Chapter 10, Problem 10.1CACR

(a)

To determine

Balance Sheet

This is a financial statement that shows the assets owned, and the liabilities owed to the creditors and the owners (Stockholders’ equity). This statement reveals the financial health of a company. So, this statement is also called as the Statement of Financial Position. It helps users know the creditworthiness of a company as to whether the company has enough assets to pay off its liabilities.

To Prepare: The journal entry transactions of Corporation A.

Explanation of Solution

Figure (1)

Description:

• Interest payable is a current liability, and decreased. Therefore, debit interest payable account for $2,500.
• Cash is a current asset, and decreased. Therefore, credit cash account for $2,500.

Figure (2)

Description:

• Inventory is a current asset, and increased. Therefore, debit inventory account for $241,100.
• Accounts payable is a current liability, and increased. Therefore, credit accounts payable account for $241,100.

Figure (3)

Description:

• Cash is a current asset, and increased. Therefore, debit cash is a current asset account for $508,800.
• Sales taxes payable is a current liability, and increased. Therefore, credit sales taxes payable account for $28,800.
• Sales revenue is a component of stockholders’ equity, and increased it. Therefore, credit sales revenue account for $480,000.

Figure (4)

Description:

• Cost of goods sold is a component of stockholders’ equity, and decreased it. Therefore, debit cost of goods sold account for $265,000.
• Inventory is a current asset, and decreased. Therefore, credit inventory account for $265,000.

Figure (5)

Description:

• Accounts payable is a current liability, and decreased. Therefore, debit accounts payable account for $230,000.
• Cash is a current asset, and decreased. Therefore, credit cash account for $230,000.

Figure (6)

Description:

• Interest expense is a component of stockholders’ equity, and decreased it. Therefore, debit interest expense account for $2,500.
• Cash is a current asset, and decreased. Therefore, credit cash account for $2,500.

Figure (7)

Description:

• Insurance expense is a component of stockholders’ equity, and decreased it. Therefore, debit insurance expense account for $5,600.
• Cash is a current asset, and decreased. Therefore, credit cash account for $5,600.

Figure (8)

Description:

• Prepaid insurance is a current asset, and increased. Therefore, debit prepaid insurance account for $10,200.
• Cash is a current asset, and decreased. Therefore, credit cash account for $10,200.

Figure (9)

Description:

• Sales taxes payable is a current liability, and decreased. Therefore, debit sales taxes payable account for $17,000.
• Cash is a current asset, and decreased. Therefore, credit cash account for $17,000.

Figure (10)

Description:

• Other operating expenses are a component of stockholders’ equity, and decreased it. Therefore, debit other operating expenses account for $91,000.
• Cash is a current asset, and decreased. Therefore, credit cash account for $91,000.

Figure (11)

Description:

• Interest expense is a component of stockholders’ equity, and decreased it. Therefore, debit interest expense account for $2,500.
• Cash is a current asset, and decreased. Therefore, credit cash account for $2,500.

Figure (12)

Description:

• Bonds payable is a liability, and decreased. Therefore, debit bonds payable account for $50,000.
• Gain on redemption of bonds is a component of stockholders’ equity, and increased it. Therefore, credit gain on redemption of bonds account for $2,000.
• Cash is a current asset, and decreased. Therefore, credit cash account for $48,000.

Figure (13)

Description:

• Cash is a current asset, and increased. Therefore, debit cash account for $92,700.
• Premium on bonds payable is a contra liability, and increased. Therefore, credit premium on bonds payable for $2,700.
• Bonds payable is a long-term liability, and increased. Therefore, credit bonds payable account for $90,000.

To determine

To Prepare: The adjustment entries of Corporation A.

Explanation of Solution

Prepare the adjustment entries of Corporation as shown below:

Figure (14)

Working note:

Calculate interest expense as shown below:

  $\begin{array}{c}\text{Interest expense = \$10,200}\times \frac{\text{5}\text{Months}}{12\text{Months}}\\ =\$4,250\end{array}$

Description:

Insurance expense is a component of stockholders’ equity, and decreased it. Therefore, debit insurance expense account for $4,250.

Prepaid insurance is a current asset, and decreased. Therefore, credit cash account for $4,250.

