Question

XYZ Company began operations in May, 2018 by selling common stock to
owners in exchange for $90,000 cash. During 2018, ABC Company entered
into the following transactions:

1.  On May 23, ABC Company purchased inventory for $50,000 cash.

2.  On June 1, ABC Company purchased a three-year insurance policy
    for $23,400 cash.

3.  On July 1, ABC Company received $49,500 cash from a customer
    for services to be performed over the next 18 months.

4.  On August 1, ABC Company purchased equipment for $60,000 cash.
    The equipment was assigned a 10-year life and a $2,400 residual
    value.

5.  On August 18, ABC Company sold one-half of the inventory that
    was purchased on May 23 to a customer for $44,000 cash.

Calculate the amount of total equity that ABC Company would report in
its December 31, 2018 balance sheet after all the above transactions
are recorded and all necessary adjusting entries are made and posted.

Answer 1

Insurance expense for the period June 1 to December 31 (7 months) = total insurance amount/36 months *7 months = 23,400/36*7 = $4,550. (Please note that 3 years = 36 months)

Service revenue that will be recorded for the period July 1 to December 31 (6 months) = total amount of cash received from customer/18 months*6 months = 49500/18*6 = $16,500

Depreciation of equipment (assuming straight line depreciation) = purchase price – salvage value/life = (60,000-2,400)/10 = $5,760 per year. Depreciation from 1^st August to 31^st December (5 months) = Annual depreciation/12 months*5 months = 5760/12*5 = $2,400

Value of one-half of inventory = 50,000/2 = $25,000. This is the cost of goods sold. This was sold for $44,000. Thus profit on sale = $44,000-25,000 = $19,000

Net income = 19,000+16,500 – (4,550+2,400)

= 35,500 – 6,950

= $28,550

Thus total equity as on December 31 = amount raised for cash+net income for the year

= 90,000+28,550

= $118,550