Exercise 9-8a: Current Liabilities Transactions

Exercise 9 8a Current Liabilitiesthe Following Transactions Apply To O

Analyze the impact of multiple financial transactions related to Ozark Sales, including issuing stock, purchasing inventory, selling equipment, providing warranties, paying taxes, borrowing from the bank, and paying expenses. Use a horizontal statements model to record the effects on assets, liabilities, equity, revenues, expenses, net income, and cash flows. Prepare journal entries and T-accounts for each transaction. Develop the financial statements for 2016, including income statement, balance sheet, and statement of cash flows. Determine the total current liabilities at December 31, 2016.

Sample Paper For Above instruction

The analysis of Ozark Sales’ financial activities for the year 2016 provides insight into its financial position, cash flows, and operational impacts. This comprehensive review begins with transaction recording using a horizontal statements model, continues with journal entries and T-accounts, and concludes with the preparation of key financial statements. The process elucidates how various transactions influence different aspects of financial health, especially focusing on current liabilities as of December 31, 2016.

Horizontal Statements Model

The initial transaction involves the issuance of common stock for $50,000, which increases cash (assets) and stockholders' equity. Buying equipment and inventory for $380,000 on account increases assets but also increases liabilities, specifically accounts payable. Selling equipment for $510,000 cash boosts cash and reduces equipment assets; the sale includes collected sales tax of 8%, which increases liabilities (sales tax payable). The gross profit from sales on equipment, costing $330,000, affects net income in the income statement.

Providing a six-month warranty on sold equipment implies setting aside estimated warranty costs—2% of sales—creating a liability and expenses. Payment of sales tax on $400,000 of sales generates a decrease in cash and an increase in sales tax payable. Borrowing $50,000 from a bank on September 1 creates a liability (note payable) with accrued interest recognized at a 4% annual rate, maturing on March 1, 2017; interest expense is recorded accordingly.

Warranty repairs costing $6,200 are expenses paid in cash, reducing cash and net income. Operating expenses of $78,000 decrease cash and net income. Payments of $250,000 on accounts payable reduce liabilities and cash. Recording accrued interest on the bank loan increases interest expense and liabilities. The combined effects reflect the company’s liquidity, solvency, and profitability.

Journal Entries and T-Accounts

The initial journal entry for issuing stock: Dr. Cash $50,000; Cr. Common Stock $50,000. Purchase of equipment inventory: Dr. Inventory $380,000; Cr. Accounts Payable $380,000. Sale of equipment: Dr. Cash $510,000; Cr. Equipment $330,000; Cr. Sales Revenue $472,000; Cr. Sales Tax Payable $38,000 (8% of $472,000). Warranty liability: Dr. Warranty Expense $9,440; Cr. Warranty Liability $9,440 (2% of sales). Sales tax payable: Dr. Cash $400,000; Cr. Sales Revenue $400,000; Cr. Sales Tax Payable $32,000.

Loan from bank: Dr. Cash $50,000; Cr. Notes Payable $50,000. Accrued interest: Dr. Interest Expense; Cr. Interest Payable. Warranty repairs: Dr. Warranty Liability $6,200; Cr. Cash $6,200. Operating expenses: Dr. Expenses $78,000; Cr. Cash $78,000. Accounts payable: Dr. Accounts Payable $250,000; Cr. Cash $250,000. Interest accrual: Dr. Interest Expense; Cr. Interest Payable—total interest calculated proportionally for six months at 4%.

Financial Statements for 2016

The income statement shows total revenues minus expenses, including cost of goods sold, warranty expenses, interest, and operating expenses, resulting in net income. The balance sheet reflects assets such as cash, inventory, equipment, and liabilities like accounts payable, sales tax payable, notes payable, and accrued interest. Equity increases with stock issuance and net income. The cash flow statement categorizes cash activities into operating, investing, and financing activities; for example, cash inflows from sales and stock issuance, and outflows for purchases, expenses, and debt payments.

Current Liabilities as of December 31, 2016

Current liabilities include accounts payable, sales tax payable, interest payable (on bank loan), and warranty liabilities (assuming six-month warranty period). The total current liabilities comprise these items, calculated based on the transactions and estimates made throughout 2016. Specifically, sales tax payable and accrued interest are key current liabilities, contributing to the overall figure.

In conclusion, Ozark Sales’ financial activities for 2016 demonstrate both operational performance and financial positioning. Proper recording and analysis of transactions ensure accurate reflection of liabilities, assets, and equity, informing management decisions and external reporting.

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