Chapter 2, Problem 43AP

a.

To determine

Indicate each event affecting the Year 1 and Year 2 accounting periods as asset source (AS), asset use (AU), asset exchange (AE) or claims exchange (CE). Record the effects of each event under the appropriate general ledger account headings of the accounting equation.

Answer to Problem 43AP

Indicate each event affecting the Year 1 and Year 2 accounting periods as asset source (AS), asset use (AU), asset exchange (AE) or claims exchange (CE) and record the effects of each event under the appropriate general ledger account headings of the accounting equation.

Table (1)

Table (2)

Note:

AE refers to asset exchange.

AS refer to asset source.

AU refers to asset used.

CE refers to claims exchange.

NA refers to does not affected.

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.

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

Asset source transactions are the transactions that results in an increase of both the asset and claims on assets.

Asset use transactions are the transactions that results in a decrease of both the asset and claims on assets.

Asset exchange transactions are the transactions that results in increase in one asset and decrease in the other asset.

Claim exchange transactions are the transactions that results in decrease of one claim and increase of other claims; thereby the total claims remains unchanged.

Working Note:

Determine the amount of prepaid rent recognized at the end of year 2.

$\begin{array}{c}\text{Prepaid rent}=\text{ Rent expense}\times \frac{\text{Number of months expired}}{\text{Months in a year}}\\ =\$9,000\times \frac{10}{12}\\ =\$7,500\end{array}$ (1)

Determine the amount of unearned revenue realized at the end of year.

$\begin{array}{c}\text{Unearned revenue}=\text{ Revenue income}\times \frac{\text{Number of months revenue earned}}{\text{Months in a year}}\\ =\$6,000\times \frac{3}{12}\\ =\$1,500\end{array}$ (2)

Determine the amount of supplies used at the end of year.

$\begin{array}{c}\text{Supplies used}=\left(\begin{array}{l}\text{Supplies at the }\\ \text{beginning of year}\end{array}\right)+\left(\begin{array}{l}\text{Supplies purchased}\\ \text{ during the year}\end{array}\right)-\left(\begin{array}{l}\text{Supplies at the }\\ \text{end of year}\end{array}\right)\\ =\$100+\$2,400-\$300\\ =\$2,200\end{array}$ (3)

b.

To determine

Prepare the statement of income, statement of changes in stockholders’ equity, balance sheet and statement of cash flows of Company A for the year ended December 31, Year 1 and Year 2.

Explanation of Solution

Balance sheet: This financial statement reports a company’s resources (assets) and claims of creditors (liabilities) and stockholders (stockholders’ equity) over those resources. The resources of the company are assets which include money contributed by stockholders and creditors. Hence, the main elements of the balance sheet are assets, liabilities, and stockholders’ equity.

Income statement: The financial statement which reports revenues and expenses from business operations and the result of those operations as net income or net loss for a particular time period is referred to as income statement.

Statement of changes in the stockholders’ equity: This statement reflects whether the components of stockholders’ equity have increased or decreased during the period.

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

Prepare the statement of income of Company A for the year ended December 31, Year 1 and Year 2.

Company A
Statement of income
For the year ended December 31, Year 1 and Year 2
Particulars	Amount
	Year 1	Year 2
Service revenue	$10,500	$26,000
Total revenue (A)	$10,500	$26,000
Expenses
Operating expenses	($3,800)	($2,850)
Supplies expenses	($700)	($2,200)
Salaries expense	($3,600)	($4,800)
Rent expense	$0	($7,500)
Total expenses (B)	($8,100)	($17,350)
Net income $\left(\text{A}\right)-\left(\text{B}\right)$	$2,400	$8,650

Table (3)

Hence, the net income of Company A for the year ended December 31, Year 1 and Year 2 are $2,400 and $8,650 respectively.

Prepare the statement of changes in stockholders’ equity of Company A for the year ended December 31, Year 1 and Year 2.

