Question

Below are the transactions and adjustments that occurred during the first year of operations at Kissick Co

1. Issued 197,000 shares of $5-par-value common stock for $985,000 in cash.

2. Borrowed $520,000 from Oglesby National Bank and signed a 11% note due in three years.

3. Incurred and paid $390,000 in salaries for the year.

4. Purchased $690,000 of merchandise inventory on account during the year.

5. Sold inventory costing $590,000 for a total of $920,000, all on credit.

6. Paid rent of $220,000 on the sales facilities during the first 11 months of the year.

7. Purchased $180,000 of store equipment, paying $54,000 in cash and agreeing to pay the difference within 90 days.

8. Paid the entire $126,000 owed for store equipment and $630,000 of the amount due to suppliers for credit purchases previously recorded.

9. Incurred and paid utilities expense of $37,000 during the year.

10. Collected $825,000 in cash from customers during the year for credit sales previously recorded.

11. At year-end, accrued $57,200 of interest on the note due to Oglesby National Bank.

12. At year-end, accrued $20,000 of past-due December rent on the sales facilities.

Required:

a. Prepare an income statement (ignoring income taxes) for Kissick Co.'s first year of operations and a balance sheet as of the end of the year. (Hint: You may find it helpful to prepare T-accounts for each account affected by the transactions.)

(Amounts to be deducted and net loss should be indicated with minus sign.)

Answer 1

Concepts and reason

Income statement:

The income statement helps to know the after-tax income of a company. It helps to know whether there is profit or loss during a period and indicates about the performance of the company. There is reporting of expenses and revenues in the income statement of the company which help in the determination of the net income or loss during the period.

Balance Sheet:

Balance sheet is prepared to forecast the assets, liabilities and stockholders’ equity of a company for a period of time. It is prepared to estimate the financial position of the company. In the balance sheet accounts receivable balance is shown after deducting allowances for bad debts from the accounts receivable balance. Plant, property and equipment are shown after adding the purchase of new equipment and reducing the depreciation. Total liabilities are calculated by adding current liabilities and long term liabilities. Thus, the total liabilities and total stockholders’ equity is calculated by adding the individual total balances of total liabilities and total stockholders’ equity.

Fundamentals

Sales:

Sales refer to the amount which is earned by a company by selling or providing the products and services of the company to the customers. It is reported in the income statement of the company. The net sales revenue is calculated by reducing the sales returns, sales allowances and sales discount from the gross sales revenue.

Cost of goods sold:

The cost of goods sold shows the total manufacturing costs incurred in a period that is direct materials cost, direct labor cost and manufacturing overhead cost.

Gross Profit:

Gross Profit is the profit which a company earns after reducing the costs that are related to the production and sell of its products. Gross profit is computed by deducting the cost of goods sold from sales revenue.

Operating income:

The operating income refers to the income which is generated through the business operations. The operating expenses are deducted from the gross margin to compute the operating income of the company. It refers to the income which a company generates from its core or main operations.

Operating expenses:

The operating expenses are the expenses which a company incurs so that it can continue its main and core activities. The operating expenses have no direct relation with the production of the company but a company incurs operating expenses for its day to day operations. The example of operating expenses includes rent, depreciation, sales commission etc. The operating expenses include selling expenses, administrative expense and it does not consider the finance related costs like interest expense, bank charges etc.

Net Income:

The net income or net loss is computed by deducting the operating expenses from the gross profit. Net income is considered as of most importance by the investors in financial statements of any year. The reason being the net income represents the increase in the investors’ wealth resulting from the profitable activities performed by the company.

Property, plant, and equipment:

Property, plant and equipment are tangible assets that have physical substance. For example: Equipments, Machinery, and Buildings etc. The plant assets are long lived assets as the useful life of the assets is more than one year.

Accumulated Depreciation:

The accumulated depreciation method represents the amount of the cost of the asset which is charged as expense. The balance in the accumulated depreciation shows the amount of depreciation charged in the estimated useful life of asset. The accumulated depreciation is recorded by debiting depreciation expense and crediting accumulated depreciation.

