Question

Prat Corp. started the 2018 accounting period with $35,000 of assets (all cash), $14,500 of liabilities, and $20,000 of common stock. During the year, the Retained Earnings account increased by $18,550. The bookkeeper reported that Prat paid cash expenses of $33,500 and paid a $3,500 cash dividend to the stockholders, but she could not find a record of the amount of cash that Prat received for performing services. Prat also paid $9,500 cash to reduce the liability owed to the bank, and the business acquired $8,000 of additional cash from the issue of common stock.

(Hint: Determine the amount of beginning retained earnings before considering the effects of the current period events. It also might help to record all events under an accounting equation before preparing the statements.)

a-1. Prepare an income statement for the 2018 accounting period.

a-2. Prepare a statement of changes in stockholders’ equity for the 2018 accounting period.

a-3. Prepare a period-end balance sheet for the 2018 accounting period.

a-4. Prepare a statement of cash flows for the 2018 accounting period.

Answer 1

• All working forms part of the answer
• Working: retained earnings beginning balance can be calculated using accounting equation---

	Assets	=	Liabilities	+	Common Stock	+	Retained Earnings
Beg 2018	$           35,000.00	=	$             14,500.00	+	$               20,000.00	+	$ 500.00

• Working for calculation of amount of cash revenues earned

A	Beginning Balance	$                 500.00
B	Increase in balance during 2018	$           18,550.00
C=A+B	Ending Retained earning balance	$           19,050.00
D	Cash expense	$           33,500.00
E	Dividends	$             3,500.00
F = (C+D+E) - A	Revenues earned during 2018	$           55,550.00

• Schedule of changes in balances based on accounting equation

	Assets	=	Liabilities	+	Common Stock	+	Retained Earnings
Beg 2018	$           35,000.00	=	$             14,500.00	+	$               20,000.00	+	$             500.00
Revenues earned	$           55,550.00	=	$                            -	+	$                              -	+	$       55,550.00
Expenses paid	$         (33,500.00)	=	$                            -	+	$                              -	+	$     (33,500.00)
Dividends paid	$           (3,500.00)	=	$                            -	+	$                              -	+	$       (3,500.00)
Liability paid off	$           (9,500.00)	=	$             (9,500.00)	+	$                              -	+	$                      -
Issuance of Common Stock	$             8,000.00	=	$                            -	+	$                 8,000.00	+	$                      -
Ending Balance 2018	$           52,050.00	=	$               5,000.00	+	$               28,000.00	+	$       19,050.00

• Income Statement

Revenues	$             55,550.00
Expenses	$             33,500.00
Net Income	$             22,050.00

• Statement of changes in Stockholder’s equity

	Common Stock	Retained Earnings	Total Stockholder's Equity
Beginning balance	$             20,000.00	$                   500.00	$        20,500.00
Add: Net Income		$             22,050.00	$        22,050.00
Less: Dividends		$               3,500.00	$           3,500.00
Additional issue of stock	$               8,000.00		$           8,000.00
Ending Balance	$             28,000.00	$             19,050.00	$        47,050.00

• Balance Sheet

Total Assets		$         52,050.00
Liabilities & Stockholder's Equity
Liabilities		$            5,000.00
Stockholder's Equity:
Common Stock	$       28,000.00
Retained earnings	$       19,050.00	$         47,050.00
Total Liabilities & Equity		$         52,050.00

• Statement of Cash Flows

Cash Flows from Operating activities
Cash received for revenue	$   55,550.00
Cash paid for expense	$ (33,500.00)
Cash paid to pay off liability	$   (9,500.00)
Net Cash provided by operating activities		$ 12,550.00
Cash Flows from Investing activities
Cash flows from Financing activities
Cash paid for dividends	$   (3,500.00)
issuance of Common stock	$      8,000.00
Net Cash provided by financing activities		$    4,500.00
Increase in Cash		$ 17,050.00
Beginning Balance Cash		$ 35,000.00
Ending Cash balance		$ 52,050.00