Chapter 2, Problem 1CP

a.

To determine

Record the given transactions in an accounting equation and give the appropriate account titles for the amounts reported in the retained earnings column.

Explanation of Solution

Record the given transactions in an accounting equation and give the appropriate account titles for the amounts reported in the retained earnings column.

Table (1)

Cash: Cash represents the cash reserves available with the company at a point of time.

Accounts receivable: Accounts receivable refers to the amounts to be received within a short period from customers upon the sale of goods and services on account. In other words, accounts receivable are amounts customers owe to the business. Accounts receivable is an asset of a business.

Prepaid Expense: Prepaid expense refers to the expense made for the service prior to the consumption or utilization, and is recorded as an asset.

Accounts payable: Accounts payable is a liability of the firm, which refers to the accounts which the company owes for purchase of certain goods or services in the past; hence it is shown in the balance sheet.

Unearned revenue: It is an advance made by the buyer before receiving the product or service. In upcoming period, the seller will have an obligation to provide goods or perform the services to the buyer for the payment already received. It is a current liability until the goods are delivered or the service is performed.

Common stock: These are the ordinary shares that a corporation issues to the investors in order to raise funds. In return, the investors receive a share of profit from the profits earned by the corporation in the form of dividend.

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. In other words, Accumulated amount of all net income less the accumulated amount of dividends declared till date is known as retained earnings.

Revenues: Revenue refers to the income received from the business activity or sale of the output, during the accounting period.

Expenses: Expenses refer to the cost incurred on the necessary purchases of the fixed assets by the firm, or the production of the goods and services, during the accounting period.

Working notes:

Calculate the rent expense

$4,800 paid in advance for one year contract to rent office space (event no. 4). Rent expense recognized for eight months.

$\begin{array}{c}\text{Rent expense}\text{=}\text{Prepaid Rent}\times \frac{\text{Months}\text{used}}{\text{12months}}\\ =\$2,400\times \frac{8\text{months}}{12\text{months}}\\ =\$1,600\end{array}$ (1)

Calculate revenue recognized from transaction 8.

$\begin{array}{c}\text{Rent expense}\text{=}\text{Revenue received in Advance }\times \frac{\text{Number of months}\text{service}\text{provided}}{\text{6 months}}\\ =\$600\times \frac{4\text{months}}{6\text{months}}\\ =\$400\end{array}$ (2)

b)

To determine

Prepare an income statement, statement of changes in stockholders’ equity, balance sheet, and statement of cash flows for Year 2.

Explanation of Solution

Prepare an income statement, statement of changes in stockholders’ equity, balance sheet, and statement of cash flows for Year 2.

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

Incorporation PSS
Income Statement
For the Year Ended December 31, Year 2
Particulars	Amount ($)	Amount ($)
Service Revenue		$21,400
Expenses
Salaries Expense	$9,200
Other Operating Expenses	6,200
Advertising Expense	1,500
Supplies Expense	585
Rent Expense	1,600
Total Expenses		19,085
Net Income		$ 2,315

Table (2)

Statement of changes in stockholders’ equity: It is one of the financial statements which report the changes in the stockholders equity from the beginning stockholder's equity to ending stockholder's equity.

Incorporation PSS
Statement of changes in stockholders’ Equity
For the Year Ended December 31, Year 2
Particulars	Amount  ($)	Amount ($)
Beginning Common Stock	6,000
Add: Common Stock Issued	2,000
Ending Common Stock		8,000
Beginning Retained Earnings	1,500
Add: Net Income	2,315
Less: Dividends	(1,000)
Ending Retained Earnings		2,815
Total Stockholders’ Equity		10,815

Table (3)

Balance Sheet: Balance Sheet summarizes 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

Incorporation PSS
Balance Sheet
As of December 31, Year 2
Particulars	Amount  ($)	Amount ($)
Assets
Cash	$8,900
Accounts Receivable	1,500
Supplies	65
Prepaid Rent	800
Land	4,000
Total Assets		$15,265
Liabilities
Accounts Payable	$1,050
Unearned Revenue	200
Salaries Payable	1,200
Notes Payable	2,000
Total Liabilities		$  4,450
Stockholders’ Equity
Common Stock	$8,000
Retained Earnings	2,815
Total Stockholders’ Equity		10,815
Total Liabilities and Stockholders’ Equity		$15,265

Table (4)

Statement of cash flows: This statement reports all the cash transactions which are responsible for inflow and outflow of cash, and result of these transactions is reported as ending balance of cash at the end of reported period.

Incorporation PSS
Statement of cash flows
For the Year Ended December 31, Year 2
Particulars	Amount  ($)	Amount ($)
Cash Flows From Operating Activities:
Cash Receipts from Customers (3)	$20,100
Cash Payment for Expenses (4)	(17,700)
Net Cash Flow from Operating Activities		$2,400
Cash Flows From Investing Activities:		0
Cash Flows From Financing Activities:
Cash Receipts from Stock Issue	$ 2,000
Cash Payments on Loan	(3,000)
Cash Payments for Dividends	(1,000)
Net Cash Flow from Financing Activities		(2,000)
Net Increase in Cash		400
Add: Beginning Cash Balance		8,500
Ending Cash Balance		$8,900

Table (5)

Working note:

Calculate the cash receipts from the customers.

Particulars	Amount  ($)
Cash sales	6,000
Cash received from unearned income	600
Collection of accounts receivables	13,500
Cash receipts from  the customers	20,100

(3)

Table (6)

Calculate the cash payments for expenses.

Particulars	Amount  ($)
Payment of prepaid rent	2,400
Payment of salaries	8,000
Payment of accounts payable	5,800
Payment of advertising expenses	1,500
Cash payments for expenses	17,700

(4)

Table (7)