Question

On October 1, 20X6, Susan Thompson opened Thompson Decorating Services, a sole proprietorship. Susan began operations with $50,000 cash, 60% of which was acquired via an owner investment. The remaining amount was obtained from a bank loan. A review of the accounting records for October revealed the following:
Asset purchases: Van, $16,000; office equipment, $4,000; and decorator (household) furnishings, $17,000. These amounts were paid in cash except for $2,100 that is still owed for the furnishings acquisition.
Services performed: Total billings on account, $18,300. Clients have remitted a total of $14,200 in settlement of their balances due.
Expenses incurred: Salaries, $8,700; advertising, $2,500; taxes, $150; postage, $1,800; utilities, $100; interest, $450; and miscellaneous, $200. These amounts had been paid by month-end with the exception of $700 of the advertising expenditures.
Further information revealed that Thompson withdrew $5,500 of cash from the business on October 31.

Instructions

Prepare an income statement for the month ending October 31, 20X6.
Prepare a statement of owner's equity for the month ending October 31, 20X6.
Prepare a balance sheet as of October 31, 20X6.

Answer 1

Answer:

                                                      Susan Thompson

                                                     Income Statement

                                          For the Month Ending October 31, 20x6.

Income                                                                 $                             $

Billings                                                                                                 18,300

Less:Operating Expenses

Salaries                                                             8,700

Advertising                                                       2,500

Postage                                                            1,800

Utilities                                                              100

Interest                                                             450

Miscellaneous                                                200                              (13,750)

Profit Before Tax                                                                                    4550

Tax                                                                                                         (  150)

Profit After Tax                                                                                       4400

                                             Susan Thompson

                                      Statement of Owner`s Equity

                             For the Month Ending October 31, 20x6

                                                                                                        $

Equity at the beginning (October 1st, 20x6)                              30,000

Profit During the year                                                                  4,400

Subtotal                                                                                         34,400

Drawings                                                                                      (5,500)

Equity at the End( October 31, 20x6)                                         28,900

                                            Susan Thompson

                                                 Balance Sheet

                                         As at October 31, 20x6

                                                                                        $                   $

Asset

Non-current

Van                                                                                16,000

Office Equipment                                                         4,000

Decorator Furnishing                                                  17,000            

                                                                                                            37,000    

Current Asset

Cash                                                                              10,600

Debtors                                                                         4,100              

                                                                                                              14,700

Total Asset                                                                                          51,700

Financed by

Equity                                                                                                   28,900

Current Liabilities

Owing Furniture Expenditure                                 2,100

Accrued Advertising Expenses                                700                   2800

Non-Current Liability

Bank Loan                                                                                             20,000

Total Equity  & Liabilities                                                                     51,700

Explanation:

When a sole proprietor is starting a new business, the opening capital for the business has to be recorded.

Here, Susan Thompson is starting the business with $50,000 cash, 60% of which was her own investment and the remaining 40% as bank loan. The accounting entries are as follow:

                                         

(Debit)   Cash                                                                $50,000

(Credit)  Owner`s Equity  (60% of $50,000)               $30,000

(Credit)   Bank Loan          (40% of $50,000)               $20,000

After this, the transactions during the month has to be recorded in the ledger and later transfer to trial balance.

Acquisition of assets:

(Debit)     Van                                                                    $16,000

(Debit)     Office Equipment                                              $4,000

(Debit)      Decorator Furnishing                                      $17,000

(Credit)      Cash ($16,000+$4,000+$17,000-$2100)      $34,900

(Credit)      Owning- Decorator Furnishing                       $2,100

Business transactions during the year:

(Credit)       Billings                                                               $18,300

(Debit)       Cash-Amount remitted by clients                     $14,200

(Debit)        Debtors ($18,300-$14,200)                               $4,100

(Debit)        Salaries                                                               $8,700

(Debit)        Advertising                                                          $2,500

(Debit)        Taxes                                                                   $150

(Debit)       Postage                                                                $1,800

(Debit)       Utilities                                                                  $100

(Debit)       Interest                                                                  $450

(Debit)      Miscellaneous                                                       $200

(Debit)      Drawing                                                                  $5,500

(Credit)     Cash                                                                       $18,700

(Credit)  Accrued Advertising Expenses                                $700

After this, the balances in the ledger has to be extracted to the trial balance where the figure will be used for preparation of income statement, statement of owner`s equity and balance sheet.

