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Question
Preparing the statement of cash flows—direct method
Diversion Rare Coins (DRC) was formed on January 1, 2018. Additional data for the year follow:
a. On January 1, 2018, DRC issued no par common stock for \(450,000.
b. Early in January, DRC made the following cash payments:
1. For store fixtures, \)46,000
2. For merchandise inventory, \(310,000
3. For rent expense on a store building, \)18,000
c. Later in the year, DRC purchased merchandise inventory on account for \(238,000. Before year-end, DRC paid \)138,000 of this accounts payable.
d. During 2018, DRC sold 2,700 units of merchandise inventory for \(400 each. Before year-end, the company collected 85% of this amount. Cost of goods sold for the year was \)340,000, and ending merchandise inventory totaled \(208,000.
e. The store employs three people. The combined annual payroll is \)97,000, of which DRC still owes \(6,000 at year-end.
f. At the end of the year, DRC paid income tax of \)18,000. There was no income taxes payable.
g. Late in 2018, DRC paid cash dividends of $35,000.
h. For store fixtures, DRC uses the straight-line depreciation method, over five years, with zero residual value.
Requirements
1. Prepare DRC’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 DRC’s balance sheet at December 31, 2018.
3. Prepare DRC’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
VerifiedAnswer
Net income for the year ended December 31, 2018 is $597,800
Diversion Rare Coins Income Statement For the year ended December 31, 2018 | |
| Income: | |
| Revenue (2,700 unitsx$400) | $1,080,000 |
| Expenses: | |
| Cost of goods sold | $340,000 |
| Depreciation ($46,000/5) | $9,200 |
| Other operating expense ($97,000+$18,000) | $115,000 |
| Income tax | $18,000 |
| Net Income | $597,800 |
Diversion Rare Coins Balance Sheet For the year ended December 31, 2018 | |
| Assets: | |
| Store Fixtures net ($46,000-$9,200) | $36,800 |
| Account Receivables ($1,080,000x15%) | $162,000 |
| Cash | $712,000 |
| Merchandise Inventory | $208,000 |
| Total | $1,118,800 |
| Common stock | $450,000 |
| Retained earnings ($597,800-$35,000) | $562,800 |
| Account payable | $100,000 |
| Accrued liabilities | $6,000 |
| Total | $1,118,800 |
Diversion Rare Coins Statement of Cash Flows For the year ended December 31, 2018 | |
| Cash Flows From Operating Activities: | |
| Receipts: | |
| Collection from customers($1,080,000x85%) | $918,000 |
| Payments: | |
| To account payables ($310,000+$138,000) | ($448,000) |
| To employees | ($91,000) |
| To operating expenses | ($18,000) |
| For income tax | ($18,000) |
| Net cash provided/ (used) in operating activities: | |
| Purchase of store fixtures | ($46,000) |
| Net cash provided/ (used) in investing activities | ($46,000) |
| Cash Flows From Financing Activities: | |
| Issuance of common stock | $450,000 |
| Dividend paid | ($35,000) |
| Net cash provided/ (used) in financing activities | $415,000 |
| Cash Balance, December 31, 2018 | $712,000 |