Question

Handout 5

Mega keeps its accounting records on a cash basis during the year. At year end, it converts its books to the accrual basis for preparing its financial statements. At the end of 2016, Mega reported the following post-closing trial balance after converting it to the accrual basis. [Hint: These will also be the beginning balances for 2017.]

December 31, 2016 (accrual)

Debit $ 2,700 4,200 2,100 5,600 12,000

$ 4,800 6,100 500 2,000 7,000 6,200

Credit

Cash

Accounts receivable

Supplies

Inventory

Equipment

Accumulated depreciation Accounts payable (for inventory) Salaries payable

Income tax payable

Common stock

Retained earnings

At the end of 2017, you are asked to convert Mega’s books from cash basis to accrual basis and prepare a balance sheet and income statement on an accrual basis. To do this, you are provided with the following information:

You are provided with the following information as of December 31, 2017:

Cash receipts from customers

Cash payments:

To vendors (for inventory)

To employees

For prepaid supplies

For other operating expenses (OE)

To stockholders

For the 2016 income tax liability that was

paid on March 15, 2017 with tax returns

Other information:

Customers owed Mega

Mega owed vendors (for inventory) Mega owed employees

Physical count of inventory Physical count of supplies

Income tax rate for 2017

67,300

30,600 15,500 2,500 5,500 6,000

2,000

5,900 7,000 900 6,300 1,000

25%

Mega depreciates its equipment using the straight-line method over 10 years with no salvage value. Assume that the balance given for other operating expenses (OE) is the same for both cash and accrual.

Required: Using accrual basis accounting, prepare a 2017 income statement and a 2017 balance sheet.

Answer 1

Mega's
Adjusted Trial Balance
December 31,2017
	Debit	Credit
Cash	$7,900
Accounts receivable	$5,900
Supplies	$1,000
Inventory	$6,300
Equipment	$12,000
Accumulated depreciation		$6,000
Accounts payable (for inventory)		$7,000
Salaries payable		$900
Income tax payable
Common stock		$7,000
Retained earnings		$6,200
Sales		$69,000
Costs of goods sold	$30,800
Supplies Expense	$3,600
Salaries expense	$15,900
Other Operating Expenses	$5,500
Depreciation expense	$1,200
Dividends	$6,000
	$96,100	$96,100
Opening Accounts Receivable	$4,200
Sales	$69,000
Cash Receipt	($67,300)
Closing Accounts Receivable	$5,900
Opening Accounts payable	$6,100
Add: purchases	$31,500
Less: Paid	($30,600)
Closing Accounts Payable	$7,000
Opening Salaries Payable	$500
Salaries expense	$15,900
Less: Salaries paid	($15,500)
Closing Salaries Payable	$900
Supplies Opening	$2,100
Add: Purchases	$2,500
Less: Consumed	($3,600)
Closing Supplies	$1,000
Opening Inventory	$5,600
Purchases	$31,500
Less: Closing Inventory	($6,300)
Costs of Goods Sold	$30,800

Income Statement for Megha
For the year ended 31st December,2017
Sales		$69,000
Costs of Goods Sold		($30,800)
Gross Profit		$38,200
Operating Expenses
Supplies Expense	$3,600
Salaries expense	$15,900
Depreciation expense	$5,500
Other Operating Expenses	$1,200
Total Operating Expenses		($26,200)
Operating Income (EBIT)		$12,000
Interest Expense		-
Income before Taxes		$12,000
Income Tax Expenses (25%)		($3,000)
Net income		$9,000
Megha's
Statement of Retained Earnings
For the year ended December 31,2017
Beginning Balance
Retained Earnings on 1 January 2018	$6,200
Add: Net Income For FY 2017	$9,000
Total		$15,200
Less: dividends Dec and Paid for Fy 2017		($6,000)
Retained earnings Balance for 31st December,2018		$9,200
Balance Sheet
Megha's
Balance Sheet as on 31st December,2017
Assets
Current assets
Cash		$7,900
Accounts Receivable		$5,900
Supplies		$1,000
Inventory		$6,300
Total Current Assets		$21,100
Property and Eqipment (Gross)
Equipment	$12,000
Less: Accumulated depreciation	($6,000)
Property and Eqipment (Net)		$6,000
Total Assets		$27,100
Liabilities
Current Liabilities
Accounts payable (for inventory)		$7,000
Salaries payable		$900
Income tax payable		$3,000
Total Current Liabilities		$10,900
Shareholder's Equity
Common stock		$7,000
Retained earnings		$9,200
Total Shatreholder's Equity		$16,200
Total Liabilities and Sharehiolder's Equity		$27,100