Question

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The trial balance for Terry’s Auto Shop as of January 1, 2016, follows:

Account Titles	Debit			Credit
Cash	$	6,090
Inventory		3,150
Common Stock				$	7,480
Retained Earnings					1,760
Total	$	9,240		$	9,240

   

The following events affected the company during the 2016 accounting period:

1.	Purchased merchandise on account that cost $4,280.
2.	The goods in Event 1 were purchased FOB shipping point with freight cost of $215 cash.
3.	Returned $420 of damaged merchandise for credit on account.
4.	Agreed to keep other damaged merchandise for which the company received an $275 allowance.
5.	Sold merchandise that cost $2,580 for $4,790 cash.
6.	Delivered merchandise to customers in Event 5 under terms FOB destination with freight costs amounting to $145 cash.
7.	Paid $2,980 on the merchandise purchased in Event 1.

Required

a.	Record the events in general journal format. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Event 1:Record entry for purchase of merchandise on account.

Event 2: Record entry cash paid for freight cost.

Event 3: Record entry to return of damaged merchandise for credit on account.

Event 4: Record entry for allowances to keep other damaged Merchandise.

Event 5: Record sale inventory for cash.

Event 6: Record entry for cost of goods sold.

Event 7: Record entry for freight cost paid.

Event 8: Record cash paid for merchandise purchased.

b.	Open general ledger T-accounts with the appropriate beginning balances, and post the journal entries to the T-accounts.

	Cash Accounts Payable Beg. Bal Beg. Bal End. Bal End. Bal Merchandise Inventory Common Stock Beg. Bal Beg. Bal End. Bal End. Bal Retained Earnings Sales Revenue Beg. Bal Beg. Bal End. Bal End. Bal Cost of Goods Sold Transportation-out Beg. Bal Beg. Bal End. Bal End. Bal

c.	Prepare an income statement, balance sheet, and statement of cash flows. (Assume that closing entries have been made.) (Statement of Cash Flows only, items to be deducted must be indicated with a negative amount.)

	TERRY'S AUTO SHOP Income Statement For the Year Ended December 31, 2016 Operating expenses

	TERRY'S AUTO SHOP Balance Sheet As of December 31, 2016 Assets Total assets Liabilities Total liabilities Stockholders’ equity Total stockholders' equity Total liabilities and stockholders' equity

	TERRY'S AUTO SHOP Statement of Cash Flows For the Year Ended December 31, 2016 Cash flow from operating activities Net cash flow from operating activities Cash flows from investing activities Cash flows from financing activities Net change in cash Ending cash balance

d.	Why does a difference exists between net income and net cash flow from operating activities.

The difference between net income and net cash flow from operating activities exists because the shop is not selling all the inventory that it purchased during the period.

Answer 1

a)	general journal	Debit	Credit
Event1	Merchandise Inventory	$ 4,280.00
	Accounts payable		$ 4,280.00
	TO Record purchase of merchandise on account.
Event2	Merchandise Inventory	$     215.00
	Cash		$     215.00
	To Record cash paid for freight cost.
Event 3	Accounts payable	$     420.00
	Merchandise Inventory		$     420.00
	TO Record return of damaged merchandise for credit on account.
Event 4	Accounts payable	$     275.00
	Merchandise Inventory		$     275.00
	TO Record allowances to keep other damaged Merchandise.
Event 5	Cash	$ 4,790.00
	Sales Revenue		$ 4,790.00
	To Record sale inventory for cash.
Event 6	Cost of goods sold	$ 2,580.00
	Merchandise Inventory		$ 2,580.00
	To Record for cost of goods sold
Event 7	Transportation-out Account	$     145.00
	Cash		$     145.00
	To Record freight cost paid.
Event 8	Accounts payable	$ 2,980.00
	Cash		$ 2,980.00
	To record cash paid for merchandise purchased.

2)

Cash Account
Beginning Balance	$    6,090.00	Merchandise Inventory	$        215.00
sales	$    4,790.00	Transportation-out Account	$        145.00
		Accounts payable	$    2,980.00
		Ending Balance	$    7,540.00
Total	$ 10,880.00	Total	$ 10,880.00
Accounts Payable Account
Cash Account	$    2,980.00	Beginning Balance	$                 -
Merchandise Inventory	$        420.00	Merchandise Inventory	$    4,280.00
Merchandise Inventory	$        275.00
Closing Balance	$        605.00
Total	$    4,280.00	Total	$    4,280.00
Merchandise Inventory Account
Beginning Balance	$    3,150.00	Accounts Payable Account	$        420.00
Accounts Payable Account	$    4,280.00	Accounts Payable Account	$        275.00
Cash Account	$        215.00	Cost of goods sold	$    2,580.00
		Ending Balance	$    4,370.00
Total	$    7,645.00	Total	$    7,645.00
Common Stock Account
		Beginning Balance	$    7,480.00
Ending Balance	$    7,480.00
Total	$    7,480.00	Total	$    7,480.00
Retained Earnings Account
		Beginning Balance	$    1,760.00
Ending Balance	$    1,760.00
Total	$    1,760.00	Total	$    1,760.00
Sales Revenue Account
		Cash	4790
Ending Balance	4790
Total	4790	Total	4790
Cost of goods sold Account
Merchandise Inventory	2580
		Ending Balance	2580
Total	2580	Total	2580
Transportation-out Account
Cash	145
		Ending Balance	145
Total	145	Total	145

3a )

TERRY'S AUTO SHOP
INCOME STATEMENT
For the Year ended 31,2016
Sales	$                                    4,790.00
Cost of goods sold	$                                 (2,580.00)
Gross Profit	$                                    2,210.00
Operating Expenses
Transportation-out Account	$                                     (145.00)
Net profit	$                                    2,065.00
TERRY'S AUTO SHOP
BALANCE SHEET
As on December 31,2016
Assets
Merchandise	$                                    4,370.00
Cash	$                                    7,540.00
Total assets	$                                 11,910.00
Liabilites
Accounts Payable	$                                       605.00
Total Liabilites	$                                       605.00
Shareholders Equity	$                                    7,480.00
Retained Earnings	$                                    3,825.00
Total Shareholders Equity	$                                 11,305.00
Total Shareholders Equity and Liability	$                                 11,910.00
TERRY'S AUTO SHOP
Statement of Cash Flows
For the Year ended 31,2016
Cash flow from Operating activities
Cash Received from customers	$                                    4,790.00
Cash Paid for expenses	$                                     (145.00)
Cash paid for purchase of merchandise inventory.	$                                 (3,195.00)
Cash flow from Operating activities	$                                    1,450.00
Cash flow from Investing activities	0
Cash flow from Financing activities	0
Net change in cash	$                                    1,450.00
Beginning Cash Balance	$                                    6,090.00
Ending Cash Balance	$                                    7,540.00

4. Thedifference between net income and operating activities is due to the inventoey, only part of the inventory is sold.