Concept explainers
Sage Inc. experienced the following transactions for 2018, its first year of operations:
- 1. Issued common stock for $50,000 cash.
- 2. Purchased $140,000 of merchandise on account.
- 3. Sold merchandise that cost $110,000 for $250,000 on account.
- 4. Collected $236,000 cash from
accounts receivable . - 5. Paid $118,000 on accounts payable.
- 6. Paid $50,000 of salaries expense for the year.
- 7. Paid other operating expenses of $28,000.
- 8. Sage adjusted the accounts using the following information from an accounts receivable aging schedule:
Required
- a. Organize the transaction data in accounts under an
accounting equation. - b. Prepare the income statement, statement of changes in stockholders’ equity, balance sheet, and statement of
cash flows for Sage Inc. for 2018. - c. What is the net realizable value of the accounts receivable at December 31, 2018?
a)
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) | |
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)
b)
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:
c)
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:
Hence, the net realizable value is $13,430.
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Chapter 5 Solutions
SURVEY OF ACCOUNTING (LL) W/ CONNECT
- Analyzing the Accounts The controller for Summit Sales Inc. provides the following information on transactions that occurred during the year: a. Purchased supplies on credit, $18,600 b. Paid $14,800 cash toward the purchase in Transaction a c. Provided services to customers on credit1 $46,925 d. Collected $39,650 cash from accounts receivable e. Recorded depreciation expense, $8,175 f. Employee salaries accrued, $15,650 g. Paid $15,650 cash to employees for salaries earned h. Accrued interest expense on long-term debt, $1,950 i. Paid a total of $25,000 on long-term debt, which includes $1.950 interest from Transaction h j. Paid $2,220 cash for l years insurance coverage in advance k. Recognized insurance expense, $1,340, that was paid in a previous period l. Sold equipment with a book value of $7,500 for $7,500 cash m. Declared cash dividend, $12,000 n. Paid cash dividend declared in Transaction m o. Purchased new equipment for $28,300 cash. p. Issued common stock for $60,000 cash q. Used $10,700 of supplies to produce revenues Summit Sales uses the indirect method to prepare its statement of cash flows. Required: 1. Construct a table similar to the one shown at the top of the next page. Analyze each transaction and indicate its effect on the fundamental accounting equation. If the transaction increases a financial statement element, write the amount of the increase preceded by a plus sign (+) in the appropriate column. If the transaction decreases a financial statement element, write the amount of the decrease preceded by a minus sign (-) in the appropriate column. 2. Indicate whether each transaction results in a cash inflow or a cash outflow in the Effect on Cash Flows column. If the transaction has no effect on cash flow, then indicate this by placing none in the Effect on Cash Flows column. 3. For each transaction that affected cash flows, indicate whether the cash flow would be classified as a cash flow from operating activities, cash flow from investing activities, or cash flow from financing activities. If there is no effect on cash flows, indicate this as a non-cash activity.arrow_forwardProvide journal entries to record each of the following transactions. For each, identify whether the transaction represents a source of cash (S), a use of cash (U), or neither (N). A. Paid $22,000 cash on bonds payable. B. Collected $12,600 cash for a note receivable. C. Declared a dividend to shareholders for $16,000, to be paid in the future. D. Paid $26,500 to suppliers for purchases on account. E. Purchased treasury stock for $18,000 cash.arrow_forwardAnalyzing Transactions. Using the analytical framework, indicate the effect of the following related transactions of a firm. a. January 1: Issued 10,000 shares of common stock for 50,000. b. January 1: Acquired a building costing 35,000, paying 5,000 in cash and borrowing the remainder from a bank. c. During the year: Acquired inventory costing 40,000 on account from various suppliers. d. During the year: Sold inventory costing 30,000 for 65,000 on account. e. During the year: Paid employees 15,000 as compensation for services rendered during the year. f. During