Trial Balance                                                                Dr($)                 Cr($)

Owner`s Equity                                                                                       30,000

Bank Loan                                                                                               20,000

Cash ($50,000+$14,200-$34,900-$18,700)              10,600

Van                                                                                16,000

Office Equipment                                                         4,000

Decorator Furnishing                                                   17,000

Owing-Decorator Furnishing                                                                   2,100

Billings                                                                                                      18,300

Debtors                                                                          4,100

Salaries                                                                           8,700

Advertising                                                                     2,500  

Taxes                                                                               150

Postage                                                                           1,800

Utilities                                                                             100

Interest                                                                           450

Miscellaneous                                                               200

Drawing                                                                          5,500

Accrued Advertising Expenses                                    ______                 700

                                                                                       71,100                  71,100

Preparation of Accounts

Income Statement

After the extraction of the trial balance, the income statement is prepared.

In this question, cost of good sold is not determined as the entity is a service business. So the profit is equal to income -operating expenses.

Also,the depreciation rate is  not given, so no depreciation is required to be calculated as such the opening value of the assets equals their closing value at the end of the month. In a case where depreciation rate is given, the depreciation will be charged against the individual value and the depreciation amount taken to income statement.

Statement of owner`s equity.

The owner`s equity at the end of the period equals opening equity + profit after tax for the year - drawings from the business.

Opening equity (60% of $50,000) + Profit for the year ($4,400) - drawing( 5500) =$28,900.

Balance Sheet

The balances of assets and liabilities from the trial balance prepared is taken to balance sheet, with inclusion of owner`s equity at the end of the period.

Answer 2

Answer: income statement: Net income $5,100, Statement of owners Equity :Total $35,100, Balance sheet : Total Liabilities $53,200, Total Asset $53,200

Explanation:

Thompson Decoration Services

Income Statement for the month ended 31 st October 20X6

$

Revenue. 18,300

Less Expenses

Salaries. 8,700

Advertising 2,500

Less: outstanding 700

-------

1,800

Taxes. 150

Postage. 1,800

Utilities. 100

Interest. 450

Miscellaneous. 200

------------

13,200

--------------

Net income. 5,100

-----------------

Statement of owners Equity for the month ended 31st October 20X6

Common Stock. Paid in capital. Retained Earnings Treasury stock Total

Balance Oct 1. 30,000. 30,000

Issued share for cash. - - - - -

Purchase of treasury stock - - - - -

Net income. - - 5,100. 5,100

Cash dividend. - - - - -

Stock dividend. - - - - -

------ ------ --------- ---------- -------------

Balance on Oct 31. - - 5,100 - 35,100

---------- -------- -------- ---------- --------------

Thompson Decoration Service

Balance sheet for the month ended 31st October 20X6

$

Current Asset

Debtors. 4,100

Account Receivable 14,200

-----------

Total Current Asset. 18,300

Fixed Asset

Van. 16,000

Office Equipment. 4,000

Furnishing. 14,900

-----------

Total Fixed Asset. 34,900

--------------

Total Asset. 53,200

---------------

Long term Liabilities

Capital. 30,000

Add: Net income 5,100

----------

35,100

Less: Drawing. 5,500

-----------

29,600

Loan. 20,000

-----------

Total Long term Liabilities 49,600

Current Liabilities

Outstanding 2,800

Interest. 450

Taxes. 150

Miscellaneous 200

--------------

Total Current Liabilities 3,600

--------------

Total Liabilities. 53,200

----------------