Question

ABC Company began operations on August 1, 2021 and entered into the following transactions during 2021:

1. On August 1, ABC Company sold common stock to owners in the amount of $100,000 and borrowed $200,000 from the local bank on a 10-month, 12% note payable.

2. On September 1, ABC Company purchased a piece of equipment costing $80,000 by paying $50,000 in cash and agreeing to pay the remainder within six months. The equipment was assigned a 5-year life and a $5,000 residual value.

3. On October 1, ABC Company received $80,000 cash from a customer for services to be performed over the next ten months.

4. On November 1, ABC Company paid $18,000 cash for a one year insurance policy.

5. On December 1, ABC Company paid $10,000 cash to its stockholders as a dividend.

（1）Calculate the amount of net income that ABC Company would report in its 2021 income statement after all the above transactions are recorded and all necessary adjusting entries are made at December 31, 2021.

（2）Calculate the amount of total liabilities that ABC Company would report in its December 31, 2021 balance sheet after all the above transactions are recorded and all necessary adjusting entries are made.

（3）Calculate the amount of total assets that ABC Company would report in its December 31, 2021 balance sheet after all the above transactions are recorded and all necessary adjusting entries are made.

Answer 1

Transactions for the year are :

Date	Account	Debit	Credit
01-Aug-21	Cash	300000
	Common stock		100000
	Bank loan		200000
01-Sep-21	Equipment	80000
	Cash		50000
	Accounts payable		30000
01-Oct-21	Cash	80000
	Unearned revenue		80000
01-Nov-21	Prepaid insurance expense	18000
	Cash		18000
01-Dec-21	Dividend paid	10000
	Cash		10000
31-Dec-21	Unearned revenue	24000
	Revenue		24000
	Depreciation expense	5000
	Accumulated depreciation		5000
	Interest expense	10000
	Interest payble		10000
	Insurance expense	3000
	Prepaid insurance expense		3000

Revenue for the year = total payment / no of for the service to be provided x no of months servuce provided this year

= (80000/10) x 3 = $24,000

Annual depreciation expense = 80000 - 5000 / 5 = $15,000

Depreciation expense for the year = annual depreciation expense/12 x no of months assets used this year

= 15000 x 4/12 = $5,000

Current year Insurance expense = total insurance policy payment / duration x no of months passed this year  

= 18000/12 x 2 = $3,000

Interest expense for the year = loan amount x interest rate x no of months in this year/12

= 200000 x 0.12 x 5/12 = $10,000

  

1) P and L statement for the year ending December 31, 2021

P and L
Revenue	24000
COGS	0
Gross profit	24000
Less : Insurance expense	-3000
EBITDA	21000
Less : Depreciation	-5000
EBIT	16000
Less : Interest	-10000
Net profit	6000

Net income for the year is $ 6,000

2) Balance sheet as on December 31, 2021

Balance sheet
Asset	Amount	Liability and common stock	Amount
Cash	302000	Accounts payable	30000
Prepaid insurance expense	15000	Unearned revenue	56000
Equipment : 80000		Interest payable	10000
Less : acc dep - (5000)	75000	Note payable	200000
		Common stock	96000
	392000		392000

Total liabilities for the year = $296,000

3) Total Assets for the year = $392,000

Please like the solution if satisfied and drop a comment in case of any doubt.

Thankyou