Question

Karla Tanner opens a Web consulting business called Linkworks and completes the following transactions in its first month of operations.

April
1 Tanner invests $80,000 cash along with office equipment valued at $26,000 in the company in exchange for common stock.
2 The company prepaid $9,000 cash for 12 months' rent for office space. (Hint: Debit Prepaid Rent for $9,000.)
3 The company made credit purchases for $8,000 in office equipment and $3,600 in office supplies. Payment is due within 10 days.
6 The company completed services for a client and immediately received $4,000 cash.
9 The company completed a $6,000 project for a client, who must pay within 30 days.
13 The company paid $11,600 cash to settle the account payable created on April 3.
19 The company paid $2,400 cash for the premium on a 12-month insurance policy. (Hint: Debit Prepaid Insurance for $2,400.)
22 The company received $4,400 cash as partial payment for the work completed on April 9.
25 The company completed work for another client for $2,890 on credit.
28 The company paid $5,500 cash in dividends.
29 The company purchased $600 of additional office supplies on credit.
30 The company paid $435 cash for this month's utility bill.

Required:
Prepare Financial statements. (Income statement, statement of Retained earnings and Balance Sheet)

Answer 1

To prepare the financial statements for Linkworks, we need to categorize the transactions into the relevant statements. The Income Statement shows a net income of $4,000, the Statement of Retained Earnings calculates the ending retained earnings to be -$1,500, and the Balance Sheet lists the company's assets, liabilities, and stockholders' equity.

Step-by-step explanation:

To prepare the financial statements for Linkworks, we need to go through the transactions and categorize them into the relevant statement.

Income Statement

• Revenue: $4,000 (services completed and cash received on April 6)
• Expenses: None in the given transactions
• Net Income: $4,000

Statement of Retained Earnings

• Beginning Retained Earnings: $0 (since it's the first month)
• Add: Net Income ($4,000 from Income Statement)
• Less: Dividends Paid ($5,500)
• Ending Retained Earnings: -$1,500

Balance Sheet

• Assets: Cash ($62,865), Office Equipment ($26,000), Prepaid Rent ($9,000), Office Supplies ($3,600), Prepaid Insurance ($2,400)
• Liabilities: Accounts Payable ($0)
• Stockholders' Equity: Common Stock ($80,000), Retained Earnings (-$1,500)

Answer 2

Income Statement

Service Revenue $10,000

Less Expenses :

Utility Bill ($435)

Net Income / (Loss) $9,565

Statement of Retained Earnings

Opening Retained Earnings $0

Add Profit Earned During the Period $9,565

Less Dividends Paid ($5,500)

Closing Retained Earnings $4,065

Balance Sheet

Assets

Non - Current Assets

Office Equipment $34,000

Total Non-Current Assets $34,000

Current Assets

Office Supplies $4,200

Prepaid Rent $9,000

Accounts Receivable $3,110

Prepaid Insurance $2,400

Cash $57,955

Total Current Assets $76,665

Total Assets $110,665

Equity and Liabilities

Equity

Common Stock $106,000

Retained Earnings $4,065

Total Equity $110,065

Liabilities

Current Liabilities

Accounts Payable $600

Total Liabilities $600

Total Equity and Liabilities $110,065

Step-by-step explanation:

First Record the Transactions as Follows ;

April 1.

Cash $80,000 (debit)

Equipment $26,000 (debit)

Common Stock $106,000 (credit)

April 2

Prepaid Rent $9,000 (debit)

Cash $9,000 (credit)

April 3

Office Equipment $8,000 (debit)

Office Supplies $3,600 (debit)

Accounts Payable $11,600 (credit)

April 6

Cash $4,000 (debit)

Service Revenue $4,000 (credit)

April 9

Accounts Receivable $6,000 (debit)

Service Revenue $6,000 (credit)

April 13

Accounts Payable $11,600 (debit)

Cash $11,600 (credit)

April 19

Prepaid Insurance $2,400 (debit)

Cash $2,400 (credit)

April 22

Cash $2,890 (debit)

Accounts Receivable $2,890 (credit)

April 28

Dividends $5,500 (debit)

Cash $5,500 (credit)

April 29

Office Supplies $600 (debit)

Accounts Payable $600 (credit)

April 30

Utility Bill $435 (debit)

Cash $435 (credit)

Then Determine Account Balances as follows :

Cash $80,000 - $9,000 + $4,000 - $11,600 - $2,400 + $2,890 - $5,500 - $435 = $57,955 (debit)

Office Equipment $26,000 + $8,000 = $34,000 (debit)

Common Stock =$106,000 (credit)

Prepaid Rent = $9,000 (debit)

Office Supplies $3,600 + $600 = $4,200 (debit)

Accounts Payable $11,600 - $11,600 + $600 = $600 (credit)

Service Revenue $4,000 + $6,000 = $10,000 (credit)

Accounts Receivable $6,000 - $2,890 = $3,110 (debit)

Prepaid Insurance = $2,400 (debit)

Dividends = $5,500 (debit)

Utility Bill = $435 (debit)