Chapter 9, Problem 13AE

a)

To determine

Prepare the journal entries for the given transactions.

Explanation of Solution

Journal:

Journal is the method of recording monetary business transactions in chronological order. It records the debit and credit aspects of each transaction to abide by the double-entry system.

Prepare the journal entries for the given transactions.

Event	Account Titles and explanation	Post  ref.	Debit $	Credit $
1.	Cash		50,000
	Common Stock			50,000
	(To record the issuance of common stock)
2.	Merchandise Inventory		180,000
	Accounts Payable			180,000
	(To record purchase of inventory on account )
3a.	Cash		262,500
	Sales Revenue			250,000
	Sales Tax Payable $\left(\$250,000\times 5\%\right)$			12,500
	(To record sales revenue)
3b.	Cost of Goods Sold		140,000
	Merchandise Inventory			140,000
	(To record cost of goods sold )
4.	Cash		50,000
	Notes Payable			50,000
	(To record borrowings from bank )
5.	Accounts Payable		180,000
	Cash			180,000
	(To record payment of cash to creditors)
6.	Sales Tax Payable $\left(\$190,000\times 5\%\right)$		9,500
	Cash			9,500
	(To record payment of sales tax )
7.	Salaries Expense		46,000
	Employee Income Tax Payable			5,300
	FICA – Social Security Tax Payable			2,760
	FICA – Medicare Tax Payable			690
	Cash			37,250
	(To record salaries expense)
8.	Warranties Payable		5,800
	Cash			5,800
	(To record the payment to warranty repairs)
9.	Operating Expenses		36,000
	Cash			36,000
	(To record operating expenses)
10.	Dividends		2,000
	Cash			2,000
	(To record payment of dividends )
11.	Warranty Expense $\left(\$250,000\times 3\%\right)$		7,500
	Warranties Payable			7,500
	(To record estimated warranty expense )
12.	Interest Expense $\left(\$50,000\times 7\%\times \left[10÷12\right]\right)$		2,917
	Interest Payable			2,917
	(To record interest expense )
13.	Payroll Tax Expense (1)		3,870
	FICA - Social Security Tax Payable			2,760
	FICA – Medicare Tax Payable			690
	Federal Unemployment Tax Payable			42
	State Unemployment Tax Payable			378
	(To record pay roll expense)

Table (1)

Working notes:

Calculate the pay roll tax expense.

		Amount ($)
FICA - Social Security Tax Payable	$\$46,000\times 6\%$	2,760
FICA – Medicare Tax Payable	$\$46,000\times 1.5\%$	690
Federal Unemployment Tax Payable	$\$7,000\times 0.6\%$	42
State Unemployment Tax Payable	$\$7,000\times 5.4\%$	378
Total payroll tax expense		3,870

(1)

Table (2)

b)

To determine

Post the transactions to T-accounts.

Explanation of Solution

T-account:

T-account is the form of the ledger account, where the journal entries are posted to this account. It is referred to as the T-account, because the alignment of the components of the account resembles the capital letter ‘T’.

The components of the T-account are as follows:

a) The title of the account

b) The left or debit side

c) The right or credit side

Post the transactions to T-accounts.

Cash
Beginning Balance	0
1.	50,000	5.	180,000
3a.	262,500	6.	9,500
4.	50,000	7.	37,250
		8.	5,800
		9.	36,000
		10.	2,000
Ending Balance	91,950

	Merchandise inventory
Beginning Balance		0	3b.	140,000
2.		180,000	8. Uncollectible accounts expense	920
Ending Balance		40,000

Accounts payable
5.	180,000	2.	180,000
Ending Balance	0

Employee income tax payable
		7.	5,300
		Ending Balance	5,300

FICA-Social Security tax payable
		7.	2,760
		13.	2,760
		Ending Balance	5,520

FICA-Medicare tax payable
		7.	690
		13.	690
		Ending Balance	1,380

Federal Unemployment tax payable
		13	42
		Ending Balance	42
State Unemployment tax payable
		13	378
		Ending Balance	378

