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Zambrano Wholesale Corporation

Income statement

For the Year Ended December 31, 2011

 

Sales revenue $705,000

Cost of goods sold 420,000

Gross profit 285,000

Operating expenses:

Insurance $ 6,500

Salaries 214,000

Rent 23,000

Depreciation 10,000

Total operating expenses 253,500

Operating income 31,500

Other income (expense):

Interest revenue 4,000

Interest expense (1,000) 3,000

Net income $34,500

 

 

Problem 2-12 (concluded)

Requirement 2

 

a. Prepaid insurance $ 2,000

b. Prepaid rent 12,000

c. Interest receivable 3,000

d. Interest payable 1,000

 


                         
Account Title Unadjusted Trial Balance Adjusting Entries Adjusted Trial Balance Income Statement Balance Sheet            
  Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.        
Cash 23,300       23,300       23,300          
Accounts receivable 32,500       32,500       32,500          
Allowance for                            
uncollectible accounts     (3) 550                
Supplies   (5) 500                  
Prepaid rent   (6) 1,000   1,000       1,000          
Inventory 65,000       65,000       65,000          
Equipment 75,000       75,000       75,000          
Accumulated depreciation-                            
equipment   10,000   (1) 9,375   19,375       19,375        
Accounts payable   26,000       26,000       26,000        
Wages payable   3,000   (2) 1,500   4,500       4,500        
Note payable   30,000       30,000       30,000        
Interest payable     (4) 1,000   1,000       1,000        
Common stock   80,000       80,000       80,000        
Retained earnings   16,050       16,050       16,050        
Sales revenue   180,000       180,000   180,000            
Cost of goods sold 95,000       95,000   95,000              
Interest expense   (4) 1,000   1,000   1,000              
Wage expense 32,350   (2) 1,500   33,850   33,850              
Rent expense 14,000     (6) 1,000 13,000   13,000              
Supplies expense 2,000     (5) 500 1,500   1,500              
Utility expense 6,000       6,000   6,000              
Bad debt expense   (3) 550                  
Depreciation expense   (1) 9,375   9,375   9,375              
                             
Net Income             19,725     19,725        
                             
Totals 345,150 345,150 13,925 13,925 357,575 357,575 180,000 180,000 197,300 197,300        
                             
                             
                                                               

Problem 2-13 (continued)

 

     
EXCALIBUR CORPORATION    
Income Statement    
For the Year Ended December 31, 2011    
       
Sales revenue ..........................................   $180,000  
Cost of goods sold .................................. 95,000  
Gross profit ............................................   85,000  
       
Operating expenses:      
Wages ................................................... 33,850    
Rent....................................................... 13,000    
Supplies ................................................ 1,500    
Utility ................................................... 6,000    
Bad debt ...............................................    
Depreciation.......................................... 9,375    
Total operating expenses ....... 64,275  
Operating income ....................................   20,725  
Other expense:    
Interest .................................................   1,000  
Net income ..............................................   $ 19,725  
       
                 

 

Problem 2-13 (continued)

 

 

EXCALIBUR CORPORATION

Statement of Shareholders' Equity

For the Year Ended December 31, 2011

 

Total

Common Retained Shareholders’

Stock Earnings Equity

Balance at January 1, 2011 $80,000 $22,050 $102,050

 

Issue of common stock - 0 - - 0 -

Net income for 2011 19,725 19,725

Less: Dividends ______ (6,000) (6,000)

Balance at December 31, 2011 $80,000 $35,775 $115,775

 

 

Problem 2-13 (continued)

         
EXCALIBUR CORPORATION      
Balance Sheet      
At December 31, 2011      
       
Assets        
         
Current assets:        
Cash .........................................................   $ 23,300    
Accounts receivable .................................. $32,500      
Less: Allowance for uncollectible accounts . (650) 31,850    
Supplies ...................................................      
Prepaid rent...............................................   1,000    
Inventory ..................................................   65,000    
Total current assets ................................   121,650    
         
