Question

Raintree Corporation maintains its records on a cash basis. At the end of each year the company's accountant obtains the necessary information to prepare accrual basis financial statements. The following cash flows occurred during the year ended December 31, 2016
Cash receipts:
From customers.................................$ 450,000
Interest on note.......................................3,000
Issue of common stock............................50,000
Total cash receipts..............................$ 503,000
Cash disbursements:
Purchase of merchandise.......................$ 220,000
Annual insurance payment..........................9,000
Payment of salaries................................180,000
Dividends paid to shareholders.....................6,000
Annual rent payment...............................12,000
Total cash disbursements.......................$ 427,000
Selected balance sheet information:

Additional information:
1. On June 30, 2015, Raintree lent a customer $50,000. Interest at 6% is payable annually on each June 30. Principal is due in 2019.
2. The annual insurance payment is made in advance on March 31.
3. Annual rent on the company's facilities is paid in advance on September 30.
Required:
1. Prepare an accrual basis income statement for 2016 (ignore income taxes).
2. Determine the following balance sheet amounts on December 31, 2016
a. Interest Receivable
b. Prepaid Insurance
c. Prepaid Rent

Answer 1

Working Notes:

Sales Revenue
Cash Collected from Customers	$4,50,000
Add: Closing Account receivable	$70,000
Less: Opening Account Receivable	-$42,000
Sales Revenue	$4,78,000
Purchases Made
Cash Paid for Purchase of Merchandise	$2,20,000
Add: Closing Account payable	$62,000
Less: Opening Account payable	-$50,000
Purchase of Merchandise Inventory	$2,32,000
Cost of goods Sold
Opening Inventory	$60,000
Add Merchandise Purchased	$2,32,000
Less: Closing Inventory	-$82,000
Cost of goods Sold	$2,10,000
Interest Revenue
Cash Received	$3,000
Add: Interest From July 1 to Dec 31 : (50000*6%)*(6/12)	$1,500
Less: Amount Accrued at the end of 2014	-$1,500
Interest Revenue	$3,000
Insurance Expense
Cash Paid	$9,000
Add: Prepaid Insurance Expired during 2016	$2,000
Less: Prepaid Insurance for Jan 1 2017 to March 31 2017: (9000*3/12)	-$2,250
Insurance Expense	$8,750
Salaries Expense
Cash Paid	$1,80,000
Add: Closing Balance of Salary Payable	$28,000
Less: Closing Balance of Salary Payable	-$20,000
Salaries Expense	$1,88,000
Rent Expense
Amount Paid	$12,000
Add: Prepaid rent expired during 2016	$7,000
Less: Prepaid Rent for Jan 1 2017 to Sep 30 2017: (12000*9/12)	-$9,000
Rent Expense	$10,000
Depreciation Expense
Closing Accumulated Depreciation	$55,000
Less: opening Accumulated Depreciation	-$40,000
Depreciation Expense	$15,000

Answer: 1

Accrual basis income statement for 2016

Sale Revenue		$4,78,000
Less: Cost of Goods Sold		-$2,10,000
Gross Profit		$2,68,000
Less: Operating Expenses
Insurance Expense	$8,750
Salaries Expense	$1,88,000
Rent Expense	$10,000
Depreciation Expense	$15,000	-$2,21,750
Operating Income		$46,250
Add Interest Income		$3,000
Net Income		$49,250

 

 

A. Interest Receivable

Interest Receivable: 50000*6%*(6/12)

$1,500

 

B. Prepaid Insurance

Prepaid Insurance: 9000*3/12

$2,250

 

C. Prepaid Rent

Prepaid Rent : 12000*9/12

$9,000