Bev’s Dry Cleaners is owned and operated by Beverly Zahn. A building and equipment are currently being rented, pending expansion to new facilities. The actual work of dry cleaning is done by another company at wholesale rates. The assets, liabilities, and common stock of the business on November 1, 2016, are as follows: Cash, $39,000; Accounts
Receivable, $80,000; Supplies, $11,000; Land, $50,000; Accounts Payable, $31,500; Common Stock, $50,000. Business transactions during November are summarized as follows:
a. Beverly Zahn invested additional cash in exchange for common stock with a deposit of $21,000 in the business bank account.
b. Purchased land adjacent to land currently owned by Bev’s Dry Cleaners to use in the future as a parking lot, paying cash of $35,000.
c. Paid rent for the month, $4,000.
d. Charged customers for dry cleaning revenue on account, $72,000.
e. Paid creditors on account, $20,000.
f. Purchased supplies on account, $8,000.
g. Received cash from cash customers for dry cleaning revenue, $38,000.
h. Received cash from customers on account, $77,000.
i. Received monthly invoice for dry cleaning expense for November (to be paid on December 10), $29,450.
j. Paid the following: wages expense, $24,000; truck expense, $2,100; utilities expense, $1,800; miscellaneous expense, $1,300.
k. Determined that the cost of supplies on hand was $11,800; therefore, the cost of supplies used during the month was $7,200.
l. Paid dividends, $5,000.
Instructions
1. Determine the amount of retained earnings as of November 1.
2. State the assets, liabilities, and stockholders’ equity as of November 1 in equation form similar to that shown in this chapter. In tabular form below the equation, indicate increases and decreases resulting from each transaction and the new balances after each transaction.
3. Prepare an income statement for November, a retained earnings statement for November, and a balance sheet as of November 30.
4. (Optional) Prepare a statement of cash flows for November.
Answer:
1. Assets = Liabilities + Stockholders’ Equity Cash Accounts + Receivable + Supplies + Land Accounts = Payable + Common Stock + 50,000 + $98,500 Retained Earnings = Retained Earnings BEV'S DRY CLEANERS Retained Earnings Statement For the Month Ended November 30, 2016 Retained earnings, November 1, 2016 $ 98,500 Net income for November $40,150 Less dividends 5,000 Increase in retained earnings 35,150 Retained earnings, November 30, 2016 $133,650 BEV'S DRY CLEANERS Balance Sheet November 30, 2016 Assets Liabilities Cash $ 81,800 Accounts payable $ 48,950 Accounts receivable 75,000 Supplies 11,800 Stockholders’ Equity Land 85,000 Common stock $ 71,000 Retained earnings 133,650 Total stockholders’ equity 204,650 Total liabilities and Total assets $253,600 stockholders’ equity $253,600 (Optional) For the Month Ended Novemer 30, 2016 Cash flows from operating activities: Cash received from customers* $115,000 Deduct cash payments for expenses and payments to creditors** (53,200) Net cash flows from operating activities $ 61,800 Cash flows used for investing activities: Purchase of land (35,000) Cash flows from financing activities: Cash received from issuing common stock $ 21,000 Deduct cash dividends (5,000) Net cash flows from financing activities 16,000 Net increase in cash during November $ 42,800 Cash balance, November 1, 2016 39,000 Cash balance, November 30, 2016 $ 81,800 * $38,000 + $77,000; these amounts are taken from the cash column of the spreadsheet in Part 2. ** $4,000 + $20,000 + $29,200; these amounts are taken from the cash column of the spreadsheet in Part 2.
