Question

The following transactions apply to Park Co. for 2016:

1. Received $50,000 cash from the issue of common stock.

2. Purchased inventory on account for $180,000.

3. Sold inventory for $250,000 cash that had cost $140,000. Sales tax was collected at the rate of 5 percent on the inventory sold.

4. Borrowed $50,000 from First State Bank on March 1, 2016. The note had a 7 percent interest rate and a one-year term to maturity.

5. Paid the accounts payable (see transaction 2).

6. Paid the sales tax due on $190,000 of sales. Sales tax on the other $60,000 is not due until after the end of the year.

7. Salaries for the year for the one employee amounted to $46,000. Assume the Social Security tax rate is 6 percent and the Medicare tax rate is 1.5 percent. Federal income tax withheld was $5,300.

8. Paid $5,800 for warranty repairs during the year.

9. Paid $36,000 of other operating expenses during the year.

10. Paid a dividend of $2,000 to the shareholders.

Adjustments:

11. The products sold in transaction 3 were warranted. Park estimated that the warranty cost would be 3 percent of sales.

12. Record the accrued interest at December 31, 2016.

13. Record the accrued payroll tax at December 31, 2016. Assume no payroll taxes have been paid for the year. Do NOT record any federal or state unemployment tax expense or liability.

Prepare an income statement, statement of changes in stockholders’ equity, balance sheet, and statement of cash flows for 2016.

Answer 1

PARK COMPANY
Income statement
for the year ended December 31, 2016
Sales Revenue	250000
Cost of goods sold	140000
Gross Profit	110000
Expenses:
Salaries Expense	46000
Payroll tax expense	3450
Warranty expenses	7500
Other operating expenses	36000
Interest Expense	2917
Total Expenses	95867
Net Income	14133
PARK COMPANY
Statement of changes in stockholders equity
for the year ended December 31, 2016
Common stock	50000
Retained Earnings:
Retained earnings as at January 1	0
Add: Net income for the year	14133
Less: Dividend paid for the year	2000
Retained earnings as at December	12133
Stockholders' equity as at December 31	62133
PARK COMPANY
Balance Sheet
as at December 31, 2016
Assets
Cash	129200
Inventory	40000
Total Assets	169200
Liabilities and stockholders' equity
Liabilities
Sales Tax Payable	3000
Note Payable	50000
Federal income tax payable	5300
Social secutiry tax payable	5520
Medicare tax payable	1380
Salaries payable	37250
Warranty Payable	1700
Interest Payable	2917
Total liabilities	107067
Stockholders' equity
Common stock	50000
Retained earnings	12133
Total stockholders' equity	62133
Total Liabilities and stockholders' equity	169200

PARK COMPANY
Worksheet for the year ending December 31, 2016
	Transactions		Unadjusted		Adjustments		Adjusted		Income statament		Balance Sheet
Account	Debit	Credit	Debit	Credit	Debit	Credit	Debit	Credit	Debit	Credit	Debit	Credit
Cash	362500	233300	129200				129200				129200
Inventory	180000	140000	40000				40000				40000
Accounts Payable	180000	180000		0				0				0
Sales Tax Payable	9500	12500		3000				3000				3000
Note Payable		50000		50000				50000				50000
Federal income tax payable		5300		5300				5300				5300
Social secutiry tax payable		2760		2760		2760		5520				5520
Medicare tax payable		690		690		690		1380				1380
Salaries payable		37250		37250				37250				37250
Warranty Payable	5800			-5800		7500		1700				1700
Interest Payable						2917		2917				2917
Common stock		50000		50000				50000				50000
Retained Earnings												12133
Dividend	2000		2000				2000
Sales Revenue		250000		250000				250000		250000
Cost of goods sold	140000		140000				140000		140000
Salaries Expense	46000		46000				46000		46000
Payroll tax expense	0		0		3450		3450		3450
Warranty expenses			0		7500		7500		7500
Other operating expenses	36000		36000				36000		36000
Interest Expense					2917		2917		2917
T o t a l	961800	961800	393200	393200	13867	13867	407067	407067	235867	250000	169200	169200
Net Income									14133
Grand Total	961800	961800	393200	393200	13867	13867	407067	407067	250000	250000	169200	169200

1. Social security tax 6% of $46,000 = $2,760. and Medicare tax 1.5% of $46,000 = $690

2. Interest is calculated as follows: 50000 x 7% x 10 /12 (10 months from March1 to December 31)

3.. Warranty expenses total liability = 3% of 250,000 = $7,500. Out if which $5,800 is paid during the year.