Demonstration Problem 3-1
Jackson Legal Services was started when a client paid the firm a $12,000 cash retainer on October 1, 20X6. Jackson agreed to provide legal advice to the client for a one-year period of time beginning on the date of the cash receipt. The closing date for the law practice is December 31.
Required:
1. Record the events for 20X6 and 20X7 under an accounting equation.
2. Prepare an income statement, a statement of retained earnings, a balance sheet, and a statement of cash flows for the 20X6 and 20X7 accounting periods.
Demonstration Problem 3-2
Bill Sanders started a part-time consulting practice named Sanders Consulting Associates (SCA) on January 1, 20X5. SCA consummated the following transactions during the 20X5 accounting period.
1. Acquired a $3,000 cash contribution of capital from the owner.
2. Purchased a $2,000 computer system.
3. Paid $100 cash for supplies.
4. Paid $360 cash for an insurance policy that covered the company for one year beginning March 1, 20X5.
5. Recognized revenue for services provided on account in the amount of $2,800.
6. Collected $2,200 of the receivables due from customers.
7. Recognized accrued operating expenses, other than supplies and insurance, that were charged on account in the amount of $1,750 (the liability is recorded in accounts payable).
8. Paid suppliers $900 of the amount due on the accounts payable.
9. On November 1, 20X5, Sanders collected $2,880 cash in advance for services to be provided under a one-year contract.
10. Distributed $200 to the owner.
11. Purchased land that cost $2,460 cash.
Adjusting Entries:
12. Recognized depreciation expense. The computer was purchased on January 1, 20X5. It had a three-year useful life and a $200 salvage value.
13. Recognized supplies expense. There were $20 of supplies on hand at the close of business on December 31, 20X5.
14. Recognized ten months of insurance expense.
15. Recognized income earned on the service contract described in Event No. 9.
SCA consummated the following transactions during the 20X6 accounting period:
1. Acquired an additional $1,000 cash contribution of capital from the owner.
2. Sold the land that it owned for $2,900 cash.
3. Paid cash to purchase $125 of supplies.
4. Borrowed $3,000 cash from a local bank.
5. Paid $420 cash to renew the insurance policy for a one-year term.
6. Recognized revenue for services provided on account in the amount of $4,700.
7. Collected $4,200 of the receivables due from customers.
8. Recognized accrued operating expenses, other than supplies and insurance. These operating expenses were charged to accounts payable in the amount of $3,300.
9. Paid suppliers $2,900 of the amount due on the accounts payable.
10. Distributed $1,800 cash to the owners of the business.
Adjusting Entries:
11. Recognized revenue earned when remaining services were performed under the service contract.
12. Recognized depreciation expense.
13. Recognized supplies expense. There were $35 of supplies on hand at the close of business on December 31, 20X6.
14. Recognized twelve months of insurance expense. Recall that the beginning balance in the prepaid insurance account represents two months’ insurance that was purchased in 20X5. Rates in 20X5 were different than those paid in 20X6. The new policy with a $420 annual premium was acquired on March 1, 20X6.
15. Recognized the accrued interest on the bank note issued in Event No. 4. The bank note carried a 12 percent annual rate of interest and a one-year term. Assume that the funds were borrowed on December 1, 20X6.
Required:
1. Record the events for 20X5 and 20X6 in ledger account balances under an accounting equation.
2. Prepare an income statement, a statement of retained earnings, a balance sheet, and a statement of cash flows for the 20X5 and 20X6 accounting periods.
