, Problem 25P

Sage Inc. experienced the following transactions for 2018, its first year of operations:

1. 1. Issued common stock for $50,000 cash.
2. 2. Purchased $140,000 of merchandise on account.
3. 3. Sold merchandise that cost $110,000 for $250,000 on account.
4. 4. Collected $236,000 cash from accounts receivable.
5. 5. Paid $118,000 on accounts payable.
6. 6. Paid $50,000 of salaries expense for the year.
7. 7. Paid other operating expenses of $28,000.
8. 8. Sage adjusted the accounts using the following information from an accounts receivable aging schedule:

Required

1. a. Organize the transaction data in accounts under an accounting equation.
2. b. Prepare the income statement, statement of changes in stockholders’ equity, balance sheet, and statement of cash flows for Sage Inc. for 2018.
3. c. What is the net realizable value of the accounts receivable at December 31, 2018?

To determine

Organize the transaction data in accounts under an accounting equation.

Explanation of Solution

Aging of receivables method: A method of determining the estimated uncollectible receivables, based on the age of individual accounts receivable is known as aging of receivables method. Under this method estimated bad debts would be treated as a target allowance balance.

Accounting equation: Accounting equation is an accounting tool expressed in the form of equation, by creating a relation between resources or assets of a business and claims on the resources by the creditors, and the owners.

The transaction data in accounts under an accounting equation is organized as follows:

Table (1)

Working note:

(1) Calculate the amount of uncollectible accounts expense:

Number of days past due	Amount	Percent Likely to be Uncollectible	Allowance Balance
	(A)	(B)	(C) $\left(\text{A}\times \text{B}\right)$
Current	$10,000	.01	$100
0-30	$$2,000	.05	$100
31-60	$1,200	.10	$120
61-90	$500	.20	$100
Over 90 days	$300	.50	$150
Total			$570

Table (2)

To determine

Prepare the income statement, statement of changes in stockholders’ equity, balance sheet and statement of cash flows for2018.

Explanation of Solution

Income statement: The financial statement which reports revenues and expenses from business operations and the result of those operations as net income or net loss for a particular time period is referred to as income statement.

Prepare the income statement.

Incorporation S
Income statement
For the year ended December 31, 2018
Particulars	Amount	Amount
Revenue
Sales revenue	$250,000
Total revenues		$250,000
Less: Expenses
Operating expense	$28,000
Salaries expense	$50,000
Uncollectible accounts expense	$570
Total expenses		($78,570)
Net income		$61,430

Table (3)

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

Prepare the statement of changes in stockholders’ equity.

Incorporation S
Statement of changes in stockholders’ equity
For the year ended December 31, 2018
Particulars	Amount	Amount
Beginning common stock	$0
Add: Common stocks issued	$50,000
Ending common stock		$50,000
Beginning retained earnings	$0
Add: Net income	$61,430
Less: Dividends	$0
Ending retained earnings		$61,430
Total stockholders’ equity		$111,430

Table (4)

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.

Prepare the balance sheet.

Incorporation S
Balance sheet
As of 31 December, 2018
Particulars	Amount	Amount
Assets
Cash		$90,000
Accounts receivable	$14,000
Less: Allowance for doubtful accounts	$570	$13,430
Merchandise inventory		$30,000
Total assets		$133,430
Liabilities
Accounts payable	$22,000
Total liabilities		$22,000
Stockholders’ equity
Common stock	$50,000
Retained earnings	$61,430
Total stockholders' equity		$111,430
Total liabilities and stockholders' equity		$133,430

Table (5)

Statement of Cash flows: Statement of cash flows is a statement reports the source and application of cash between two balance sheet dates. It shows how the cash is sourced and used for the company’s operating, investing, and financing activities.

Prepare the statement of cash flows.

Incorporation S
Statement of cash flow
For the year ended 31 December, 2018
Particulars	Amount	Amount
Cash flow from operating activities:
Inflow from customers	$236,000
Outflow for inventory	($118,000)
Outflow for expense (2)	($78,000)
Net cash flow from operating activities		$40,000
Cash flow from investing activities		$0
Cash flow from financing activities
Inflow from issue of common stock	$50,000
Net cash flow from financing activities		$50,000
Net change in cash		$90,000
Add: Beginning cash balance		$0
Ending cash balance		$90,000

Table (6)

Working note:

(2) Calculate the amount of outflow for expense:

$\begin{array}{c}\text{Outflow for expenses}=\text{Salaries paid}+\text{Other operating expenses}\\ =\$50,000+\$28,000\\ =\$78,000\end{array}$

To determine

Calculate the net realizable value of the accounts receivable at December 31, 2018.

Explanation of Solution

Net realizable value: Net realizable value is the net amount of receivables which a business expects to collect from its debtors. Accounts receivable less allowance for doubtful accounts is represented as cash realizable value.

Calculate the net realizable value:

$\begin{array}{c}\text{Net realizable value}=\text{Accounts receivable}-\text{Allowance for doubtful debts}\\ =\$14,000-\$570\\ =\$13,430\end{array}$

Hence, the net realizable value is $13,430.