CHAPTER 4

Case Study 1—Applying the Major Adjustments

The following is a balance sheet for Tango Inc. at the end of its first year of trading:

During 2016, the following transactions took place:

1.The owners withdrew equity in the form of cash of $40,000.

2.Premises continued to be rented at an annual rental of $40,000. During the year, rent of $30,000 was paid.

3.Insurance on the premises was paid during the year as follows: for the period April 1, 2016 to March 31, 2017 for $2,600

4.A second piece of plant and equipment was bought on January 1, 2016 for $26,000. This is expected to be used in the business for four years and then be sold for $6,000.

5.Wages totaling $73,400 were paid during the year. At the end of the year, the business owed $1,720 of wages for the last week of the year.

6.Electricity bills for the first three quarters of the current year and $1,240 (for the last quarter) of the previous year were paid, totaling $3,640. After December 31, 2016 but before the financial statements had been finalized for the year, the bill for the last quarter of the current year arrived showing a charge for $1,380.

7.The prepaid expenses of $10,600 consisted of Insurance ($600) and rent ($10,000).

8.The accrued expenses of $2,500 comprised of Wages ($1,260) and electricity ($1,240).

9.Inventories totaling $134,000 were bought on credit.

10.Inventories totaling $16,000 were bought for cash.

11.Sales revenue on credit totaled $358,000 (cost $178,000).

12.Cash sales revenue totaled $108,000 (cost $50,000).

13.Receipts from receivables account totaled $356,000.

14.Payments to payables account totaled $142,000

15.Machine running expenses paid totaled $32,400.

The business uses the straight-line method for depreciating plant & equipment. Ignore taxation.

Required:

Prepare an income statement, statement of retained earnings, balance sheet, and cash flow statement (both direct and indirect method) for December 31, 2016. Also comment as to how the financial statements are inter-related.