Question

Vernon Manufacturing Company experienced the following accounting events during its first year of operation. With the exception of the adjusting entries for depreciation, assume that all transactions are cash transactions and that financial statement data are prepared in accordance with GAAP.

1. Acquired $51,000 cash by issuing common stock.
2. Paid $7,800 for the materials used to make its products, all of which were started and completed during the year.
3. Paid salaries of $4,100 to selling and administrative employees.
4. Paid wages of $6,700 to production workers.
5. Paid $6,600 for furniture used in selling and administrative offices. The furniture was acquired on January 1. It had a $1,400 estimated salvage value and a four-year useful life.
6. Paid $7,700 for manufacturing equipment. The equipment was acquired on January 1. It had a $1,100 estimated salvage value and a two-year useful life.
7. Sold inventory to customers for $26,100 that had cost $13,600 to make.

Required

How these events would affect the balance sheet and income statement by recording them in a horizontal financial statements model as indicated here. The first event is recorded as an example. (Enter decreases to account balances with a minus sign.)

Financial Statements Model Assets Equity Income Statement Event CashInventory Manuf. Equi Office Furn, +Ret. Ear Common+ Rev. Exp. Net Inc. 0 stock 51,000+ 51,000+ 4 5b 6b 7b Tota 51,000+ 51,000

Answer 1

Assumptions:

1.The Purchases are directly reflected in the Income statement as an expense(however,subsequently it is being sent to Income statement as expense)

2.Inventory value=Raw Material Cost+Direct Wages+Direct exp(related to Production)+Indirect Exp(related to Production)

3.Depreciation=(Cost of Asset-Salvage Value)/Life of Asset

4.It is assumed that inventories are sold to customers for cash.

Event No.1:

The cash is collected from issue of common stock.Hence 51000 is debited in the Cash Account and common stock is also credited with 51000

Event No.2:

Cash was paid  $7800 for purchase of material required to produce a product.So this results in cash of  $7800 being credited from the balance and Purchase being debited.The Inventory was also subsequently debited by $7800.

Event No.3

In this case,Cash was credited by $4100 and Exp is debited by $4100 since it is not a expense payment related to production and hence not added into inventory.

Event No.4

In this case,Cash was credited by $6700 and Exp is debited by $6700 ,Inventory is also added by $6700 since it is a expense relating to production.

Event No.5a

In this case,since furniture was purchased for cash,it is credited by $6600 and subsequently Furniture Account is debited by $6600.

Event No.5b

At the End of the year Depreciation is calculated on Office Furniture by using the formula mentioned in the Assumptions.This results in depreciation of $2600 .The Furniture Account is credited by $2600 and Exp is debited by $2600 in the income statement.

Event No.6a

In this case,since Manufacturing Equipment was purchased for cash,it is credited by $7700 and subsequently Manufacturing Equipment Account is debited by $7700

Event No.6b

At the End of the year Depreciation is calculated on Manufacturing Equipment by using the formula mentioned in the Assumptions.This results in depreciation of $3300 .The Manufacturing Equipment Account is credited by $3300 and Exp is debited by $3300 in the income statement.

Event No.7a

In this case,inventories that costed $13600 were sold to customers at $26100.Hence the cash is debited by 26100 and Revenue were credited by $26100 and subsequently inventory was also credited by $13600.

Event No.7b

This entry is done so as to show the closing stock and calculate the profit earned by the activities done during the period .

In this event the closing inventory is shown in the statement as revenue so as to calculate the actual profit earned during the period .

The statement has been attached as per the requirements

Financial Statements Model Equity Income Statement Manuf Equi office Event No. Commorn stock Ret. Ear Cash+Inventory+ Rev Exp.Net Inc. Furn 51000+ 7800 4100 + -6700+ -6600+ 51000+ 7800 78001 = 41001 = 67001 = 6700+ 5a 5b 6a 6b 7a 7b Total 66001 2600| 26001 = 7700 +7700 3300+ 33001 = 26100+ 13600+ 26100 9001 01 270001 44200 + 900+ 4400+ 4000 | 51000+ 24500 2500