
a.
Use a horizontal statements model to show the effect of the transactions on the elements of financial statements.
a.

Explanation of Solution
Financial Statements:
Financial statements are complete record of all the financial transactions that take place in the business during a particular financial year. They report important financial information such as assets, liabilities, revenues and expenses of the company to the internal and external users for taking necessary decision. They help them to know the financial status of the business for a particular period.
Use a horizontal statements model to show the effect of the transactions on the elements of financial statements as follows:
Incorporation A | ||||||||||
Horizontal Statements Model | ||||||||||
Event | Assets | = | Liabilities | + | Equity | Net Income | ||||
Year 1 | ||||||||||
1 | + | NA | + | NA | + FA | |||||
2 | +- | NA | NA | NA | − ΙΑ | |||||
3 | +- | NA | NA | NA | − ΙΑ | |||||
4 | + | NA | + | + | + OA | |||||
5 | − | NA | − | − | − ΟΑ | |||||
6 | − | NA | − | − | NA | |||||
7 | NA | NA | +- | NA | NA | |||||
Year 2 | ||||||||||
1 | − | NA | − | − | − ΟΑ | |||||
2 | − | NA | − | − | − ΟΑ | |||||
3 | + | NA | + | + | + OA | |||||
4 | − | NA | − | − | − ΟΑ | |||||
5 | − | NA | − | − | NA | |||||
6 | NA | NA | +- | NA | NA | |||||
Year 3 | ||||||||||
1 | +- | NA | NA | NA | − ΙΑ | |||||
2 | − | NA | − | − | − ΟΑ | |||||
3 | + | NA | + | + | + OA | |||||
4 | − | NA | − | − | NA | |||||
5 | NA | NA | +- | NA | NA |
Table (1)
b.
Record the transactions in general journal form and post them to T-accounts.
b.

Explanation of Solution
Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.
Accounting rules for Journal entries:
- To record increase balance of account: Debit assets, expenses, losses and credit liabilities, capital, revenue and gains.
- To record decrease balance of account: Credit assets, expenses, losses and debit liabilities, capital, revenue and gains.
Record the transactions in general journal form as follows:
Event | Account title and Explanation | Post ref |
Debit (in $) | Credit (in $) |
Year 1 | ||||
1. | Cash | 80,000 | ||
Common Stock | 80,000 | |||
(To record the issue of the common stock) | ||||
2. | Computer | 35,000 | ||
Cash | 35,000 | |||
(To record the purchase of Computer) | ||||
3. | Computer | 2,450 | ||
Cash | 2,450 | |||
(To record the purchase of Computer) | ||||
4. | Cash | 65,000 | ||
Service Revenue | 65,000 | |||
(To record the service revenue) | ||||
5. | Computer Service Expense | 1,500 | ||
Cash | 1,500 | |||
(To record computer service expense expense) | ||||
6. | 14,980 | |||
| 14,980 | |||
(To record depreciation expense ) | ||||
7. | Service revenue | 65,000 | ||
Computer Service Expense | 1,500 | |||
Depreciation Expense | 14,980 | |||
| 48,520 | |||
(To close the revenue and expenses accounts to the retained earnings account) | ||||
Year 2 | ||||
1. | Maintenance Expense | 1,000 | ||
Cash | 1,000 | |||
(To record maintenance expense) | ||||
2. | Maintenance Expense | 1,500 | ||
Cash | 1,500 | |||
(To record maintenance expense) | ||||
3. | Cash | 68,000 | ||
Service Revenue | 68,000 | |||
(To record the service revenue) | ||||
4. | Computer Service Expense | 1,500 | ||
Cash | 1,500 | |||
(To record computer service expense) | ||||
5. | Depreciation Expense | 8,988 | ||
Accumulated Depreciation | 8,988 | |||
(To record depreciation expense ) | ||||
6. | Service revenue | 68,000 | ||
Computer maintenance expense | 2,500 | |||
Computer Service Expense | 1,500 | |||
Depreciation Expense | 8,988 | |||
Retained earnings | 55,012 | |||
(To close the revenue and expenses accounts to the retained earnings account) | ||||
Year 3 | ||||
1. | Accumulated depreciation | 6,000 | ||
Cash | 6,000 | |||
(To record accumulated depreciation) | ||||
2. | Computer Service Expense | 1,200 | ||
Cash | 1,200 | |||
(To record computer service expense) | ||||
3. | Cash | 70,000 | ||
Service Revenue | 70,000 | |||
(To record the service revenue) | ||||
4. | Depreciation Expense | 9,741 | ||
Accumulated Depreciation | 9,741 | |||
(To record depreciation expense ) | ||||
5. | Service revenue | 70,000 | ||
Computer Service Expense | 1,200 | |||
Depreciation Expense | 9,741 | |||
Retained earnings | 59,059 | |||
(To close the revenue and expenses accounts to the retained earnings account) |
Table (1)
Working note:
Determine the depreciation rate applied each year.
Useful life = 5 years
Calculate the depreciation expense using Double-declining-balance method.
Calculate the depreciation expense for Year 1.
Calculate the depreciation expense for Year 2.
Calculate the depreciation expense for Year 3.
Cash (Year 1) | |||
1. | 80,000 | 2. | 35,000 |
4. | 65,000 | 3. | 2,450 |
5. | 1,500 | ||
Balance 106,050 |
Cash (Year 2) | |||
3. | 68,000 | 1. | 1,000 |
2. | 1,500 | ||
4. | 1,500 | ||
Balance 170,050 |
Cash (Year 3) | |||
3. | 70,000 | 1. | 6,000 |
2. | 1,200 | ||
Balance 232,850 |
Common Stock (Year 1) | |||
1. | 80,000 | ||
Balance 80,000 |
Computer (Year 1) | |||
2. | 35,000 | ||
3. | 2,450 | ||
Balance 37,450 |
Accumulated Depreciation (Year 1) | |||
6. | 14,980 | ||
Balance 14,980 |
Accumulated Depreciation (Year 2) | |||
5. | 8,988 | ||
Balance 23,968 |
Accumulated Depreciation (Year 3) | |||
1. | 6,000 | 4. | 9,741 |
Balance 27,709 |
Common Stock (Year 1) | |||
1. | 80,000 | ||
Balance 80,000 |
Retained Earnings (Year 1) | |||
7. | 48,520 | ||
Balance 48,520 |
Retained Earnings (Year 2) | |||
6. | 55,012 | ||
Balance 103,532 |
Retained Earnings (Year 3) | |||
5. | 59,059 | ||
Balance 162,591 |
Service Revenue (Year 1) | |||
7. | 65,000 | 4. | 65,000 |
Balance 0 |
Service Revenue (Year 2) | |||
6. | 68,000 | 3. | 68,000 |
Balance 0 |
Service Revenue (Year 3) | |||
5. | 70,000 | 3. | 70,000 |
Balance 0 |
Maintenance Expense (Year 2) | |||
1. | 1,000 | ||
2. | 1,500 | 6. | 2,500 |
Balance 0 |
Computer Service Expense (Year 1) | |||
5. | 1,500 | 7. | 1,500 |
Balance 0 |
Computer Service Expense (Year 2) | |||
4. | 1,500 | 6. | 1,500 |
Balance 0 |
Computer Service Expense (Year 3) | |||
2. | 1,200 | 5. | 1,200 |
Balance 0 |
Depreciation Expense (Year 1) | |||
6. | 14,980 | 7. | 14,980 |
Balance 0 |
Depreciation Expense (Year 2) | |||
5. | 8,988 | 6. | 8,988 |
Balance 0 |
Depreciation Expense (Year 3) | |||
4. | 9,741 | 5. | 9,741 |
Balance 0 |
c.
Use a vertical model to present financial statements for Year 1, Year 2, and Year 3.
c.

