Chapter 1, Problem 33AP

a.

To determine

Prepare the income statement, statement of changes in stockholders’ equity, Period-end-balance sheet and statement of cash flows of Corporation P for the year 2016.

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

Prepare 2016 income statement of Corporation P:

Corporation P
Income Statement
For the Year Ended December 31, 2016
Particulars	Amount
Revenue	$35,550
Less: Expenses	$26,000
Net income	$9,550

Table (1)

Working notes:

Calculate (sales) revenue.

$\begin{array}{c}\text{Revenue = Net income + Expenses}\\ \text{=}\text{\$9,550 +}\text{\$26,000}\\ \text{=}\text{\$35,550}\end{array}$ (1)

Calculate net income.

$\begin{array}{c}\text{Net income = }\left(\begin{array}{l}\text{Ending retained earnings + Cash }\\ \text{dividend }-\text{Opening retained earnings}\end{array}\right)\\ \text{=\$12,550}\text{+\$2,000}-\$5,000\\ =\$9,550\end{array}$ (2)

Calculate ending retained earnings.

$\begin{array}{c}\text{Ending retained earnings = Opening retained earnings + Increased in retained earnings}\\ \text{=}\text{\$5,000}\text{+\$7,550}\\ \text{=}\text{\$12,550}\end{array}$ (3)

Prepare the 2016 statement of changes in stockholders’ equity of Corporation P:

Corporation P
Statement of Changes in Stockholders' Equity
For the year Ended December 31,  2016
Particulars	Amount	Amount
Opening common stock	$13,000
Add: Issuance of common stock	$4,000
Ending Common stock		$17,000
Opening retained earnings	$5,000
Add: Net income	$9,550
Less: cash dividend	($2,000)
Ending retained earnings		$12,550
Total stockholders' equity		$29,550

Table (2)

Working note:

Calculate Opening common stock.

$\begin{array}{c}\text{Opening common stock = Assets }-\left(\text{Liabilites +}\text{Opening retained earnings}\right)\\ =\$30,000-\left(\$12,000+\$5,000\right)\\ =\$13,000\end{array}$ (4)

Prepare the 2016 balance sheet of Corporation P:

Corporation P
Balance Sheet
For the year Ended December 31,  2016
	Amount	Amount
Assets:
Assets		$38,550
Liabilities		$9,000
Stockholders' Equity:
Common stock	$17,000
Retained earnings	$12,550
Total stockholders' equity		$29,550
Total liabilities and Stockholders' equity		$38,550

Table (3)

Working notes:

Calculate total assets.

$\begin{array}{c}\text{Total assets =}\text{Openning cash + increased in cash}\\ \text{=}\text{\$30,000}\text{+\$8,550}\\ \text{=}\text{\$38,550}\end{array}$ (5)

Calculate total liabilities.

$\begin{array}{c}\text{Total liabilites = Opening liabilites }-\text{Partial payoff}\\ \text{=}\text{\$12,000}-\$3,000\\ =\$9,000\end{array}$ (6)

Prepare the 2016 statement of cash flows of Corporation P:

Corporation P
Statement of Cash Flows
For the year Ended December 31,  2016
Particulars	Amount	Amount
Cash flow from operating Activities:
Cash receipt from revenue	$35,550
Less: Cash payment for expense	($26,000)
Net cash flow from operating activates		$9,550
Cash flow from Investing Activities:
Net cash flow from investing activities		$0
Cash flow from Financing Activities:
Cash receipts from issuance of stock	$4,000
Cash payment to creditors	($3,000)
Cash dividend paid to stockholders	($2,000)
Net cash flow from financing activities		($1,000)
Net increase in cash		$8,550
Add: Opening cash balance		$30,000
Ending cash balance		$38,550

Table (4)

b.

To determine

Determine the percentage of total assets that were provided by creditors, investors and earnings of Corporation P.

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 of Corporation P:

$\begin{array}{c}\text{Percentage}\text{of}\text{total}\text{assets}\text{=}\frac{\text{Total liabilites}}{\text{Total}\text{assets}}\text{×100}\\ \text{=}\frac{\text{\$9,000}}{\text{\$38,550}}\text{×100}\\ \text{=23}\text{.35\%}\end{array}$

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.

Calculate percentage of total assets acquired from investors of Corporation P:

$\begin{array}{c}\text{Percentage}\text{of}\text{total}\text{assets}\text{=}\frac{\text{Common stock}}{\text{Total}\text{assets}}\text{×100}\\ \text{=}\frac{\text{\$17,000}}{\text{\$38,550}}\text{×100}\\ \text{=44}\text{.10\%}\end{array}$

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 percentage of total assets acquired from retained earnings of Corporation P:

$\begin{array}{c}\text{Percentage}\text{of}\text{total}\text{assets}\text{=}\frac{\text{Retained}\text{earnings}}{\text{Total}\text{assets}}\text{×100}\\ \text{=}\frac{\text{\$12,550}}{\text{\$38,550}}\text{×100}\\ \text{=32}\text{.56\%}\end{array}$

c.

To determine

Ascertain the balance in the revenue, expenses, and dividends accounts of January1, 2017.

Explanation of Solution

The balances of the temporary accounts, revenue, expenses and dividends will be zero on January 1, 2017, because they were closed to Retained Earnings at December 31, 2016.