Demonstration Problem 3-1 Solution: Accounting Equations 20X6 and 20X7
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Assets |
= |
Liabilities |
+ |
Equity |
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20X6 |
Cash |
= |
Unearned Revenue |
+ |
Cont. Capital |
+ |
Ret. Ear. |
|
Beginning Balances |
$ -0- |
$ -0- |
$ -0- |
$ -0- |
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1. Recognition of Liability |
12,000 |
12,000 |
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2. Adjustment for Earned Rev. |
(3,000) |
3,000 |
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───── |
──── |
───── |
───── |
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Ending/Beginning Balances |
$12,000 |
= |
$ 9,000 |
+ |
$ -0- |
+ |
$3,000 |
|
20X7 |
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1. Adjustment for Earned Rev. |
(9,000) |
9,000 |
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───── |
──── |
───── |
───── |
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Ending Balances |
$12,000 |
$ -0- |
$ -0- |
$12,000 |
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═════ |
════ |
═════ |
═════ |
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Demonstration Problem 3-1 ─ Solution ─ Financial Statements
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Jackson Legal Services Financial Statements |
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Income Statements |
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For the Periods Ended |
20X6 |
20X7 |
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Revenue |
$3,000 |
$9,000 |
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Expense |
-0- |
-0- |
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Net Income |
$3,000 |
$9,000 |
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Statements of Retained Earnings |
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Beginning Retained Earnings |
$ -0- |
$ 3,000 |
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Net Income |
3,000 |
9,000 |
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Distributions |
-0- |
-0- |
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Ending Retained Earnings |
$3,000 |
$12,000 |
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Balance Sheets |
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Assets |
|||||
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Cash |
$12,000 |
$12,000 |
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Liabilities |
|||||
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Unearned Revenue |
$ 9,000 |
$ -0- |
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|
Equity |
|||||
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Retained Earnings |
3,000 |
12,000 |
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Total Liabilities and Equity |
$12,000 |
$12,000 |
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Statements of Cash Flows |
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Cash Flows from Operating Activities |
$12,000 |
$ -0- |
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Cash Flows from Investing Activities |
-0- |
-0- |
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Cash Flows from Financing Activities |
-0- |
-0- |
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Net Change in Cash |
$12,000 |
$ -0- |
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Beginning Cash Balance |
-0- |
12,000 |
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Ending Cash Balance |
$12,000 |
$12,000 |
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Demonstration Problem 3-2 — Solution ─ Ledger Account Balances
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20X5 Ledger Account Balances Prior to Closing |
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Assets |
= |
Liabilities |
+ |
Equity |
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|
Cash |
Prepaid Ins. |
Unearned Rev. |
Cont. Cap. |
Ret. Ear. |
||||||
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(1) $3,000 |
(4) $ 360 |
(9) $2,880 |
(1) $3,000 |
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(2) (2,000) |
(14) (300) |
(15) (480) |
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(3) (100) |
Bal. $ 60 |
Bal. $2,400 |
Revenue |
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(4) (360) |
(5) $2,800 |
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(6) 2,200 |
Comp. Equip. |
Accts. Pay. |
(15) 480 |
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(8) (900) |
(2) $2,000 |
(7) $1,750 |
Bal. $3,280 |
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(9) 2,880 |
(8) (900) |
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(10) (200) |
Accum. Dep. |
Bal. $ 850 |
Oper. Exp. |
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(11) (2,460) |
(12) $(600) |
(7) $(1,750) |
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Bal. $ 2,060 |
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Land |
Dep. Exp. |
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Accts. Rec. |
(11) $2,460 |
(12) $(600) |
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(5) $2,800 |
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(6) (2,200) |
Supplies Exp. |
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Bal. $ 600 |
(13) $(80) |
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Supplies |
Ins. Expense |
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(3) $100 |
(14) $(300) |
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(13) (80) |
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Bal. $ 20 |
Distribution |
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(10) $(200) |
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Total Assets |
= |
Total Liab. |
+ |
Total Equity |
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|
$6,600 |
= |
$3,250 |
+ |
$3,350 |
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Demonstration Problem 3-2 ─ Solution ─ Ledger Account Balances
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20X6 Ledger Account Balances Prior to Closing |
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Assets |
= |
Liabilities |
+ |
Equity |
||||||
|
Cash |
Prepaid Ins. |
Unearned Rev. |
Cont. Cap. |
Ret. Ear. |
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|
Bal. $2,060 |
Bal. $ 60 |
Bal. $2,400 |
Bal. $3,000 |
Bal. $ 350 |
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(1) 1,000 |
(5) 420 |
(11) (2,400) |
(1) 1,000 |
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(2) 2,900 |
(14) (410) |
Bal. -0- |
Bal. $4,000 |
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(3) (125) |
Bal. $ 70 |
Revenue |
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(4) 3,000 |
Accts. Pay. |
(6) $4,700 |
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(5) (420) |
Comp. Equip. |
Bal. $ 850 |
(11) 2,400 |
