Question

Transactions and Financial statements
Van Jordan established an insurance agency on March 1, 20Y5, and completed the following transactions during March.

a. Opened a business bank account in the name of Jordan Insurance Inc. with a deposit of $50,000 in exchange for capital stock.
b. Borrowing $25,000 by issuing a note payable.
c. Received cash from fees earned, $28,000.
d. Paid rent on office and equipment for the month, $3,000.
e. Paid automobile expenses for the month, $1,800, and miscellaneous expenses, $900.
f. Paid office salaries, $4,200.
g. Paid interest on note payable, $100.
h. Purchased land as a future building site, paying cash of $55,000.
i. Paid dividends, $4,000.

Instructions:

1. Indicate the effect of each transaction and the balances after each transaction, using the integrated financial statement framework.

2. Briefly explain why the stockholders' investments and revenues increased stockholders' equity, while dividends and expenses decreased stockholders' equity.

3. Prepare an income statement and retained statement for March.

4. Prepare a balance sheet as of March 31, 20Y5.

5. Prepare a statement of cash flows for March.

Answer 1

SOLUTION: PART-1)
Particulars	Assets			=	Liabilities		Stockholder's Equity
	Cash	+	Land	=	Notes	+	Paid in	+	Retained
					Payable		Capital		Earnings
Capital	50,000						50,000
Borrowed by issuing note Payable	25,000				25,000
Service Rendered	28,000								28,000
Paid rent	(3,000)								(3,000)
Paid automobile & Miscellaneous expense	(2,700)								(2,700)
Paid office salaries	(4,200)								(4,200)
Paid interest	(100)								(100)
Purchased land	(55,000)		55,000
Paid Dividends	(4,000)								(4,000)
Balance as on 31st March20Y5	34,000	+	55,000	=	25,000	+	50,000	+	14,000

PART-2) Stockholder investment increases the equity and as a result revenues increases the net income. Now increase in net income increases the shareholder's equity whereas dividend decreases the retained earnings which in turn reduces shareholders' equity. In the similar way expenses declines the net income and decrease in net income declines shareholders' equity

PART-3)

Income Statement
For the month ending 31st March
Particulars	Details $		Amount $
Service Revenue			28,000
Less: Expenses
Rent expense	3,000
Automobile & Misc. expense	2,700
Salaries expense	4,200
Interest expense	100
Total Expenses			10,000
Net Income
Transferred to Retained earnings			18,000
Retained Earnings Statement
For the month ending 31st March
Particulars	Details $		Amount $
Opening Balance of	-
Retained Earnings
Add Net Income	18,000
less dividend	(4,000)
Closing Balance of Retained Earnings			14,000

　

PART-4)

Balance sheet As on 31st March 20Y5
	Details $		Amount $
Assets
Cash	34,000
Land	55,000
Total Assets			89,000
Liabilities
Notes payable	25,000
Paid in Capital	50,000
Retained Earnings	14,000
Total Liabilities & Shareholder's Equity			89,000

　

PART-5)

Cash flow Statement
For the month ending 31st March
Particulars	Details $		Amount $
Cash collected from sale	28,000
Less Expenses paid	(9,900)
Cash from Operating Activity			18,100
Purchase of land	(55,000)
Cash used in Investing Activity			(55,000)
Issue of Capital	50,000
issue of Notes payable	25,000
Less interest paid	(100)
Dividend paid	(4,000)
Cash from financing Activities			70,900
Net Increase in Cash			34,000
Add Opening Balnce of Cash			0
Closing Balance of cash			34,000