Company A
Statement of changes in stockholders' equity
For the year ended December 31, Year 1 and Year 2
Particulars	Amount
	Year 1	Year 2
Beginning Common Stock	$0	$20,000
Add: Stock Issued	$20,000	$15,000
Ending Common Stock (A)	$20,000	$35,000
Beginning Retained Earnings	$0	$2,400
Add/Less: Net Income (Loss)	$2,400	$8,650
Less: Dividends	$0	($2,000)
Ending Retained Earnings (B)	$2,400	$9,050
Total stockholder's equity $\left(\text{A}\right)+\left(\text{B}\right)$	$22,400	$44,050

Table (4)

Hence, the total stockholders’ equity of Company A for the year ended December 31, Year 1 and Year 2 are $22,400 and $44,050 respectively.

Prepare the Balance sheet of Company A as on December 31, Year 1 and Year 2.

Company A
Balance sheet
As on  December 31, Year 1 and Year 2
Assets	Year 1	Year 2
Cash	$8,400	$38,550
Accounts Receivable	$3,500	$15,400
Supplies	$100	$300
Prepaid Rent	$0	$1,500
Land	$14,000	$0
Total Assets	$26,000	$55,750
Liabilities and stockholders' equity
Liabilities
Accounts Payable	$0	$2,400
Salaries Payable	$3,600	$4,800
Unearned Revenue	$0	$4,500
Total Liabilities	$3,600	$11,700
Stockholders’ Equity
Common Stock	$20,000	$35,000
Retained Earnings	$2,400	$9,050
Total Stockholders’ Equity	$22,400	$44,050
Total liabilities and stockholders' equity	$26,000	$55,750

Table (5)

Hence, the assets and liabilities of Company A as on December 31, Year 1 and Year 2 are $26,000 and $55,750 respectively.

Prepare the statement of cash flows of Company A for the year ended December 31, Year 1 and Year 2.

Company A
Statement of cash flows
For the year ended December 31, Year 1 and Year 2
Particulars	Amount
	Year 1	Year 2
Cash flow from operating activities:
Cash Receipts from Customers (4)	$20,000	$35,000
Cash payments for expenses (5)	(5) ($4,600)	(6) ($15,450)
Net Cash Flow from Operating Activities	$2,400	$3,150
Cash Flows From Investing Activities:
Cash Payment for Land	($14,000)	$0
Cash Proceeds from Sale of Land	$0	$14,000
Net Cash Flow From Investing Activities	($14,000)	$14,000
Cash Flows From Financing Activities:
Cash Receipts from Stock Issue	$20,000	$15,000
Cash Payment for Dividends	$0	($2,000)
Net Cash Flow From Financing Activities	$20,000	$13,000
Net Change in Cash	$8,400	$30,150
Add: Beginning Cash Balance	$0	$8,400
Ending Cash Balance	$8,400	$38,550

Table (6)

Hence, the net change in the cash during the Year 1 and Year 2 are $8,400 and $38,550.

Working Note:

Determine the amount of cash receipts from customers for Year 2.

$\begin{array}{c}\text{Cash receipts from customers}=\left(\begin{array}{l}\text{Event 5 of }\\ \text{Year 2}\end{array}\right)+\left(\begin{array}{l}\text{Event 8 of }\\ \text{Year 2}\end{array}\right)\\ =\$6,000+\$12,600\\ =\$18,600\end{array}$ (4)

Determine the amount of cash paid for operating expense for Year 1

$\begin{array}{c}\text{Cash paid for operating expenses }=\left(\begin{array}{l}\text{Purchased supplies}\\ \text{ on account}\end{array}\right)+\left(\begin{array}{l}\text{Other operating }\\ \text{expenses}\end{array}\right)\\ =\$800+\$3,800\\ =\$4,600\end{array}$ (5)

Determine the amount of cash paid for operating expense for Year 2.

$\begin{array}{c}\text{Cash paid for operating expenses}=\text{ Salaries payable}+\text{Prepaid rent}+\left(\begin{array}{l}\text{Other operating }\\ \text{expenses}\end{array}\right)\\ =\$3,600+\$9,000+\$2,850\\ =\$15,450\end{array}$ (6)