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 is the financial statement that reports a company’s resources (assets) and claims of creditors (liabilities) and stockholders (stockholders’ equity) over those resources. The resources of the company are assets which include money contributed by stockholders and creditors. Hence, the main elements of the balance sheet are assets, liabilities, and stockholders’ equity.

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 B are prepared as follows:

Company B
Financial Statements
For the Year ended December 31
Income Statements	2018	2019	2020	2021	2022
Revenue	$26,100	$28,500	$32,000	$31,300	$0
Depreciation Expense (W.N. 1)	($10,000)	($10,000)	($10,000)	($10,000)	$0
Operating Income	$16,100	$18,500	$22,000	$21,300	$0
Gain/(Loss)	$0	$0	$0	$0	(W.N. 2) ($1,200)
Net Income	$16,100	$18,500	$22,000	$21,300	($1,200)
Statements of Changes in Stockholders’ Equity	2018	2019	2020	2021	2022
Beginning Common Stock	$0	$60,000	$60,000	$60,000	$60,000
Add: Stock Issued	$60,000	$0	$0	$0	$0
Ending Common Stock	$60,000	$60,000	$60,000	$60,000	$60,000
Beginning Retained Earnings	$0	$16,100	$34,600	$56,600	$77,900
Add: Net Income	$16,100	$18,500	$22,000	$21,300	($1,200)
Ending Retained Earnings	$16,100	$34,600	$56,600	$77,900	$76,700
Total Stockholders' Equity	$76,100	$94,600	$116,600	$137,900	$136,700
Balance Sheets	2018	2019	2020	2021	2022
Assets:
Cash	$36,100	$64,600	$96,600	$127,900	$136,700
Equipment	$50,000	$50,000	$50,000	$50,000	$0
Less: Accumulated Depreciation	($10,000)	($20,000)	($30,000)	($40,000)	$0
Total Assets	$76,100	$94,600	$116,600	$137,900	$136,700
Stockholders’ Equity:
Common Stock	$60,000	$60,000	$60,000	$60,000	$60,000
Retained Earnings	$16,100	$34,600	$56,600	$77,900	$76,700
Total Stockholders’ Equity	$76,100	$94,600	$116,600	$137,900	$136,700
Statements of Cash Flows	2018	2019	2020	2021	2022
Operating Activity:
Inflow from Customers	$26,100	$28,500	$32,000	$31,300	$0
Net Cash Operating activity	$26,100	$28,500	$32,000	$31,300	$0
Investing Activity:
Sale of Equipment	$0	$0	$0	$0	$8,800
Paid for Equipment	($50,000)	$0	$0	$0	$0
Net Cash Investing activity	($50,000)	$0	$0	$0	$8,800
Financing Activity:
Inflow from stock issuance	$60,000	$0	$0	$0	$0
Net Cash Financing activity	$60,000	$0	$0	$0	$0
Net Change in Cash	$36,100	$28,500	$32,000	$31,300	$8,800
Add: Beginning Cash Balance	$0	$36,100	$64,600	$96,600	$127,900
Ending Cash Balance	$36,100	$64,600	$96,600	$127,900	$136,700

Table (1)

Working note 1:

Calculate depreciation Expense:

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

Working note 2:

Calculate loss on the sale of equipment:

$\begin{array}{c}\begin{array}{l}\text{Loss on}\text{the }\\ \text{Sale}\text{of}\text{equipment}\end{array})\text{=}\left(\begin{array}{l}\text{Sales}\text{price}\text{of}\text{equipment}-\\ \text{Book}\text{value}\text{of}\text{equipment of 5th Year}\end{array}\right)\\ \text{=}\text{\$8,800}-\text{\$10,000}\\ \text{=}(\text{\$1,200})\end{array}$