
a.
Calculate the amount of
a.

Explanation of Solution
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:
Amount of retained earnings is calculated as follows:
Company C | ||||||||
Accounting Equation | ||||||||
As of January 1, 2018 | ||||||||
Assets | = | Liabilities | + | |||||
Cash | + | Land | = | Notes payable | + |
Common Stock | + |
Retained Earnings (1) |
$800 | $3,500 | $600 | $1,000 | 2,700 |
Table (1)
Working note:
1. Calculate the amount of retained earnings:
Note:
Therefore, the amount of retained earnings is $2,700.
b.
Explain with reason whether the dividend can be paid or cannot be paid by Company C.
b.

Explanation of Solution
Dividends:
Dividends are the rewards to the stockholders for investing their money in the company. Payment of dividend depends upon the decision of the management.
The company has only
c.
Ascertain the percentage of assets acquired from creditors
c.

Explanation of Solution
Debt to Asset Ratio: Debt to asset ratio is the ratio that measures the difference between total asset and total liability of the company. Debt ratio reflects the finance strategy of the company. It is used to evaluate company’s ability to pay its debts. Higher debt ratio implies the higher financial risk.
Calculate the percentage of assets acquired from creditors:
Note: Total
Therefore, The Percentage of total assets acquired from creditors is 14%.
d.
Ascertain the percentage of assets acquired from investors
d.

Explanation of Solution
Stockholders’ equity to asset ratio: Stockholders ‘equity to asset ratio is the ratio that measures the difference between total asset and stockholders ‘equity of the company. Stockholders’ equity ratio reflects the amount of assets that can be claimed by the stockholders in proportion to the value of shares owned by them.
Percentage of total assets acquired from investors is calculated as follows:
Therefore, The Percentage of total assets acquired from investors is 23.3%.
e.
Ascertain the percentage of assets acquired from retained earnings.
e.

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.
Percentage of total assets acquired from retained earnings:
Therefore, The Percentage of total assets acquired from retained earnings is 62.8%.
f.
Create an
f.

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:
Accounting equation is created as follows:
Company C | ||||||||
Accounting Equation | ||||||||
As of January 1, 2018 | ||||||||
Assets | = | Liabilities | + | Stockholders’ Equity | ||||
Cash | + | Land | = | Notes payable | + |
Common Stock | + |
Retained Earnings (2) |
$800 | $3,500 | 13.9% | 23.3% | 62.8% |
Table (2)
Working note:
2. Calculate Percentage of total assets acquired from retained earnings:
g.
Prepare income statement, statement of changes in stockholders’ equity, a
g.

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:
Accounting equation is created as follows:
Company C | |||||||||
Accounting Equation | |||||||||
As of December 31, 2018 | |||||||||
Assets | Liabilities | Stockholders’ Equity | |||||||
Cash | + | Land | = |
Notes Payable | + |
Common Stock | + |
Retained Earnings | Account title |
$800 | $3,500 | $600 | $1,000 | 2,700 | |||||
1,800 | NA | NA | NA | 1,800 | Revenue | ||||
(1,200) | NA | NA | NA | (1,200) | Expenses | ||||
(500) | NA | NA | NA | (500) | Dividends | ||||
900 | $3,500 | $600 | $1,000 | $2,800 |
Table (3)
Income statement: Income statement is the financial statement of a company which shows all the revenues earned and expenses incurred by the company over a period of time.
Income statement is prepared as follows:
Company C | |
Income Statement | |
For the year Ended December 31, 2018 | |
Particulars | Amount ($) |
Revenues | 1,800 |
Expenses | (1,200) |
Net Income | $600 |
Table (4)
Statement of changes in the stockholders’ equity: This statement reflects whether the components of stockholders’ equity have increased or decreased during the period.
Statement of changes in stockholders’ equity is prepared as follows:
Company C | ||
Statement of Changes in Stockholders’ Equity | ||
For the Year Ended December 31, 2018 | ||
Particulars | Amount ($) | Amount ($) |
Beginning Common Stock | 1,000 | |
Add: Common Stock Issued | 0 | |
Ending Common Stock | 1,000 | |
Beginning Retained Earnings | 2,700 | |
Add: Net Income | 600 | |
Less: Dividends | (500) | |
Ending Retained Earnings | 2,800 | |
Total Stockholders’ Equity | $3,800 |
Table (5)
Balance sheet: Balance Sheet is one of the financial statements that summarize the assets, the liabilities, and the Shareholder’s equity of a company at a given date. It is also known as the statement of financial status of the business.
The Balance sheet is prepared as follows:
Company C | ||
Balance Sheet | ||
As of December 31, 2018 | ||
Particulars | Amount ($) | Amount ($) |
Assets: | ||
Cash | 900 | |
Land | 3,500 | |
Total Assets | 4,400 | |
Liabilities: | ||
Notes Payable | 600 | |
Total Liabilities | 600 | |
Stockholders’ Equity: | ||
Common Stock | 1,000 | |
Retained Earnings | 2,800 | |
Total Stockholders’ Equity | 3,800 | |
Total Liabilities and Stockholders’ Equity | $4,400 |
Table (6)
Statement of cash flows: Statement of cash flows is one among the financial statement of a Company statement that shows aggregate data of all
Statement of cash flows is prepared as follows:
Company C | ||
Statement of Cash Flows | ||
For the Year Ended December 31, 2018 | ||
Particulars | Amount ($) | Amount ($) |
Cash Flows From Operating Activities: | ||
Cash Receipts from Customers | 1,800 | |
Cash Payments for Expenses | (1,200) | |
Net Cash Flow from Operating Activities | 600 | |
Cash Flows From Investing Activities: | 0 | |
Cash Flows From Financing Activities: | ||
Cash Payments for Dividends | (500) | |
Net Cash Flow from Financing Activities | (500) | |
Net Increase in Cash | 100 | |
Add: Beginning Cash Balance | 800 | |
Ending Cash Balance | $900 |
Table (7)
h.
Comment on the terminology used to date each statement.
h.

Explanation of Solution
Comment on the terminology used is as follows:
- The statements of income, changes in stockholders’ equity and cash flows explain about the happening of the company over a span of time. The span of time in this case is one year. Therefore, these statements use terminology “For the year ended December 31, 2018”.
- On the other hand, the balance sheet is prepared at a specific point of time. Therefore this statement use terminology “As of December 31, 2018 “
i.
State the way the fact of appraised value of land will change the financial statements.
i.

Explanation of Solution
Historical cost principle: Historical cost principle refers to the original cost of an asset at the time, when the asset is acquired.
Generally, the market value of the asset is not recorded in the fianancial statements since, the assets are reported by the amount paid for them regardless of the increase in the market value of the asset according to the historical cost concept.
j.
Ascertain the balance in the revenue account on January 1, 2019.
j.

Explanation of Solution
The revenue account had zero balance on January 1, 2019 because the balance in this account is transferred to retained earnings account during December 31, 2018 closing process.
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