Survey Of Accounting
Survey Of Accounting
5th Edition
ISBN: 9781259631122
Author: Edmonds, Thomas P.
Publisher: Mcgraw-hill Education,
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Chapter 3, Problem 26P

Comprehensive cycle problem: Perpetual system

At the beginning of 2018, the Redd Company had the following balances in its accounts:

Chapter 3, Problem 26P, Comprehensive cycle problem: Perpetual system At the beginning of 2018, the Redd Company had the , example  1

During 2018, the company experienced the following events:

1. Purchased inventory that cost $15,200 on account from Ross Company under terms 1/10, n/30. The merchandise was delivered FOB shipping point. Freight costs of $200 were paid in cash.

2. Returned $800 of the inventory that it had purchased because the inventory was damaged in transit. The seller agreed to pay the return freight cost.

3. Paid the amount due on its account payable to Ross Company within the cash discount period.

4. Sold inventory that had cost $18,000 for $32,000 on account, under terms 2/10, n/45.

5. Received merchandise returned from a customer. The merchandise originally cost $800 and was sold to the customer for $1,500 cash. The customer was paid $1,500 cash for the returned merchandise.

6. Delivered goods FOB destination in Event 4. Freight costs of $140 were paid in cash.

7. Collected the amount due on the account receivable within the discount period.

8. Took a physical count indicating that $21,100 of inventory was on hand at the end of the accounting period.

Required

a. Identify these events as asset source (AS), asset use (AU), asset exchange (AE), or claims exchange (CE).

b. Record each event in a statements model like the following one.

Chapter 3, Problem 26P, Comprehensive cycle problem: Perpetual system At the beginning of 2018, the Redd Company had the , example  2

c. Prepare a multistep income statement, a statement of changes in stockholders’ equity, a balance sheet, and a statement of cash flows.

a.

Expert Solution
Check Mark
To determine

Identify the events as asset source (AS), asset use (AU), asset exchange (AE), or claims exchange (CE).

Explanation of Solution

Identify the events as asset source (AS), asset use (AU), asset exchange (AE), or claims exchange (CE).

Event No.Event type
1a.AS
1b.AE
2.AU
3.AU
4a.AS
4b.AU
5a.AU
5b.AS
6.AU
7.AU
8.AU

Table (1)

  • Asset source: All the transactions which increase assets either by borrowing from creditors (increase liabilities), or by earning operating revenues (increase in stockholders’ equity) are referred to as asset source transactions.
  • Asset use: All the transactions which decrease assets either by paying off liabilities (decrease in liabilities), or by paying operating expenses (decrease in stockholders’ equity) are referred to as asset use transactions.
  • Asset exchange: All the transactions which increase assets and decrease assets simultaneously, with no effect on the total assets value are referred to as asset exchange transactions.
  • Claims exchange: All the transactions which include exchange of liabilities for equity are referred to as claims exchange transactions.

b.

Expert Solution
Check Mark
To determine

Record each event in a statements model.

Explanation of Solution

Horizontal statements model: The model that represents all the financial statements, balance sheet, income statement, and statement of cash flows in one table in a horizontal form, is referred to as, horizontal statements model.

Record each event in a statements model.

Survey Of Accounting, Chapter 3, Problem 26P

Table (2)

Working Note:

(1) Compute purchase discount.

Purchase discount = {(Purchases–Purchase returns)×Purchase discount percentage}($15,200–$800)×1%= $14,400×1%= $144

(2)  Compute the cash paid for inventory purchased.

Cash paid for inventory = {PurchasesPurchase returnsPurchase discount}= $15,200$800$144(1)= $14,256

(3) Compute sales discount.

Sales discount = Accounts receivable×Sales discount percentage= $32,000×2%= $640

(4) Compute cash received.

Cash received from customers = SalesSales discount= $32,000$640(3)= $31,360

c.

Expert Solution
Check Mark
To determine

Prepare a multistep income statement, statement of stockholders’ equity, balance sheet, and statement of cash flows for Company R.

Explanation of Solution

Multi-step income statement: The income statement represented in multi-steps with several subtotals, to report the income from principal operations, and separate the other expenses and revenues which affect net income, is referred to as multi-step income statement.

Prepare a multistep income statement for Company R for the year ended December 31, 2018.

Company R
Income Statement
For the Year Ended December 31, 2018
Net sales $29,860
Cost of goods sold (5)($18,356)
Gross margin $11,504 
Operating expenses:  
 Transportation-out ($140)
Net income$11,364

Table (3)

  Working Note:

    (5) Determine the amount of cost of goods sold.

    Cost of goods sold=(Cost of inventory sold)+(Shrinkage of inventory)(Cost of inventory returned from customers)=$18,000+$1,156$800=$18,356

Statement of stockholders’ equity: The statement which reports the changes in stock, paid-in capital, retained earnings, and treasury stock, during the year is referred to as statement of stockholders’ equity.

