Chapter 7, Problem 27P

a.

To determine

Record the given events in the accounting equation.

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.

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

Record the given events in accounting equation.

Table (1)

Working notes:

Determine the sales tax payable on the service rendered in 2018.

$\begin{array}{c}\text{Sales tax payable}=\left(\begin{array}{l}\text{Value of }\\ \text{service provided }\end{array}\right)\times \text{Rate of tax}\\ \text{=\$130,000}\times 6\%\\ =\$7,800\end{array}$

Determine the sales tax due for the year 2018.

$\begin{array}{c}\text{Sales tax payable}=\left(\begin{array}{l}\text{Value of }\\ \text{service provided }\end{array}\right)\times \text{Rate of tax}\\ \text{=\$110,000}\times 6\%\\ =\$6,600\end{array}$

Calculate the amount of accrued interest expense at December 31, 2018.

$\begin{array}{c}\text{Accrued interest}=\text{Notes payable}\times \text{Interest rate}\times \frac{\text{Number of months}}{\text{Months in a year}}\\ =\$50,000\times 6\%\times \frac{9}{12}\\ =\$2,250\end{array}$

Determine the sales tax payable on the service rendered in 2019.

$\begin{array}{c}\text{Sales tax payable}=\left(\begin{array}{l}\text{Value of }\\ \text{service provided }\end{array}\right)\times \text{Rate of tax}\\ \text{=\$201,000}\times 6\%\\ =\$12,060\end{array}$

Determine the sales tax due for the year 2019.

$\begin{array}{c}\text{Sales tax payable}=\left(\begin{array}{l}\text{Value of }\\ \text{service provided }\end{array}\right)\times \text{Rate of tax}\\ \text{=\$185,000}\times 6\%\\ =\$11,100\end{array}$

Calculate the amount of accrued interest expense at April 1, 2019.

$\begin{array}{c}\text{Accrued interest}=\text{Notes payable}\times \text{Interest rate}\times \frac{\text{Number of months}}{\text{Months in a year}}\\ =\$50,000\times 6\%\times \frac{3}{12}\\ =\$750\end{array}$

b.

To determine

Prepare an income statement, a statement of changes in stockholders’ equity, a balance sheet, and a statement of cash flows for Company WE for 2018 and 2019.

Explanation of Solution

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.

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.

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: Statement of cash flow is a financial statement that shows the cash and cash equivalents of a company for a particular period of time. It shows the net changes in cash, by reporting the sources and uses of cash as a result of operating, investing, and financing activities of a company.

Prepare the income statement for Company WE for the year ended December 31, 2018.

Company WE
Statement of income
For the year ended December 31, 2018
Particulars	Amount $	Amount $
Service Revenue		130,000
Expenses:
Operating Expenses	62,000
Total operating expense		(62,000)
Operating income		68,000
Interest expense		(2,250)
Net income		65,750

Table (2)

Prepare the statement of changes in stockholders’ equity of Company WE for the year ended December 31, 2018.

Company WE
Statement of changes in stockholders' equity
For the year ended December 31, 2018
Particulars	Amount $	Amount $
Common Stock		0
Beginning retained earnings	0
Add/Less: Net Income (Loss)	65,750
Ending Retained Earnings		65,750
Total stockholder's equity		65,750

Table (3)

Prepare the balance sheet of Company WE as on December 31, 2018.

Company WE
Balance sheet
As on December 31, 2018
Assets	Amount $	Amount $
Cash		119,200
Total Assets		119,200
Liabilities and stockholders' equity
Liabilities
Sales tax Payable	1,200
Interest Payable	2,250
Notes  Payable	50,000
Total Liabilities		53,450
Stockholders’ Equity
Retained Earnings	66,750
Total Stockholders’ Equity		65,750
Total liabilities and stockholders' equity		119,200

Table (4)

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

Company WE
Statement of cash flows
For the year ended December 31, 2018
Particulars	Amount $	Amount $
Cash flow from operating activities:
Inflow from Customers	130,000
Inflow from Sales Tax	7,800
Outflow for Expenses	(62,000)
Outflow for Sales Tax	(6,600)
Net Cash Flow from Operating Activities		69,200
Cash Flows From Investing Activities:
Net Cash Flow From Investing Activities		0
Cash Flows From Financing Activities:
Inflow from loan	50,000
Net Cash Flow From Financing Activities		50,000
Net Change in Cash		119,200
Add: Beginning Cash Balance		0
Ending Cash Balance		119,200

Table (5)

Prepare the income statement for Company WE for the year ended December 31, 2019.

Company WE
Statement of income
For the year ended December 31, 2019
Particulars	Amount $	Amount $
Service Revenue		201,000
Expenses:
Operating Expenses	102,500
Total operating expense		(102,500)
Operating income		98,500
Interest expense		(750)
Net income		97,750

Table (6)

Prepare the statement of changes in stockholders’ equity of Company WE for the year ended December 31, 2019.

Company WE
Statement of changes in stockholders' equity
For the year ended December 31, 2019
Particulars	Amount $	Amount $
Common Stock		0
Beginning retained earnings	65,750
Add/Less: Net Income (Loss)	97,750
Ending Retained Earnings		163,500
Total stockholder's equity		163,500

Table (7)

Prepare the balance sheet of Company WE as on December 31, 2019.

Company WE
Balance sheet
As on December 31, 2019
Assets	Amount $	Amount $
Cash		164,460
Total Assets		164,460
Liabilities and stockholders' equity
Liabilities
Sales tax Payable	960
Total Liabilities		960
Stockholders’ Equity
Retained Earnings	163,500
Total Stockholders’ Equity		163,500
Total liabilities and stockholders' equity		164,460

Table (8)

Prepare the statement of cash flows of Company WE for the year ended December 31, 2019.

Company WE
Statement of cash flows
For the year ended December 31, 2019
Particulars	Amount $	Amount $
Cash flow from operating activities:
Cash reeipts from Customers	$201,000
Inflow from Sales Tax	12,060
Cash paid for Expenses	(102,500)
Cash paid for Sales Tax expense	(12,300)
Cash paid for Interest exepnse	(3,000)
Net Cash Flow from Operating Activities		95,260
Cash Flows From Investing Activities:
Net Cash Flow From Investing Activities		0
Cash Flows From Financing Activities:
Repayment of loan	(50,000)
Net Cash Flow From Financing Activities		(50,000)
Net Change in Cash		45,260
Add: Beginning Cash Balance		119,200
Ending Cash Balance		164,460

Table (9)