Question

Karla Tanner opens a Web consulting business called Linkworks and completes the following transactions in its first month of operations.

April
1 Tanner invests $80,000 cash along with office equipment valued at $26,000 in the company in exchange for common stock.
2 The company prepaid $9,000 cash for 12 months' rent for office space. (Hint: Debit Prepaid Rent for $9,000.)
3 The company made credit purchases for $8,000 in office equipment and $3,600 in office supplies. Payment is due within 10 days.
6 The company completed services for a client and immediately received $4,000 cash.
9 The company completed a $6,000 project for a client, who must pay within 30 days.
13 The company paid $11,600 cash to settle the account payable created on April 3.
19 The company paid $2,400 cash for the premium on a 12-month insurance policy. (Hint: Debit Prepaid Insurance for $2,400.)
22 The company received $4,400 cash as partial payment for the work completed on April 9.
25 The company completed work for another client for $2,890 on credit.
28 The company paid $5,500 cash in dividends.
29 The company purchased $600 of additional office supplies on credit.
30 The company paid $435 cash for this month's utility bill.

Required:
Prepare Financial statements. (Income statement, statement of Retained earnings and Balance Sheet)

Answer 1

Answer:

Income Statement

Service Revenue     $10,000

Less Expenses :

Utility Bill                     ($435)

Net Income / (Loss)  $9,565

Statement of Retained Earnings

Opening Retained Earnings                      $0

Add Profit Earned During the Period    $9,565

Less Dividends Paid                              ($5,500)

Closing Retained Earnings                     $4,065

Balance Sheet

Assets

Non - Current Assets

Office Equipment                     $34,000

Total Non-Current Assets        $34,000

Current Assets

Office Supplies                           $4,200

Prepaid Rent                               $9,000

Accounts Receivable                    $3,110

Prepaid Insurance                       $2,400

Cash                                           $57,955

Total Current Assets                 $76,665

Total Assets                              $110,665

Equity and Liabilities

Equity

Common Stock                         $106,000

Retained Earnings                        $4,065

Total Equity                                $110,065

Liabilities

Current Liabilities

Accounts Payable                           $600

Total Liabilities                                $600

Total Equity and Liabilities       $110,065

Explanation:

First Record the Transactions as Follows ;

April 1.

Cash $80,000 (debit)

Equipment $26,000 (debit)

Common Stock $106,000 (credit)

April 2

Prepaid Rent $9,000 (debit)

Cash $9,000 (credit)

April 3

Office Equipment $8,000 (debit)

Office Supplies $3,600 (debit)

Accounts Payable $11,600 (credit)

April 6

Cash $4,000 (debit)

Service Revenue $4,000 (credit)

April 9

Accounts Receivable $6,000 (debit)

Service Revenue $6,000 (credit)

April 13

Accounts Payable $11,600 (debit)

Cash $11,600 (credit)

April 19

Prepaid Insurance $2,400 (debit)

Cash $2,400 (credit)

April 22

Cash $2,890 (debit)

Accounts Receivable $2,890 (credit)

April 28

Dividends $5,500 (debit)

Cash $5,500 (credit)

April 29

Office Supplies $600 (debit)

Accounts Payable $600 (credit)

April 30

Utility Bill $435 (debit)

Cash $435 (credit)

Then Determine Account Balances as follows :

Cash $80,000 - $9,000 + $4,000 - $11,600 - $2,400 + $2,890 - $5,500  - $435 = $57,955 (debit)

Office Equipment $26,000 + $8,000 = $34,000 (debit)

Common Stock =$106,000 (credit)

Prepaid Rent = $9,000 (debit)

Office Supplies $3,600 + $600 = $4,200 (debit)

Accounts Payable $11,600 - $11,600 + $600 = $600 (credit)

Service Revenue $4,000 + $6,000 = $10,000 (credit)

Accounts Receivable $6,000 - $2,890 = $3,110 (debit)

Prepaid Insurance =  $2,400 (debit)

Dividends = $5,500 (debit)

Utility Bill = $435 (debit)