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# Equation approach for transactions

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The Srinivas Company was incorporated on April 1, 20X1. Srinivas has ten holders of common stock. Diveesh Srinivas, who was the president and chief executive officer, held 51% of the shares. The company rented space in chain discount stores and specialized in selling ladies' shoes. Srinivas's first location was a store in Import Market Centers, Inc.

The following events occurred during April:

a. The company was incorporated. Common stockholders invested \$120,000 cash.
b. Purchased merchandise inventory for cash, \$35,000.
c. Purchased merchandise inventory on open account, \$25,000.
d. Merchandise carried in inventory at a cost of \$40,000 was sold for cash for \$30,000 and on open account for \$70,000, a grand total of \$100,000. Srinivas carries and will collect these accounts receivable.
e. Collection of the above accounts receivable, \$15,000.
f. Payments of accounts payable, \$18,000. See transaction c.
g. Special display equipment and fixtures were acquired on April 1 for \$36,000. Their expected useful live was 36 months with no terminal scrap value. Straight-line depreciation was adopted. This equipment was removable. Srinivas paid \$12,000 as a down payment and signed a promissory not for \$24,000.
h. On April 1, Srinivas signed a rental agreement with Import Market Centers. The agreement called for a flat \$2,000 per month, payable quarterly in advance. Therefore, Srinivas paid \$6,000 cash on April 1.
i. The rental agreement also called for a payment of 10% of all sales. This payment was in addition to the flat \$2,000 per month. In this way, Import Market Center would share in any success of the venture and be compensated for general services such as cleaning and utilities. This payment was to be made in cash on the last day of each month as soon as the sales for the month were tabulated. Therefore, Srinivas made the payment on April 30.
j. Wages, salaries, and sales commissions were all paid in cash for all earnings by employees. The amount was \$43,000.
k. Depreciation expense was recognized. See transaction g.
l. The expiration of an appropriate amount of prepaid rental services was recognized. See transaction h.

1. Prepare an analysis of Srinivas Company's transactions, employing the equation approach demonstrated in Exhibit 15-1. Two additional columns will be needed: Equipment and Fixtures, and Note Payable. Show all amounts in thousands.
2. Prepare a balance sheet as of April 30, 20X1, and an income statement for the month of April. Ignore income taxes.
3. Given these sparse facts, analyze Srinivas's performance for April and its financial position as of April 30, 20X1.

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#### Solution Preview

Please see the attached file. Solutions in the two excel sheets - Sheet 1 and Srinivas Company

For each of the following independent cases, compute the amounts (in thousands) for the items indicated by
letters, and show your supporting computations:

CASE
1 2 3
Revenues \$150 \$ K \$300
Expenses 120 170 270
Dividends Declared 0 5 Q
Additional Investment by stockholders 0 30 35
Net income E 20 P
Retained earnings Beginning of year 40 50 100
Retained earnings End of year D J 110
Paid-in capital Beginning of year 15 10 N
Paid-in capital End of year C H 85
Total assests Beginning of year 85 F L
Total assests End of year 95 275 M
Total liabilities Beginning of year A 100 105
Total liabilities End of year B G 95

To solve for the amounts use the following equations
1. Net Income = Revenues - Expenses
2. Total Assets = Total Liabilities + Total Paid -in Capital + Retained Earnings
3. Retained Earnings are the end of year = Retained Earnings at ...

#### Solution Summary

The solution explains how to record transactions using the accounting equation and then to make the financial statements and assess the performance.

\$2.19