Chapter 10, Problem 31BP

To determine

Prepare an income statement, statement of changes in equity, balance sheet, and statement of cash flows for Year 2016, Year 2017, Year 2018, and Year 2019.

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 $)
2016
1.	Cash $\left(\$300,000\times 1.03\right)$		309,000
	Premium on bonds payable			9,000
	Bonds payable			300,000
	(To record the issuance of bonds payable on premium)
2.	Land		309,000
	Cash			309,000
	(To record the purchase of land)
Year 2016,2017 and 2018
3.	Cash		36,000
	Lease Revenue			36,000
	(To record  the lease revenue)
4.	Interest Expense $\left(\$300,000\times 6\%\right)$		18,000
	Cash			18,000
	(To record interest expense)
5.	Premium on bonds payable		600
	Interest expense $\left(\frac{\$9,000}{15\text{years}}\right)$			600
	(To record the amortization of premium on bonds payable)
Year 2019
6.	Cash		310,000
	Gain			1,000
	Land			309,000
	(To record  the sale of land for gain)
7.	Bonds payable		300,000
	Loss on bonds redemption		4,800
	Premium on bonds payable $\left(9,000-\text{Amortized premium of \$1,800}\right)$		7,200
	Cash $\left(\$300,000\times 1.04\right)$			312,000
	(To record redemption of bonds payable)

Table (1)

Post the transactions to T-accounts as follows:

Cash (Year 2016)
1.309,000	2.309,000
3.36,000	4.18,000
Bal.18,000

Cash (Year 2017)
3.36,000	4.18,000
Bal.36,000

Cash (Year 2018)
3.36,000	4.18,000
Bal.54,000

Cash (Year 2019)
6.310,000	7.312,000
Bal.52,000

Land (Year 2016)
2.309,000
Bal.309,000

Land (Year 2019)
	6.309,000
Bal.0

Bonds Payable (Year 2016)
	1. 300,000
	Bal.300,000

Bonds Payable (Year 2019)
7. 300,000
	Bal.0

Premium on bonds payable (Year 2016)
5.600	1.9,000
	Bal.           8,400

Premium on bonds payable (Year 2017)
5.600
	Bal.           7,800

Premium on bonds payable (Year 2018)
5.600
	Bal.           7,200

Premium on bonds payable (Year 2019)
7.7,200
	Bal.           0

Retained Earnings (Year 2016)
	Cl18,600
	Bal.18,600

Retained Earnings (Year 2017)
	Cl18,600
	Bal.37,200

Retained Earnings (Year 2018)
	Cl18,600
	Bal.55,800

Retained Earnings (Year 2019)
Cl    3,800
	Bal.52,000

Lease Revenue (Year 2016)
Cl36,000	3.36,000
	Bal.0-

Lease Revenue (Year 2017)
Cl36,000	3.36,000
	Bal.0-

Lease Revenue (Year 2018)
Cl36,000	3.36,000
	Bal.0-

Interest Expense (Year 2016)
4.18,000	5.  600
	Cl17,400

Interest Expense (Year 2017)
4.18,000	5.  600
	Cl17,400

Interest Expense (Year 2018)
4.18,000	5.  600
	Cl17,400
Bal.0

Gain on sale of land (Year 2019)
Cl1,000	6.1,000
	Bal.0-

Loss on Bond Redemption (Year 2019)
7.           4,800	Cl            4,800
Bal. 0

Prepare an income statement, statement of changes in equity, balance sheet, and statement of cash flows for Year 2016, Year 2017, Year 2018, and Year 2019 as follows:

Company W
Financial Statements	2016 ($)		2017 ($)			2018 ($)		2019 ($)
Income Statements for the Year Ended December 31
Lease Revenue	36,000		36,000			36,000		0
Interest Expense	(17,400)		(17,400)			(17,400)		0
Operating Income	18,600		18,600			18,600		0
Non-operating income or expense:
Gain on sale of land	0		0			0		1,000
Loss on bond redemption	0		0			0		(4,800)
Net Income	$18,600		$18,600			$18,600		$(3,800)
Statement of changes in Stockholders’ Equity
Common stock		0		0	0		0
Beginning retained earnings		0		18,600	37,200		55,800
Add: Net income		18,600		18,600	18,600		(3,800)
Ending retained earnings		18,600		37,200	55,800		52,000
Total stockholders’ Equity		$18,600		$37,200	$55,800		$52,000
Balance Sheets as of December 31
Assets	2016		2017			2018		2019
Cash	18,000		36,000			54,000		52,000
Land	309,000		309,000			309,000		0
Total Assets	$327,000		$345,000			$363,000		$52,000
Liabilities
Bonds Payable	300,000		300,000			300,000		0
Premium on bonds payable	8,400		7,800			7,200		0
Total Liabilities	308,400		307,800			307,200		0
Stockholders’ Equity
Retained Earnings	18,600		37,200			55,800		52,000
Total Liabilities and Stockholders’ Equity	$327,000		$345,000			$363,000		$52,000
Statements of Cash Flows for the Year Ended December 31
Cash Flows From Operating Activity:
Receipts from lease	36,000		36,000			36,000		0
Paid for Interest	(18,000)		(18,000)			(18,000)		0
Net Cash Flow from Operating Activity	18,000		18,000			18,000		0
Cash Flows From investing Activity:
Receipt from sale of land	0		0			0		310,000
Paid to purchase land	(309,000)		0			0		0
Net Cash Flow from Investing Activity	(309,000		0			0		310,000
Cash Flows From Financing Activity:
Proceeds from bond issue	309,000		0			0		0
Repayment of bond	0		0			0		(312,000)
Net Cash Flow from Financing Activity	309,000		0			0		(312,000)
Net Change in Cash	18,000		18,000			18,000		(2,000)
Add: Beginning Cash Balance	0		18,000			36,000		54,000
Ending Cash Balance	$18,000		$36,000			$54,000		$52,000

Table (2)