Exercise 721 Current liabilities LO 71 72 74 710 The followi

Exercise 7-21 Current liabilities LO 7-1, 7-2, 7-4, 7-10 [The following information applies to the questions displayed below.] The following transactions apply to Ozark Sales for 2018: The business was started when the company received $48,500 from the issue of common stock. Purchased equipment inventory of $177,500 on account. Sold equipment for $193,500 cash (not including sales tax). Sales tax of 6 percent is collected when the merchandise is sold. The merchandise had a cost of $118,500. Provided a six-month warranty on the equipment sold. Based on industry estimates, the warranty claims would amount to 3 percent of sales. Paid the sales tax to the state agency on $143,500 of the sales. On September 1, 2018, borrowed $19,500 from the local bank. The note had a 6 percent interest rate and matured on March 1, 2019. Paid $5,900 for warranty repairs during the year. Paid operating expenses of $52,500 for the year. Paid $124,500 of accounts payable. Recorded accrued interest on the note issued in transaction no. 6. Exercise 7-21 Part b Prepare the income statement, balance sheet, and statement of cash flows for 2018.

Solution

Income statement

Particulars

Amount ($)

Amount ($)

(A): Income

Sales                    

193500

Less: Cost of merchandise

118500

(A): Gross profit

75000

(B): Expenditures

Operating expenses

52500

Provision for warranty expenses

5805

Interest on borrowed fund

585

Warranty expenses in addition of provision (5900 - 5805)

95

(B): Total expenditures

58985

Net profit (A - B)

16015

Balance sheet

Assets:

Amount ($)

Amount ($)

Current assets:

Inventory (177500 - 118500)

59000

Cash

81600

140600

Non-current assets:

Total assets

140600

Liabilities and equity:

Current liabilities:

Accounts payable (177500-124500)

53000

Acrrued interest (19500 x 6%) x 6/12

585

Sales tax liability (11610 -8610)

3000

56585

Non-current liabilities:

Borrowed loan

19500

19500

Equity:

Common stock

48500

Profit and loss account

16015

64515

Total liabilities and equity

140600

Cash flow

Cash flow from operating activities

Cash received from sales

    193,500.00

Sales tax collected {193500 + (193500 x 6%)} - 193500

       11,610.00

Warranty expense paid

       (5,900.00)

Operating expenses paid

    (52,500.00)

Payment of account payable

(124,500.00)

Sales tax paid (143500 x 6%)

       (8,610.00)

Cash flow from operating activities

   13,600.00

Cash flow from investing activities

Cash flow from financing activities

Cash received from common stock

       48,500.00

Borrowed from local bank

       19,500.00

Cash flow from financing activities

   68,000.00

Cash balance as at the end of financial year

   81,600.00

Note:
It has been assumed that neither the loan borrowed from local bank nor the interest on such loan has yet been paid.

Income statement
Particulars	Amount ($)	Amount ($)
(A): Income
Sales	193500
Less: Cost of merchandise	118500
(A): Gross profit	75000
(B): Expenditures
Operating expenses	52500
Provision for warranty expenses	5805
Interest on borrowed fund	585
Warranty expenses in addition of provision (5900 - 5805)	95
(B): Total expenditures	58985
Net profit (A - B)	16015