Question

Alvie Heating & Air experienced the following events during Year 2:

• Acquired $50,000 cash from the issue of common stock
• Paid $20,000 cash to purchase land
• Borrowed $40,000 cash
• Provided services for $60,000 cash
• Paid $12,000 cash for rent expense
• Paid $18,000 cash for other operating expenses
• Paid 10% interest on the Note Payable.
• Paid a $5,000 cash dividend to the stockholders
• Determined that the market value of the land purchased in Event 2 is now $16,500

The January 1, Year 2 account balances are $15,000 Cash, $10,000 Land and $25,000 Common Stock.

1. What is Alvie's Net Income for Year 2?

2. By how much did Retained Earnings change during Year 2?

3. What is the balance of the Cash account displayed on the Balance Sheet for Year 2?

4. What is the value of the Net Cash Flows from Financing Activities?

Answer 1

Requirement 1:

Income Statement
Revenues:
Service revenue		$60,000
Expenses:
Rent expense	$12,000
Other operating expenses	$18,000
Interest expense (40,000 x 10%)	$4,000
Total Expenses		$34,000
Net income		$26,000

Requirement 2:

Net income	$26,000
(Less): Dividends	($5,000)
Change in retained earnings during Year 2	$21,000

Requirement 3:

T-Account

Cash
Beg. Bal. $15,000	$20,000
$50,000	$12,000
$40,000	$18,000
$60,000	$5,000
End. Bal.$110,000

Requirement 4:

Cash flows from financing activities:
Issuance of common stock	$50,000
Borrowed cash	$40,000
Payment of cash dividends	($16,500)
Net cash flows from financing activities	$73,500