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(7) 4,200 |
Bal. $2,000 |
(8) 3,300 |
Bal. $7,100 |
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(9) (2,900) |
(9) (2,900) |
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(10) (1,800) |
Accum. Dep. |
Bal. $1,250 |
Oper. Exp. |
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Bal. $7,915 |
Bal. $ (600) |
(8) $(3,300) |
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(12) (600) |
Note Pay. |
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Accts. Rec. |
Bal. $(1,200) |
(4) $3,000 |
Dep. Exp. |
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Bal. $ 600 |
(12) $ (600) |
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(6) 4,700 |
Land |
Interest Pay. |
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(7) (4,200) |
Bal. $2,460 |
(15) $ 30 |
Supplies Exp. |
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Bal. $1,100 |
(2) (2,460) |
(13) $ (110) |
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Bal. -0- |
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Supplies |
Ins. Expense |
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Bal. $ 20 |
(14) $ (410) |
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(3) 125 |
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(13) (110) |
Interest Exp. |
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Bal. $ 35 |
(15) $ (30) |
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Gain on Land |
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(2) $ 440 |
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Distribution |
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(10) $(1,800) |
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Total Assets |
= |
Total Liab. |
+ |
Total Equity |
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|
$9,920 |
= |
$4,280 |
+ |
$5,640 |
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Demonstration Problem 3-2 — Solution ─ Financial Statements |
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Income Statements |
20X5 |
20X6 |
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Consulting Revenue |
$3,280 |
$7,100 |
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Total Expense |
(2,730) |
(4,450) |
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Operating Income |
$ 550 |
$2,650 |
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Gain on Sale of Land |
-0- |
440 |
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Net Income |
$ 550 |
$3,090 |
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Statements of Changes in Equity |
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Beginning Contributed Capital |
$ -0- |
$3,000 |
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Plus: Capital Acquisitions from Owners |
3,000 |
1,000 |
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Ending Contributed Capital |
$3,000 |
$4,000 |
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Beginning Retained Earnings |
$ -0- |
$ 350 |
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Plus: Net Income |
550 |
3,090 |
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Less: Distributions |
(200) |
(1,800) |
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Ending Retained Earnings |
$ 350 |
$1,640 |
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Total Equity |
$3,350 |
$5,640 |
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Balance Sheets |
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Cash |
$2,060 |
$7,915 |
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Accounts Receivable |
600 |
1,100 |
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Supplies |
20 |
35 |
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Prepaid Insurance |
60 |
70 |
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Computer Equipment |
2,000 |
2,000 |
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Accumulated Depreciation |
(600) |
(1,200) |
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Land |
2,460 |
-0- |
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Total Assets |
$6,600 |
$9,920 |
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Unearned Revenue |
$2,400 |
$ -0- |
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Accounts Payable |
850 |
1,250 |
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Interest Payable |
-0- |
30 |
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Note Payable |
-0- |
3,000 |
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Total Liabilities |
$3,250 |
$4,280 |
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Contributed Capital |
$3,000 |
$4,000 |
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Retained Earnings |
350 |
1,640 |
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Total Equity |
$3,350 |
$5,640 |
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|
Total Liabilities and Equity |
$6,600 |
$9,920 |
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Demonstration Problem 3-2 — Solution ─ (continued)
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Statements of Cash Flows |
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Cash Flows from Operating Activities |
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Cash Receipts from Consulting Revenue |
$ 5,080 |
$4,200 |
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Cash Payments for Expenses |
1,360 |
(3,445) |
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Net Cash Inflow from Operating Activities |
$ 3,720 |
$ 755 |
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Cash Flows from Investing Activities |
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Cash Payment to Purchase Land |
$(2,460) |
$ -0- |
||||
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Cash Payment to Purchase Computer Equipment |
(2,000) |
-0- |
||||
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Cash Receipt from Sale of Land |
-0- |
2,900 |
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Net Cash Outflow from Investing Activities |
$(4,460) |
$2,900 |
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Cash Flows from Financing Activities |
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|
Cash Receipt from Bank Loan |
$ -0- |
$3,000 |
||||
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Cash Receipt from Capital Acquisitions |
3,000 |
1,000 |
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Cash Payment for Distribution |
(200) |
(1,800) |
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Net Cash Inflow from Financing Activities |
$2,800 |
$2,200 |
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|
Net Change in Cash |
$2,060 |
$5,855 |
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|
Beginning Cash Balance |
-0- |
2,060 |
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Ending Cash Balance |
$2,060 |
$7,915 |
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