Question

PLEASE SHOW WORK :D

Medina Corporation keeps its book on a cash basis. At the end of the year, the company’s accountant obtains the necessary information to prepare accrual basis financial statements to give to its shareholders.

The following cash flows occurred during the year ended December 31, 2020:

Cash receipts:

From customers $450,000

Interest on note 3,000

Issue of common stock 50,000

Total cash receipts $503,000

Cash disbursements:

Purchase of merchandise $220,000

Annual insurance payment 9,000

Payment of salaries 200,000

Dividends paid to shareholders 6,000

Annual rent payment 12,000

Total cash disbursements $447,000

Selected balance sheet information: LOOK AT THE DATES!!!!

12/31/19 12/31/20

Cash $25,000 $101,000

Accounts receivable 42,000 70,000

Inventory 60,000 82,000

Prepaid insurance 2,000 ?

Prepaid rent 7,000 ?

Interest receivable 1,500 ?

Note receivable 50,000 50,000

Equipment 150,000 150,000

Accumulated depreciation–equipment (40,000) (55,000)

Accounts payable (for merchandise) 50,000 62,000

Salaries payable 20,000 28,000

Common stock 200,000 250,000

Additional information:

1. On June 30, 2019, Medina lent a customer $50,000. Interest at 6% is payable annually on each June 30. Principal is due in 2025.

2. The annual insurance payment is made in advance on March 31.

3. Annual rent on the company’s facilities is paid in advance on September 30.

1a. Prepare an accrual basis income statement for 2020 (ignore income taxes).

1b. Determine the following balance sheet amounts on December 31, 2020:

1. Interest receivable

2. Prepaid insurance

3. Prepaid rent

Answer 1

Answer (1a) : Accural basis income statement:

Notes: Necessary Calculations:

1. Credit Sales = Ending balance of accounts receivablele - Begnning balance of accounts receivables

= $70,000 - $42,000

= $28,000

2. Increase in accounts payable = Ending balance of accounts payable - Begnning balance of accounts payable

= $62,000 - $ 50,000

= $12,000

3. Cost of Goods Sold = Begnning balance of inventory + Purchases - Ending balance of Inventory +  Increase in accounts payable

= $60,000 + $220,000 - $82,000 + $12,000

= $210,000

4. Insurance expense = Annual insurance payment  * Time Period

= $9,000 * 9/12

= $6,750.

5. Rent expense = Annual rent payment * Time Period

= $12,000 * 3/12

= $3,000

6. Salaries and wages expense = Cash payment of salaries + Ending salaries payable - Begnning salaries payable

= $200,000 + $28,000 - $20,000

= $208,000

7. Interest income = Principal amount * Rate of interest * Time period

= $50,000 * 6% * 6/12

= $1,500

Answer (1b) : Determination of balance sheet items at December31, 2020.

1. Interest receviable = Principal amount * Rate of interest * Time period

= $50,000 * 6% * 6/12

= $1,500

2. Prepaid Insurance = Annual insurance payment - Insurance expense for the year

= $9,000 - $6,750

= $2,250

3. Prepaid Rent = Annual rent payment - Rent expense for the year

= 12,000 - $3,000

= $9,000