Chapter 8, Problem 20P

Problem 8-20 Effect of business structure on financial statements

Cascade Company was started on January 1, 2018, when it acquired $60,000 cash from the owners. During 2018, the company earned cash revenues of $35,000 and incurred cash expenses of $18,100. The company also paid cash distributions of $4,000.

Required

Prepare a 2018 income statement, capital statement (statement of changes in equity), balance sheet, and statement of cash flows under each of the following assumptions. (Consider each assumption separately.)

1. a. Cascade is a sole proprietorship owned by Carl Cascade.
2. b. Cascade is a partnership with two partners, Carl Cascade and Beth Cascade. Carl Cascade invested $24,000 and Beth Cascade invested $36,000 of the $60,000 cash that was used to start the business. Beth was expected to assume the vast majority of the responsibility for operating the business. The partnership agreement called for Beth to receive 60 percent of the profits and Carl to get the remaining 40 percent. With regard to the $4,000 distribution, Beth withdrew $2,400 from the business and Carl withdrew $1,600.
3. c. Cascade is a corporation. It issued 5,000 shares of $5 par common stock for $60,000 cash to start the business.

To determine

Prepare a 2018 income statement, capital statement, balance sheet, and statement of cash flows for a sole proprietorship owned by Person C.

Explanation of Solution

Income statement: It is one of the financial statements 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.

Prepare the income statement of for C’s sole proprietorship the year ended December 31, 2018:

C’s sole proprietorship
Income statement
For the year ended December 31, 2018
Particulars	Amount ($)
Revenues	35,000
Less: Expenses	(18,100)
Net income	16,900

Table (1)

Statement of owner's’ equity: This statement reports the beginning owner’s equity and all the changes which led to ending owner's’ equity. Additional capital, net income from income statement is added to and drawings are deducted from beginning owner’s equity to arrive at the end result, ending owner’s equity.

Prepare the capital account of C’s sole proprietorship for the year ended December 31, 2018:

C’s sole proprietorship
Capital statement
For the year ended December 31, 2018
Particulars	Amount ($)
Beginning Capital Balance	0
Add: initial Capital  from partners	60,000
Add: Net Income	16,900
Less: Withdrawal by owner	(4,000)
Ending Capital Balance	72,900

Table (2)

Balance sheet: Balance Sheet is one of the financial statements which summarize the assets, the liabilities, and the Shareholder’s equity of a company at a given date. It is also known as the statement of financial status of the business.

Prepare the balance sheet of C’s sole proprietorship as on December 31^st, 2018:

C’s sole proprietorship
Balance sheet
As on December 31, 2018
Particulars	Amount ($)
Assets
Cash	72,900
Total assets	72,900
Liabilities and Equity
Liabilities	0
Equity
C’s Capital	72,900
Total Liabilities and Equity	72,900

Table (3)

Statement Cash flows: Statement of cash flows is a statement showing the source and application of cash between two balance sheet dates. It shows how the cash is sourced and used for the company’s operating, investing, and financing activities.

Prepare statement of cash flows for year ended December 31^st, 2018 of C’s sole proprietorship:

C’s sole proprietorship
Cash Flow Statement
For the year ended  December 31, 2018
Particulars	Amount ($)	Amount ($)
Cash Flows From Operating Activities:
Receipts from Revenues	35,000
Paid for Expenses	(18,100)
Net Cash Flow from Operating Activities		16,900
Cash Flows From Investing Activities		0
Cash Flows From Financing Activities:
Proceeds from owners	60,000
Paid for Owner’s Withdrawals	(4,000)
Net Cash Flow from Financing Activities		56,000
Net Change in Cash		72,900
Add: Beginning Cash Balance		0
Ending Cash Balance		72,900

Table (4)

To determine

Prepare a 2018 income statement, capital statement, balance sheet, and statement of cash flows for a partnership C.

Explanation of Solution

Calculate the capital contributions and determine the adjustments to the capital account:

Particulars	Amount ($)	Percentage (%)
Capital contributions:
CC’s contribution	24,000	40%
JC’s contribution	36,000	60%
Total capital contribution	60,000	100%
Adjustments to capital account
Revenues (add to capital)	35,000
Expenses (deduct from capital)	18,100
Withdrawals:
CC (deduct from capital)	1,600
BC (deduct from capital)	2,400

Table (5)

Income statement: It is one of the financial statements 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.

Prepare the income statement of a partnership C for the year ended December 31, 2018:

Partnership C
Income statement
for the year ended December 31, 2018
Particulars	Amount ($)
Revenues	35,000
Less: Expenses	(18,100)
Net income	16,900

Table (6)

Statement of owner's’ equity: This statement reports the beginning owner’s equity and all the changes which led to ending owner's’ equity. Additional capital, net income from income statement is added to and drawings are deducted from beginning owner’s equity to arrive at the end result, ending owner’s equity.

