Powell Company began the 2018 accounting period with $40,000 cash, $86,000 inventory, $60,000 common stock, and $66,000 retained earnings. During 2018, Powell experienced the following events:

1. Sold merchandise costing $58,000 for $99,500 on account to Prentise Furniture Store.

2. Delivered the goods to Prentise under terms FOB destination. Freight costs were $900 cash.

3. Received returned goods from Prentise. The goods cost Powell $4,000 and were sold to Prentise for $5,900.

4. Granted Prentise a $3,000 allowance for damaged goods that Prentise agreed to keep.

5. Collected partial payment of $81,000 cash from accounts receivable.

Required

Record the events in a statements model.

Prepare an income statement, a balance sheet, and a statement of cash flows.

Why would Prentise agree to keep the damaged goods?