Chapter 2, Problem 35P

To determine

Record the transactions in general ledger accounts under the accounting equation and identify the amounts that would be reported in the financial statements.

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.

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

Prepare general ledger accounts under the accounting equation as given below:

Table (1)

Working Note (1):

Determine the amount of prepaid rent.

$\begin{array}{c}\text{Prepaid rent}=\text{ Rent expense }\times \frac{\text{Number of months}}{\text{Months in year}}\\ =\$6,000\times \frac{11}{12}\\ =\$5,500\end{array}$

Working note (2):

Determine the amount of unearned revenue.

$\begin{array}{c}\text{Unearned revenue}=\text{ Revenue income }\times \frac{\text{Number of months}}{\text{Months in year}}\\ =\$9,600\times \frac{6}{12}\\ =\$4,800\end{array}$

1. a. The additional two transactions are prepaid rent on February 1 and unearned revenue on July 1.
2. b. Company W’s reported value of land on its balance sheet is $36,000 (Refer Table (1)).
3. c. The net cash flow from operating activities would be reported on the statement of cash flows amounts to $44,100(Refer Table (1)).

Working note (3):

Determine the amount of net cash flow from operating activities.

  $\begin{array}{c}\begin{array}{l}\text{Net cash }\\ \text{flows from }\\ \text{operating }\\ \text{activities}\end{array}\}=\left(\begin{array}{l}\text{Decrease in }\\ \text{accounts }\\ \text{receivable}\end{array}\right)\text{+}\left(\begin{array}{l}\text{Increase in }\\ \text{unearned }\\ \text{revenue}\end{array}\right)-\left(\begin{array}{l}\text{Increase in }\\ \text{prepaid }\\ \text{rent}\end{array}\right)-\left(\begin{array}{l}\text{Decrease in }\\ \text{accounts }\\ \text{payable}\end{array}\right)\\ =\$46,000+\$9,600-\$6,000-\$5,500\\ =\$44,100\end{array}$

1. d. The amount of rent expense would be reported on the income statement is $5,500 (2).
2. e. The amount of total liabilities that would be reported on the balance sheet $43,800$\left(\$32,500+\$6,500+\$4,800\right)$.
3. f. The amount of supplies expense that would be reported on the income statement is $2,450$\left(\$2,500-\$50\right)$.
4. g. The amount of unearned revenue that would be reported on the balance sheet is $4,800 (3).
5. h. The net cash flow from investing activities that would be reported on the statement of cash flows is $15,000$\left(\left(\$15,000\right)+\$30,000\right)$.
6. i. The amount of total expenses that would be reported on the income statement is $42,450$\left(\$28,000+\$6,500+\$2,450+\$5,500\right)$.
7. j. The amount of service revenue that would be reported on the income statement is $62,800$\left(\$58,000+\$4,800\right)$.
8. k. The net cash flow from financing activities that would be reported on the statement of cash flows is $18,000$\left(\$20,000-\$2,000\right)$.
9. l. The net income that would be reported on the income statement is $20,850$\left(\$62,800+500-\$42,450\right)$.
10. m. The retained earnings that would be reported on the balance sheet amounts to $66,350 (4).

    Working note (4):

    Determine the amount of retained earnings.

    $\begin{array}{c}\begin{array}{l}\text{Ending retained}\\ \text{ earnings}\end{array}\}=\left(\begin{array}{l}\text{Beginning }\\ \text{retained }\\ \text{earnings}\end{array}\right)+\left(\begin{array}{l}\text{Net }\\ \text{Income}\end{array}\right)-\left(\begin{array}{l}\text{Dividends }\\ \text{paid}\end{array}\right)\\ =\$47,500+\$20,850-\$2,000\\ =\$66,350\end{array}$