Problem Solution

PROBLEM SOLUTION

October

Entries

Capitalized Organizational Costs+ 1,800

Common Equity+ 1,800

Cash+ 20,000

Common Equity+ 20,000

Cash- 2,000

Rent Expense+ 2,000

Cash- 1,500

Deposits+ 1,500

Inventory+150,000

Accounts Payable+150,000

Revenues+220,000

Accounts Receivable+220,000

Inventory- 132,000

Cost of Goods Sold+132,000

Cash+ 65,000

Accounts Receivable- 65,000

Cash- 2,400

Salary Expense+ 2,400

Utility Expense+ 4,400

Utilities Payable+ 4,400

Amortization Expense+ 10

Accumulated Amortization- 10

Taxes Payable+ 27,717

Tax Expense+ 27,717

Income Statement

Revenues$220,000

Cost of Goods Sold 132,000

Gross Profit 88,000

Gen. & Adm. Expense

Amortization Expense 10

Rent 2,000

Salary Expense 2,400

Utilities 4,400

Operating Income 79,190

Taxes 27,717

Net Income$ 51,473

Assets

Cash 79,100(0+20,000-2,000-1,500+65,000-2,400)

Accounts Receivable 155,000(0+220,000-65,000)

Inventory 18,000(0+150,000-132,000)

Total Current Assets 252,100

Deposits 1,500(0+1,500)

Organizational Costs 1,800(0+1,800)

Accumulated Amort.( 10)(0+10)

Net Organizational Costs 1,790

Total Assets 255,390

Liabilities & Equity

Accounts Payable 150,000(0+150,000)

Utilities Payable 4,400(0+4,400)

Taxes Payable 27,717(0+27,717)

Total Current Liabilities 182,117

Common Equity 21,800(0+1,800+20,000)

Retained Earnings 51,473(0+51,473)

Total Equity 73,273

Total Liabilities & Equity 255,390

From Operating Activities:

Net Income 51,473(From the Income Stmt)

Plus: Amortization 10(From the Income Stmt)

Operating Cash Flows 51,483

Changes in Working Capital

Accounts Receivable(155,000)(0 - 155,000)

Inventories( 18,000)(0 - 18,000)

Deposits( 1,500)(0 - 1,500)

Accounts Payable 150,000(150,000 – 0)

Utilities Payable 4,400( 4,400 - 0)

Income Taxes Payable 27,717( 27,717 - 0)

From Working Capital 7,617

Total From Operating Activities 59,100

From Investing Activities:

Organizational Costs( 1,800)(0 - 1,800)

Total From Investing Activities( 1,800)

From Financing Activities:

Equity 21,800(21,800 - 0)

Total From Financing Activities 21,800

Total Cash Flows 79,100

Plus: Beginning Cash Balance 0

Ending Cash Balance 79,100

November

Entries

Revenues+250,000

Accounts Receivable+250,000

Inventory- 150,000

Cost of Goods Sold+150,000

Cash+140,000

Accounts Receivable- 140,000

Inventory+180,000

Accounts Payable+180,000

Cash- 150,000

Accounts Payable- 150,000

Fixed Assets+ 5,000

Note Payable+ 5,000

Depreciation Expense+ 83

Accumulated Depreciation+ 83

Cash- 25,000

Advertising Expense+ 25,000

Cash- 2,000

Rent Expense+ 2,000

Cash- 2,400

Salary Expense+ 2,400

Cash- 4,400

Utilities Payable- 4,400

Utility Expense+ 5,000

Utilities Payable+ 5,000

Amortization Expense+ 10

Accumulated Amortization- 10

Taxes Payable+ 22,927

Tax Expense+ 22,927

Income Statement

Revenues$250,000

Cost of Goods Sold 150,000

Gross Profit 100,000

Gen. & Adm. Expense

Advertising Expense 25,000

Amortization Expense 10

Depreciation Expense 83

Rent 2,000

Salary Expense 2,400

Utilities 5,000

Operating Income 65,507

Taxes 22,927

Net Income$ 42,580

Assets

Cash 35,300(79,100+140,000-150,000-25,000

-2,000-2,400-4,400)

Accounts Receivable 265,000(155,000+250,000-140,000)

Inventory 48,000(18,000-150,000+180,000)

Total Current Assets 348,300

Deposits 1,500

Fixed Assets 5,000(0+5,000)

Accumulated Depr.( 83)(0+83)

Net Fixed Assets 4,917

Organizational Costs 1,800

Accumulated Amort.( 20)(10+10)

Net Organizational Costs 1,780

Total Assets 356,497

Liabilities & Equity

Accounts Payable 180,000(150,000+180,000-150,000)

Utilities Payable 5,000(4,400-4,400+5,000)

Taxes Payable 50,644(27,717+22,927)

Note Payable 5,000(0+5,000)

Total Current Liabilities 240,644

Common Equity 21,800

Retained Earnings 94,053(51,473+42,580)

