Accounting Cycle:

Determine proper account balances in the balance sheet and the income statement at the ends of Year 1 and Year 2 based on this information for both years.Remember, assets and liabilities carry over from one year to the next.Revenues and expenses implicitly become part of Owners' Equity at the end of Year 1.In several cases it will be necessary to think about necessary adjustments to ensure that account balances are correct at the end of a year.The balance sheet and the income statement are to be prepared from accrual basis information.

1.Orange Company [the firm] was formed on May 1, Year 1 when eight people each invested $500 in the firm.One investor lent $4,000 to the firm that is to be repaid on May 1, Year 2 along with $210 of interest.

2.The firm leased an office space for one year on May 1, Year 1 and moved in that same day.The monthly rate was $300 and the rent for the entire twelve-month lease term had to be paid on May 1, Year 2.

3.On June 1, Year 1, the firm rented some equipment for two years.The firm paid $480 at the time of signing the rental agreement.The contract calls for a second rental payment of $480 on June 1, Year 2.

4.On September 13, Year 1, the firm purchased some supplies for use in the business at a cost of $900.This amount was charged to the firm's account.

5.On September 14, Year 1, the firm returned 70% of the supplies it had purchased because they were defective.

6.On May 15, Year 1, the firm hired five employees at a monthly salary of $250 each.These employees started working for the firm immediately.These employees are to be paid at the middle of each month for the period ending on that day. Their first payday will be on June 15, Year 1.

7.On September 30, Year 1, the firm paid the amount owed for the supplies it had purchased earlier.

8.On October 1, Year 1, the firm completed its first consulting project for a client.The project was valued at $40,000 and the client paid 30% immediately and promised to pay the remainder on January 31, Year 2.Orange promised not to charge interest on the unpaid amount.

9.The paydays for June through December happened as scheduled.No employees were fired nor were any more employees hired.Refer to item 6 above.

10.On June 1, Year 1, the firm received $12,000 for a consulting project to be started in December Year 1.

11.During December Year 1, Orange completed $9,000 of the project discussed in the previous item.

Supplies on hand at the end of Year 1 were $100 by actual count.

First, let's find proper account balances at the end of Year 1.

Accounting Cycle (continued):[5336]

Orange Company

Balance Sheet

December 31, Year 1

Cash$22,500

Accounts Receivable28,000

Prepaid Equipment Rental200

Supplies Inventory100

Office Rent Payable$2,400

Salaries Payable625

Unearned Revenues3,000

Interest Payable140

Note Payable4,000

Contributed Capital4,000

Retained Earnings________36,635

$50,800$50,800

Orange Company

Income Statement

For the Eight Months Ended December 31, Year 1

Consulting Revenues$49,000

Expenses:

Salaries Expense$9,375

Office Rent Expense2,400

Equipment Rent Expense280

Supplies Expense170

Interest Expense140_12,365

Income$36,635

Accounting Cycle (continued):[5336]

Orange Company

Statement of Cash Flows

For the Year Ended December 31, Year 1

Operating Activities:

Cash Received from Clients$24,000

Cash Paid to Consultants(8,750)

Cash Paid to Suppliers(270)

Cash Paid for Equipment Rent(480)$14,500

Investing Activities:

None0

Financing Activities:

Cash from Owners to Form Firm$4,000

Cash Borrowed$4,000$8,000

Change in Cash During Year $22,500

Add Starting Cash0

Equals Ending Cash$22,500

The following events occurred in Year 2.

1.On January 16, Year 2, the firm granted a salary increase to the five employees.The new salary is $300 per month.

2.The firm finished the remainder of the project described in items 10 and 11 from Year 1.

3.The firm collected the amount that was owed from the client for the project described in item 8 from Year 1.

4.The firm obtained a very large client.The firm provided $35,000 in services for this client through the remainder of Year 2.Of this amount 40% was still owed to Orange at the end of Year 2.

5.The firm paid its employees the proper amounts on each of the paydays in Year 2.

6.The firm bought supplies on account at a cost of $900.

7.On May 1, Year 2, the firm repaid the investor that had lent it $4,000 plus the interest that was due.

8.On May 1, Year 2, the firm paid the appropriate amount for the office it moved into on May 1, Year 1.The firm also renegotiated the lease on this office space at a new monthly rental amount of $400.This is to be paid on the first of each month starting May 1, Year 2.

9.On June 1, Year 2, the firm made its second payment of $480 for the rental of the equipment.

Supplies on hand at the end of Year 2 by actual count were $300.

Accounting Cycle (continued):[5336]

Required:

Confirm that these are the correct balances in the balance sheet, income statement and statement of cash flows prepared at the end of Year 2.

Orange Company

Balance Sheet

December 31, Year 2

Cash$42,260

Accounts Receivable14,000

Prepaid Equipment Rental200

Supplies Inventory300

Accounts Payable900

Salaries Payable750

Contributed Capital4,000

Retained Earnings________51,110

$56,760$56,760

Orange Company

Income Statement

For the Year Ended December 31, Year 2

Consulting Revenues$38,000

Expenses:

Salaries Expense$17,875

Office Rent Expense4,400

Equipment Rent Expense480

Supplies Expense700

Interest Expense70$23,525

Income$14,475

Orange Company

Statement of Cash Flows

For the Year Ended December 31, Year 2

Operating Activities:

Cash Received from Clients$49,000

Cash Paid to Consultants(17,750)

Cash Paid for Office Rent(6,800)

Cash Paid for Equipment Rent(480)

Cash Paid for Interest(210)$23,760

Investing Activities:

None0

Financing Activities:

Cash Paid to Lenders$(4,000)$(4,000)

Change in Cash During Year $19,760

Add Starting Cash22,500

Equals Ending Cash $42,260