Chapter 9, Problem 27AP

a.

To determine

Show the effects of each of the transactions on the elements of the financial statements, using a horizontal statements model like the one shown next. Use (+) 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.

Note:

OA refers to operating activities.

FA refers to financing activities.

NA refers to does not affected.

b.

To determine

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

Explanation of Solution

Prepare journal entries for Company T.

Date	Account title and Explanation	Post ref.	Amount $
			Debit	Credit
2016
1.	Cash		110,400
	Discount on Notes Payable (1)		9,600
	Notes payable			120,000
	( To record the issuance of discount note)
2.	Cash		310,000
	Service Revenue			130,000
	( To record the services rendered for cash)
3.	Operating expense		145,000
	Cash			145,000
	( To record the payment of operating expense )
4.	Interest Expense (2)		4,800
	Discount on Notes Payable			4,800
	( To record the amortized interest expense on discount notes)
5a.	Service Revenue		310,000
	Retained Earnings			310,000
	( To record the closing entries for revenue account)
5b.	Retained Earnings		149,800
	Selling and Administration Expenses			145,000
	Interest Expense			4,800
	( To record the closing of expense account)
2017
1.	Cash		346,000
	Service Revenue			346,000
	( To record the services rendered for cash)
2.	Operating expense		178,000
	Cash			178,000
	( To record the payment of operating expense )
3a.	Interest Expense (3)		4,800
	Discount on Notes Payable			4,800
	( To record the amortized interest expense on discount notes)
3b.	Notes payable		120,000
	Cash			120,000
	( To record the payment of note payable)
4a.	Service Revenue		346,000
	Retained Earnings			346,000
	( To record the closing entries for revenue account)
4b.	Retained Earnings		182,800
	Selling and Administration Expenses			178,000
	Interest Expense			4,800
	( To record the closing of expense account)

Table (2)

Working Note:

Determine the amount of discount on notes payable

$\begin{array}{c}\text{Discount expense}=\left(\begin{array}{l}\text{Face value of}\\ \text{ notes payable}\end{array}\right)\times \left(\begin{array}{l}\text{Rate of }\\ \text{interest}\end{array}\right)\\ \text{=}\$120,000\times 8\%\\ =\$9,600\end{array}$ (1)

Determine the amount of accrued interest expense.

The interest on note is accrued for 9 months which is from July 01, 2016 to December 31, 2016.

$\begin{array}{c}\text{Accrued interest expense}=\text{Principal}\times \text{Rate of interest}\times \text{Time outstanding}\\ \text{=\$120,000}\times \frac{8}{100}\times \frac{6}{12}\\ =\$4,800\end{array}$ (2)

Determine the amount of accrued interest expense.

The interest on note is accrued for 3 months which is from January 01, 2017 to June 30, 2017.

$\begin{array}{c}\text{Accrued interest expense}=\text{Principal}\times \text{Rate of interest}\times \text{Time outstanding}\\ \text{=\$120,000}\times \frac{8}{100}\times \frac{6}{12}\\ =\$4,800\end{array}$ (3)

Post the transactions to T-accounts.

Cash
2016		3.	$145,000
1.	$110,400
2.	$310,000
Balance	$275,400
2016
1.	$346,000	2.	$178,000
		3b.	$120,000
Balance	$323,400

Notes Payable
2016
		1.	$120,000
		Balance	$120,000
2017
3b.	$120,000
		Balance	$0

Discount on Notes Payable
2016
1.	$9,600	4.	$4,800
Balance	$4,800
2017
		3a.	$4,800
Balance	$0

Retained Earnings
2016
5a.	$149,800	5a.	$310,000
		Balance	$160,200
2017
4b.	$182,800	4a.	$346,000
		Balance	$323,400

Service Revenue
2016
5a.	$310,000	5a.	$310,000
		Balance	$0
2017
4a.	$346,000	1.	346,000
		Balance	$0

Operating expense
2016
3.	$145,000	5b.	$145,000
Balance	$0
2017
2.	$178,000	4b.	$178,000
Balance	$0

Interest expense
2016
4.	$4,800	5b.	$4,800
Balance	$0
2017
3a.	$4,800	4b.	$4,800
Balance	$0

c.

To determine

Prepare income statement, statement of changes in stockholders’ equity, balance sheet, and statement of cash flows for Company T for the year 2016 and 2017.

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 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 T for the year ended December 31, 2016 and 2017.

Company T
Statement of income
For the year ended December 31, 2016 and 2017
Particulars	Amount $
	2016	2017
Service Revenue	310,000	$346,000
Total revenues	310,000	$346,000
Expenses:
Operating expenses	145,000	178,000
Interest Expense	4,800	4,800
Total operating expense	(149,800)	(182,800)
Net income	$160,200	$163,200

Table (3)

Hence, the net income of Company T for the year ended December 31, 2016 and 2017 is $160,200 and $163,200 respectively.

Prepare the statement of changes in stockholders’ equity of Company T for the year ended December 31, 2016 and 2017.

Company T
Statement of changes in stockholders' equity
For the year ended December 31, 2016 and 2017
Particulars	Amount $
	2016	2017
Beginning Common Stock	0	0
Add: Stock Issued	0	0
Ending Common Stock	0	0
Beginning Retained Earnings	0	160,200
Plus: Net Income	160,200	163,200
Ending Retained Earnings	160,200	323,400
Total stockholder's equity	160,200	323,400

Table (4)

Hence, the total stockholders’ equity of Company T for the year ended December 31, 2016 and 2017 is $160,200 and $323,400 respectively.

Prepare the balance sheet of Company T as on December 31, 2016 and 2017.

Company T
Balance sheet
As on December 31, 2016 and 2017
Assets	Amount $
	2016	2017
Cash	275,400	323,400
Total Assets	275,400	323,400
Liabilities
Notes Payable	120,000	0
Less: Discount on Notes Payable	(4,800)	0
Total Liabilities	115,200	0
Stockholders’ Equity
Common Stock		0
Retained Earnings	160,200	323,400
Total Stockholders’ Equity	160,200	323,400
Total liabilities and stockholders' equity	275,400	323,400

Table (5)

Hence, the total of assets and liabilities and stockholders’ equity of Company T as on December 31, 2016 and 2017 is $275,400 and $323,400.

Prepare the statement of cash flows of Company T for the year ended December 31, 2016 and 2017.

Company T
Statement of cash flows
For the year ended December 31, 20
Particulars	Amount $
	2016	2017
Cash flow from operating activities:
Cash Receipts from Customers	310,000	346,000
Cash payments for expenses	(145,000)	(178,000)
Cash paid for interest	(0)	(9,600)
Net Cash Flow from Operating Activities	165,000	158,400
Cash Flows From Investing Activities:	0	0
Net Cash Flow From Investing Activities	0	0
Cash Flows From Financing Activities:
Issuance of note payable	110,400
Repayment of note payable		(110,400)
Net Cash Flow From Financing Activities	110,400	(110,400)
Net Change in Cash	275,400	48,000
Add: Beginning Cash Balance	0	275,400
Ending Cash Balance	275,400	323,400

Table (6)