Sales tax payable
6	9,500	3a.	12,500
		Ending Balance	3,000

Warranty payable
8	5,800	11	7,500
		Ending Balance	1,700

Interest payable
		12	2,917
		Ending Balance	2,917

Notes payable
		4.	50,000
		Ending Balance	50,000

Common stock
		1.	50,000
		Ending Balance	50,000

Dividends
10.	2,000
Ending Balance	2,000

Sales revenue
		3a.	250,000
		Ending Balance	250,000

Cost of goods sold
3b.	140,000
Ending Balance	140,000

Operating expense
9.	36,000
Ending Balance	36,000

Payroll tax expense
13.	3,870
Ending Balance	3,870

Salaries expense
7.	46,000
Ending Balance	46,000

Warranty expense
11.	7,500
Ending Balance	7,500

Interest expense
12.	2,917
Ending Balance	2,917

c)

To determine

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

Explanation of Solution

Income statement:

This is the financial statement of a company which shows all the revenues earned and expenses incurred by the company over a period of time.

Prepare the income statement.

Company P
Income statement
For the Year ended December 31, 2016
Particulars	Amount ($)	Amount ($)
Sales Revenue		$250,000
Cost of Goods Sold		(140,000)
Gross Margin		110,000
Expenses:
Operating Expenses	$36,000
Payroll Tax Expense	3,870
Salaries Expenses	46,000
Warranty Expense	7,500
Total Operating Expenses		(93,370)
Operating Income		16,630
Interest Expense		(2,917)
Net Income		$13,713

Table (3)

Statement of stockholder's equity:

This statement reports the beginning stockholder's equity and all the changes which led to ending stockholder's equity. Additional capital, net income from income statement is added to and dividends are deducted from beginning stockholder's equity to arrive at the end result, closing balance of stockholder's equity.

Prepare the statement of changes in stockholders’ equity.

Company P
Statement of changes in stockholders’ equity
For the Year ended December 31, 2016
Particulars	Amount ($)	Amount ($)
Beginning Common Stock	$0
Add: Common Stock Issued	50,000
Ending Common Stock		$50,000
Beginning Retained Earnings	0
Add: Net Income	$13,713
Less: Dividends	(2,000)
Ending Retained Earnings		11,713
Total Stockholders’ Equity		$61,713

Table (4)

Balance Sheet:

Balance Sheet summarizes 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.

Company P
Balance sheet
As on December 31, 2016
Particulars	Amount ($)	Amount ($)
Assets
Cash		$  91,950
Merchandise Inventory		40,000
Total Assets		$131,950
Liabilities and Stockholders’ Equity
Liabilities
Employee Income Tax Payable	$5,300
FICA Tax – Social Security Tax Payable	5,520
FICA Tax – Medicare Tax Payable	1,380
Federal Unemployment Tax Payable	42
State Unemployment Tax Payable	378
Sales Tax Payable	3,000
Warranties Payable	1,700
Interest Payable	2,917
Notes Payable	50,000
Total Liabilities		70,237
Stockholders’ Equity
Common Stock	$50,000
Retained Earnings	11,713
Total Stockholders’ Equity		61,713
Total Liabilities and Stockholders’ Equity		$131,950

Table (5)

Statement of cash flows:

The financial statement that shows the changes in cash flows from operating, investing, and financing activities is referred to as statement of cash flows.

Prepare statement of cash flows.

Company P
Statement of changes in stockholders’ equity
For the Year ended December 31, 2016
Particulars	Amount ($)	Amount ($)
Cash Flows From Operating Activities:
Collection from Customers	$250,000
Collection of Sales Tax	12,500
Payment to accounts payable (Purchase Inventory)	(180,000)
Expenses paid (2)	(79,050)
Payment of Sales Tax	(9,500)
Net Cash Flow from Operating Activities		($6,050)
Cash Flows From Investing Activities		0
Cash Flows From Financing Activities:
Stock Issue	$ 50,000
Loan	50,000
Dividends paid	(2,000)
Net Cash Flow from Financing Activities		98,000
Net Change in Cash		91,950
Add: Beginning Cash Balance		0
Ending Cash Balance		$91,950

Table (6)

Working note:

Calculate the cash paid for expenses:

Salaries paid	$37,250
Warranties payable	$5,800
Operating expenses paid	$36,000
Cash paid for expense	$79,050

(2)

Table (7)