Question

The following events apply to Tracey’s Restaurant for the 2016 fiscal year:1. Started the company when it acquired $21,000 cash from the issue of common stock.2. Purchased a new cooktop that cost $22,000 cash.3. Earned $32,000 in cash revenue.4. Paid $16,000 cash for salaries expense.5. Paid $7,000 cash for operating expenses.6. Adjusted the records to reflect the use of the cooktop. The cooktop, purchased on January 1, 2016, has an expected useful life of five years and an estimated salvage value of $2,000. Use straight-line depreciation. The adjusting entry was made as of December 31, 2016.---------------------------------------------------------------------------------------------------------a. Write an accounting equation and record the effects of each accounting event under the appropriate general ledger account headings. (Negative amounts should be indicated by a minus sign.)b. What amount of depreciation expense would Tracey’s report on the 2017 income statement?c. What amount of accumulated depreciation would Tracey’s report on the December 31, 2017, balance sheet?d. Would the cash flow from operating activities be affected by depreciation in 2017?

Answer 1

Answer:

Tracey's Restaurant

a) Accounting equation and effects of each accounting event:

Asset = Liabilities + Owners' Equity

1. Assets: Cash +$21,000 = Liabilities + Owner's Equity +$21,000

Effect: Cash is increased and Owner's Equity increased by $21,000.

2. Assets: Equipment +$22,000, Cash -$22,000 = Liabilities + Equity

Effect: Equipment is increased and Cash decreased by $22,000.

3. Assets: Cash +$32,000 = Liabilities + Equity: Retained Earnings +$32,000

Effect: Cash is increased and Retained Earnings are increased by $32,000.

4. Assets: Cash -$16,000  = Liabilities + Equity: Retained Earnings -$16,000

Effect: Cash decreases and Retained Earnings are decreased by $16,000.

5. Assets: Cash -$6,000  = Liabilities + Equity: Retained Earnings -$6,000

Effect: Cash decreases and Retained Earnings are decreased by $6,000.

6. Assets: Equipment -$4,000 = Liabilities + Equity: Retained Earnings -$4,000

b) Depreciation for 2017 Income Statement:

Depreciation = ($22,000 - $2,000)/5 = $4,000

c) Accumulated Depreciation for December 31, 2017 Balance Sheet:

Depreciation for 2016 = $4,000

Depreciation for 2017 = $4,000

Total Accumulated Depreciation for 2017 = $8,000

d) Cash flow from operating activities would not be affected by depreciation in 2017.  Depreciation is not a cash flow item.  It is an accounting estimate, purely based on judgement, which management uses to spread the costs of a fixed asset over its productive years.

Explanation:

a) The accounting equation or the balance sheet equation shows that assets or resources owned by an entity are equal to its Liabilities or future financial obligations and Equity or the owner's share in the business.

At each point in time, and with each transaction, this equation always balances.

b) A transaction may affect either side of the equation to keep it in balance.

c) The purchase of cooktop (Equipment) affected two assets: Equipment and Cash.  The Equipment Account increased in value and the Cash Account decreased in value by the same amount.

d) Depreciation of a fixed asset does not affect the operating cash flow.  This means that there is no cash flow at the time of depreciation.  By its nature, depreciation is an accounting technique which helps to spread the cost of a fixed asset.  It accords with the accrual and matching principles which try to ensure that each period's cost is matched to it revenue.