Exercise 3-16 Effect of sales returns and allowances and freight costs on the financial statements: Perpetual system LO 3-4 Powell Company began the 2018 accounting period with $30,000 cash, $96,000 inventory, $70,000 common stock, and $56,000 retained earnings. During 2018, Powell experienced the following events: 1. Sold merchandise costing $63,000 for $109,500 on account to Prentise Furniture Store. 2. Delivered the goods to Prentise under terms FOB destination. Freight costs were $600 cash. 3. Received returned goods from Prentise. The goods cost Powell $5,000 and were sold to Prentise for $6,800. 4. Granted Prentise a $4,000 allowance for damaged goods that Prentise agreed to keep. 5. Collected partial payment of $90,500 cash from accounts receivable. Required a. Record the events in a statements model shown below. b. Prepare an income statement, a balance sheet, and a statement of cash flows. c. Why would Prentise agree to keep the damaged goods? Event No. Statement of Cash Flows Cash Bal. 30,000 + + II 11 1a. 1b. POWELL COMPANY Financial Statements Model for 2018 Assets Stockholders' Equity Income Statement Accounts Common Net Retained + Inventory Receivable Revenue Expenses Earnings Stock Income 96,000 70,000 + 56,000 109,500+ 109,500 109,500 109,500 (63,000) (63,000) 63,000/= (63,000) (600) 600/= (600) (6,800) + (6,800) (6,800)| (6,800) 5,000/= 5,000 (5,000)| 5,000 (4,000) + (4,000) (4,000)| (4,000) (90,500)| + 8,200 + 38,000 = 70,000 + 96,100 98,700 58,600 40,100 + + 2. (600) + + + + + OA + + . . + 3b. + + + + 4. 6. + OA 90,500+ 119,900 + Total 0 POWELL COMPANY Income Statement For the Year Ended December 31, 2018 Net sales $ 98,700 Cost of goods sold 58,000 Gross margin 40,700 Operating expenses (600) Net income $ 40,100 POWELL COMPANY Balance Sheet As of December 31, 2018 Assets Cash $ 119,900 Accounts receivable 8,200 Merchandise inventory 38,000 $ 166,100 0 Total assets Liabilities Stockholders' equity Common stock Retained earnings $ 70,000 96,100 Total stockholders' equity Total liabilities and stockholders' equity 166,100 $ 166,100 Get goods at reduced cost. X Can resell the damaged goods. X Repair the damaged goods. Retain the damaged goods. POWELL COMPANY Statement of Cash Flows For the Year Ended December 31, 2018 Cash flow from operating activities Cash inflow from customers 90,500 Cash outflow for expenses (600) $ 89,900 0 0 Net cash flow from operating activities Cash flows from investing activities Cash flows from financing activities Net change in cash Plus: Beginning cash balance Ending cash balance 89,900 30,000 $ 119,900