Chapter 1, Problem 33P

Mark’s Consulting experienced the following transactions for 2018, its first year of operations, and 2019. Assume that all transactions involve the receipt or payment of cash.

Transactions for 2018

1. 1. Acquired $20,000 by issuing common stock.
2. 2. Received $35,000 cash for providing services to customers
3. 3. Borrowed $25,000 cash from creditors.
4. 4. Paid expenses amounting to $22,000.
5. 5. Purchased land for $30,000 cash.

Transactions for 2019

Beginning account balances for 2019 are:

1. 1. Acquired an additional $24,000 from the issue of common stock.
2. 2. Received $95,000 for providing services.
3. 3. Paid $15,000 to creditors to reduce loan.
4. 4. Paid expenses amounting to $71,500.
5. 5. Paid a $3,000 dividend to the stockholders.
6. 6. Determined that the market value of the land is $47,000.

Required

1. a. Write an accounting equation, and record the effects of each accounting event under the appropriate headings for each year. Record the amounts of revenue, expense, and dividends in the Retained Earnings column. Provide appropriate titles for these accounts in the last column of the table.
2. b. Prepare an income statement, statement of changes in stockholders’ equity, year-end balance sheet, and statement of cash flows for each year.
3. c. Determine the amount of cash that is in the Retained Earnings account at the end of 2018 and 2019.
4. d. Compare the information provided by the income statement with the information provided by the statement of cash flows. Point out similarities and differences.
5. e. Determine the balance in the Retained Earnings account immediately after Event 2 in 2018 is recorded and after Event 2 in 2019 is recorded.

To determine

Write an accounting equation and record the effects of each accounting events under the appropriate headings for each year. Record the amounts of expenses, revenue, and dividends in the retained earnings column.

Explanation of Solution

Accounting event: An accounting event is a cost-effective event that affects assets, liabilities, or stockholders’ equity of a Company.

Write an accounting equation and record the effects of each accounting events under the appropriate headings for 2018 as follows:

Table (1)

Write an accounting equation and record the effects of each accounting events under the appropriate headings for 2019 as follows:

Table (2)

To determine

Prepare an income statement, statement of changes in stockholder’s equity, year-end balance sheet and statement of cash flows for both years.

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 an income statement for the year ending December 31, 2018:

Company M
Income Statement
For the Period Ended December 31, 2018
Particulars	Amount ($)
Service Revenue	35,000
Expenses	(22,000)
Net Income	13,000

Table (3)

Prepare an income statement for the year ending December 31, 2019:

Company M
Income Statement
For the Period Ended December 31, 2019
Particulars	Amount ($)
Service Revenue	95,000
Expenses	(71,500)
Net Income	23,500

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.

Prepare a statement of changes in stockholder’s equity for the year ending December 31, 2018:

Company M
Statement of Changes in Stockholders’ Equity
For the Period Ended December 31, 2018
Particulars	Amount ($)	Amount ($)
Beginning Common Stock	0
Add: Common Stock Issued	20,000
Ending Common Stock		$20,000
Beginning Retained Earnings	0
Add: Net Income	$13,000
Ending Retained Earnings		13,000
Total Stockholders’ Equity		$33,000

Table (5)

Prepare a statement of changes in stockholder’s equity for the year ending December 31, 2019:

Company M
Statement of Changes in Stockholders’ Equity
For the Period Ended December 31, 2019
Particulars	Amount ($)	Amount ($)
Beginning Common Stock	$20,000
Add: Common Stock Issued	24,000
Ending Common Stock		$44,000
Beginning Retained Earnings	13,000
Add: Net Income	23,500
	36,500
Less: Dividends	(3,000)
Ending Retained Earnings		33,500
Total Stockholders’ Equity		$77,500

Table (6)

Balance Sheet: Balance Sheet is one of the financial statements which 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.

