Question

Exercise 7-21 Current liabilities LO 7-1, 7-2, 7-4, 7-10 [The following information applies to the questions displayed below.] The following transactions apply to Ozark Sales for 2018: The business was started when the company received $48,500 from the issue of common stock. Purchased equipment inventory of $177,500 on account. Sold equipment for $193,500 cash (not including sales tax). Sales tax of 6 percent is collected when the merchandise is sold. The merchandise had a cost of $118,500. Provided a six-month warranty on the equipment sold. Based on industry estimates, the warranty claims would amount to 3 percent of sales. Paid the sales tax to the state agency on $143,500 of the sales. On September 1, 2018, borrowed $19,500 from the local bank. The note had a 6 percent interest rate and matured on March 1, 2019. Paid $5,900 for warranty repairs during the year. Paid operating expenses of $52,500 for the year. Paid $124,500 of accounts payable. Recorded accrued interest on the note issued in transaction no. 6. Exercise 7-21 Part b Prepare the income statement, balance sheet, and statement of cash flows for 2018.

Answer 1

Income statement
Particulars	Amount ($)	Amount ($)
(A): Income
Sales	193500
Less: Cost of merchandise	118500
(A): Gross profit		75000
(B): Expenditures
Operating expenses	52500
Provision for warranty expenses	5805
Interest on borrowed fund	585
Warranty expenses in addition of provision (5900 - 5805)	95
(B): Total expenditures		58985
Net profit (A - B)		16015

	Balance sheet
Assets:
	Amount ($)	Amount ($)
Current assets:
Inventory (177500 - 118500)	59000
Cash	81600
		140600
Non-current assets:
Total assets		140600
Liabilities and equity:
Current liabilities:
Accounts payable (177500-124500)	53000
Acrrued interest (19500 x 6%) x 6/12	585
Sales tax liability (11610 -8610)	3000
		56585
Non-current liabilities:
Borrowed loan	19500
		19500
Equity:
Common stock	48500
Profit and loss account	16015
		64515
Total liabilities and equity		140600

Cash flow
Cash flow from operating activities
Cash received from sales	193,500.00
Sales tax collected {193500 + (193500 x 6%)} - 193500	11,610.00
Warranty expense paid	(5,900.00)
Operating expenses paid	(52,500.00)
Payment of account payable	(124,500.00)
Sales tax paid (143500 x 6%)	(8,610.00)
Cash flow from operating activities		13,600.00
Cash flow from investing activities
Cash flow from financing activities
Cash received from common stock	48,500.00
Borrowed from local bank	19,500.00
Cash flow from financing activities		68,000.00
Cash balance as at the end of financial year		81,600.00

Note:
It has been assumed that neither the loan borrowed from local bank nor the interest on such loan has yet been paid.