
Prepare income statements, balance sheets, and statements of

Explanation of Solution
Double-declining-balance method:
It is an accelerated method of depreciation under which the depreciation declines in each successive year until the value of asset becomes zero. Under this method, the book value (original cost less
T-account:
T-account is the form of the ledger account, where the
Income statement:
Income statement is the financial statement of a company which shows all the revenues earned and expenses incurred by the company over a period of time.
Balance is the financial statement that reports a company’s resources (assets) and claims of creditors (liabilities) and stockholders (
Statement of cash flows:
Statement of cash flows is one among the financial statement of a Company statement that
Shows aggregate data of all
T-accounts are prepared as follows:
Cash | |||
Year 1 150,000 | 120,000 | ||
72,000 | |||
Bal. | 102,000 | ||
Year 2 83,000 | |||
Bal. | 185,000 | ||
Equipment | ||||
Year 1 120,000 | ||||
Bal. | 120,000 | |||
Accumulated Depreciation | |||
Year 1 | 40,000 (2) | ||
Year 2 | Bal. | 40,000 | |
26,667 (2) | |||
Bal. | 66,667 |
Common Stock | |||
Year 1 | 150,000 | ||
Bal. | 150,000 | ||
Year 1 Cl. 40,000 | Cl. | 72,000 | |
Bal. | 32,000 | ||
Year 2 Cl. 26,667 | Cl. | 83,000 | |
Bal. | 88,333 |
Sales Revenue | ||||||
Year 1 Cl. 72,000 | 72,000 | |||||
Year 2 | Cl. 83,000 | Bal. | 0 | |||
83,000 | ||||||
Bal. | 0 |
Depreciation Expense | |||
Year 1 40,000 (2) | Cl. | 40,000 | |
Bal. 0 | Cl. | 26,667 | |
Year 2 26,667 (2)26,667 | |||
Bal. 0 | |||
Prepare income statement, balance sheets, and statements of cash flows for year 1 and year 2 using vertical format.
Company GM | ||
Financial Statements | ||
Income Statements | Year 1 | Year 2 |
Sales Revenue | $72,000 | $83,000 |
Depreciation Expense | ($40,000) | ($26,667) |
Net Income | $32,000 | $56,333 |
Balance Sheets | Year 1 | Year 2 |
Assets: | ||
Cash | $102,000 | $185,000 |
Equipment | $120,000 | $120,000 |
Accumulated Depreciation | ($40,000) | ($66,667) |
Total Assets | $182,000 | $238,333 |
Stockholders’ Equity | ||
Common Stock | $150,000 | $150,000 |
Retained Earnings | $32,000 | $88,333 |
Total Stockholders’ Equity | $182,000 | $238,333 |
Statements of Cash Flows | Year 1 | Year 2 |
Cash Flows From Operating Activities: | ||
Inflow from Customers | $72,000 | $83,000 |
Cash Flows From Investing Activities: | ||
Outflow to Purchase Equipment | ($120,000) | $0 |
Cash Flows From Financing Activities: | ||
Inflow from Stock Issue | $150,000 | $0 |
Net Change in Cash | $102,000 | $83,000 |
Add: Beginning Cash Balance | $0 | $102,000 |
Ending Cash Balance | $102,000 | $185,000 |
Table (1)
Working notes:
Calculate the Double-declining-balance rate:
Note: Straight line depreciation rate =
Calculate the depreciation expense (double-declining-balance method) of equipment for year 1 and year 2:
Year |
Book value at the beginning | × | Double-declining-balance rate (1) | × | Annual depreciation expense |
Year 1 | ($120,000-$0) | × | 0.3334 | × | $40,000 |
Year 2 | ($120,000-$40,000) | × | 0.3334 | × | $26,667 |
Table (2) (2)
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