The assets and liabilities of Global Travel Agency on December 31, 20Y5, and its revenue and expenses for the year are as follows: Accounts payable $108,000 Miscellaneous expense $19,500 Accounts receivable 539,000 Rent expense 56,000 Cash 200,000 Supplies 6,000 Common stock 575,000 Supplies expense 12,700 Fees earned 940,000 Utilities expense 34,800 Land 1,500,000 Wages expense 415,000Common stock was $525,000 and retained earnings was $1,250,000 as of January 1, 20Y5. During the year, additional common stock of $50,000 was issued for cash, and dividends of $90,000 were paid.

Instructions :

1. Prepare an income statement for the year ended December 31, 20Y5.

2. Prepare a statement of stockholders' equity for the year ended December 31, 20Y5.

3. Prepare a balance sheet as of December 31, 20Y5.

4. What items appear on both the statement of stockholders' equity and the balance sheet?

Solution:

Global Travel Agency

1. Income Statement for the year ended December 31, 20Y5:

Revenue (Fees Earned) = $940,000

less Expenses:

Wages = $415,000

Miscellaneous = $19,500

Rent = $56,000

Supplies Exp = $12,700

Utilities = $34,800

Total = $538,000

Net Income = $402,000

2. Statement of Stockholders' Equity for the year ended December 31, 20Y5:

Common Stock = $575,000

Retained Earnings = $1,562,000 (1,250,000 + 402,000 - 90,000)

Total Equity = $2,137,000

3. Balance sheet as of December 31, 20Y5:

Assets:

Land = $1,500,000

Supplies = $6,000

Accounts Receivable = $539,000

Cash = $200,000

Total Assets = $2,245,000

Equity & Liabilities:

Equity:

Common Stock = $575,000

Retained Earnings = $1,562,000

Total Equity = $2,137,000

Liabilities:

Accounts Payable = $108,000

Total Equity and Liabilities = $2,245,000

4. Items appearing on Stockholders' Equity and Balance Sheet are:

a) Common Stock

b) Retained Earnings

Explanation:

a) Financial Statements are the financial reports prepared by management to summarize the financial position (Balance Sheet), the financial performance (Income Statement), and the cash flows (Cash Flow Statement), including notes of an entity at a given date and for a period of time, usually a year or a quarter.

b) The income statement shows the (net income) excess of revenue over cost of revenue and other expenses incurred in the running of the business.

c) The balance sheet lists the assets, liabilities, and Equity.  It shows the resources available for business operations and the owners of the funds used in financing the resources.  Liabilities are outside fund owners, while Equity depicts the internal fund owners.

d) Other items that might appear in Stockholders' Equity and the balance sheet are Additional Paid-in Capital and Treasury Stock (contra account to the Common Stock).

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