Total Equity 115,853

Total Liabilities & Equity 356,497

From Operating Activities:

Net Income 42,580(From the Income Stmt)

Plus: Depreciation 83(From the Income Stmt)

Plus: Amortization 10(From the Income Stmt)

Operating Cash Flows 42,673

Changes in Working Capital

Accounts Receivable(110,000)(155,000 – 265,000)

Inventories( 30,000)( 18,000 – 48,000)

Deposits

Accounts Payable 30,000(180,000 - 150,000)

Utilities Payable 600( 5,000 - 4,400)

Income Taxes Payable 22,927( 50,644 - 27,717)

From Working Capital( 86,473)

Total From Operating Activities( 43,800)

From Investing Activities:

Fixed Assets( 5,000)(0 – 5,000)

Organizational Costs 0

Total From Investing Activities( 5,000)

From Financing Activities:

Note Payable 5,000(0 – 5,000)

Equity 0

Total From Financing Activities 5,000

Total Cash Flows( 43,800)

Plus: Beginning Cash Balance 79,100

Ending Cash Balance 35,300

December

Entries

Revenues+300,000

Accounts Receivable+300,000

Inventory- 180,000

Cost of Goods Sold+180,000

Cash+280,000

Accounts Receivable- 280,000

Inventory+315,000

Accounts Payable+315,000

Cash- 180,000

Accounts Payable- 180,000

Cash- 2,000

Rent Expense+ 2,000

Cash- 2,400

Salary Expense+ 2,400

Cash- 5,000

Utilities Payable- 5,000

Utility Expense+ 6,000

Utilities Payable+ 6,000

Fixed Assets+ 27,000

Cash- 27,000

Cash+ 15,000

Long-term Debt+ 12,671

Current Portion of L-T Debt+ 2,329(see amortization schedule on handout)

Depreciation Expense+ 533(83 for computer + 450 for van)

Accumulated Depreciation+ 533

Cash+ 1,500

Deposits- 1,500

Amortization Expense+ 10

Accumulated Amortization- 10

Taxes Payable+ 38,117

Tax Expense+ 38,117

Cash- 88,761

Taxes Payable- 88,761

Interest Expense 150

Interest Payable 150

Income Statement

Revenues$300,000

Cost of Goods Sold 180,000

Gross Profit 120,000

Gen. & Adm. Expense

Advertising Expense

Amortization Expense 10

Depreciation Expense 533

Rent 2,000

Salary Expense 2,400

Utilities 6,000

Operating Income 109,057

Interest Expense 150

Taxable Income 108,907

Taxes 38,117

Net Income$ 70,790

Assets

Cash 26,639(35,300+280,000-180,000-2,000-2,400

-5,000-27,000+15,000+1,500-88,761)

Accounts Receivable 285,000(265,000+300,000-280,000)

Inventory 183,000(48,000-180,000+315,000)

Total Current Assets 494,639

Deposits 0(1,500-1,500)

Fixed Assets 32,000(5,000+27,000)

Accumulated Depr.( 616)(83 + 533)

Net Fixed Assets 31,384

Organizational Costs 1,800

Accumulated Amort.( 30)(20+10)

Net Organizational Costs 1,770

Total Assets 527,793

Liabilities & Equity

Accounts Payable 315,000(180,000+315,000-180,000)

Utilities Payable 6,000(5,000-5,000+6,000)

Taxes Payable 0(50,644+38,117-88,761)

Interest Payable 150(0+150)

Note Payable 5,000

Current Portion of L-T Debt 2,329(0+2,329)

Total Current Liabilities 328,479

L-T Debt 12,671(0+12,671)

Common Equity 21,800

Retained Earnings 164,843(94,053+70,790)

Total Equity 186,643

Total Liabilities & Equity 527,793

From Operating Activities:

Net Income 70,790(From the Income Stmt)

Plus: Depreciation 533(From the Income Stmt)

Plus: Amortization 10(From the Income Stmt)

Operating Cash Flows 71,333

Changes in Working Capital

Accounts Receivable( 20,000)(265,000 – 285,000)

Inventories(135,000)( 48,000 – 183,000)

Deposits 1,500(1,500 – 0)

Accounts Payable 135,000(315,000 - 180,000)

Utilities Payable 1,000( 6,000 - 5,000)

Interest Payable 150(150 – 0)

Income Taxes Payable ( 50,644)(0 - 50,644)

From Working Capital( 67,994)

Total From Operating Activities 3,339

From Investing Activities:

Fixed Assets( 27,000)(5,000 – 32,000)

Organizational Costs 0

Total From Investing Activities( 27,000)

From Financing Activities:

Current Portion of L-T Debt 2,124(2,124 – 0)

L-T Debt 13,876(13,876 – 0)

Note Payable 0

Equity 0

Total From Financing Activities 15,000

Total Cash Flows( 8,661)

Plus: Beginning Cash Balance 35,300

Ending Cash Balance 26,639