Question

The following transactions apply to Ozark Sales for Year 1:

1. The business was started when the company received $50,000 from the issue of common stock.
2. Purchased equipment inventory of $175,000 on account.
3. Sold equipment for $203,000 cash (not including sales tax). Sales tax of 8 percent is collected when the merchandise is sold. The merchandise had a cost of $128,000.
4. Provided a six-month warranty on the equipment sold. Based on industry estimates, the warranty claims would amount to 4 percent of sales.
5. Paid the sales tax to the state agency on $153,000 of the sales.
6. On September 1, Year 1, borrowed $20,500 from the local bank. The note had a 7 percent interest rate and matured on March 1, Year 2.
7. Paid $6,000 for warranty repairs during the year.
8. Paid operating expenses of $54,500 for the year.
9. Paid $125,900 of accounts payable.
10. Recorded accrued interest on the note issued in transaction no. 6.

b-1. Prepare the income statement for Year 1.

b-2. Prepare the balance sheet for Year 1.

b-3. Prepare the statement of cash flows for Year 1.

Answer 1

Part b-1	Income Statement
	Sales			$ 203,000
	Less: Cost of Goods Sold			$-128,000
	Gross Profit			$    75,000
	Operating Expense		$    54,500
	Warranty Expense ($203,000*4%)		$      8,120
	Total Operating Expense			$ -62,620
	Operating Income			$    12,380
	Add: Other income/gains
	Interest Revenue			$         478
	Net Income			$    12,858
Part b-2	Balance Sheet
	Assets:
	Cash			$    91,100
	Inventory			$    47,000
	Interest Receivable ($20,500*7%*4/12)			$         478
	Total Assets			$ 138,578
	Liabilities:
	Accounts Payable			$    49,100
	Estimated Warranty			$      2,120
	Sales Tax Payable			$      4,000
	Note Payable			$    20,500
	Total liabilities			$    75,720
	Stockholder's Equity
	Common Stock		$    50,000
	Retained Earning		$    12,858
	Total Stockholder's Equity			$    62,858
	Total Liabilities and equity			$ 138,578
Part b-2	Cash Flow
	Cash flow from operating activities:
	Cash from sales		$ 219,240
	Cash paid for repairs		$    -6,000
	Cash paid for operating expense		$ -54,500
	Cash paid for sales tax		$ -12,240
	Cash paid for purchases		$-125,900
	Total Cash flow from operating activities			$    20,600
	Cash flow from Financing activities:
	Issue of common stock		$    50,000
	Borrowing from bank		$    20,500
	Cash flow from financing activities			$    70,500
	Net Increase/decrease			$    91,100