Chapter 2, Problem 2.4.3P

Financial statements
Padget Home Services began its operations on January 1, 20Y7 (see Problem 2-3). After its second year of operations, the following amounts were taken from the accounting records of Padget Home Services, Inc., as of December 31, 20Y8.

Instuctions

Prepare a balance sheet as of December 31, 20Y8.

To determine

Balance sheet- It is a financial statement that records the company's assets, liabilities and stockholder's equity at a point in time. The balance sheet also known as statement of financial condition is expressed in the accounting equation as:

  $Assets=Liabilities\text{ + Stockholder's equity}$

The balance sheet is prepared using accounting equation in vertical form. Also, the balance on assets side must be equal to sum of balances of liabilities and stockholder's equity.

To prepare the balance sheet of company P for the year ended December 31, 20Y8.

Answer to Problem 2.4.3P

The balance sheet of Company P reports total assets of $500000 is equal to the sum of total liabilities of $120000 and stockholder's equity of $380000.

Explanation of Solution

Computation of balance sheet of company P for the year ended December 31, 20Y8:

  $\begin{array}{l}\begin{array}{l}\text{ Company P}\\ \text{ Balance sheet}\\ \text{ December 31, 20Y8}\\ \text{ (Amount in dollars)}\end{array}\hfill \\ \begin{array}{l}\text{ Assets}\\ \text{Cash 160000}\\ \text{Land 340000}\end{array}\hfill \\ \text{Total assets 500000}\hfill \\ \begin{array}{l}\text{ Liabilities}\\ \text{Notes payable 120000}\\ \text{ Stockholders' equity}\\ \text{Common stock 110000}\\ \text{Retained earnings 270000}\\ \text{ Total stockholders' equity 380000}\end{array}\hfill \\ \text{Total liabilities and stockholders' equity 500000}\hfill \end{array}$

Computation of purchase of land during year ended December 31, 20Y8:

  $\begin{array}{l}\text{= Balance as on December 31, 20Y8 - Blance as on January 1, 20Y8}\\ \text{= \$340000 - \$215000}\\ \text{= \$125000}\end{array}$

Computation of issue of notes payable during year ended December 31, 20Y8:

  $\begin{array}{l}\text{= Balance as on December 31, 20Y8 - Blance as on January 1, 20Y8}\\ \text{= \$120000 - \$80000}\\ \text{= \$40000}\end{array}$

Computation of retained earnings balance for the year ended December 31, 20Y8:

  $\begin{array}{l}=\text{ Balance as on January 1, 20Y8 + Net Income - Dividends paid}\\ \text{= \$120000 + \$200000 - \$50000}\\ \text{= \$270000}\end{array}$

Computation of issue of common stock during year ended December 31, 20Y8:

  $\begin{array}{l}\text{= Balance as on December 31, 20Y8 - Blance as on January 1, 20Y8}\\ \text{= \$110000 - \$75000}\\ \text{= \$35000}\end{array}$

Computation of Cash balance of company P for the year ended December 31, 20Y8:

  $\begin{array}{l}\begin{array}{l}\text{ Company P}\\ \text{ Statement of Cash Flows}\\ \text{ For the year ended December 31, 20Y8}\\ \text{ (Amount in dollars)}\end{array}\hfill \\ \begin{array}{l}\text{Cash flow from operating activities}\\ \text{ Cash received from fees earned 886000}\\ \text{ Cash paid for interest expense (7200)}\\ \text{ Cash paid for miscellaneous expenses (13800)}\\ \text{ Cash paid for rent expense (100000)}\\ \text{ Cash paid for salaries expenses (380000)}\\ \text{ Cash paid for taxes (65000)}\\ \text{ Cash paid for utilities expenses (120000)}\\ \text{ Net cash flow from operating activities 200000}\\ \text{Cash flow from investing activities}\\ \text{ Cash flow for purchase of land (125000)}\\ \text{Cash flow from financing activities}\\ \text{ Cash received from common stock issued 35000}\\ \text{ Cash received from issuing notes payable 40000}\\ \text{ Cash paid for dividends paid (50000)}\\ \text{ Net cash flow from financing activities 25000}\end{array}\hfill \\ \begin{array}{l}\text{Net increase in cash 100000}\\ \text{Cash balance as on January 1, 20Y8 60000}\end{array}\hfill \\ \text{Cash balance as on December 31, 20Y8 160000}\hfill \end{array}$

Computation of Net Income

  $\begin{array}{l}\begin{array}{l}\text{ Company P}\\ \text{ Income Statement}\\ \text{ For the year ended December 31, 20Y8}\\ \text{ (Amount in dollars) }\end{array}\hfill \\ \begin{array}{l}\text{Fees Earned 886000}\\ \text{Operating Expenses}\\ \text{ Interest expenses 7200}\\ \text{ Miscellaneous expense 13800}\\ \text{ Rent expense 100000}\\ \text{ Salaries expense 380000}\\ \text{ Taxes expense 65000}\\ \text{ Utilities expense 120000}\\ \text{ Total operating expense 686000}\end{array}\hfill \\ \text{Net Income 200000}\hfill \end{array}$