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Analyzing And Correcting Accounting Information

Assume that you invested $1,000 in a business venture on January 1, 1998. At the end of the year, you received the following information about the venture, along with a check for $60 representing your share of the company's distribution of profits.

Dear(Your name)
We are pleased to send you the enclosed check representing your share of profits for the company for last year. As one of the 100 partners who invested $1,000 in the business, you are entitled to an equal share of the company's profits. The following events occured during 1998.

1. Equipment was purchased at a cost of $50,000

2. A five-year lease was taken on a building at $12,000 per year. A payment ($24,000) was made for the first two years of the lease.

3. Merchandise was purchased at a cost of $40,000.

4. Eighty percent of the merchandise was sold during the year. $150,000 cash was received from the sale. Customers still owe $25,000, which should be collected during 1999.

5. Wages, utilities, transportation and other costs of $30,000 were paid for in 1998.

Accordingly, company profits were as follows

Sales revenues $150,000
Cost of merchandise -40,000
Cost of equipment -50,000
Cost of lease -24,000
Other costs -30,000

Net Income $ 6,000

Distribution per partner $ 60

Required

a.) Assume that depreciation expense on the quipment was $10,000 for the year. Prepare an analysis of each event (1-5) for the company describing the effect of the event on the company's assets, liabilities, owners' equity, revenues, and expense. Include any related events that should affects the company's accounts.

b.) Prepare a corrected Income Statement in good form

Solution Preview

a.) Assume that depreciation expense on the equipment was $10,000 for the year. Prepare an analysis of each event (1-5) for the company describing the effect of the event on the company's assets, liabilities, owners' equity, revenues, and expense. Include any related events that should affects the company's accounts.

Event Company's assets Company's liabilities Owners' equity Revenues Expense
1. Equipment was purchased at a cost of $50,000 Increase in Assets
Debit equipment account by $50000
Decrease in asset credit Cash account by $50000 No effect No effect No effect No effect
2. A five-year lease was taken on a building at $12,000 per year. A payment ($24,000) was made for the first two years of the lease.

Decrease in Assets
Cash account by $24000
Increase in Assets
Debit pre paid lease by $12000 No effect No ...

Solution Summary

The solution contains analysis of events for the company describing the effect of the event on the company's assets, liabilities, owners' equity, revenues, and expense and income statement.

$2.19