Prepare a balance sheet as on December 31, 2018:

Company M
Balance Sheet
As of December 31, 2018
Particulars	Amount ($)	Amount ($)
Assets:
Cash	$28,000
Land	30,000
Total Assets		$58,000
Liabilities:
Notes Payable		$25,000
Stockholders’ Equity:
Common Stock	$20,000
Retained Earnings	13,000
Total Stockholders’ Equity		33,000
Total Liabilities and Stockholders’ Equity		$58,000

Table (7)

Prepare a balance sheet as on December 31, 2019:

Company M
Balance Sheet
As of December 31, 2019
Particulars	Amount ($)	Amount ($)
Assets:
Cash	$57,500
Land	30,000
Total Assets		$87,500
Liabilities:
Notes Payable		$10,000
Stockholders’ Equity:
Common Stock	$44,000
Retained Earnings	33,500
Total Stockholders’ Equity		77,500
Total Liabilities and Stockholders’ Equity		$87,500

Table (8)

Statement Cash flows: Statement of cash flows is a statement showing the source and application of cash between two balance sheet dates. It shows how the cash is sourced and used for the company’s operating, investing, and financing activities.

Prepare a statement of cash flows for the year ending December 31, 2018:

Company M
Statement of Cash Flows
For the Year Ended December 31, 2018
Particulars	Amount ($)	Amount ($)
Cash Flows From Operating Activities:
Cash Receipts from Customers	35,000
Cash Payments for Expenses	(22,000)
Net Cash Flow from Operating Activities		13,000
Cash Flows From Investing Activities:
Cash Payment for Land	(30,000)
Net Cash Flow from Investing Activities		(30,000)
Cash Flows From Financing Activities:
Cash Receipts from Borrowed Funds	25,000
Cash Receipts from Stock Issue	20,000
Net Cash Flow from Financing Activities		45,000
Net Increase in Cash		28,000
Add: Beginning Cash Balance		0
Ending Cash Balance		28,000

Table (9)

Prepare a statement of cash flows for the year ending December 31, 2019:

Company M
Statement of Cash Flows
For the Year Ended December 31, 2019
Particulars	Amount ($)	Amount ($)
Cash Flows From Operating Activities:
Cash Receipts from Customers	95,000
Cash Payments for Expenses	(71,500)
Net Cash Flow from Operating Activities		23,500
Cash Flows From Investing Activities:		0
Cash Flows From Financing Activities:
Cash Receipts from Stock Issue	$24,000
Cash Payment on Debt	(15,000)
Cash Payment for Dividends	(3,000)
Net Cash Flow from Financing Activities		6,000
Net Increase in Cash		29,500
Add: Beginning Cash Balance		28,000
Ending Cash Balance		57,500

Table (10)

To determine

Compute the amount of cash in the retained earnings account at the end of 2018 and 2019.

Explanation of Solution

The retained earnings account does not have any cash balance.

To determine

Compare the income statement with the statement of cash flows, and point out the difference and similarities.

Explanation of Solution

The amount of net income from the income statement, and the amount of cash flows from operating activities of the statement of cash flows are same for 2018($13,000) and 2019 (23,500). However due to the investing and financing activities the net change in cash differs, as they do not affect the amounts of revenue and expenses directly.

To determine

Compute the balance in the retained earnings account immediately after events 2 in 2018 and in 2019 are recorded.

Answer to Problem 33P

• The balance in the Retained Earnings account is zero immediately after the Event 2 during the year 2018.
• The balance in the Retained Earnings account is $13,000 immediately after the Event 2 during the year 2019.

Explanation of Solution

• For the year 2018, the revenue is recorded in the revenue account but not in the retained earnings account, as the expense, dividend, and revenue are closed at the end of accounting period.  The Retained Earnings accounts will have a balance of $13,000$\left(\$35,000-22,000\right)$, after closing the accounts at the end of 2018.
• However, this Retained Earnings balance of $13,000 becomes the beginning balance of Retained Earnings account on January 1, 2019.  This is because the 2018 ending balance becomes the beginning balance of 2019. Thus, the balance of $13,000 in the retained earnings for 2019 will not change until the closing process is completed in December 2019.