Question

At the beginning of Year 2, the Redd Company had the following balances in its accounts:

Cash	$	15,300
Inventory		5,500
Land		2,300
Common stock		12,000
Retained earnings		11,100

During Year 2, the company experienced the following events:

1. Purchased inventory that cost $11,500 on account from Ross Company under terms 2/10, n/30. The merchandise was delivered FOB shipping point. Freight costs of $830 were paid in cash.

2. Returned $600 of the inventory it had purchased from Ross Company because the inventory was damaged in transit. The seller agreed to pay the return freight cost.

3. Paid the amount due on its account payable to Ross Company within the cash discount period.

4. Sold inventory that had cost $8,000 for $14,000 on account, under terms 2/10, n/45.

5. Received merchandise returned from a customer. The merchandise originally cost $1,350 and was sold to the customer for $2,400 cash. The customer was paid $2,400 cash for the returned merchandise.

6. Delivered goods FOB destination in Event 4. Freight costs of $720 were paid in cash.

7. Collected the amount due on the account receivable within the discount period.

8. Sold the land for $4,100.

9. Recognized accrued interest income of $400.

10. Took a physical count indicating that $6,800 of inventory was on hand at the end of the accounting period. (Hint:Determine the current balance in the inventory account before calculating the amount of the inventory write down.)

d. Prepare a multistep income statement, a statement of changes in stockholders’ equity, a balance sheet, and a statement of cash flows for year 2. (Statement of Cash Flows only, items to be deducted must be indicated with a minus amount.)

Answer 1

Inventory before adjustment = $5500 + 11500+830 -600-(11500-600)*2% - 8000+1350 = $10362

Income Statement (Multi-step)
Sales Revenue	$          14,000
Less Sales Returns	$          -2,400
Less Sales Discount	$              -280
Net Sales Revenue		$          11,320
Cost of Goods Sold		$          10,212
Gross Profit		$            1,108
Less operating expenses
Delivery Expense	$                720
Total Operating Expenses		$                720
Operating Income		$                388
Other Income (Expenses)
Interest Revenue		$                400
Gain on sale of land		$            1,800
Income before tax		$            2,588
Income tax expense		$                   -
Net Income		$            2,588

Statement of Stockholder's Equity
	Common Stock	Retained Earnings
Beginning Balance	$          12,000	$          11,100
Add : Stock issued	$                   -
Add : Net Income		$            2,588
Less : Dividend paid		$                   -
Ending Balance	$          12,000	$          13,688

Balance Sheet
Assets
Current Assets
Cash	$          18,488
Accounts Receivable	$                   -
Less : Allowance for Doubtful Debts	$                   -
Inventory	$            6,800
Interest Receivable	$                400
Prepaid Insurance
Total Current Assets		$          25,688
Non Current Asstes
Land		$                   -
Total Assets		$          25,688
Liabilities
Current Liabilities
Accounts Payable	$                   -
Total Current Liabilities		$                   -
Stockholder's Equity
Common Stock	$          12,000
Retained Earnings	$          13,688
Total Stockholder's Equity		$          25,688
Total Liabilities & Stockholder's Equity		$          25,688

Cash Flow Statement
Indirect Method
Cash Flow from Operating Activities
Profit after tax		$            2,588
Adjustments
Gain on sale of land	$          -1,800
Increase in Inventory	$          -1,300
Increase in Interest Receivable	$              -400
Total Adjustments		$          -3,500
Cash from Operating Activities			$              -912
Cash flow from Investing Activities
Sale of land		$            4,100
Net cash used In investing activities			$            4,100
Cash flow from Financing Activities
Issue of Common Stock		$                   -
Net cash used in financing activities			$                   -
Increase in Cash			$            3,188
Opening Balance of Cash			$         15,300
Closing Balance of Cash			$         18,488