Figure (15)

Description:

• Depreciation expense is a component of stockholders’ equity, and decreased it. Therefore, debit depreciation expense account for $7,000.
• Accumulated depreciation – equipment is a contra asset, and increased. Therefore, credit accumulated depreciation - equipment account for $7,000.

Figure (16)

Working note:

Calculate income tax expense as shown below:

  $\begin{array}{c}\text{Income tax expense = Income from operations }\times \text{ Tax rate}\\ \text{=}\text{\$107,150}\times \text{30\%}\\ \text{=}\text{\$31,245}\end{array}$

Description:

• Income tax expense is a component of stockholders’ equity, and decreased it. Therefore, debit income tax expense account for $31,245.
• Income taxes payable is a current liability, and increased. Therefore, credit income taxes payable account for $31,245.

To determine

To Prepare: The T-Accounts of Corporation A.

Answer to Problem 10.1CACR

Cash
Bal.	$30,000		$2,500
	$508,800		$230,000
	$92,700		$2,500
			$10,200
			$17,000
			$91,000
			$2,500
			$48,000
Bal.	$227,800

Table (1)

Inventory
Bal.	$30,750		$265,000
	$241,100
Bal.	$6,850

Table (2)

Prepaid Insurance
Bal.	$5,600		$5,600
	$10,200		$4,250
Bal.	$5,950

Table (3)

Equipment
Bal.	$38,000

Table (4)

Accumulated Depreciation - Equipment
			$7,000

Table (5)

Accounts Payable
	$230,000	Bal.	$13,750
			$241,100
		Bal.	$24,850

Table (6)

Other Operating Expenses
	$91,000

Table (7)

Interest Expense
	$2,500
	$2,500
Bal.	$5,000

Table (8)

Income Tax Expense
	$31,245

Table (9)

Interest Payable
	$2,500	Bal.	$2,500
		Bal.	$0

Table (10)

Sales Taxes Payable
	$17,000		$28,800
		Bal.	$11,800

Table (11)

Income Taxes Payable
			$31,245

Table (12)

Bonds Payable
	$50,000	Bal.	$50,000
			$90,000
		Bal.	$90,000

Table (13)

Premium on Bonds Payable
			$2,700

Table (14)

Common Stock
		Bal.	$25,000

Table (15)

Retained Earnings
		Bal.	$13,100

Table (16)

Sales Revenue
			$480,000

Table (17)

Cost of Goods sold
	$265,000

Table (18)

Depreciation Expense
	$7,000

Table (19)

Insurance Expense
	$5,600
	$4,250
Bal.	$9,850

Table (20)

Gain on Redemption of Bonds
		Bal.	$2,000

Table (21)

Explanation of Solution

Normal balance of assets account, expenses, losses account is debit balance. Hence, a debit increases these accounts and credit decreases these accounts.

Normal balance of liabilities account, capital account, revenue account and gains is credit balance. Hence, a debit decreases these accounts and credit increases these accounts.

(b)

To determine

To Prepare: The adjusted trail balance of Corporation A on December 31, 2017.

Explanation of Solution

Prepare the adjusted trail balance of Corporation A on December 31, 2017 as shown below:

Figure (17)

(c)

To determine

To Prepare: The income statement of Corporation A on December 31, 2017.

Answer to Problem 10.1CACR

Prepare the income statement of Corporation A on December 31, 2017 as shown below:

Figure (18)

Explanation of Solution

Gross profit is calculated by deducting cost of goods sold from sales revenue. Total operating expenses are calculated by adding insurance expense, depreciation expense, and other operating expenses. Income from operations is calculated by deducting total operating expenses from gross profit. Income before taxes is calculated by deducting interest expenses and adding gain on redemption of bonds from income from operations. Income tax expense is calculated by multiplying income from operations with tax rate. Net income is calculated by deducting income tax expense from income before taxes.

To determine

To Prepare: The retained earnings statement of Corporation A on December 31, 2017.

Answer to Problem 10.1CACR

Prepare retained earnings statement of Corporation A on December 31, 2017 as shown below:

Figure (19)

Explanation of Solution

Ending retained earnings is calculated by adding opening retained earnings and net income and then deducting the dividends. Therefore, ending retained earnings is $86,005.

To determine

To Prepare: The classified balance sheet statement of Corporation A on December 31, 2017.

Explanation of Solution

Prepare classified balance sheet statement of Corporation A on December 31, 2017 as shown below:

Figure (20)