Q36PGA - Horngren'S Financial And Managerial Accounting

Question

Boundary Rare Coins (BRC) was formed on January 1, 2018. Additional data for the year follow: 

1. On January 1, 2018, BRC issued no-par common stock for \(475,000.
2. Early in January, BRC made the following cash payments: For store fixtures, \)53,000; For merchandise inventory, \(260,000; For rent expense on the store building, \)13,000 
3. Later in the year, BRC purchased merchandise inventory on account for \(240,000. Before year-end, BRC paid \)160,000 of these accounts payable.
4. During 2018, BRC sold 2,200 units of merchandise inventory for \(450 each. Before year-end, the company collected 85% of this amount. Cost of goods sold for the year was \)330,000, and ending merchandise inventory totaled \(170,000.
5. The store employs three people. The combined annual payroll is \)80,000, of which BRC still owes \(4,000 at year-end. 
6. At the end of the year, BRC paid income tax of \)24,000. There are no income taxes payable.
7. Late in 2018, BRC paid cash dividends of $40,000. 
8. For store fixtures, BRC uses the straight-line depreciation method, over five years, with zero residual value. 

Requirements 

1. Prepare BRC’s income statement for the year ended December 31, 2018. Use the single-step format, with all revenues listed together and all expenses listed together.
2. Prepare BRC’s balance sheet at December 31, 2018. 
3. Prepare BRC’s statement of cash flows for the year ended December 31, 2018. Format cash flows from operating activities by the direct method.

Step-by-Step Solution

Answer

1. Net income for the year ended December 31, 2018 is $532,400
2. Total Assets equals $1,051,400, and Total Liabilities and stockholders’ equity equals $1,051,400.
3. Net cash flow $690,500.

Step 1: Income statement for the year ended December 31, 2018

Boundary Rare Coins Statement of Cash Flows For the year ended December 31, 2018
Income:
Revenue (2,200 x $450)	$990,000
Expenses:
Cost of goods sold	$330,000
Depreciation ($53,000 / 5)	$10,600
Other operating expense ($80,000+$13,000)	$93,000
Income tax	$24,000
Net Income	$532,400

Step 2: Balance sheet at December 31, 2018

Boundary Rare Coins Statement of Cash Flows For the year ended December 31, 2018
Assets:
Store Fixtures net	$42,400
Account Receivables ($990,000*15%)	$148,500
Cash	$690,500
Merchandise Inventory	$170,000
Total	$1,051,400
Common stock	$475,000
Retained earnings ($532,400-$40,000)	$492,400
Account payable	$80,000
Accrued liabilities	$4,000
Total	$1,051,400

Step 4: Statement of cash flows using direct method

Boundary Rare Coins Statement of Cash Flows For the year ended December 31, 2018
Cash Flows From Operating Activities:
Receipts:
From customers ($990,000*85%)	$841,500
Payments:
To accounts payable ($260,000+$160,000)	($420,000)
To employees	($76,000)
To Rent	($13,000)
To Income tax	($24,000)
Net cash provided/ (used) in operating activities	$308,500
Cash Flows From Investing Activities:
Purchase of store fixtures	($53,000)
Net cash provided/ (used) in investing activities	($53,000)
Cash Flows From Financing Activities:
Issuance of common stock	$475,000
Dividend paid	($40,000)
Net cash provided/ (used) in financing activities	$435,000
Cash Balance, December 31, 2018	$690,500