Chapter 1, Problem 19AE

a.

To determine

Record the eight events in the accounting equation.

Explanation of Solution

The eight events are recorded using accounting equation:

Table (1)

b.

To determine

Prepare an income statement, statement of changes in equity, year-end balance sheet, and statement of cash flows for the year 2.

Explanation of Solution

Income statement:

Income statement is the financial statement of a company which shows all the revenues earned and expenses incurred by the company over a period of time.

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 is the financial statement that 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 cash flows:

Statement of cash flows is one among the financial statement of a Company statement that

Shows aggregate data of all cash inflows and cash outflows that is received and paid by the Company from its ongoing business operations.

Income statement for the year 2 is prepared as follows:

Company D
Income Statement
For the Year Ended December 31, Year 2
Particulars	Amount ($)
Service Revenue	$20,000
Utilities Expense	(1,000)
Operating Expense	($15,000)
Net Income	4,000

Table (2)

Statement of changes in equity for the year 2 is prepared is as follows:

Company D
Statement of Changes in Stockholders’ Equity
For the Year Ended December 31, Year 2
Particulars	Amount ($)	Amount ($)
Beginning Common Stock	6,000
Add: Common Stock Issued	30,000
Ending Common Stock		36,000
Beginning Retained Earnings	8,000
Add: Net Income	4,000
Less: Dividends	(2,000)
Ending Retained Earnings		10,000
Total Stockholders’ Equity		46,000

Table (3)

Balance sheet for the year 2 is prepared as follows:

Company D
Balance Sheet
As of December 31, Year 2
Particulars	Amount ($)	Amount ($)
Assets:
Cash	32,000
Land	24,000
Total Assets:		56,000
Liabilities:
Notes Payable	10,000
Total Liabilities		10,000
Stockholders’ Equity:
Common Stock	36,000
Retained Earnings	10,000
Total Stockholders’ Equity		46,000
Total Liabilities and Stockholders’ Equity		56,000

Table (4)

Statement of cash flows for the year 2 is prepared as follows:

Company D
Statement of Cash Flows
For the Year Ended December 31, Year 2
Particulars	Amount ($)	Amount ($)
Cash Flows From Operating Activities:
Cash Receipts from Customers	20,000
Cash Payment for Utilities Expense	(1,000)
Cash Payments for Other Operating Expense	(15,000)
Net Cash Flow from Operating Activities		4,000
Cash Flows From Investing Activities:
Cash Paid to Purchase Land	(12,000)
Net Cash Flow from Investing Activities		(12,000)
Cash Flows From Financing Activities:
Cash Receipts from Stock Issue	30,000
Cash Receipts from Loan	10,000
Cash Payments for Dividends	(2,000)
Net Cash Flow from Financing Activities		38,000
Net Increase in Cash		30,000
Add: Beginning Cash Balance		2,000
Ending Cash Balance		32,000

Table (5)

c.

To determine

Ascertain the percentage of assets provided by the retained earnings and find out the amount of cash in the retained earnings account.

Explanation of Solution

Retained earnings:

Retained earnings are the portion of earnings kept by the business for the purpose of reinvestments, payment of debts, or for future growth.

Calculate the percentage of assets provided by retained earnings:

$\begin{array}{c}\begin{array}{l}\text{Percantage}\text{of}\text{assets}\\ \text{provided}\text{by}\text{retained}\text{earnings}\end{array})\text{=}\frac{\text{Retained}\text{earnings}}{\text{Total}\text{Assets}}\text{×100}\\ \text{=}\frac{\text{\$10,000}}{\text{\$56,000}}\text{×100}\\ \text{=17}\text{.9\%}\end{array}$

Retained earnings are used to purchase assets or to pay liabilities and therefore, the amount of cash in the retained earnings accounts cannot be determined

Conclusion

Therefore, the percentage of assets provided by retained earnings is 17.9%.