Question

LO 1-7 Exercise 1-15B

Preparing an income statement and a balance sheet Petre Company was started on January 1, Year 1. During Year 1, the company experienced the following accounting events: (1) Issued $25,000 in common stock, (2) earned cash revenues of $14,500, (3) paid cash expenses of $9,200, and (4) paid a $500 cash dividend to its stockholders. These were the only events that affected the company during Year 1. Required a. Create an accounting equation and record the effects of each accounting event under the appropriate general ledger account headings. b. Prepare an income statement, statement of changes in stockholders' equity, and a balance sheet dated December 31, Year 1, for Petre Company. c. Explain why different terminology is used to date the income statement than is used to date the balance sheet.


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Answer 1

a. Sure, I can help you with that. Here's how the accounting equation would look like and the effects of each event:

Accounting Equation: Assets = Liabilities + Equity

1. Issued $25,000 in common stock:

- Increase in Cash (+$25,000)

- Increase in Common Stock (+$25,000)

2. Earned cash revenues of $14,500:

- Increase in Cash (+$14,500)

- Increase in Retained Earnings (+$14,500)

3. Paid cash expenses of $9,200:

- Decrease in Cash (-$9,200)

- Decrease in Retained Earnings (-$9,200)

4. Paid a $500 cash dividend to stockholders:

- Decrease in Cash (-$500)

- Decrease in Retained Earnings (-$500)

b. Here are the financial statements:

Income Statement for Year 1:

Revenues: $14,500

Expenses: $9,200

Net Income: $5,300

Statement of Changes in Stockholders' Equity for Year 1:

Beginning Common Stock: $0

Issuance of Common Stock: +$25,000

Net Income: +$5,300

Dividends: -$500

Ending Common Stock: $25,000

Retained Earnings: $5,300

Balance Sheet as of December 31, Year 1:

Assets:

- Cash: $25,800 ($25,000 + $14,500 - $9,200 - $500)

Liabilities: $0

Equity:

- Common Stock: $25,000

- Retained Earnings: $5,300

c. Different terminology is used to date the income statement (covers a period) and the balance sheet (a specific point in time) because they represent different aspects of a company's financial status. The income statement shows the financial performance over a specific period (Year 1 in this case), while the balance sheet provides a snapshot of the company's financial position as of a particular date (December 31, Year 1).