Explanation of Solution
Income statement:
Income statement is a financial statement that shows the net income or net loss by deducting the expenses from the revenues and vice versa.
Statement of changes in stockholders' equity:
Statement of changes in stockholders' equity records the changes in the owners’ equity during the end of an accounting period by explaining about the increase or decrease in the capital reserves of shares.
Balance sheet summarizes the assets, the liabilities, and the
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.
Use a vertical model to present financial statements for Year 1, Year 2, and Year 3 as follows:
Incorporation A | |||
Financial Statements | |||
For the year ended December 31 | |||
Income Statements | |||
Year 1 | Year 2 | Year 3 | |
Service Revenue | $65,000 | $68,000 | $70,000 |
Expenses: | |||
Maintenance Expense | 0 | (2,500) | 0 |
Computer Service Expense | (1,500) | (1,500) | (1,200) |
Depreciation Expense | (14,980) | (8,988) | (9,741) |
Total Expenses | (16,480) | (12,988) | (10,941) |
Net Income | $48,520 | $55,012 | $59,059 |
Statement of Changes in Stockholder's Equity | |||
Beginning Common Stock | 0 | $80,000 | $80,000 |
Add: Stock Issued | 80,000 | 0 | 0 |
Ending Common Stock | 80,000 | 80,000 | 80,000 |
Beginning Retained Earnings | 0 | 48,520 | 103,532 |
Add: Net Income | 48,520 | 55,012 | 59,059 |
Ending Retained Earnings | 48,520 | 103,532 | 162,591 |
Total Stockholders’ Equity | $128,520 | $183,532 | $242,591 |
Table (2)
Incorporation A | |||
Financial Statements | |||
Balance Sheet as of December 31 | |||
Year 1 | Year 2 | Year 3 | |
Assets | |||
Cash | $106,050 | $170,050 | $232,850 |
Computer | 37,450 | 37,450 | 37,450 |
Less: Accumulated Depreciation | (14,980) | (23,968) | (27,709) |
Total Assets | $128,520 | $183,532 | $242,591 |
Liabilities | $0 | $0 | $0 |
Stockholders’ Equity | |||
Common Stock | 80,000 | 80,000 | 80,000 |
Retained Earnings | 48,520 | 103,532 | 162,591 |
Total Stockholders’ Equity | $128,520 | $183,532 | $242,591 |
Total Liabilities and Stockholders' Equity | $128,520 | $183,532 | $242,591 |
Table (3)
Incorporation A | |||
Statement of Cash Flows | |||
For the Year Ended December 31 | |||
Particulars | Year 1 (in $) | Year 2 (in $) | Year 3 (in $) |
Cash Flows From Operating Activities: | |||
Inflow from revenue | 65,000 | 68,000 | 70,000 |
Outflow for expenses | (1,500) | (4,000) | (1,200) |
Net Cash Flow from operating activities | 63,500 | 64,000 | 68,800 |
Cash Flows From Investing Activities: | |||
Outflow to purchase Computer | (37,450) | 0 | (6,000) |
Net Cash Flow from investing activities | (37,450) | 0 | (6,000) |
Cash Flows From Financing Activities: | |||
Inflow from stock issue | 80,000 | 0 | 0 |
Net Cash Flow from financing activities | 80,000 | 0 | 0 |
Net Increase in Cash | 106,050 | 64,000 | 62,800 |
Add: Beginning Cash Balance | 0 | 106,050 | 170,050 |
Ending Cash Balance | $106,050 | $170,050 | $232,850 |
(Table 4)
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