Question

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

Preparing Accounting Equation, Income Statement and Balance Sheet for Year 1& Year 2:-

Year 1:-

Star Company

Accounting Equation

For the Year 1

No.			Assets	=	Stockholders		Equity
	Cash	+	Inventory	=	Common Stock	+	Sales Revenue	-	Expenses
(1)	$78,000	+		=	$78,000	+		-
(2)	(36,400)	+	$36,400	=		+		-
(3)	46,000	+		=		+	$46,000	-
		+	(19,000)	=		+		-	$19,000	Cost of Goods Sold
(4)	(13,400)	+		=		+		-	13,400	operating Expenses
Bal.	$74,200	+	$17,400	=	$78,000	+	$46,000	-	$32,400

Star Company

Income Statement

For the end of Year 1

Accounts	Amount	Amount
Sales Revenue	$46,000
Less:- Cost of Goods Sold	(19,000)
Gross Profit		$27,000
Less:- Expenses
Operating Expenses	$13,400
Total Expenses		$(13,400)
Net Income		$13,600

Star Company

Statement of Stockholders Equity

For the end of Year 1

Accounts	Amount
Retained Earnings, Beginning	$0
Add:- Net Income	$13,600
Retained Earnings, Ending	$13,600

Star Company

Balance Sheet

Year 1

Accounts	Amount	Amount
Assets:-
Cash	$74,200
Inventory	17,400
Total Assets		$91,600
Liabilities and Stockholders Equity
Stockholders Equity:-
Common Stock	$78,000
Retained Earnings, Ending	13,600
Total Liabilities and Stockholders Equity		$91,600

Year 2:-

Star Company

Accounting Equation

Year 2

No.	Assets			=	Stockholders		Equity
	Cash	+	Inventory	=	Common Stock	+	Retained Earnings	+	Sales Revenue	-	Expenses
Beg. Bal.	$74,200	+	$17,400	=	$78,000	+	$13,600	+	$0	-	$0
(1)	(15,900)	+	15,900	=		+		+		-
(2)	57,000	+		=		+		+	57,000	-
		+	(32,800)	=		+		+		-	32,800	Cost of Goods Sold
(3)	(21,000)	+		=		+		+		-	21,000	Operating Expenses
Bal.	$94,300	+	$500	=	$78,000	+	$13,600	+	$57,000	-	$53,800

Star Company

Income Statement

For the end of Year 2

Accounts	Amount	Amount
Sales Revenue	$57,000
Less:- Cost of Goods Sold	(32,800)
Gross Profit		$24,200
Less:- Expenses
Operating Expenses	$21,000
Total Expenses		$(21,000)
Net Income		$3,200

Star Company

Statement of Retained Earnings

For the end of Year 2

Accounts	Amount
Retained Earnings, Beginning	$13,600
Add:- Net Income	3,200
Retained Earnings, Ending	$16,800

Star Company

Balance Sheet

Year 2

Accounts	Amount	Amount
Assets:-
Cash	$94,300
Inventory	500
Total Assets		$94,800
Liabilities and Stockholders Equity:-
Stockholders Equity:-
Common Stock	$78,000
Retained Earnings, Ending	16,800
Total Liabilities and Stockholders Equity		$94,800