Chapter 8, Problem 26AP

a.

To determine

Use a horizontal statements model to show the effect of the transactions on the elements of financial statements.

Explanation of Solution

Financial Statements:

Financial statements are complete record of all the financial transactions that take place in the business during a particular financial year. They report important financial information such as assets, liabilities, revenues and expenses of the company to the internal and external users for taking necessary decision. They help them to know the financial status of the business for a particular period.

Use a horizontal statements model to show the effect of the transactions on the elements of financial statements as follows:

Incorporation A
Horizontal Statements Model
Event		Assets	=	Liabilities	+	Equity		Net Income		Cash Flow
2016
1		+		NA		+		NA		+ FA
2		+-		NA		NA		NA		− ΙΑ
3		+-		NA		NA		NA		− ΙΑ
4		+		NA		+		+		+ OA
5		−		NA		−		−		− ΟΑ
6		−		NA		−		−		NA
7		NA		NA		+-		NA		NA
2017
1		−		NA		−		−		− ΟΑ
2		−		NA		−		−		− ΟΑ
3		+		NA		+		+		+ OA
4		−		NA		−		−		− ΟΑ
5		−		NA		−		−		NA
6		NA		NA		+-		NA		NA
2018
1		+-		NA		NA		NA		− ΙΑ
2		−		NA		−		−		− ΟΑ
3		+		NA		+		+		+ OA
4		−		NA		−		−		NA
5		NA		NA		+-		NA		NA

Table (1)

b.

To determine

Record the transactions in general journal form and post them to T-accounts.

Explanation of Solution

Journal entry:

Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.

Accounting rules for Journal entries:

• To record increase balance of account: Debit assets, expenses, losses and credit liabilities, capital, revenue and gains.
• To record decrease balance of account: Credit assets, expenses, losses and debit liabilities, capital, revenue and gains.

Record the transactions in general journal form as follows:

Event	Account title and Explanation	Post ref	Debit  (in $)	Credit (in $)
2016
1.	Cash		70,000
	Common Stock			70,000
	(To record the issue of the common stock)
2.	Wrecker		32,000
	Cash			32,000
	(To record the purchase of wrecker)
3.	Wrecker		3,000
	Cash			3,000
	(To record the purchase of wrecker)
4.	Cash		56,100
	Service Revenue			56,100
	(To record  the service revenue)
5.	Gas &Oíl Expense		12,000
	Cash			12,000
	(To record gas and oil expense)
6.	Depreciation Expense		10,000
	Accumulated Depreciation  (1)			10,000
	(To record depreciation expense )
7.	Service revenue		56,100
	Gas &Oíl Expense			12,000
	Depreciation Expense			10,000
	Retained earnings			34,100
	(To close the revenue and expenses accounts to the retained earnings account)
2017
1.	Maintenance Expense		900
	Cash			900
	(To record maintenance expense)
2.	Maintenance Expense		1,250
	Cash			1,250
	(To record maintenance expense)
3.	Cash		62,000
	Service Revenue			62,000
	(To record  the service revenue)
4.	Gas &Oil Expense		18,000
	Cash			18,000
	(To record gas and oil expense)
5.	Depreciation Expense		10,000
	Accumulated Depreciation			10,000
	(To record depreciation expense )
6.	Service revenue		62,000
	Maintenance expense			2,150
	Gas &Oil Expense			18,000
	Depreciation Expense			10,000
	Retained earnings			31,850
	(To close the revenue and expenses accounts to the retained earnings account)
2018
1.	Accumulated depreciation		4,800
	Cash			4,800
	(To record accumulated depreciation)
2.	Gas &Oil Expense		19,100
	Cash			19,100
	(To record gas and oil expense)
3.	Cash		65,000
	Service Revenue			65,000
	(To record  the service revenue)
4.	Depreciation Expense		7,400
	Accumulated Depreciation			7,400
	(To record depreciation expense )
5.	Service revenue		65,000
	Gas &Oil Expense			19,100
	Depreciation Expense			7,400
	Retained earnings			38,500
	(To close the revenue and expenses accounts to the retained earnings account)

Table (1)

Working note:

Calculate the depreciation expense on 2016.

$\begin{array}{c}\text{Depreciation expense = }\frac{\left(\text{Cost of the asset}-\text{Residual value}\right)}{\text{Estimated useful life of the asset}}\\ =\frac{\left(\left(\$32,000+\$3,000\right)-\$5,000\right)}{3\text{years}}\\ =\frac{\$35,000-\$5,000}{3}\\ =\$10,000\end{array}$ (1)

Calculate the depreciation expense on 2018.

