Practice problem from tutorial

Source: Horngren, Sundem, Elliott, and Philbrick. Introduction to Financial Accounting. 9th Edition. Pearson, 2009.

Preparing financial statements - illustration

Hector Lopez, a salaried employee of a local bicycle company, quits his job and opens his own bicycle shop, Bigwheels Company, on
January 2, 20XX. Let’s take a look at some transactions of Bigwheels Company and see how they affect the financial statements.

List of transactions:
1. Initial investment by owners, $400,000 cash. They receive 4,000 shares with a par value of $1 per share.
2. Loan from bank, $100,000
3. Acquired store equipment for cash, $15,000
4. Acquired inventory for cash, $120,000
5. Acquired inventory on credit, $10,000
6. Acquired inventory for $10,000 cash plus $20,000 trade credit
7. Sold unneeded equipment for $1,000 cash
8. Returned inventory for supplier for full credit, $800
9. Paid cash to creditors, $4,000
10.
A. Sold bicycles to customers on credit, $160,000.
B. The cost to Bigwheels of the inventory sold was $100,000.
11. During the month, Bigwheels collects $5,000 of its accounts receivables
12. Paid $6,000 of store rent covering January, February, and March of 20XX at the beginning of month
13. Recognize $2,000 worth of rent that was a period cost for January 20XX
14. Recognize a depreciation expense of $100

Assets = Liabilities + Shareholders’ equity

 Cash Accounts Inventory Prepaid rent Equipment = Note Accounts Contributed Retained
receivable payable payable Capital earnings
1. Initial investment 400000
400000
2. Loan from bank 100000
100000
3. Acquire store equipment
-15000 15000
4. Acquire inventory for cash 10000
-120000 120000
5. Acquire inventory on credit
10000
6. Acquire inventory on part 20000
cash and part credit
-10000 30000
7. Sale of equipment
1000 -1000
8. Return of inventory acquired 800
-800
9. Payment to suppliers -4000
-4000
10(a) Sale on credit 160000

10 (b) cost of inventory sold

-100000
11 Collect accounts receivables 5000

12 Pay rent in advance 6000

-6000
13 Recognize rental expense 2000
-2000
14 Recognize depreciation
-100
Does balance sheet tally?

STEP I: Posting journal entries

Entry Transactions Debit Credit

8
9
10a

10b

11

12

13

14

STEP II: Posting transactions to T-accounts

 Cash Accounts receivable Inventory Prepaid rent Equipment
Dr Cr Dr Cr Dr Cr Dr Cr Dr Cr

Notes payable Accounts payable Paid-in-capital Additional paid in Retained earnings

capital
Dr Cr Dr Cr Dr Cr Dr Cr Dr Cr

Sales revenue Cost of goods sold Depreciation Accumulated Rent expense

depreciation
Dr Cr Dr Cr Dr Cr Dr Cr Dr Cr

STEP III: Preparing the trial balance

 Debit Credit

STEP IV: Prepare financial statements

Balance sheet Income statement
Assets

Liabilities and Equity