Chapter 6, Problem 25P

To determine

Prepare income statements, statements of changes in stockholders’ equity, balance sheet, and statements of cash flows for each of the five years.

Explanation of Solution

Straight-line Depreciation:

Under the straight-line method of depreciation, the same amount of depreciation is allocated every year over the estimated useful life of an asset. The formula to calculate the depreciation cost of the asset using the residual value is shown as below:

$\text{Depreciation Expense = }\frac{\left(\text{Cost of the asset}-\text{Salvage value}\right)}{\text{Estimated useful life of the asset}}$

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 stockholders' equity:

Statement of changes in stockholders' equity records the changes in the owners’ equity during the end of an accounting period by explaining about the increase or decrease in the capital reserves of shares.

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 statement that shows aggregate data of all cash inflows and cash outflows that is received and paid by the Company from its ongoing business operations.

Income statements, Statements of changes in stockholders’ equity, Balance sheets and cash flow statements of Company Z is prepared as follows:

Company Z
Financial Statements
For the year ended December 31
Income Statements	2014	2015	2016	2017	2018
Revenue	$9,500	$10,500	$10,500	$8,500	$0
Depreciation Expense (1)	($9,000)	($9,000)	($9,000)	($9,000)	$0
Operating Income	$500	$1,000	$1,500	($500)	$0
Gain/(Loss)	$0	$0	$0	$0	(2) $500
Net Income	$500	$1,000	$ 1,500	($500)	$500
Statements of Changes in Stockholders’ Equity	2014	2015	2016	2017	2018
Beginning Common Stock	$0	$40,000	$40,000	$40,000	$40,000
Add: Stock Issued	$40,000	$0	$0	$0	$0
Ending Common Stock	$40,000	$40,000	$40,000	$40,000	$40,000
Beginning Retained Earnings	$0	$500	$1,500	$3,000	$2,500
Add: Net Income	$500	$1,000	$1,500	($500)	$500
Ending Retained Earnings	$500	$1,500	$3,000	$2,500	$3,000
Total Stockholders' Equity	$40,500	$41,500	$43,000	$42,500	$43,000
Balance Sheets	2014	2015	2016	2017	2018
Assets:
Cash	$9,500	$19,500	$30,000	$38,500	$43,000
Equipment	$40,000	$40,000	$40,000	$40,000	$0
Less: Accumulated Depreciation	($9,000)	($18,000)	($27,000)	($36,000)	$0
Total Assets	$40,500	$41,500	$43,000	$42,500	$43,000
Stockholders’ Equity:
Common Stock	$40,000	$40,000	$40,000	$40,000	$40,000
Retained Earnings	$500	$1,500	$3,000	$2,500	$3,000
Total Stockholders’ Equity	$40,500	$41,500	$43,000	$42,500	$43,000
Statements of Cash Flows	2014	2015	2016	2017	2018
Operating Activity:
Inflow from Customers	$9,500	$10,000	$10,500	$8,500	$0
Net Cash Operating activity	$9,500	$10,000	$10,500	$8,500	$0
Investing Activity:
Sale of Equipment	$0	$0	$0	$0	$4,500
Paid for Equipment	($40,000)	$0	$0	$0	$0
Net Cash Investing activity	($40,000)	$0	$0	$0	$4,500
Financing Activity:
Inflow from stock issuance	$40,000	$0	$0	$0	$0
Net Cash Financing activity	$40,000	$0	$0	$0	$0
Net Change in Cash	$9,500	$10,000	$10,500	$8,500	$4,500
Add: Beginning Cash Balance	$0	$9,500	$19,500	$30,000	$38,500
Ending Cash Balance	$9,500	$19,500	$30,000	$38,500	$43,000

Table (1)

Working note 1: Calculate depreciation Expense:

$\begin{array}{c}\text{Depreciation Expense = }\frac{\left(\text{Cost of the asset}-\text{Salvage value}\right)}{\text{Estimated useful life of the asset}}\\ \text{=}\frac{\text{\$50,000}-\text{\$10,000}}{\text{4Years}}\\ \text{=\$9,000 Per Year}\end{array}$

Working note 2: Calculate gain on the sale of equipment:

$\begin{array}{c}\begin{array}{l}\text{Gain on}\text{the }\\ \text{Sale}\text{of}\text{equipment}\end{array})\text{=}\left(\begin{array}{l}\text{Sales}\text{price}\text{of}\text{equipment}-\\ \text{Book}\text{value}\text{of}\text{equipment of 5th year}\end{array}\right)\\ \text{=}\text{\$4,500}-\text{\$4,000}\\ \text{=}\text{\$500}\end{array}$