Chapter 1, Problem 33BP

a.

To determine

Prepare the year 2 income statement of Corporation B.

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.

Prepare year 2 income statement of Corporation B as follows:

Corporation B
Income Statement
Year 2
Particulars	Amount
Revenue	$27,500
Less: Expenses	$15,000
Net income	$12,500

Table (1)

Working notes:

Calculate (sales) revenue.

$\begin{array}{c}\text{Revenue = Net income + Expenses}\\ \text{=}\text{\$12,500 +}\text{\$15,000}\\ \text{=}\text{\$27,500}\end{array}$ (1)

Calculate net income.

$\begin{array}{c}\text{Net income = }\left(\begin{array}{l}\text{Ending retained earnings + Cash }\\ \text{dividend }-\text{Opening retained earnings}\end{array}\right)\\ \text{=\$28,500}\text{+\$4,000}-\$20,000\\ =\$12,500\end{array}$ (2)

Calculate ending retained earnings.

$\begin{array}{c}\text{Ending retained earnings = Opening retained earnings + Increased in retained earnings}\\ \text{=}\text{\$20,000}\text{+\$8,500}\\ \text{=}\text{\$28,500}\end{array}$ (3)

b.

To determine

Prepare the year 2 Statement of changes in stockholders’ equity of Corporation B.

Explanation of Solution

Statement of changes in Stockholder’s equity:

This statement reports the beginning stockholders’ equity and all the changes, which led to ending stockholders’ equity. Additional capital, net income from income statement is added to and drawings are deducted from beginning stockholders’ equity to arrive at the result, ending stockholders’ equity.

Prepare the year 2 statement of changes in stockholders’ equity of Corporation B as follows:

Corporation B
Statement of Changes in Stockholders' Equity
For the year Ended December 31,  Year 2
Particulars	Amount	Amount
Opening common stock	$10,000
Add: Issuance of common stock	$8,000
Ending Common stock		$18,000
Opening retained earnings	$20,000
Add: Net income	$12,500
Less: cash dividend	($4,000)
Ending retained earnings		$28,500
Total stockholders' equity		$46,500

Table (2)

Working note:

Calculate Opening common stock.

$\begin{array}{c}\text{Opening common stock = Assets }-\left(\text{Liabilites +}\text{Opening retained earnings}\right)\\ =\$50,000-\left(\$20,000+\$20,000\right)\\ =\$10,000\end{array}$ (4)

c.

To determine

Prepare the year 2 balance sheet of Corporation B.

Explanation of Solution

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.

Prepare the year 2 balance sheet of Corporation B as follows:

Corporation B
Balance Sheet
For the year Ended December 31,  Year 2
	Amount	Amount
Assets:
Assets		$64,500
Liabilities		$18,000
Stockholders' Equity:
Common stock	$18,000
Retained earnings	$28,500
Total stockholders' equity		$46,500
Total liabilities and Stockholders' equity		$64,500

Table (3)

Working notes:

Calculate total assets.

$\begin{array}{c}\text{Total assets =}\text{Openning cash + increased in cash}\\ \text{=}\text{\$50,000}\text{+\$14,500}\\ \text{=}\text{\$64,500}\end{array}$ (5)

Calculate total liabilities.

$\begin{array}{c}\text{Total liabilites = Opening liabilites }-\text{Partial payoff}\\ \text{=}\text{\$20,000}-\$2,000\\ =\$18,000\end{array}$ (6)

d.

To determine

Prepare the year 2 statement of cash flows of Corporation B.

Explanation of Solution

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.

Prepare the year 2 statement of cash flows of Corporation B as follows:

Corporation B
Statement of Cash Flows
For the year Ended December 31,  Year 2
Particulars	Amount	Amount
Cash flow from operating Activities:
Cash receipt from revenue	$27,500
Less: Cash payment for expense	($15,000)
Net cash flow from operating activates		$12,500
Cash flow from Investing Activities:
Net cash flow from investing activities		$0
Cash flow from Financing Activities:
Cash receipts from issuance of stock	$8,000
Cash payment to creditors	($2,000)
Cash dividend paid to stockholders	($4,000)
Net cash flow from financing activities		$2,000
Net increase in cash		$14,500
Add: Opening cash balance		$50,000
Ending cash balance		$64,500

Table (4)

e.

To determine

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

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 B as follows:

$\begin{array}{c}\text{Percentage}\text{of}\text{total}\text{assets}\text{=}\frac{\text{Total liabilites}}{\text{Total}\text{assets}}\text{×100}\\ \text{=}\frac{\text{\$18,000}}{\text{\$64,500}}\text{×100}\\ \text{=27}\text{.90\%}\end{array}$

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 B as follows:

$\begin{array}{c}\text{Percentage}\text{of}\text{total}\text{assets}\text{=}\frac{\text{Common stock}}{\text{Total}\text{assets}}\text{×100}\\ \text{=}\frac{\text{\$18,000}}{\text{\$64,500}}\text{×100}\\ \text{=27}\text{.90\%}\end{array}$

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 B as follows:

$\begin{array}{c}\text{Percentage}\text{of}\text{total}\text{assets}\text{=}\frac{\text{Retained}\text{earnings}}{\text{Total}\text{assets}}\text{×100}\\ \text{=}\frac{\text{\$28,500}}{\text{\$64,500}}\text{×100}\\ \text{=44}\text{.18\%}\end{array}$

f.

To determine

Ascertain the cash need to distribute to creditors and owners if the Corporation B were liquidated on December 31, Year 2.

Explanation of Solution

Corporation B was liquidated on December 31, Year 2, the cash paid to the creditors is $18,000, and the balance amount $46,500 ($64,500 –$18,000) equally distributed to the owners of the Corporation B.