Question

Sage Inc. experienced the following transactions for Year 1, its first year of operations:

1. Issued common stock for $110,000 cash.
2. Purchased $205,000 of merchandise on account.
3. Sold merchandise that cost $162,000 for $322,000 on account.
4. Collected $290,000 cash from accounts receivable.
5. Paid $185,000 on accounts payable.
6. Paid $64,000 of salaries expense for the year.
7. Paid other operating expenses of $80,000.
8. Sage adjusted the accounts using the following information from an accounts receivable aging schedule:

Number of Days Past Due	Amount			Percent Likely to Be Uncollectible	Allowance Balance
Current	$	19,200		0.01
0–30		8,000		0.05
31–60		1,600		0.10
61–90		1,600		0.20
Over 90 days		1,600		0.50

Required

1. Organize the transaction data in accounts under an accounting equation.
2. Prepare the income statement, statement of changes in stockholders’ equity, balance sheet, and statement of cash flows for Sage Inc. for Year 1.
3. What is the net realizable value of the accounts receivable at December 31, Year 1?

Answer 1

Event	Assets	=	Liabilities	+	Equity	Account titles
Cash	+	AR	-	Allowance	+	Mer Inv.	=	Acc Pay	+	Comm. Stock	=	Retained Earnings
1.	110000										110000			NA
2.							205000		205000					NA
3a.							-162000						-162000	Cost of goods sold
3b.			322000										322000	Revenue
4.	290000		-290000											NA
5.	-185000								-185000					NA
6.	-64000												-64000	Operating expenses
7.	-80000												-80000	Operating expenses
8.					1872								-1872	Operating expenses
Bal.	71000	+	32000	-	1872	+	43000	=	20000	+	110000	+	14128	Net income

Sage Inc. Income Statement

	$	$
Sales		322,000
Cost of Goods Sold		162,000
Gross Profit		160,000
Operating Expenses
Salaries Expense	64,000
Other Operating Expenses	80,000
Bad Debt Expense	1872
Total Operating Expenses		145872
Net Operating Income		14128

Sage Inc. Statement of Changes in Stockholders' Equity

Beginning Common Stock	0
Issued during the period	110,000
Ending Common Stock		$ 110,000
Beginning Retained Earnings	0
Net income earned during the period	14128
Ending Retained Earnings		14128
Total Stockholders' Equity		124128

Sage Inc.Balance Sheet

Assets	$	$
Cash		71,000
Accounts Receivable	32,000
Allowance for Doubtful Accounts	(1872)	30128
Inventory		43,000
Total Assets		144128
Liabilities
Accounts Payable	20,000
Total Liabilities		20,000
Stockholders' Equity
Common Stock	110,000
Retained Earnings	14128
Total Stockholders' Equity		124128
Total Liabilities and Stockholders' Equity		144128

Sage Inc. Statement of Cash Flows

	$	$
Cash Flows from Operating Activities
Cash collected from customers	290,000
Cash paid for inventories	(185,000)
Cash paid for operating expenses	(144,000)
Net cash flows from Operating Activities		(39,000)
Cash flows from Investing Activities		0
Cash flows from Financing Activities
Issuance of Common Stock	110,000
Net cash flows from Financing Activities		110,000
Net change in cash		71,000
Beginning cash balance		0
Ending cash balance		71,000

net realizable value of the accounts receivable at December 31, Year 1 = 32000 - 1872 = 30128

Answer 2