Chapter 7, Problem 29P

a.

To determine

Record the given events in the accounting equation.

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.

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

Record the given events in accounting equation:

Table (1)

Working note 1: Determine the sales tax payable on the service rendered in 2014.

$\begin{array}{c}\text{Sales tax payable}=\left(\begin{array}{l}\text{Value of }\\ \text{service provided }\end{array}\right)\times \text{Rate of tax}\\ \text{=\$50,000}\times 5\%\times 9/12\\ =\$1,875\end{array}$

Working note 2: Determine the sales tax due for the year 2014.

$\begin{array}{c}\text{Sales tax payable}=\left(\begin{array}{l}\text{Value of }\\ \text{service provided }\end{array}\right)\times \text{Rate of tax}\\ \text{=\$50,000}\times 5\%\times 3/12\\ =\$625\end{array}$

b.

To determine

Prepare an income statement, a statement of changes in stockholders’ equity, a balance sheet, and a statement of cash flows for Company O for 2014 and 2015.

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: Balance Sheet is one of the financial statements which 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 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 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.

Prepare the income statement for Company O for the year ended December 31, 2014:

Company O
Statement of income
For the year ended December 31, 2014
Particulars	Amount $	Amount $
Service Revenue		140,000
Expenses:
Operating Expenses	84,000
Total operating expense		(84,000)
Operating income		56,000
Interest expense		(1,875)
Net income		54,125

Table (2)

Prepare the statement of changes in stockholders’ equity of Company O for the year ended December 31, 2014:

Company O
Statement of changes in stockholders' equity
For the year ended December 31, 2014
Particulars	Amount $	Amount $
Common Stock		0
Beginning retained earnings	0
Add/Less: Net Income (Loss)	54,125
Ending Retained Earnings		54,125
Total stockholder's equity		54,125

Table (3)

Prepare the balance sheet of Company O as on December 31, 2014:

Company O
Balance sheet
As on December 31, 2014
Assets	Amount $	Amount $
Cash		107,800
Total Assets		107,800
Liabilities and stockholders' equity
Liabilities
Sales tax Payable	1,800
Interest Payable	1,875
Notes  Payable	50,000
Total Liabilities		53,675
Stockholders’ Equity
Retained Earnings	54,125
Total Stockholders’ Equity		54,125
Total liabilities and stockholders' equity		107,800

Table (4)

Prepare the statement of cash flows of Company O for the year ended December 31, 2014;

Company O
Statement of cash flows
For the year ended December 31, 2014
Particulars	Amount $	Amount $
Cash flow from operating activities:
Inflow from Customers	140,000
Inflow from Sales Tax	8,400
Outflow for Expenses	(84,000)
Outflow for Sales Tax	(6,600)
Net Cash Flow from Operating Activities		57,800
Cash Flows From Investing Activities:
Net Cash Flow From Investing Activities		0
Cash Flows From Financing Activities:
Inflow from loan	50,000
Net Cash Flow From Financing Activities		50,000
Net Change in Cash		107,800
Add: Beginning Cash Balance		0
Ending Cash Balance		107,800

Table (5)

Prepare the income statement for Company O for the year ended December 31, 2015;

Company O
Statement of income
For the year ended December 31, 2015
Particulars	Amount $	Amount $
Service Revenue		155,000
Expenses:
Operating Expenses	96,000
Total operating expense		(96,000)
Operating income		59,000
Interest expense		(625)
Net income		58,375

Table (6)

Prepare the statement of changes in stockholders’ equity of Company O for the year ended December 31, 2015.

Company O
Statement of changes in stockholders' equity
For the year ended December 31, 2015
Particulars	Amount $	Amount $
Common Stock		0
Beginning retained earnings	54,125
Add/Less: Net Income (Loss)	58,375
Ending Retained Earnings		112,500
Total stockholder's equity		112,500

Table (7)

Prepare the balance sheet of Company O as on December 31, 2015.

Company O
Balance sheet
As on December 31, 2015
Assets	Amount $	Amount $
Cash		113,700
Total Assets		113,700
Liabilities and stockholders' equity
Liabilities
Sales tax Payable	1,200
Total Liabilities		1,200
Stockholders’ Equity
Retained Earnings	112,500
Total Stockholders’ Equity		112,500
Total liabilities and stockholders' equity		113,700

Table (8)

Prepare the statement of cash flows of Company O for the year ended December 31, 2015.

Company O
Statement of cash flows
For the year ended December 31, 2015
Particulars	Amount $	Amount $
Cash flow from operating activities:
Cash reeipts from Customers	$155,000
Inflow from Sales Tax	9,300
Cash paid for Expenses	(96,000)
Cash paid for Sales Tax expense	(9,900)
Cash paid for Interest exepnse	(2,500)
Net Cash Flow from Operating Activities		55,900
Cash Flows From Investing Activities:
Net Cash Flow From Investing Activities		0
Cash Flows From Financing Activities:
Repayment of loan	(50,000)
Net Cash Flow From Financing Activities		(50,000)
Net Change in Cash		5,900
Add: Beginning Cash Balance		107,800
Ending Cash Balance		113,700

Table (9)