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B6001– Accounting 1 – Financial Accounting

Problem Set #4

Instructions

All homework assignments are type B1 assignments. You may discuss the assigned questions with your classmates, but you must write up the answers yourself. Submitting answers that are not your own, which includes copying someone else’s answer file, is an honor code violation.

Answers to homework assignments must be submitted to Canvas electronically in pdf-format. You may create your original write-up using any word-processing and/or spreadsheet software of your choice, or writing by hand, but you must convert your write-up to a pdf-file before uploading.

Check your answer file for spelling and formatting. Have pity on the graders, unreadable submissions are not graded.

Label the steps in your calculations clearly and show enough detail so that an informed and competent reader can understand your derivations and arguments.

Question 1: GIJoe

Question 2: Sheffer

Question 3:  A Cruel World

Question 1:  GIJoe

The GIJoe Company started its operations in 2019.  Two years later, the balance sheet for December 31, 2020, showed the following account balances (there were no other accounts listed):

Wages payable 6, Loan made to the ABC company 50, Paid in capital 500, Accounts payable 50, PP&E 200, Inventory 59, Cash 400, Advances from customers 40, Accumulated depreciation 30, Accounts receivables 93, Retained earnings (?).

During 2021 the following transactions occurred:

1. Depreciation expense was $20.

2. Insurance expenses were $25, all paid in cash.

3. Rent for 18 months, starting January 1, 2021, in the amount of $36, was paid in cash.

4. Sales, all on credit, were $753.

5. Collections from customers were $777.

6. In addition to the transactions described in items 4 and 5 above, there was a sale to the customer who paid $40 in advance (see December 31, 2020 balances).  The selling price was $100, and the customer will pay the balance in 2022.

7. GIJoe purchased $555 worth of inventory, on account.

8. Payments on accounts payable were $444.

9. The total Cost Of Goods Sold during the year was $565.

10. The employees of GIJoe earned $48 as wages.  Cash payments to employees were $50.

11. The ABC company paid GIJoe $5 as interest on its loan, and paid back $15 of the principle.

12. A dividend of $48 was declared and paid during 2021.

13. On the last day of the year, Mrs. GIJoe, one of the owners of the GIJoe Company, purchased a lottery ticket and won $77,784 in cash.  She bought the lottery ticket with money from her personal account.

Required:

a. What was the balance of the Retained Earnings account on December 31, 2020?

b. Record the entries for all the transactions that occurred during 2021. You can use journal entries or the accounting equation to record the transactions.

c. Prepare an Income Statement for the year ended December 31, 2021.

d. Prepare a Balance Sheet for December 31, 2021.

e. Prepare a Statement of Cash Flows for the year ended December 31, 2021.

Question 2:  Sheffer

The Sheffer Company’s statement of cash flows for 2021 showed the following calculation of the cash flow from operating activities:

Collections from customers     $ 2,245

Payments to suppliers      (1,375)

Payments to employees (   688)

Payments to the IRS (for income tax) (     72)

Cash flow from operating activities       $    110

The company’s balance sheet at the beginning and end of 2021 showed the following:

     Beginning    End

  of year  of year

Accounts payable    $   92    $ 103

Accounts receivable 218 262

Accumulated depreciation   93 122

Income tax payable 142 180

Merchandise inventory 141 189

Plant and equipment (at cost) 338 371

Wages payable   36   37

A note to the financial statements showed that the company bought plant and equipment during the year for $33. Assume that all sales and inventory purchases during the year were made on credit.

Required:

a. Prepare an income statement for the Sheffer Company for 2021.

b. Did the Sheffer Company use the direct or the indirect method in preparing its statement of cash flows?

Question 3:  A Cruel World

You are given two consecutive balance sheets, an income statement, and a few facts for A Cruel World, Inc.

Balance Sheets (years 0 and 1)

Year 0 Year 1

Cash 3,000 3,000

Accounts Receivables 2,000 4,000

Inventory 3,000 4,000

Property, Plant and Equipment (net)     12,000     11,000

Total Assets     20,000     22,000

Accounts Payable 7,000 5,000

Bonds Payable 5,000 6,000

   Total Liabilities     12,000     11,000

Common Stock 3,000 4,000

Retained Earnings 5,000 7,000

   Total Shareholders' Equity 8,000     11,000

Total Liabilities and Equity     20,000     22,000

Income Statement (year 1)

Sales  20,000

Costs of Goods Sold  (8,000)

Wage Expense  (4,000)

Depreciation Expense  (2,000)

Interest Expense  (1,000)

   Net Income Before Tax    5,000

Tax Expense   (2,000)

Net Income    3,000

Facts

All property, plant and equipment that is retired or sold is fully depreciated.  

Purchases of property, plant and equipment were made in cash.

Required:

a. Construct the Statement of Cash Flows for A Cruel World in year 1 using the direct method.

b. Construct the supporting schedule to the Statement of Cash Flows which reconciles net income to cash flow from operations for A Cruel World in year 1.  (That is, calculate cash flow from operations using the indirect method.)