Prepare the capital account of Partnership C for the year ended December 31, 2018:

Partnership C
Capital statement
for the year ended December 31, 2018
Particulars	Amount ($)
Beginning Capital Balance	0
Add: initial Capital  from partners	60,000
Add: Net Income	16,900
Less: Withdrawal by partners	(4,000)
Ending Capital Balance	72,900

Table (7)

Balance sheet: Balance Sheet is one of the financial statements which summarize the assets, the liabilities, and the Shareholder’s equity of a company at a given date. It is also known as the statement of financial status of the business.

Prepare the balance sheet of Partnership C as on December 31^st, 2018:

Partnership C
Balance sheet
As on December 31, 2018
Particulars	Amount ($)
Assets
Cash	72,900
Total assets	72,900
Liabilities and Equity
Liabilities	0
Equity
CC’s Capital (1)	29,160
BC’s Capital (1)	43,740
Total Liabilities and Equity	72,900

Table (8)

Statement Cash flows: Statement of cash flows is a statement showing the source and application of cash between two balance sheet dates. It shows how the cash is sourced and used for the company’s operating, investing, and financing activities.

Prepare statement of cash flows for year ended December 31^st, 2018 of Partnership C.

Partnership C
Cash Flow Statement
For the year ended  December 31, 2018
Particulars	Amount ($)	Amount ($)
Cash Flows From Operating Activities:
Receipts from Revenues	35,000
Paid for Expenses	(18,100)
Net Cash Flow from Operating Activities		16,900
Cash Flows From Investing Activities		0
Cash Flows From Financing Activities:
Proceeds from Partners	60,000
Paid for partners’ Withdrawals	(4,000)
Net Cash Flow from Financing Activities		54,000
Net Change in Cash		72,900
Add: Beginning Cash Balance		0
Ending Cash Balance		72,900

Table (9)

Working note:

(1) Calculate the ending balance of capital for each partner.

Particulars	CC	BC	Total
Beginning Capital Balance	$0	$0	$0
Investments	24,000	36,000	60,000
Add: Net Income			16,900
CC 40%	6,760
BC 60%		10,140
Less: Withdrawals	(1,600)	(2,400)	(4,000)
Ending Capital Balances	$29,160	$43,740	$72,900

Table (10)

To determine

Prepare a 2018 income statement, statement of changes in stockholders equity, balance sheet, and statement of cash flows for Corporation C.

Explanation of Solution

Income statement: It is one of the financial statements 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.

Prepare the income statement of Corporation C for the year ended December 31, 2018.

Corporation C
Income statement
For the year ended December 31, 2018
Particulars	Amount ($)
Revenues	35,000
Less: Expenses	(18,100)
Net income	16,900

Table (11)

Statement of owner's’ equity:  This statement reports the beginning owner’s equity and all the changes which led to ending owner's’ equity. Additional capital, net income from income statement is added to and drawings are deducted from beginning owner’s equity to arrive at the end result, ending owner’s equity.

Prepare the capital account of Corporation C for the year ended December 31, 2018.

Corporation C
Statement of changes in stockholders’ equity
For the year ended December 31, 2018
Particulars	Amount ($)
Beginning Capital Balance	0
Add: issuance of common stock	60,000
Ending common stock (a)	60,000
Beginning retained earnings	$0
Add: Net Income	16,900
Less: Dividends	(4,000)
Ending retained earnings (b)	$12,900
Total stockholders’ equity $\left[\left(a\right)+\left(b\right)\right]$	72,900

Table (12)

Balance sheet: Balance Sheet is one of the financial statements which summarize the assets, the liabilities, and the Shareholder’s equity of a company at a given date. It is also known as the statement of financial status of the business.

Prepare the balance sheet of Corporation C as on December 31^st, 2018.

Corporation C
Balance sheet
As on December 31, 2018
Particulars	Amount ($)
Assets
Cash	72,900
Total assets	72,900
Liabilities and Equity
Liabilities	0
Equity
Common stock, $5 par value, 5000 shares issued and outstanding	25,000
Paid-in capital in excess and outstanding	35,000
Total paid in capital	60,000
Retained earnings	12,900
Total Liabilities and Equity	72,900

Table (13)

Statement Cash flows: Statement of cash flows is a statement showing the source and application of cash between two balance sheet dates. It shows how the cash is sourced and used for the company’s operating, investing, and financing activities.

Prepare statement of cash flows for year ended December 31^st, 2018 of Corporation C.

Corporation C
Cash Flow Statement
For the year ended  December 31, 2018
Particulars	Amount ($)	Amount ($)
Cash Flows From Operating Activities:
Receipts from Revenues	35,000
Paid for Expenses	(18,100)
Net Cash Flow from Operating Activities		16,900
Cash Flows From Investing Activities		0
Cash Flows From Financing Activities:
Proceeds from issue of stock	60,000
Paid for Dividends	(4,000)
Net Cash Flow from Financing Activities		54,000
Net Change in Cash		72,900
Add: Beginning Cash Balance		0
Ending Cash Balance		72,900

Table (14)