Question

PROBLEM 1

Star Company engaged in the following transactions during Year 1:

1) Started the business by issuing $78,000 of common stock for cash.

2) The company paid cash to purchase $36,400 of inventory.

3) The company sold inventory that cost $19,000 for $46,000 cash.

4) Operating expenses incurred and paid during the year, $13,400.

Star Company engaged in the following transactions during Year 2:

1) The company paid cash to purchase $15,900 of inventory.

2) The company sold inventory that cost $32,800 for $57,000 cash.

3) Operating expenses incurred and paid during the year, $21,000.

Note: Star uses the perpetual inventory system.

REQUIRED: Prepare the accounting equation. Prepare the Income Statement (Multiple Step) and the Balance Sheet, for both years.

Answer 1

Accounting Equation
					Common		Retained
	Cash	+	Inventory	=	Stock	+	Earnings		Revenue	-	Expenses	=	Income
Year 1
1)	$ 78,000.00				$ 78,000.00
2)	$(36,400.00)		$   36,400.00
3)	$ 46,000.00		$ (19,000.00)				$ 27,000.00		$ 46,000.00		$ 19,000.00		$ 27,000.00
4)	$(13,400.00)						$(13,400.00)				$ 13,400.00		$(13,400.00)
	$ 74,200.00		$   17,400.00		$ 78,000.00		$ 13,600.00		$ 46,000.00		$ 32,400.00		$ 13,600.00
Year 2
Beg. Bal	$ 74,200.00		$   17,400.00		$ 78,000.00		$ 13,600.00
1)	$(15,900.00)		$   15,900.00
2)	$ 57,000.00		$ (32,800.00)				$ 24,200.00		$ 57,000.00		$ 32,800.00		$ 24,200.00
3)	$(21,000.00)						$(21,000.00)				$ 21,000.00		$(21,000.00)
	$ 94,300.00		$        500.00		$ 78,000.00		$ 16,800.00		$ 57,000.00		$ 53,800.00		$    3,200.00

	Income Statement
	Particulars		Year 1	Year 2
	Revenue		$ 46,000.00	$ 57,000.00
Less:	COGS		$ 19,000.00	$ 32,800.00
	Gross Margin		$ 27,000.00	$ 24,200.00
Less:	Operating Expenses		$ 13,400.00	$ 21,000.00
	Net Income		$ 13,600.00	$   3,200.00

Balance Sheet
Assets		Year 1	Year 2
Cash		$ 74,200.00	$ 94,300.00
Inventory		$ 17,400.00	$      500.00
Total		$ 91,600.00	$ 94,800.00
Liabilities and Equity
Common stock		$ 78,000.00	$ 78,000.00
Retained earnings		$ 13,600.00	$ 16,800.00
Total		$ 91,600.00	$ 94,800.00