the year: Collected 45,000 from customers related to sales on account. g. During the year: Paid merchandise suppliers 28,000 related to purchases on account. h. December 31: Recognized depreciation on the building of 7,000 for financial reporting. Depreciation expense for income tax purposes was 10,000. i. December 31: Recognized compensation for services rendered during the last week in December but not paid by year-end of 4,000. j. December 31: Recognized and paid interest on the bank loan in Part b of 2,400 for the year. k. Recognized income taxes on the net effect of the preceding transactions at an income tax rate of 40%. Assume that the firm pays cash immediately for any taxes currently due to the government.arrow_forward
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Terms of sale are 2/10, n/30. The balances of the accounts as of January 1 have been recorded in the general ledger in your Working Papers or in CengageNow. Hammond Auto Supply does not track cash sales by customer. Jan. 2Issued Ck. No. 6981 to JSS Management Company for monthly rent, 775. 2J. Hammond, the owner, invested an additional 3,500 in the business. 4Bought merchandise on account from Valencia and Company, invoice no. A691, 2,930; terms 2/10, n/30; dated January 2. 4Received check from Vega Appliance for 980 in payment of 1,000 invoice less discount. 4Sold merchandise on account to L. Paul, invoice no. 6483, 850. 6Received check from Petty, Inc., 637, in payment of 650 invoice less discount. 7Issued Ck. No. 6982, 588, to Fischer and Son, in payment of invoice no. 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No. 6985 to Forbes Freight, 96, for freight charges on merchandise purchased on January 4. 23Received credit memo no. 163, 376, from Costa Products for merchandise returned. 29Sold merchandise on account to Bruce Supply, invoice no. 6486, 1,835. 31Cash sales for January 21 through January 31, 4,428. 31Issued Ck. No. 6986, 53, to M. Miller for miscellaneous expenses not recorded previously. 31Recorded payroll entry from the payroll register: total salaries, 6,200; employees federal income tax withheld, 872; FICA Social Security tax withheld, 384.40, FICA Medicare tax withheld, 89.90. 31Recorded the payroll taxes: Social Security tax, 384.40, FICA Medicare tax, 89.90; state unemployment tax, 334.80; federal unemployment tax, 37.20. 31Issued Ck. No. 6987, 4,853.70, for salaries for the month. 31J. Hammond, the owner, withdrew 1,000 for personal use, Ck. No. 6988. Required 1. Record the transactions for January using a sales journal, page 73; a purchases journal, page 56; a cash receipts journal, page 38; a cash payments journal, page 45; and a general journal, page 100. Assume the periodic inventory method is used. 2. Post daily all entries involving customer accounts to the accounts receivable ledger. 3. Post daily all entries involving creditor accounts to the accounts payable ledger. 4. Post daily those entries involving the Other Accounts columns and the general journal to the general ledger. Write the owners name in the Capital and Drawing accounts. 5. Add the columns of the special journals and prove the equality of the debit and credit totals. 6. Post the appropriate totals of the special journals to the general ledger. 7. Prepare a trial balance. 8. Prepare a schedule of accounts receivable and a schedule of accounts payable. 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No. 6985 to Forbes Freight, 96, for freight charges on merchandise purchased on January 4. 23Received credit memo no. 163, 376, from Costa Products for merchandise returned. 29Sold merchandise on account to Bruce Supply, invoice no. 6486, 1,835. 31Cash sales for January 21 through January 31, 4,428. 31Issued Ck. No. 6986, 53, to M. Miller for miscellaneous expenses not recorded previously. 31Recorded payroll entry from the payroll register: total salaries, 6,200; employees federal income tax withheld, 872; FICA Social Security tax withheld, 384.40, FICA Medicare tax withheld, 89.90. 31Recorded the payroll taxes: Social Security tax, 384.40, FICA Medicare tax, 89.90; state unemployment tax, 334.80; federal unemployment tax, 37.20. 31Issued Ck. No. 6987, 4,853.70, for salaries for the month. 31J. Hammond, the owner, withdrew 1,000 for personal use, Ck. No. 6988. Required 1. Record the transactions in the general journal for January. 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