Chapter 1, Problem 1.5BP

To determine

To prepare: The income statement, statement of stockholders’ equity, and balance sheet of Company TH for the year ended December 31, 2015.

Answer to Problem 1.5BP

The financial statements of Company TH for the year ended December 31, 2015 reports the following values:

• The net income earned during the year is $24,200.
• The total stockholders’ equity is $67,000.
• The balance of assets and liabilities are valued at $103,000.

Explanation of Solution

Financial statement: Financial statements are condensed summary of transactions communicated in the form of reports for the purpose of decision making. The financial statements reports, and shows the financial status of the business. The financial statements consist of the balance sheet, income statement, statement of retained earnings, and the cash flow statement.

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. 

Prepare income statement of Company TH for the year ended December 31, 2015.

Company TH
Statement of Income
For the year ended December, 31 2015
Particulars	Amount $	Amount $
Service revenue		69,400
Less: Expense
Interest expense	2,100
Utilities expense	6,000
Advertising expense	10,400
Salaries expense	26,700
Total Expenses		(45,200)
Net Income		24,200

Table (1)

Statement of stockholder's equity: This statement reports the beginning stockholder's equity and all the changes which led to ending stockholder's equity. Additional capital, net income from income statement is added to and drawings or dividends are deducted from beginning stockholder's equity to arrive at the end result, closing balance of stockholder's equity.

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

Company TH
Statement of Stockholders Equity
For the year ended December, 31 2015
Particulars	Common Stock	Retained Earnings	Total Stockholders’ Equity
Balance at the Beginning	$21,000	$26,800	$47,800
Add:
Issuance of stock	$6,000		$6,000
Net Income during the year		$24,200	$24,200
	$27,000	$51,000	$78,000
Less:
Dividends Paid (1)		($11,000)	($11,000)
Balance at the End	$27,000	$40,000	$67,000

Table (2)

Determine the amount of dividends paid during the year.

$\begin{array}{c}\begin{array}{l}\text{Retained earnings }\\ \text{at the end}\end{array}\}=\left\{\begin{array}{l}\text{Retained earnings }\\ \text{at the beginning}\end{array}\right\}+\text{Net Income}-\text{Dividends Paid}\\ \text{\$40,000}=\$26,800+\$24,200-\text{Dividends Paid}\\ \text{Dividends Paid}=\$51,000-\$40,000\\ \text{Dividends Paid}=\$11,000\end{array}$ (1)

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.

Prepare Balance sheet of Company TH for the year ended December 31, 2015.

Company TH
Balance sheet
For the year ended December, 31 2015
Assets	Amount $	Amount $
Cash	5,200
Account receivables from customers	13,200
Supplies	4,600
Building	80,000
Total Assets		103,000
Liabilities and Stockholder's Equity	Amount $	Amount $
Liabilities
Accounts Payables	7,700
Note Payables	25,000
Salaries Payables	3,300	36,000
Stockholders’ Equity
Common Stock	27,000
Retained Earnings	40,000	67,000
Total Stockholder's Equity
Total Liabilities and Stockholder's Equity		103,000

Table (3)

Conclusion

Hence, the financial statements of Company TH for the year ended December 31, 2015 reports the following:

• The net income earned during the year is $24,200.
• The total stockholders’ equity is $67,000.
• The balance of assets and liabilities are valued at $103,000.