Equipment .................................................. 75,000      
Less: Accumulated depreciation ............... (19,375) 55,625    
Total assets ..........................................   $177,275    
         
Liabilities and Shareholders' Equity      
         
Current liabilities:        
Accounts payable .....................................   $ 26,000    
Wages payable .........................................   4,500    
Note payable ............................................ Interest payable ........................................   30,000 1,000    
Total current liabilities ...........................   61,500    
         
Shareholders’ equity:        
Common stock ......................................... $80,000      
Retained earnings ..................................... 35,775      
Total shareholders’ equity .....................   115,775    
Total liabilities and shareholders’ equity   $177,275    
         
                       

 

Problem 2-13 (concluded)

 

December 31, 2011

Sales revenue............................................................. 180,000

Income summary................................................... 180,000

 

Income summary....................................................... 160,275

Cost of goods sold................................................. 95,000

Interest expense..................................................... 1,000

Wage expense........................................................ 33,850

Rent expense......................................................... 13,000

Supplies expense .................................................. 1,500

Utility expense...................................................... 6,000

Bad debt expense.................................................. 550

Depreciation expense............................................ 9,375

 

Income summary ($180,000 - 160,275)........................... 19,725

Retained earnings.................................................. 19,725

 

CASES

Requirement 1

Cash basis accounting produces a measure of performance called net operating cash flow. This measure is the difference between cash receipts and cash disbursements during a reporting period from transactions related to providing goods and services to customers. On the other hand, the accrual accounting model measures an entity’s accomplishments (revenues) and resource sacrifices (expenses) during the period, regardless of when cash is received or paid.

Requirement 2

In most cases, the accrual accounting model provides a better measure of performance because it attempts to measure the accomplishments and sacrifices that occurred during the year, which may not correspond to cash inflows and outflows.

Requirement 3

Adjusting entries, for the most part, are conversions from cash to accrual. Prepayments and accruals occur when cash flow precedes or follows expense or revenue recognition.

Requirement 1

Cash-basis net income $26,000

Add: 1. Unexpired (prepaid insurance) $12,000 x 8/12 8,000

2. Increase in accounts receivable ($6,500 – 5,000) 1,500

5. Increase in inventories ($35,000 – 32,000) 3,000

Deduct: 3. Increase in wages payable ($8,200 – 7,200) (1,000)

4. Increase in utilities payable ($1,200 – 900) (300)

6. Increase in amount owed to suppliers (4,000)

Accrual basis net income $33,200

Requirement 2

Assets would be higher by $12,500 ($8,000 + 1,500 + 3,000) and liabilities would also be higher by $5,300 ($1,000 + 300 + 4,000). The difference, $7,200, is the difference between cash and accrual income. Therefore, equity would be higher by $7,200.

 

Requirement 1

Prepaymentsoccur when the cash flow precedes either expense or revenue recognition. Accrualsoccur when the cash flow comes after either expense or revenue recognition.

Requirement 2

The appropriate adjusting entry for a prepaid expense is a debit to expense and a credit to the prepaid asset. For unearned revenue, the appropriate adjusting entry is a debit to the unearned revenue liability account and a credit to revenue. Failure to record an adjusting entry for a prepaid expense will cause assets and shareholders’ equity to be overstated. Failure to record an adjusting entry for unearned revenue will cause liabilities to be overstated and shareholders’ equity to be understated.

Requirement 3

The required adjusting entry for accrued liabilities is a debit to expense and a credit to a liability. For accrued receivables, the appropriate adjusting entry is a debit to a receivable and a credit to revenue. Failure to record an adjusting entry for an accrued liability will cause liabilities to be understated and shareholders’ equity to be overstated. Failure to record an adjusting entry for accrued receivables will cause assets and shareholders’ equity to be understated.

 

 

Date: 2015-12-11; view: 2129

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