$\begin{array}{c}\text{Depreciation expense = }\frac{\left(\begin{array}{l}\text{Cost of the asset}-\text{Residual value}-\text{Accumulated}\\ \text{depreciation+Payment made to overhaul asset}\end{array}\right)}{\text{Estimated useful life of the asset}}\\ =\frac{\left(\left(\$35,000-\$5,000-\$20,000\right)+\$4,800\right)}{2\text{years}}\\ =\frac{\$10,000+\$4,800}{2}\\ =\$7,400\end{array}$ (2)

Post the transactions to T-accounts as follows:

Cash (2016)
1.	70,000	2.	32,000
4.	56,100	3.	3,000
		5.	12,000
Balance              79,100

Cash (2017)
3.	62,000	1.	900
		2.	1,250
		4.	18,000
Balance            120,950

Cash (2018)
3.	65,000	1.	4,800
		2.	19,100
Balance            162,050

Wrecker (2016)
2.	32,000
3.	3,000
Balance              35,000

Accumulated Depreciation (2016)
		6.	10,000
		Balance        10,000

Accumulated Depreciation (2017)
		5.	10,000
		Balance        20,000

Accumulated Depreciation (2018)
1.	4,800	4.	7,400
		Balance        22,600

Common Stock (2016)
		1.	70,000
		Balance        70,000

Retained Earnings (2016)
		7.	34,100
		Balance        34,100

Retained Earnings (2017)
		6.	31,850
		Balance        65,950

Retained Earnings (2018)
		5.	38,500
		Balance      104,450

Service Revenue (2016)
7.	56,100	4.	56,100
		Balance                 0

Service Revenue (2017)
6.	62,000	3.	62,000
		Balance                 0

Service Revenue (2018)
5.	65,000	3.	65,000
		Balance                 0

Maintenance Expense (2017)
1.	900
2.	1,250	6.	2,150
Balance                       0

Gas & Oil Expense (2016)
5.	12,000	7.	12,000
Balance                       0

Gas & Oil Expense (2017)
4.	18,000	6.	18,000
Balance                       0

Gas & Oil Expense (2018)
2.	19,100	5.	19,100
Balance                       0

Depreciation Expense (2016)
6.	10,000	7.	10,000
Balance                       0

Depreciation Expense (2017)
5.	10,000	6.	10,000
Balance                       0

Depreciation Expense (2018)
4.	7,400	5.	7,400
Balance                       0

c.

To determine

Use a vertical model to present financial statements for 2016, 2017, and 2018.

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 2016, 2017, and 2018 as follows:

Incorporation A
Financial Statements
For the year ended December 31
Income Statements
	2016	2017	2018
Service Revenue	$56,100	$62,000	$65,000
Expenses:
Maintenance Expense	0	(2,150)	0
Gas & Oil Expense	(12,000)	(18,000)	(19,100)
Depreciation Expense	(10,000)	(10,000)	(7,400)
Total Expenses	(22,000)	(30,150)	(26,500)
Net Income	$34,100	$31,850	$38,500
Statement of Changes in Stockholder's Equity
Beginning Common Stock	0	$70,000	$70,000
Add: Stock Issued	70,000	0	0
Ending Common Stock	70,000	70,000	70,000
Beginning Retained Earnings	0	34,100	65,950
Add: Net Income	34,100	31,850	38,500
Ending Retained Earnings	34,100	65,950	104,450
Total Stockholders’ Equity	$104,100	$135,950	$174,450

Table (2)

Incorporation A
Financial Statements
Balance Sheet as of December 31
	2016	2017	2018
Assets
Cash	$79,100	$120,950	$162,050
Wrecker	35,000	35,000	35,000
Less: Accumulated Depreciation	(10,000)	(20,000)	(22,600)
Total Assets	$104,100	$135,950	$174,450
Liabilities	$0	$0	$0
Stockholders’ Equity
Common Stock	70,000	70,000	70,000
Retained Earnings	34,100	65,950	104,450
Total Stockholders’ Equity	$104,100	$135,950	$174,450
Total Liabilities and Stockholders' Equity	$104,100	$135,950	$174,450

Table (3)

Incorporation A
Statement of Cash Flows
For the Year Ended December 31
Particulars	2016 (in $)	2017 (in $)	2018 (in $)
Cash Flows From Operating Activities:
Inflow from revenue	56,100	62,000
Outflow for expenses	(12,000)	(20,150)	(19,100)
Net Cash Flow from operating activities	44,100	41,850	45,900
Cash Flows From Investing Activities:
Outflow to purchase Wrecker	(35,000)	0	(4,800)
Net Cash Flow from investing activities	(35,000)	0	(4,800)
Cash Flows From Financing Activities:
Inflow from stock issue	70,000	0	0
Net Cash Flow from financing activities	70,000	0	0
Net Increase in Cash	79,100	41,850	41,100
Add: Beginning Cash Balance	0	79,100	120,950
Ending Cash Balance	$79,100	120,950	162,050

(Table 4)