Question

Powell Company began the 2018 accounting period with $31,000 cash, $97,000 inventory, $50,000 common stock, and $78,000 retained earnings. During 2018, Powell experienced the following events:

Sold merchandise costing $63,500 for $110,500 on account to Prentise Furniture Store.

Delivered the goods to Prentise under terms FOB destination. Freight costs were $1,000 cash.

Received returned goods from Prentise. The goods cost Powell $5,100 and were sold to Prentise for $7,000.

Granted Prentise a $3,000 allowance for damaged goods that Prentise agreed to keep.

Collected partial payment of $91,500 cash from accounts receivable.

Required

Record the events in a statements model shown below.

Prepare an income statement, a balance sheet, and a statement of cash flows.

Why would Prentise agree to keep the damaged goods?

Answer 1

			Powell company
		Financial statements model for 2018
Event	Balance sheet	Income statement	Statement of cash flows
Assets	=	Stockholder's Equity	Revenue	-	Expenses	=	Net income
Cash	+	Accounts receivable	+	Inventory	=	Common stock	+	Retained earnings
Bal.	31000				97000		50000		78000
1a.			110500						110500	110500		0		110500	0	NA
1b.					-63500				-63500	0		63500		-63500	0	NA
2	-1000								-1000	0		1000		-1000	-1000	OA
3a.			-7000						-7000	-7000		0		-7000	0	NA
3b.					5100				5100	0		-5100		5100	0	NA
4			-3000						-3000	-3000		0		-3000	0	NA
5	91500		-91500												91500	OA
Total	121500		9000	0	38600		50000		119100	100500		59400		41100

			Powell company
			Income statement
		For the year ended December 31,2018
					$		$
Sales revenue							110500
Less:
Sales returns					7000
Sales allowances					3000		10000
Net sales							100500
Less:Cost of goods sold			(63500-5100)				58400
Gross profit							42100
Less: Operating expenses
Freight charges paid							1000
Net operating income							41100
			Powell company
			Balance sheet
		As of December 31,2018
					$		$
Assets:
Cash					121500
Accounts receivable					9000
Inventory					38600
Total assets							169100
Liabilities
Stockholder's equity
Common stock					50000
Retained earnings					119100
Total stockholder's equity							169100
Total liabilities and stockholder's equity							169100

Powell company Statement of cash flows For the year ended December 31, 2018 $ $ Cash flow from operating activities: Casf inflow from customers 91500 Casf outflow for freight -1000 Net cash flow from operating activities 90500 Cash flows from investing activities 0 Cash flows from financing activities 0 Net change in cash 90500 Less:Beginning cash balance 31000 Ending cash balance 121500 Reasons for keeping the damaged goods: Damaged goods can be resold It is possible to get goods at reduced cost Damaged goods can be repaired