3. Income Statements and Retained Earnings

Smithson Exploration Corporation was formed on January 1, 20X3. The company was formed by Cliff Smithson with the goal of conducting geophysical support services related to natural gas drilling operations in the Unita Basin region of eastem Utah. The company's initial capitalization consisted of shareholder investments of $2,000,000 and an additional bank loan of $1,500,000. During the first year of operation, the company purchased land, buildings, and equipment in the amount of $400,000, $1,000,000, and $600,000, respectively. (Hint: In subsequent chapters you will be introduced to the concepts of depreciation relating to certain of these assets; for now you may ignore this issue). During 20X3, the company signed contracts to deliver consulting services with a total value of $5,000,000. By year's end, $3,200,000 of services had been provided and billed under these agreements. The other $1,800,000 of work will not be performed until 20X4. All amounts billed had been collected during 20X3, with the exception of December's billings in the amount of $250,000. The Smithson's are quite confident that the December billing will be collected in the normal course of business in early 20X4. Expenses paid during 20X3 included rent ($280,000), wages ($1,560,000), interest ($150,000), and taxes ($430,000). In addition, the company had incurred rent ($20,000), wages ($60,000), and interest ($12,000) related to 20x3 activity that was not yet paid as of the end of 20X3. SMITHSON CORPORATION Income Statement For the Year Ending December 31, 20X3 Revenues Services to customers Expenses Rent Wages Interest Taxes Net income $ $ SMITHSON CORPORATION Statement of Retained Earnings For the Year Ending December 31, 20X3 Beginning retained earnings Plus: Net income $ $ Less: Dividends Ending retained earnings $ SMITHSON CORPORATION Balance Sheet December 31, 20X3 Assets Cash Accounts receivable Land Building Equipment Total assets $ LA $ Liabilities Rent payable Wages payable Interest payable Loan payable Total liabilities Stockholders' equity Capital stock Retained earnings Total stockholders' equity Total liabilities and equity $ $ Cash received: From customers ($ 3,200,000 - $ 250,000) From stockholders From lenders $ $ Cash payments: For rent For wages For interest For taxes For divindends For land, building, equipment For repayment of loans Ending cash $