Chapter 10, Problem 31AP

To determine

Prepare an income statement, statement of changes in equity, balance sheet, and statement of cash flows for Year1, Year2, Year3, and Year 4.

Explanation of Solution

Journal entry:

Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.

Accounting rules for Journal entries:

• To record increase balance of account: Debit assets, expenses, losses and credit liabilities, capital, revenue and gains.
• To record decrease balance of account: Credit assets, expenses, losses and debit liabilities, capital, revenue and gains.

Income statement:

Income statement is a financial statement that shows the net income or net loss by deducting the expenses from the revenues and vice versa.

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 sheet summarizes the assets, the liabilities, and the stockholder’s equity of a company at a given date. It is also known as the statement of financial status of the business.

Statement of cash flows

Statement of cash flow is a financial statement that shows the cash and cash equivalents of a company for a particular period of time. It shows the net changes in cash, by reporting the sources and uses of cash as a result of operating, investing, and financing activities of a company.

Record the transactions in general journal form as follows:

Date and Event number	Account title and Explanation	Post ref	Debit  (in $)	Credit (in $)
Year 1
1.	Cash $\left(\$500,000\times 0.96\right)$		480,000
	Discount on bonds payable		20,000
	Bonds payable			500,000
	(To record the issuance of bonds payable on discount)
2.	Land		480,000
	Cash			480,000
	(To record the purchase of land)
Year 1, 2, and 3
3.	Cash		60,000
	Lease Revenue			60,000
	(To record  the lease revenue)
4.	Interest Expense $\left(\$500,000\times 8\%\right)$		40,000
	Cash			40,000
	(To record interest expense)
5.	Interest expense $\left(\frac{\$20,000}{20\text{years}}\right)$		1,000
	Discount on bonds payable			1,000
	(To record the amortization of discount on bonds payable)
Year 4
6.	Cash		500,000
	Gain			20,000
	Land			480,000
	(To record  the sale of land for gain)
7.	Bonds payable		500,000
	Loss on bonds redemption		7,000
	Discount on bonds payable $\left(\$20,000-\text{Amortized discount of \$3,000}\right)$			17,000
	Cash $\left(\$500,000\times 0.98\right)$			490,000
	(To record redemption of bonds payable)

Table (1)

Post the transactions to T-accounts as follows:

Cash (Year 1)
1.480,000	2.480,000
3.60,000	4.40,000
Bal.20,000

Cash (Year 2)
3.60,000	4.40,000
Bal.40,000

Cash (Year 3)
3.60,000	4.40,000
Bal.60,000

Cash (Year 4)
3.500,000	4.490,000
Bal.70,000

Land (Year 1)
2.480,000
Bal.480,000

Land (Year 4)
	6.480,000
Bal.0

Bonds Payable (Year 1)
	1. 500,000
	Bal.500,000

Bonds Payable (Year 4)
7. 500,000
	Bal.0

Discount on bonds payable (Year 1)
1.20,000	5.1,000
Bal.19,000

Discount on bonds payable (Year 2)
	5.1,000
Bal.18,000

Discount on bonds payable (Year 3)
	5.1,000
Bal.17,000

Discount on bonds payable (Year 4)
	7.17,000
Bal.0

Retained Earnings (Year 1)
	Cl19,000
	Bal.19,000

Retained Earnings (Year 2)
	Cl19,000
	Bal.38,000

Retained Earnings (Year 3)
	Cl19,000
	Bal.57,000

Retained Earnings (Year 4)
	Cl13,000
	Bal.70,000

Lease Revenue (Year 1)
Cl60,000	3.60,000
	Bal.0-

Lease Revenue (Year 2)
Cl60,000	3.60,000
	Bal.0-

Lease Revenue (Year 3)
Cl60,000	3.60,000
	Bal.0-

Interest Expense (Year 1)
4.40,000
5.1,000	Cl41,000

Interest Expense (Year 2)
4.40,000
5.1,000	Cl41,000

Interest Expense (Year 3)
4.40,000
5.1,000	Cl41,000

Gain on sale of land (Year 4)
Cl20,000	6.20,000
	Bal.0-

Loss on Bond Redemption (Year 4)
7.           7,000	Cl          7,000
Bal. 0

Prepare an income statement, statement of changes in equity, balance sheet, and statement of cash flows for Year1, Year2, Year3, and Year 4 as follows:

Company OZ
Financial Statements	Year 1 ($)		Year 2 ($)			Year 3 ($)		Year 4 ($)
Income Statements for the Year Ended December 31
Lease Revenue	60,000		60,000			60,000		0
Interest Expense	(41,000)		(41,000)			(41,000)		0
Operating Income	19,000		19,000			19,000		0
Non-operating income or expense:
Gain on sale of land	0		0			0		20,000
Loss on bond redemption	0		0			0		(7,000)
Net Income	$19,000		$19,000			$19,000		$13,000
Statement of changes in Stockholders’ Equity
Common stock		0		0	0		0
Beginning retained earnings		0		19,000	38,000		57,000
Add: Net income		19,000		19,000	19,000		13,000
Ending retained earnings		19,000		38,000	57,000		70,000
Total stockholders’ Equity		$19,000		$38,000	$57,000		$70,000
Balance Sheets as of December 31
Assets	Year 1		Year 2			Year 3		Year 4
Cash	20,000		40,000			60,000		70,000
Land	480,000		480,000			480,000		0
Total Assets	500,000		520,000			540,000		70,000
Liabilities
Bonds Payable	500,000		500,000			500,000		0
Discount on bonds payable	(19,000)		(18,000)			(17,000)		0
Total Liabilities	481,000		482,000			483,000		0
Stockholders’ Equity
Retained Earnings	19,000		38,000			57,000		70,000
Total Liabilities and Stockholders’ Equity	500,000		520,000			540,000		70,000
Statements of Cash Flows for the Year Ended December 31
Cash Flows From Operating Activity:
Receipts from lease	60,000		60,000			60,000		0
Paid for Interest	(40,000)		(40,000)			(40,000)		0
Net Cash Flow from Operating Activity	20,000		20,000			20,000		0
Cash Flows From investing Activity:
Receipt from sale of land	0		0			0		500,000
Paid to purchase land	(480,000)		0			0		0
Net Cash Flow from Investing Activity	(480,000)		0			0		500,000
Cash Flows From Financing Activity:
Proceeds from bond issue	480,000		0			0		0
Repayment of bond	0		0			0		(490,000)
Net Cash Flow from Financing Activity	480,000		0			0		(490,000)
Net Change in Cash	20,000		20,000			20,000		10,000
Add: Beginning Cash Balance	0		20,000			40,000		60,000
Ending Cash Balance	$20,000		$40,000			$60,000		$70,000

Table (2)