Current assets:

The current assets are shown in the balance sheet of the company. The assets which in a year is expected to be turned into cash are the current assets. Such assets include cash, inventory, accounts receivable, prepaid expenses etc.

Accounts receivable:

Accounts receivable is a current asset for the company. It represents the amount which is required to be collected by the company from its customers when the goods are sold on credit to the customers. Accounts receivable are referred to as person from whom cash is receivable for credit sales made and it is expected that it will be received within one year from the date and thus are referred to as current assets.

Inventory:

Inventory represents the inventory purchased by a firm for re-sale, which has not been sold as on the date of the balance sheet. The inventory is disclosed in assets side of the balance sheet under the head Current Assets. Inventory is also disclosed in the credit side of the trading account of the firm.

Cash:

Cash is considered as a current asset for the company. It is reported in the assets section of the balance sheet. It is a real account. When there is inflow of cash then there is increase in the balance of the current assets. When there is outflow of cash then there is decrease in the balance of current assets.

Current liabilities:

The current liabilities are shown in the balance sheet of the company. The liabilities which are to be paid by the company in one year cash are the current liabilities. Such liabilities include salaries payable, interest payable, accounts payable, short term debt etc.

Notes Payable:

There is issuing of notes payable when the loans are taken from bank. The acquisition of the equipment which is costly or inventory purchases also result in issuance of notes payable. The notes payable are considered as current liability for the company.

Accounts Payable:

Accounts payable is a current liability for the company. It represents the amount which is required to be paid by the company to the suppliers when the goods are purchased on credit from the suppliers.

Long-term liabilities:

The long-term liabilities are shown in the balance sheet of the company. The liabilities which are to be paid by the company after one year are the long-term liabilities. Such liabilities include debentures, bonds payable etc.

Shareholders’ equity:

The shareholders’ equity section of balance sheet presents the amount of the total stockholders’ equity when the balance sheet is prepared. In the stockholders’ equity section of the balance sheet the total stockholders’ equity is computed by adding the capital stock, additional paid in capital and retained earnings.

Accrued Expense:

Accrued expenses are those expenses that have been incurred but for which no payment has been made. Adjusting entries regarding accrued expenses is made by debiting the accrued expense that is increasing the expense and by making a credit to liabilities which will increase the liabilities. Examples for accrued expenses are accrued expense for taxes, interest, Insurance and salaries.

a.

1.

Prepare the income statement of K Company for the first year of operation.

Following schedule shows the income statement of K Company for the first year of operation:

The amount of net loss of the company is $394,200.

Following schedule shows the calculation:

Working Note:

Calculate the amount of rent expense to be reported in the income statement.

Following schedule shows the amount of rent expense to be reported in the income statement:

The rent expense to be reported in the income statement is $240,000.

Following schedule shows the calculation:

Prepare the cash account.

Following schedule shows the cash account:

The balance of cash account at the end of the year is $873,000.

Following schedule shows the calculation:

Prepare the accounts receivable account.

Following schedule shows the accounts receivable account:

The balance of accounts receivable account at the end of the year is $95,000.

Following schedule shows the calculation:

Prepare the merchandise inventory account.

Following schedule shows the merchandise inventory account:

The balance of merchandise inventory at the end of the year is $100,000.

Following schedule shows the calculation:

Prepare the accounts payable account.

Following schedule shows the accounts payable account:

The balance of accounts payable at the end of the year is $60,000.

Following schedule shows the calculation:

2.

Prepare the balance sheet of the company.

Following schedule shows the balance sheet of the company.

The total of the assets section of the balance sheet is $1,248,000 and the total of the liabilities and equity section of the balance sheet is $1,248,000.

Following schedule shows the calculation:

Ans: Part a.1

The amount of net loss of the company is $394,200.

Part a.2

The total of the assets section of the balance sheet is $1,248,000 and the total of the liabilities and equity section of the balance sheet is $1,248,000.