Chapter 2, Problem 43BP

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 43BP

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 affect.

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 on asset and increase of other claim on asset; thereby the total claims remains unchanged.

Working Note:

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

$\begin{array}{c}\text{Prepaid rent}=\text{ Rent expense}\times \frac{\text{Number of months expired}}{\text{Months in a year}}\\ =\$3,600\times \frac{10}{12}\\ =\$3,000\end{array}$ (1)

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

$\begin{array}{c}\text{Unearned revenue}=\text{ Revenue income}\times \frac{\text{Number of months revenue earned}}{\text{Months in a year}}\\ =\$4,800\times \frac{3}{12}\\ =\$1,200\end{array}$ (2)

b.

To determine

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

Company IS
Statement of income
For the year ended December 31, Year 1 and Year 2
Particulars	Amount
	Year 1	Year 2
Service revenue	$42,000	$33,200
Total revenue (A)	$42,000	$33,200
Expenses
Operating expenses	($21,000)	($19,500)
Supplies expenses	($1,000)	($900)
Salaries expense	($3,200)	($3,900)
Rent expense	$0	($3,000)
Total expenses (B)	($25,200)	($27,300)
Net income  $\left(\text{A}\right)-\left(\text{B}\right)$	$16,800	$5,900

Table (3)

Hence, the net income of Company IS for the year ended December 31, Year 1 and Year 2 are $16,800 and $5,900 respectively.

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

Company IS
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	$60,000
Add: Stock Issued	$60,000	$20,000
Ending Common Stock (A)	$60,000	$80,000
Beginning retained earnings	$0	$16,800
Add/Less: Net Income (Loss)	$16,800	$5,900
Less: Dividends	$0	($5,000)
Ending Retained Earnings (B)	$16,800	$17,700
Total stockholder's equity	$76,800	$97,700

Table (4)

Hence, the total stockholders’ equity of Company IS for the year ended December 31, Year 1 and Year 2 are $76,800 and $97,700 respectively.

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

Company IS
Balance sheet
As on  December 31, Year 1 and Year 2
Assets	Year 1	Year 2
Cash	$58,200	$99,700
Accounts Receivable	$4,000	$3,000
Supplies	$200	$300
Prepaid Rent	$0	$600
Land	$18,000	$3,000
Total Assets	$80,400	$106,600
Liabilities and stockholders' equity
Liabilities
Accounts Payable	$0	$1,400
Salaries Payable	$3,600	$3,900
Unearned Revenue	$0	$3,600
Total Liabilities	$3,600	$8,900
Stockholders’ Equity
Common Stock	$60,000	$80,000
Retained Earnings	$16,800	$17,700
Total Stockholders’ Equity	$76,800	$97,700
Total liabilities and stockholders' equity	$80,400	$106,600

Table (5)

Hence, the assets and liabilities of Company IS as on December 31, Year 1 and Year 2 are $80,400 and $106,600 respectively.

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

Company IS
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	$38,000	$37,800
Cash payments for expenses	(3) ($21,800)	(4) ($26,300)
Net Cash Flow from Operating Activities	$16,200	$11,500
Cash Flows From Investing Activities:
Cash Payment for Land	($18,000)	$0
Cash Proceeds from Sale of Land	$0	$15,000
Net Cash Flow From Investing Activities	($18,000)	$15,000
Cash Flows From Financing Activities:
Cash Receipts from Stock Issue	$60,000	$20,000
Cash Payment for Dividends	$0	($5,000)
Net Cash Flow From Financing Activities	$60,000	$15,000
Net Change in Cash	$58,200	$41,500
Add: Beginning Cash Balance	$0	$58,200
Ending Cash Balance	$58,200	$99,700

Table (6)

Hence, the net change in the cash during the Year 1 and Year 2 are $58,200 and $99,700.

Working Note:

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

$\begin{array}{c}\text{Cash paid for operating expenses }=\left(\begin{array}{l}\text{Cash paid to }\\ \text{accounts payable}\end{array}\right)+\left(\begin{array}{l}\text{Other operating }\\ \text{expenses}\end{array}\right)\\ =\$800+\$21,000\\ =\$21,800\end{array}$ (3)

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

$\begin{array}{c}\text{Cash paid for operating expenses}=\text{ Salaries payable}+\text{Prepaid rent}+\left(\begin{array}{l}\text{Other operating }\\ \text{expenses}\end{array}\right)\\ =\$3,200+\$3,600+\$19,500\\ =\$26,300\end{array}$ (4)