Question

Zambrano Wholesale Corporation maintains its records on a cash basis. At the end of each year the company’s accountant obtains the necessary information to prepare accrual basis financial statements. The following cash flows occurred during the year ended December 31, 2021:

Cash receipts:
From customers	$	665,000
Interest on note		3,840
Loan from a local bank		110,000
Total cash receipts	$	778,840
Cash disbursements:
Purchase of merchandise	$	388,000
Annual insurance payment		5,760
Payment of salaries		208,000
Dividends paid to shareholders		10,000
Annual rent payment		23,000
Total cash disbursements	$	634,760

Selected balance sheet information:

	12/31/2020			12/31/2021
Cash	$	24,000		$	168,080
Accounts receivable		61,000			90,000
Inventory		78,000			61,000
Prepaid insurance		2,300			?
Prepaid rent		10,800			?
Interest receivable		2,880			?
Note receivable		48,000			48,000
Equipment		90,000			90,000
Accumulated depreciation		(39,000	)		(48,000	)
Accounts payable (for merchandise)		109,000			120,000
Salaries payable		19,800			23,700
Notes payable		0			110,000
Interest payable		0			?

Additional information:

1. On March 31, 2020, Zambrano lent a customer $48,000. Interest at 8% is payable annually on each March 31. Principal is due in 2024.
2. The annual insurance payment is paid in advance on April 30. The policy period begins on May 1.
3. On October 31, 2021, Zambrano borrowed $110,000 from a local bank and signed a note promising repayment. Principal and interest at 6% are due on October 31, 2022.
4. Annual rent on the company’s facilities is paid in advance on June 30. The rental period begins on July 1.

Required:

1. Prepare an accrual basis income statement for 2021 (ignore income taxes).
2. Determine the following balance sheet amounts on December 31, 2021:

Answer 1

Accounts payable
Balance ending		120,000
Add: Payments made		388,000
		508,000
Less: Balance beginning		109,000
Purchases for the year		399,000
Inventory
Balance beginning		78,000
Add: Purchases		399,000
		477,000
Less: Ending Inventory		61,000
Cost of goods sold		416,000
Interest revenue
Interest received in cash		3,840
Less: receivable on March 31, 2020		2,880
received for current year		960
Interest due on note receivable (9 months)		2,880
Interest revenue for current year		3,840
Insurance expense
Annual insurance paid		5,760
Less: prepaid for next year (4 months)		1,920
use for current year (8 months)		3,840
Add: prepaid on March 31, 2020		2,300
Insurance expense for the year		6,140
Rent expense
Annual rent paid		23,000
Prepaid for next year		11,500
Paid for current year		11,500
Add: prepaid on Dec. 31, 2020		10,800
Rent expense for the year		22,300
Salary and wages expense
Cash paid for salaries		208,000
Less: Payable on 12/31/20		19,800
Paid for current year		188,200
Add: Payable on 12/31/18		23,700
Salary expense for current year		211,900
Income Statement
For the year December 31, 2018
Sales revenue (665,000 + 29,000)		694,000
Less: Cost of goods sold		416,000
Gross Profit		278,000
Less: Operating expense
Insurance expense	6,140
Depreciation expense	9,000
Rent expense	22,300
Salaries & wages	211,900
Total operating expenses		249,340
Operating Income		28,660
Other income / expenses
Interest revenue	3,840
Interest expenses (110,000*6%*2/12)	(1,100)	2,740
Net Income		31,400

a. Prepaid Insurance = $1,920
b. Prepaid Rent = $11,500
c. Interest Receivable = $2,880 i.e. $48,000 * 8% x 9/12
d. Interest Payable = $1,100