Chapter 7, Problem 21BP

a)

To determine

Show the effects of each of the transactions on the elements of the financial statements, using a horizontal statements model. Indicate (+) for increase, (−) for decrease, and NA for not affected.

Explanation of Solution

Accounting equation: Accounting equation is an accounting tool expressed in the form of equation, by creating a relationship between the resources or assets of a company, and claims on the resources by the creditors and the owners. Accounting equation is expressed as shown below.

$\text{Assets}=\text{ Liabilities}+\text{Stockholders' equity}$

Show the effect of each event on the financial statements using a horizontal statement model.

Table (1)

Note:

OA refers to operating activities.

FA refers to financing activities.

NA refers to does not affected.

3a. This transaction records cash sale.

3b. This transaction records the credit card sale.

3b. This transaction records the sales made on account.

3d. This transaction records the cost of merchandise sold.

b)

To determine

Prepare general journal entries for each of the transactions and post them to T-accounts.

Explanation of Solution

Prepare journal entries for Company DS.

Date	Account title and Explanation	Post ref.	Amount
			Debit	Credit
2016
1.	Cash		$50,000
	Common stock			$50,000
	(To record the issuance of common stock )
2.	Merchandise inventory		$120,000
	Cash			$120,000
	(To record the purchase of inventory for cash)
3a.	Cash		$50,000
	Sales revenue			$50,000
	(To record the cash sales)
3b.	Accounts receivable		$111,550
	Credit Card Expense $\left(\$115,000\times 3\%\right)$		$3,450
	Sales revenue			$115,000
	(To record the credit card sales)
3c.	Accounts receivable		$15,000
	Sales revenue			$15,000
	(To record the sales on account)
3d.	Cost of goods sold		$95,000
	Merchandise inventory			$95,000
	(To record the cost of merchandise sold)
4.	Cash		$111,550
	Accounts receivable - Credit card			$111,550
	(To record the cash collected from credit card company)
5.	Cash		$11,300
	Accounts receivable			$11,300
	(To record the cash collected from accounts receivable)
6.	Selling and administrative expenses		$51,500
	Cash			$51,500
	(To record the cash paid for selling and administrative expenses )
7.	Uncollectible accounts expense (1)		$185
	Allowance for doubtful accounts			$185
	(To record the uncollectible accounts expense)

Table (2)

Post the journal entries to T-accounts.

Cash
1. Common stock	$50,000	2.	$120,000
3a.	$50,000	6.	$51,500
4.	$111,550
5.	$11,300
Balance	$51,350

Accounts Receivable
3c.	$15,000	5.	$11,300
Balance	$3,700

Accounts Receivable – Credit Card
3b.	$111,550	4.	$111,550
Balance	$0

Allowance for Doubtful Accounts
		7.	$185
		Balance	$185

Merchandise Inventory
2.	$120,000	3d.	$95,000
Balance	$25,000

Common Stock
		1.	$50,000
		Balance	$50,000

Sales Revenue
		3a.	$50,000
		3b.	$115,000
		3c.	$15,000
		Balance	$180,000

Cost of Goods Sold
3d.	$95,000
Balance	$95,000

Credit Card Expense
3b.	$3,450
Balance	$3,450

Selling & Administration Expense
6.	$51,500
Balance	$51,500

Uncollectible  Accounts Expense
7.	(1) $185
Balance	$185

Working Note:

Determine the amount of uncollectible account expense.

$\begin{array}{c}\begin{array}{l}\text{Uncollectible account }\\ \text{expense}\end{array}\}=\left(\begin{array}{l}\text{Ending accounts}\\ \text{ receivable}\end{array}\right)\times \left(\begin{array}{l}\text{Estimated rate }\\ \text{of percentage}\end{array}\right)\\ =\$3,700\times 5\%\\ =\$185\end{array}$ (1)

c)

To determine

Prepare income statement, statement of changes in stockholders’ equity, balance sheet, and statement of cash flows for Company T for 2016.

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.

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

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 income statement for Company DS for the year ended December 31, 2016.

Company DS
Statement of income
For the year ended December 31, 2016
Particulars	Amount	Amount
Service revenue		$180,000
Less: Cost of goods sold		($95,000)
Gross margin		$85,000
Operating expenses
Credit card expense	$3,450
Selling and administrative  expenses	$51,500
Uncollectible accounts expense	$185
Total operating expenses		($55,135)
Net income		$29,865

Table (3)

Hence, the net income of Company DS for the year ended December 31, 2016 is $29,865.

Prepare the statement of changes in stockholders’ equity of Company DS for the year ended December 31, 2016.

Company DS
Statement of changes in stockholders' equity
For the year ended December 31, 2016
Particulars	Amount		Amount
Beginning Common Stock	$0
Add: Stock Issued	$50,000
Ending Common Stock		$50,000
Beginning retained earnings	$0
Add/Less: Net Income (Loss)	$29,865
Less: Dividends	$0
Ending Retained Earnings		$29,865
Total stockholder's equity		$79,865

Table (4)

Hence, the total stockholders’ equity of Company DS for the year ended December 31, 2016 is $79,865.

Prepare the balance sheet of Company DS as on December 31, 2016.

Company DS
Balance sheet
As on December 31, 2016
Assets	Amount	Amount
Cash		$51,350
Accounts Receivable	$3,700
Less: Allowance for doubtful accounts	($185)	$3,515
Merchandise Inventory		$25,000
Total Assets		$79,865
Liabilities and stockholders' equity
Liabilities
Total Liabilities		$0
Stockholders’ Equity
Common Stock	$50,000
Retained Earnings	$29,865
Total Stockholders’ Equity		$79,865
Total liabilities and stockholders' equity		$79,865

Table (5)

Hence, the total of assets and liabilities and stockholders’ equity of Company DS as on December 31, 2016 is $79,865.

Prepare the statement of cash flows of Company IS for the year ended December 31, 2016.

Company DS
Statement of cash flows
For the year ended December 31, 2016
Particulars	Amount	Amount
Cash flow from operating activities:
Cash Receipts from Customers (2)	$172,850
Outflow for inventory	($120,000)
Outflow for expenses	($51,500)
Net Cash Flow from Operating Activities		$1,350
Cash Flows From Investing Activities:
Net Cash Flow From Investing Activities		$0
Cash Flows From Financing Activities:
Cash Receipts from Stock Issue	$50,000
Net Cash Flow From Financing Activities		$50,000
Net Change in Cash		$51,350
Add: Beginning Cash Balance		$0
Ending Cash Balance		$51,350

Table (6)

Working note:

Determine the amount of cash collected from customers.

$\begin{array}{c}\text{Cash receipts from customers}=\text{Cash sales}+\left(\begin{array}{l}\text{Collections from }\\ \text{Accounts receivable}\end{array}\right)+\left(\begin{array}{l}\text{Cash from }\\ \text{credit card sales}\end{array}\right)\\ =\$50,000+\$11,300+\$111,550\\ =\$172,850\end{array}$ (2)

Hence, the net change in cash during 2016 is $51,350.