Question

At the beginning of 2018, the Redd Company had the following balances in its accounts:

Cash	$	7,900
Inventory		1,900
Common stock		7,400
Retained earnings		2,400

During 2018, the company experienced the following events:

1. Purchased inventory that cost $5,400 on account from Redd Company under terms 2/10, n/30. The merchandise was delivered FOB shipping point. Freight costs of $490 were paid in cash.

2. Returned $450 of the inventory that it had purchased because the inventory was damaged in transit. The seller agreed to pay the return freight cost.

3. Paid the amount due on its account payable to Redd Company within the cash discount period.

4. Sold inventory that had cost $5,900 for $8,900 on account, under terms 2/10, n/45.

5. Received merchandise returned from a customer. The merchandise originally cost $490 and was sold to the customer for $790 cash. The customer was paid $790 cash for the returned merchandise.

6. Delivered goods FOB destination in Event 4. Freight costs of $590 were paid in cash.

7. Collected the amount due on the account receivable within the discount period.

8. Took a physical count indicating that $1,600 of inventory was on hand at the end of the accounting period.

1. Identify these events as asset source (AS), asset use (AU), asset exchange (AE), or claims exchange (CE). (Select "NA" if there is no effect on the "Classification".)

	Event Classification 1a. (Purchase inventory). 1b. (Shipping cost). 2. 3. 4a. (Recording revenue). 4b. (Recording cost of goods sold). 5a. (Reversing revenue). 4b. (Reversing cost of goods sold). 6. 7. 8

Part 2

2. Record each event in a statements model like the following one. In the Cash Flow column, use OA to designate operating activity, IA for investment activity, FA for financing activity, or NC for net change in cash. If the element is not affected by the event, leave the cell blank. The first event is recorded as an example. (Not every cell will require entry. Enter any decreases to account balances and cash outflows with a minus sign.)

REDD COMPANY Horizontal Statements Model - 2018 Event Balance Sheet Income Statement Statement of Cash Flows Assets = Liabilities + Stockholders’ Equity Revenue – Expenses = Net Income Cash + Accounts Receivable + Merchandise Inventory = Accounts Payable + Common Stock + Retained Earnings Bal. 7,900 + + 1,900 = + 7,400 + 2,400 – = 1a. + + = + + – = 1b. + + = + + – = 2. + + = + + – = 3. + + = + + – = 4a. + + = + + – = 4b. + + = + + – = 5a. + + = + + – = 5b. + + = + + – = 6. + + = + + – = 7. + + = + + – = 8. + + = + + – = Bal. + + = + + – =

Part 3

1. c-1. Prepare a multistep income statement.

2. c-2. Prepare a statement of changes in stockholders’ equity.

3. c-3. Prepare a balance sheet.

4. c-4. Prepare a statement of cash flows.

Answer 1