Chapter 9, Problem 13BE

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		40,000
	Common Stock			40,000
	(To record the issuance of common stock)
2.	Merchandise Inventory		128,000
	Accounts Payable			128,000
	(To record purchase of inventory on account )
3a.	Cash		210,000
	Sales Revenue			200,000
	Sales Tax Payable $\left(\$200,000\times 5\%\right)$			10,000
	(To record sales revenue)
3b.	Cost of Goods Sold		110,000
	Merchandise Inventory			110,000
	(To record cost of goods sold )
4.	Cash		40,000
	Notes Payable			40,000
	(To record borrowings from bank )
5.	Accounts Payable		128,000
	Cash			128,000
	(To record payment of cash to creditors)
6.	Sales Tax Payable $\left(\$160,000\times 5\%\right)$		8,000
	Cash			8,000
	(To record payment of sales tax )
7.	Salaries Expense		45,000
	Employee Income Tax Payable			5,600
	FICA – Social Security Tax Payable (1)			2,700
	FICA – Medicare Tax Payable (1)			675
	Cash			36,025
	(To record salaries expense)
8.	Warranties Payable		3,200
	Cash			3,200
	(To record the payment to warranty repairs)
9.	Operating Expenses		24,000
	Cash			24,000
	(To record operating expenses)
10.	Dividends		5,000
	Cash			5,000
	(To record payment of dividends )
11.	Warranty Expense $\left(\$200,000\times 3\%\right)$		6,000
	Warranties Payable			6,000
	(To record estimated warranty expense )
12.	Interest Expense $\left(\$40,000\times 6\%\times \left[3÷12\right]\right)$		600
	Interest Payable			600
	(To record interest expense )
13.	Payroll Tax Expense (1)		3,795
	FICA - Social Security Tax Payable			2,700
	FICA – Medicare Tax Payable			675
	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	$\$45,000\times 6\%$	2,700
FICA – Medicare Tax Payable	$\$45,000\times 1.5\%$	675
Federal Unemployment Tax Payable	$\$7,000\times 0.6\%$	42
State Unemployment Tax Payable	$\$7,000\times 5.4\%$	378
Total payroll tax expense		3,795

…… (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.	40,000	5.	128,000
3a.	210,000	6.	8,000
4.	40,000	7.	36,025
		8.	3,200
		9.	24,000
		10.	5,000
Ending Balance	85,775

	Merchandise inventory
Beginning Balance		0	3b.	110,000
2.		128,000
Ending Balance		18,000

Accounts payable
5.	128,000	2.	128,000
Ending Balance	0

Employee income tax payable
		7.	5,600
		Ending Balance	5,600

FICA-Social Security tax payable
		7.	2,700
		13.	2,700
		Ending Balance	5,400

FICA-Medicare tax payable
		7.	675
		13.	675
		Ending Balance	1,350

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

Sales tax payable
6	8,000	3a.	10,000
		Ending Balance	2,000

Warranty payable
8	3,200	11	6,000
		Ending Balance	2,800

Interest payable
		12	600
		Ending Balance	600

Notes payable
		4.	40,000
		Ending Balance	40,000

Common stock
		1.	40,000
		Ending Balance	40,000

Dividends
10.	5,000
Ending Balance	5,000

Sales revenue
		3a.	200,000
		Ending Balance	200,000

Cost of goods sold
3b.	110,000
Ending Balance	110,000

Operating expense
9.	24,000
Ending Balance	24,000

Payroll tax expense
13.	3,795
Ending Balance	3,795

Salaries expense
7.	45,000
Ending Balance	45,000

Warranty expense
11.	6,000
Ending Balance	6,000

Interest expense
12.	600
Ending Balance	600

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 R
Income statement
For the Year ended December 31, Year 1
Particulars	Amount ($)	Amount ($)
Sales Revenue		$200,000
Cost of Goods Sold		(110,000)
Gross Margin		90,000
Expenses:
Operating Expenses	$24,000
Payroll Tax Expense	3,795
Salaries Expenses	45,000
Warranty Expense	6,000
Total Operating Expenses		(78,795)
Operating Income		11,205
Interest Expense		(600)
Net Income		$10,605

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 R
Statement of changes in stockholders’ equity
For the Year ended December 31, Year 1
Particulars	Amount ($)	Amount ($)
Beginning Common Stock	$0
Add: Common Stock Issued	40,000
Ending Common Stock		$40,000
Beginning Retained Earnings	0
Add: Net Income	$10,605
Less: Dividends	(5,000)
Ending Retained Earnings		5,605
Total Stockholders’ Equity		$45,605

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 R
Balance sheet
As on December 31, Year 1
Particulars	Amount ($)	Amount ($)
Assets
Cash		$  85,775
Merchandise Inventory		18,000
Total Assets		$103,775
Liabilities and Stockholders’ Equity
Liabilities
Employee Income Tax Payable	$5,600
FICA Tax – Social Security Tax Payable	5,400
FICA Tax – Medicare Tax Payable	1,350
Federal Unemployment Tax Payable	42
State Unemployment Tax Payable	378
Sales Tax Payable	2,000
Warranties Payable	2,800
Interest Payable	600
Notes Payable	40,000
Total Liabilities		58,170
Stockholders’ Equity
Common Stock	$40,000
Retained Earnings	5,605
Total Stockholders’ Equity		45,605
Total Liabilities and Stockholders’ Equity		$103,775

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 cash flows
For the Year ended December 31, Year 1
Particulars	Amount ($)	Amount ($)
Cash Flows From Operating Activities:
Collection from Customers	$200,000
Collection of Sales Tax	10,000
Payment to accounts payable (Purchase Inventory)	(128,000)
Expenses paid (2)	(63,225)
Payment of Sales Tax	(8,000)
Net Cash Flow from Operating Activities		($10,775)
Cash Flows From Investing Activities		0
Cash Flows From Financing Activities:
Stock Issue	$ 40,000
Loan	40,000
Dividends paid	(5,000)
Net Cash Flow from Financing Activities		75,000
Net Change in Cash		85,775
Add: Beginning Cash Balance		0
Ending Cash Balance		$85,775

Table (6)

Working note:

Calculate the cash paid for expenses:

Salaries paid	$36,025
Warranties payable	$3,200
Operating expenses paid	$24,000
Cash paid for expense	$63,225

…… (2)

Table (7)