Chapter 6, Problem 30P

Purchase and use of tangible asset: Three accounting cycles, doubledeclining- balance depreciation

The following transactions pertain to Accounting Solutions Inc. Assume the transactions for the purchase of the computer and any capital improvements occur on January 1 each year.

2018

1. Acquired $80,000 cash from the issue of common stock.

2. Purchased a computer system for $35,000. It has an estimated useful life of five years and a $5,000 salvage value.

3. Paid $2,450 sales tax on the computer system.

4. Collected $65,000 in fees from clients.

5. Paid $1,500 in fees for routine maintenance to service the computers.

6. Recorded double-declining-balance depreciation on the computer system for 2018.

2019

1. Paid $1,000 for repairs to the computer system.

2. Bought off-site backup services to maintain the computer system, $1,500.

3. Collected $68,000 in fees from clients.

4. Paid $1,500 in fees to service the computers.

5. Recorded double-declining-balance depreciation for 2019.

2020

1. Paid $6,000 to upgrade the computer system, which extended the total life of the system to six years. The salvage value did not change.

2. Paid $1,200 in fees to service the computers.

3. Collected $70,000 in fees from clients.

4. Recorded double-declining-balance depreciation for 2020.

Required

a. Record the previous transactions in a horizontal statements model like the following one.

b. Use a vertical model to present financial statements for 2018, 2019, and 2020.

To determine

Record the given transactions in a horizontal statements model.

Explanation of Solution

Horizontal statements model: The model that represents all the financial statements, balance sheet, income statement, and statement of cash flows in one table in a horizontal form, is referred to as, horizontal statements model.

Record the given transactions in a horizontal statements model as follows:

For 2018:

Figure (1)

For 2019:

Figure (2)

For 2020:

Figure (3)

Note: Refer working notes for the amount of depreciation expense.

Working note 1:

Determine the depreciation rate applied each year.

Useful life = 5 years

$\begin{array}{c}\text{Depreciation rate = }\frac{\text{100\%}}{\text{5 years}}\text{ × 2}\\ \text{= 40\%}\end{array}$

Working note 2:

Calculate the depreciation expense for 2018.

$\begin{array}{c}\text{Depreciation for 2018}=\left(\begin{array}{l}\text{Beginning book value }\\ \text{× Depreciation rate (W}\text{.N 1)}\end{array}\right)\\ =\$37,450\times \frac{40}{100}\\ =\$14,980\end{array}$

Working note 3:

Calculate the depreciation expense for 2019.

$\begin{array}{c}\text{Depreciation for 2019}=\left(\begin{array}{l}\left(\begin{array}{l}\text{Beginning book value }\\ \text{– Depreciation for 2018}\end{array}\right)\\ \times \text{Depreciation rate}\end{array}\right)\\ =\left(\left(\$37,450-\$14,980\right)\times \frac{40}{100}\right)\\ =\$8,988\end{array}$

Working note 4:

Calculate the depreciation expense for 2020.

$\begin{array}{c}\text{Depreciation for 2020}=\left(\begin{array}{l}\left(\begin{array}{l}\text{Beginning book value }\\ \text{– }\left(\begin{array}{l}\text{Depreciation for 2018+}\\ \text{Depreciation for 2019}\end{array}\right)\end{array}\right)\\ \times \text{Depreciation rate}\end{array}\right)\\ =\left(\left(\$37,450-\left(\$14,980+\$8,988\right)\right)\times \frac{50}{100}\right)\\ =\$55,000-\$17,968\times \frac{50}{100}\\ =\$9,741\end{array}$

To determine

Use a vertical model to present financial statements for 2018, 2019, and 2020.

Explanation of Solution

Income statement:

Income statement is a financial statement that shows the net income or net loss by deducting the expenses from the revenues and vice versa.

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 summarizes the assets, the liabilities, and the stockholder’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 flow is a financial statement that shows the cash and cash equivalents of a company for a particular period of time. It shows the net changes in cash, by reporting the sources and uses of cash as a result of operating, investing, and financing activities of a company.

Use a vertical model to present financial statements for 2018, 2019, and 2020as follows:

Incorporation A
Financial Statements
For the year ended December 31
Income Statements
Particulars	2018	2019	2020
Service Revenue	$65,000	$68,000	$70,000
Less: Expenses
Maintenance Expense	0	(2,500)	0
Computer Service Expense	(1,500)	(1,500)	(1,200)
Depreciation Expense (refer working notes)	(14,980)	(8,988)	(9,741)
Net Income	$48,520	$55,012	$59,059
Statement of Changes in Stockholder's Equity
Beginning Common Stock	0	$80,000	$80,000
Add: Stock Issued	80,000	0	0
Ending Common Stock (A)	80,000	80,000	80,000
Beginning Retained Earnings	0	48,520	103,532
Add: Net Income	48,520	55,012	59,059
Ending Retained Earnings (B)	48,520	103,532	162,591
Total Stockholders’ Equity $\text{(A+B)}$	$128,520	$183,532	$242,591

Table (1)

Incorporation A
Balance Sheet as of December 31
Particulars	2018	2019	2020
Assets
Cash	$106,050	$170,050	$232,850
Computer	37,450	37,450	37,450
Less: Accumulated Depreciation	(14,980)	(23,968)	(27,709)
Total Assets	$128,520	$183,532	$242,591
Liabilities	$0	$0	$0
Stockholders’ Equity
Common Stock	80,000	80,000	80,000
Retained Earnings	48,520	103,532	162,591
Total Stockholders’ Equity	$128,520	$183,532	$242,591
Total Liabilities and Stockholders' Equity	$128,520	$183,532	$242,591

Table (2)

Incorporation A
Statement of Cash Flows
For the Year Ended December 31
Particulars	2018  (in $)	2019 (in $)	2020 (in $)
Cash Flows From Operating Activities:
Inflow from revenue	65,000	68,000	70,000
Less: Outflow for expenses	(1,500)	(4,000)	(1,200)
Net Cash Flow from operating activities (C)	63,500	64,000	68,800
Cash Flows From Investing Activities:
Outflow to purchase Computer	(37,450)	0	(6,000)
Net Cash Flow from investing activities (D)	(37,450)	0	(6,000)
Cash Flows From Financing Activities:
Inflow from stock issue	80,000	0	0
Net Cash Flow from financing activities (E)	80,000	0	0
Net Increase in Cash $\left(\text{C + D + E}\right)$	106,050	64,000	62,800
Add: Beginning Cash Balance	0	106,050	170,050
Ending Cash Balance	$106,050	$170,050	$232,850

(Table 3)