Question

On March 31, 2015, Cars, Inc. owes Preston Devices, one of its suppliers, $25,000 for previous purchases. During April 2015, Preston sells Cars devices with a sales price of $10,000 and a cost to Preston of $8,000. During April, Cars pays Preston $12,000 against the amount owed to Preston. What is the effect of these April transactions on Preston's balance sheet?

Answer 1

March 31, outstanding debt $25,000

During April $10,000 more merchandise is sold to Cars inc. (COGS $8,000)

Cars paid $12,000 to Preston to lower its accounts payable

On March 31, Preston's balance sheet showed an accounts receivable of $25,000.

On April 30, the accounts receivable balance is $23,000, the cash balance increased by $12,000 and retained earnings should increase by $2,000.

The income statement should show an increases in sales revenue of $10,000 - $8,000 COGS = $2,000 profit (which increases retained earnings).