ABC Company began operations in 2009 and entered into the following transactions
ID: 2340115 • Letter: A
Question
ABC Company began operations in 2009 and entered into the following
transactions during the year:
May 1: Sold common stock to owners for $200,000 cash.
May 10: Purchased inventory costing $40,000 on account.
June 1: Purchased equipment for $48,000 cash. The equipment
was assigned a 10-year life and a $6,000 residual
value.
August 1: Purchased a two-year insurance policy for $24,000 cash.
October 3: Sold one-half of the inventory that was purchased on
May 10 to a customer for $49,000; the customer did
not pay for the goods, but agreed to pay XYZ Company
within ninety days.
November 9: Paid stockholders $10,000 cash as a dividend.
December 17: Collected a $22,000 partial payment from the customer
who purchased the inventory on October 3.
December 31: Recorded adjusting entries related to the equipment
and the prepaid insurance.
Calculate the amount of net income, that ABC Company would report in its 2009 income statement after all the above transactions are recorded and all necessary adjusting entries are made and posted.
Calculate the amount of working capital reported by ABC company at December 31, 2009 after all the above transactions are recorded and all adjusting entries are made and posted
Explanation / Answer
Net income: $21550
Total assets: $251550
Total assets = Cash + Accounts receivable + Inventory + Prepaid insurance + Equipment = $140000 + 27000 + 20000 + 19000 + 45550 = $251550
Working capital: $166000
Working capital = Current assets - Current liabilities = ($140000 + 27000 + 20000 + 19000) - $40000 = $206000 - $40000 = $166000
Working:
Annual depreciation = ($48000 - $6000)/10 years = $42000/10 = $4200
Depreciation expense from Jun. 1 to Dec. 31 = $4200 x 7/12 = $2450
Insurance expense = $24000 x 5/24 = $5000
Date Assets = Liabilities + Stockholders' Equity Income Statement Cash Accounts Receivable Inventory Prepaid Insurance Equipment = Accounts Payable + Common Stock Retained Earnings Revenue - Expenses = Net Income May-01 200000 200000 May-10 40000 40000 Jun-01 -48000 48000 Aug-01 -24000 24000 Oct-03 49000 49000 49000 49000 -20000 -20000 20000 -20000 Nov-09 -10000 -10000 Dec-17 22000 -22000 Dec-31 -2450 -2450 2450 -2450 -5000 -5000 5000 -5000 Bal. 140000 27000 20000 19000 45550 40000 200000 11550 49000 27450 21550