Chapter 2, Problem 6AE

a.

To determine

Identify the events whether it result in revenue or expense recognition.

Explanation of Solution

Revenue recognition principle:

Revenue recognition principle states that every business organization should recognize the revenue when it is earned, no matter, cash related to that obligation is received or not.

Expense recognition principle:

According to this principle, the expense should be recognized when it is actually incurred, doesn’t matter, payment is made or not.

Identify the events whether it is revenue or expense recognition.

Event	Revenue	Expense
1. Issued common stock	NA	NA
2. Performed service on account	$82,000	NA
3. Paid Cash dividends	NA	NA
4. Collected accounts receivable	NA	NA
5. Payment made for operating expenses	NA	$53,000
6. Performed services for cash	$19,000	NA
7. Recognized accrued utilities expense	NA	$3,500

Table (1)

b.

To determine

Determine the amount of net income that is reported on the Year 1 income statement.

Explanation of Solution

Income statement:

This is a financial statement that shows the net income earned or net loss suffered by Incorporation through reporting all the revenues earned and expenses incurred by the company over a specific period of time. An income statement is also known as an operations statement, an earnings statement, a revenue statement, or a profit and loss statement. The net income is the excess of revenue over expenses.

Prepare the income statement to compute the net income.

Incorporation C
Income statement
Particulars	Amount ($)	Amount ($)
Total Revenue (1)	$101,000
Less: Total Expenses (2)	$56,500
Net income		$44,500

Table (2)

Working note:

Calculate the amount of total revenue:

$\begin{array}{c}\text{Total Revenue}=\left(\begin{array}{l}\text{Service performed on account}+\\ \text{Service performed for cash}\end{array}\right)\\ =\$82,000+\$19,000\\ =\$101,000\end{array}$ (1)

Calculate the amount of total expenses

$\begin{array}{c}\text{Total Expenses}=\left(\begin{array}{l}\text{Operating expenses}+\\ \text{Accrued utilities expenses}\end{array}\right)\\ =\$53,000+\$3,500\\ =\$56,500\end{array}$ (2)

Conclusion

Hence, the amount of net income that is to be reported on the Year 1 income statement is $44,500.

c.

To determine

Identify the events that affect the statement of cash flows.

Explanation of Solution

Cash Flow Statement:

Cash Flow Statement is a fundamental financial statement that renders valuable information regarding the cash inflows or the cash receipts of a business and the cash outflows or cash payments for a specific period of time.

Identify the events that affect the statement of cash flows.

Event	Statement of cash flows
1. Issued common stock	FA
2. Performed service on account	NA
3. Paid Cash dividends	FA
4. Collected accounts receivable	OA
5. Payment made for operating expenses	OA
6. Performed services for cash	OA
7. Recognized accrued utilities expense	NA

Table (3)

Note:

FA refers to Financing Activity.

OA refers to Operating Activity.

NA refers to not affected by the event.

d.

To determine

Determine the amount of cash flow from operating activities that is to be reported on the Year 1 cash flow statement.

Explanation of Solution

Cash Flow Statement:

Cash Flow Statement is a fundamental financial statement that renders valuable information regarding the cash inflows or the cash receipts of a business and the cash outflows or cash payments for a specific period of time.

Cash flows from operating activities refer to the cash received or cash paid in day-to-day operating activities of a company.

Prepare the statement of cash flow to calculate the cash flow from operating activities.

Incorporation C
Cash flow statement
Particulars	Amount ($)	Amount ($)
Cash flow from operating activities
Cash from revenue (3)	$95,000
Cash paid for expenses	($53,000)
Net cash flow from operating activities		$42,000

Table (4)

Working note:

Calculate the amount of cash from revenue.

$\begin{array}{c}\text{Cash from revenue}=\left(\begin{array}{l}\text{Revenue from accounts receivable}+\\ \text{Performed service for cash}\end{array}\right)\\ =\$76,000+\$19,000\\ =\$95,000\end{array}$ (3)

e.

To determine

Identify the balance of the service revenue account before and after closing.

Explanation of Solution

The amount of service revenue before closing the revenue account is $101,000.

The amount of service revenue after closed to the retained earnings account is zero.

f.

To determine

Identify the balance of retained earnings account that appears on the Year 1 balance sheet.

Explanation of Solution

Retained earnings:

Retained earnings are the portion of earnings kept by the business for the purpose of reinvestments, payment of debts, or for future growth.

Prepare the retained earnings statement to calculate the balance of retained earnings.

Incorporation C
Statement of Retained Earnings
Particulars	Amount ($)	Amount ($)
Retained earnings, Beginning	$0
Add: Net income	$44,500
Subtotal	$44,500
Less: Dividends	$6,000
Retained earnings, Ending		$38,500

Table (5)

Conclusion

Hence, the balance of retained earnings that appears on the Year 1 balance sheet is $38,500.