Prepare a statement of stockholders’ equity for Company R for the year ended December 31, 2018.

Company R
Statement of Stockholders’ Equity
For the Year Ended December 31, 2018
Beginning common stock$30,000 
Add: Stock issued$0 
Ending common stock $30,000
   
Beginning retained earnings$11,900 
Add: Net income$11,364 
Ending retained earnings$23,264
Total stockholders’ equity$53,264

Table (4)

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.

Prepare the balance sheet for Company R as at December 31, 2018.

Company R
Balance Sheet
December 31, 2018
Assets  
 Cash$32,164 
 Merchandise inventory$21,100 
 Total assets $53,264
   
Liabilities $0
   
Stockholders’ equity  
 Common stock$30,000 
 Retained earnings$23,264 
 Total stockholders’ equity $53,264
Total liabilities and stockholders’ equity$53,264

Table (5)

Statement of cash flows: Statement of cash flows reports all the cash transactions which are responsible for inflow and outflow of cash and the result of these transactions is reported as ending balance of cash at the end of reported period.

Prepare the statement of cash flows for Company R for the year ended December 31, 2018.

Company R
Statement of Cash Flows
For the Year Ended December 31, 2018
Cash flows from operating activities:  
Inflow from customers (6)$29,860 
 Outflow for inventory (7)($14,456) 
 Outflow for expenses($140) 
 Net cash flow from operating activities $15,624
Cash flows from investing activities $0
   
Cash flows from financing activities $0
Net change in cash $15,624
Add: Beginning cash balance $16,900
Ending cash balance $31,164

Table (6)

Working note:

(6) Determine the cash inflow from customers.

Inflow from customers = (Cash received from customers )(Increase in accounts receivable)= $31,360(7)$1,500(5a)= $29,860

(7) Determine the cash outflow for inventory.

Outflow for inventory = (Freight paid for inventory )+(Cash paid to accounts payable)= $200(1b)+$14,256(3)= $14,456

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Chapter 3 Solutions

Survey Of Accounting

Ch. 3 - 11. Define transportation-in. Is it a product or a...Ch. 3 - Prob. 12QCh. 3 - Prob. 13QCh. 3 - 14. Dyer Department Store purchased goods with the...Ch. 3 - 15. Eastern Discount Stores incurred a 5,000 cash...Ch. 3 - 16. What is the purpose of giving credit terms to...Ch. 3 - Prob. 17QCh. 3 - 18. Ball Co. purchased inventory with a list price...Ch. 3 - 22. Explain the difference between purchase...Ch. 3 - Prob. 20QCh. 3 - Prob. 21QCh. 3 - 25. What is the advantage of using common size...Ch. 3 - 27. What is the purpose of preparing a schedule of...Ch. 3 - 28. Explain how the periodic inventory system...Ch. 3 - Prob. 25QCh. 3 - Exercise 3-1 Determining the cost of financing...Ch. 3 - Exercise 3-2 Comparing a merchandising company...Ch. 3 - Exercise 3-3 Effect of inventory transactions on...Ch. 3 - Exercise 3-4 Effect of inventory transactions on...Ch. 3 - Exercise 3-5 Recording inventory transactions in a...Ch. 3 - Exercise 4-6A Understanding the freight terms FOB...Ch. 3 - Exercise 3-7 Effect of purchase returns and...Ch. 3 - Exercise 3-8 Accounting for product costs:...Ch. 3 - Effect of product cost and period cost: Horizontal...Ch. 3 - Cash Discounts and Purchase Returns On April 6,...Ch. 3 - Exercise 4-9A Determining the effect of inventory...Ch. 3 - Inventory financing costs Bill Norman comes to you...Ch. 3 - Effect of shrinkage: Perpetual system Ho Designs...Ch. 3 - Comparing gross margin and gain on sale of land...Ch. 3 - Single-step and multistep income statements The...Ch. 3 - Prob. 16ECh. 3 - Effect of cash discounts on financial statements:...Ch. 3 - Using common size statements and ratios to make...Ch. 3 - Prob. 19ECh. 3 - Determining cost of goods sold: Periodic system...Ch. 3 - Identifying product and period costs Required...Ch. 3 - Problem 4-23A Identifying freight costs Required...Ch. 3 - Effect of purchase returns and allowances and...Ch. 3 - Preparing a schedule of cost of goods sold and...Ch. 3 - Prob. 25PCh. 3 - Comprehensive cycle problem: Perpetual system At...Ch. 3 - Prob. 27PCh. 3 - Comprehensive cycle problem: Periodic system...Ch. 3 - Prob. 1ATCCh. 3 - ATC 3-2 Group Exercise Multistep income statement...Ch. 3 - Prob. 3ATCCh. 3 - Prob. 4ATC
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