Chapter 2, Problem 33BE

a)

To determine

Record the events in general ledger accounts under an accounting equation.

Answer to Problem 33BE

Record the events in general ledger accounts under an accounting equation.

Table (1)

Explanation of Solution

Accounting equation:

Accounting equation is an accounting tool expressed in the form of equation, by creating a relationship between the resources or assets of a company, and claims on the resources by the creditors and the owners. Accounting equation is expressed as shown below.

$\text{Assets = Liabilities + Stockholders' Equity}$

Straight-line Depreciation:

Under the straight-line method of depreciation, the same amount of depreciation is allocated every year over the estimated useful life of an asset. The formula to calculate the depreciation expense is shown below:

$\text{Depreciation = }\frac{\left(\text{Cost of the asset}-\text{Residual value}\right)}{\text{Estimated useful life of the asset}}$

Working note:

Calculate the depreciation expense:

Cost of the stove is $24,000. Residual value is $4,000. Estimated life time of the Stove is 4 years.

$\begin{array}{c}\text{Depreciation = }\frac{\left(\text{Cost of the asset}-\text{Residual value}\right)}{\text{Estimated useful life of the asset}}\\ =\frac{\left(\$24,000-\$4,000\right)}{\text{4}\text{Years}}\\ =\frac{\$20,000}{\text{4}\text{Years}}\\ =\$5,000\end{array}$ (1)

Hence, the depreciation expense per year on stove is $5,000. Company HG will report $5,000 as its depreciation expense every year, till the completion of 4 years (estimated life time of the stove).

b)

To determine

Prepare the balance sheet and statement of cash flows for the Year 1 accounting period.

Answer to Problem 33BE

Prepare the balance sheet for the Year 1 accounting period.

Highland Grill
Balance Sheet
As of December 31, Year 1
Particulars	Amount ($)	Amount ($)
Assets:
Cash		$33,500
Stove	$24,000
Less: Accumulated Depreciation	(5,000)	19,000
Total Assets		$52,500
Liabilities		$0
Stockholders’ Equity
Common Stock	$40,000
Retained Earnings	12,500
Total Stockholders’ Equity		52,500
Total Liabilities and Stockholders’ Equity		$52,500

Table (2)

Prepare the statement of cash flows for the Year 1 accounting period.

Company HG
Statement of Cash Flows
For the Year Ended December 31, Year 1
Particulars	Amount ($)	Amount ($)
Cash Flows From Operating Activities:
Cash Receipts from Revenue	$21,000
Cash Payment for Salaries	(3,500)
Net Cash Flow from Operating Activities		$17,500
Cash Flows From Investing Activities:
Cash Outflow for Stove	(24,000)
Net Cash Flow from Investing Activities		(24,000)
Cash Flows From Financing Activities:
Cash Receipts from Issue of Stock	40,000
Net Cash Flow from Financing Activities		40,000
Net Change in Cash		33,500
Plus: Beginning Cash Balance		0
Ending Cash Balance		$33,500

Table (3)

Explanation of Solution

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.

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. Statement of cash flows includes the changes in cash balance due to operating, investing, and financing activities.

c)

To determine

Ascertain the net income for Year 1.

Answer to Problem 33BE

$12,500 is the net income for Year 1

Explanation of Solution

Net income:

Net income is the excess amount of revenue which arises after deducting all the expenses of a company. In simple terms, it is the difference between total revenue and total expenses of the company.

Ascertain the net income for Year 1.

Particulars	Amount ($)	Amount ($)
Revenue		21,000
Less: Expenses
Salaries	3,500
Depreciation expense	5,000	(8,500)
Net income		12,500

Table (4)

Hence, the net income for Year 1 is $12,500.

d)

To determine

Ascertain the amount of depreciation that would be reported on the Year 2 income statement of Company HG.

Answer to Problem 33BE

$5,000 is the amount that would be reported on the Year 2 income statement of Company HG.

Explanation of Solution

Straight-line Depreciation:

Under the straight-line method of depreciation, the same amount of depreciation is allocated every year over the estimated useful life of an asset. The formula to calculate the depreciation cost of the asset using the residual value is shown as below:

$\text{Depreciation = }\frac{\left(\text{Cost of the asset}-\text{Residual value}\right)}{\text{Estimated useful life of the asset}}$

Ascertain the amount of depreciation that would be reported on the Year 2 income statement of Company HG.

Cost of the stove is $22,000. Residual value is $2,000. Estimated life time of the Stove is 5 years.

$\begin{array}{c}\text{Depreciation = }\frac{\left(\text{Cost of the asset}-\text{Residual value}\right)}{\text{Estimated useful life of the asset}}\\ =\frac{\left(\$24,000-\$4,000\right)}{\text{4 Years}}\\ =\frac{\$20,000}{\text{4 Years}}\\ =\$5,000\end{array}$

Hence, $5,000 is the amount that would be reported on the Year 2 income statement of Company HG.

e)

To determine

Ascertain the amount of accumulated depreciation that would be reported on the Year 2 balance sheet of Company HG.

Answer to Problem 33BE

$10,000 would be reported as accumulated depreciation on the year 2 balance sheet of Company HG.

Explanation of Solution

Accumulated depreciation:

Accumulated depreciation is the aggregation of depreciation expense recognized for the particular asset. Accumulated depreciation refers to the accumulated amount of depreciation that is subtracted from the value of assets in the balance sheet over a period of time.

Ascertain the amount of accumulated depreciation that would be reported on the Year 2 balance sheet of Company HG.

Particulars	Amount ($)
Depreciation expense for Year 1	5,000
Depreciation expense for Year 2	5,000
Accumulated depreciation	10,000

Table (2)

Hence, $10,000 would be reported as accumulated depreciation on the year 2 balance sheet of Company HG.

f)

To determine

State whether the cash flows from the operating activities would be affected by the depreciation expense in the Year 2.

Explanation of Solution

No, depreciation is a non-cash expense. Non-cash expense would not affect the statement of cash flows because, there is no cash inflow or out flow in such transactions.

Therefore, depreciation expense in the Year 2 would not affect the cash flows from operating expenses.