Question

Blue Spruce Company recently hired a new accountant whose first task was to prepare the financial statements for the year ended December 31, 2021. The following is what he produced:

BLUE SPRUCE COMPANY Income Statement December 31, 2021
Sales								$396,000
Less: Unearned revenue						$5,400
Purchase discounts						3,600		9,000
Total revenue								387,000
Cost of goods sold
Purchases						231,500
Less: Purchase returns and allowances						3,900
Net purchases						235,400
Add: Sales returns and allowances						7,500
Cost of goods available for sale						242,900
Add: Freight out						9,500
Cost of selling merchandise								252,400
Gross profit margin								134,600
Operating expenses
Freight in						4,600
Insurance expense						10,600
Interest expense						2,500
Rent expense						18,100
Salaries expense						42,200
Total operating expenses								78,000
Profit margin								56,600
Other revenues
Interest revenue				$1,400
Investment by owner				3,400		4,800
Other expenses
Depreciation expense				7,100
Drawings by owner				48,500		55,600		(50,800	)
Profit from operations								$5,800

BLUE SPRUCE COMPANY Balance Sheet Year Ended December 31, 2021
Assets
Cash					$16,400
Accounts receivable					7,900
Merchandise inventory, January 1, 2021					29,600
Merchandise inventory, December 31, 2021					24,100
Equipment			$71,000
Less: loan payable (for equipment purchase)			49,600		21,400
Total assets					$99,400
Liabilities and Owner's Equity
Long-term investment					$49,600
Accumulated depreciation—equipment					21,300
Sales discounts					2,800
Total liabilities					73,700
Owner’s equity					25,700
Total liabilities and owner’s equity					$99,400

The owner of the company, Lily Oliver, is confused by the statements and has asked you for your help. She doesn’t understand how, if her Owner’s Capital account was $74,800 at December 31, 2020, owner’s equity is now only $25,700. The accountant tells you that $25,700 must be correct because the balance sheet is balanced. The accountant also tells you that he didn’t prepare a statement of owner’s equity because it is an optional statement. You are relieved to find out that, even though there are errors in the statements, the amounts used from the accounts in the general ledger are the correct amounts.

Answer 1