
a)
Prepare the
a)

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 | 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 | 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 | 6,000 | ||
Warranties Payable | 6,000 | |||
(To record estimated warranty expense ) | ||||
12. | Interest Expense | 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 | 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 | 2,700 | |
FICA – Medicare Tax Payable | 675 | |
Federal Unemployment Tax Payable | 42 | |
State Unemployment Tax Payable | 378 | |
Total payroll tax expense | 3,795 |
…… (1)
Table (2)
b)
b)

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)
Prepare the income statement, statement of changes in stockholders’ equity,
c)

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 | $10,605 |
Table (3)
Statement of
This statement reports the beginning stockholder's equity and all the changes which led to ending stockholder's equity. Additional capital, net income from income statement is added to and dividends are deducted from beginning stockholder's equity to arrive at the end result, closing balance of stockholder's equity.
Prepare the statement of changes in stockholders’ equity.
Company R | ||
Statement of changes in stockholders’ equity | ||
For the Year ended December 31, Year 1 | ||
Particulars | Amount ($) | Amount ($) |
Beginning Common Stock | $0 | |
Add: Common Stock Issued | 40,000 | |
Ending Common Stock | $40,000 | |
Beginning | 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)
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