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Comprehensive Problem Use Extreme Edge's 2013 balance sheet from Exhibit 2-1C as the starting point for this problem. Assume Extreme Edge had the following transactions in 2014 (amounts in thousands, except par value): 1. Issued 10 shares of $1 par value common stock for a total of $80 in cash. 2 Used cash of $100 to purchase equipment. Purchased $718 of inventory on credit from suppliers. 4. Recorded $1,200 of credit sales. 5. Matched $660 cost of goods sold to the sales in transaction 4 above, 3 Balance Sheet Exhibit 2-IC Extreme Edge, Inc. Balance Sheet December 31, 2013 Assets Cash $ 30,000 Accounts receivable, net 90,000 Inventory 170.000 Total Current Assets 290,000 Property, plant and equipment: Equipment 500,000 Less: accumulated depreciation (100,000) Equipment, net 400,000 Intangible assets: Customer database 25,000 Less: accumulated amortization (5,000) Customer database, net 20,000 Total Assets S 710,000 $ 160,000 32,000 192,000 Liabilities Accounts payable Accrued liabilities Total Current Liabilities Long-term Liabilities: Notes payable Total Liabilities Shareholders' Equity (S/E) Common stock (C/S), Si par Additional paid-in-capital C/S Total Contributed Capital Retained earnings Total Shareholders' Equity Total Liabilities and S/E 100,000 292,000 40,000 360,000 400,000 18.000 418.000 S 710,000 The balance sheet, or the statement of financial position, reports resources and claims against those resources at the end of each reporting period. In the language of business, these resources and claims are referred to as assets, liabilities, and shareholders' equity. We will now investigate how Extreme Edge discloses the accounts for each of these three balance sheet elements. 14 Assets: Revenue-producing resources. More specifically, businesses report future economic benefits as either current or long-term assets based on their convertibility into cash. Assets that will be converted into cash within one year are current assets. Long-term or noncurrent assets such as the manufacturing plant, equipment, and intangible assets, exist for more than one reporting period - hence their long-term designation on the balance sheet. Liquidity, or how readily an asset can be converted to cash, determines the sequence of current asset disclosures. Cash appears as the first current asset because it is readily available to pay the maturing obligations (liabilities) of the firm." Accounts receivable represent expected collections from customers for goods that they purchased on credit. Inventory reports the historical cost of unsold products at the end of the reporting period. Extreme Edge had $30,000 of cash at the end of its first year of business. The company also controlled $90,000 and $170,000 of accounts receivable and inventory respectively, at the end of 2013 Property, plant, and equipment represent a firm's productive, long-term tangible resources, and the historical cost of these assets are charged against revenues (as depreciation expense) over their productive (revenue-producing) lives. Each year's income statement reports one year's amount of depreciation expense on the property, plant or equipment. The accumulation of these costs (.e., the sum total of depreciation expenses or accumulated depreciation) reduces the amount of the asset on the balance sheet to its book, carrying, or net value. Extreme Edge reported equipment at a book value of $400,000 at the end of 2011. Recall from the journal entries that Extreme Edge purchased $500,000 of equipment at the beginning of 2011. The firm anticipated that equipment would last five years. Consequently, it recorded $100,000 of depreciation expense at the end of 2011. Viewed from a balance sheet perspective, its equipment is worth only 80% of its cost by the end of 2011. Similarly, the company reported its customer database at $20,000 at year-end (i.e., $25,000 historical cost minus $5,000 accumulated amortization). Accountants refer to accumulated depreciation and accumulated amortization as contra (or negative) assets because they reduce the historical cost of long-term assets to their book values on the balance sheet. Liabilities: Liabilities are future economic sacrifices arising from present obligations to transfer assets or provide services that arose from past transactions. Similar to assets, liabilities are reported on the balance sheet as either current (short-term) or noncurrent (long-term) liabilities, depending on payment date. Current liabilities, such as obligations to vendors (accounts payable), employees, property owners, advertisers, and utility companies (accrued liabilities) require cash payment within the next year. Extreme Edge owed $160,000 to its suppliers as accounts payable on December 31, 2013. The firm also had $32,000 of accrued liabilities at the end of the year. In addition to its current liabilities, Extreme Edge also owed $100,000 to its bank for borrowed funds on December 31, 2013. This note payable is a long- term liability because Extreme Edge does not plan to pay it off during 2014, Shareholder's Equity: The third element of the balance sheet is owner or shareholder equity (the claims of shareholder's to the assets of the firm). The balance sheet reflects the end-of-the-year balances that were reported in the statement of shareholders' equity. Recall from the discussion of this financial statement above, that Extreme Edge had $400,000 of contributed capital and S18,000 of retained earnings on December 31, 2013. 15 Chap 2 (1) - Compatibility Mode - Word Search Insert Draw Design Layout References Mailings Review View Help General Journal (s in thousands) Trans 1 Credit Accounts Cash (asset) Common stock (shareholders' equity) Additional paid in capital (shareholders' equity) Debit 80 10 70 2 3 5 6 9 10 11 12 13 14 23 here to search ORI W Widgins, Noah WN Share Ledger Account Cash Assets Debit Credit Trans. Bee 1 Balance $30 db. 110 db $80 Account Accounts receivable Debit Credit Balance Account Inventory Trans. Debit Credit Balance Trans. Debit Account Equipment Credit Balance Trass. Debit Account Accum depreciation Credit Balanse Trans. Debit Credit Balance Account Customer database Trans. Debit Credit Balance Account Assum amortization Liabilities Tras. Debit Credit Balance Account Accounts payable Trans Debit Credit Balance Account Accrued liabilities Trans Debit Credit Balance Account Notes payable 24 2:39 PM 9/10/2020 2 Chap 2 (1) - Compatibility Mode - Word Search Draw Design Layout References Mailings Review View Help Shareholders' Equity Trans. Debit Beg 1 Account Common stock Credit Balance $40 er $10 50 cr. Account Add paid in capital Debit Credit Trans. Beg 1 Balance 5360 er 430 cm $70 Account Retained earnings Credit Trans. Beg Debit Balance $18 er Revenues Trans. Debit Account Sales revenues Credit Balance Tras Account COGS Expenses Debit Credit Balance Trans, Debit Credit Balance Account Operating expense Trans. Debit Credit Account Depreciation exp Balance Trans Debit Account Amortization exp Credit Balance Account Trans Dehit Credit Balance Intersexperte Account Income tax expense Trans. Dehit Credit Balance to search Share Trial Balance Debit Credit Accounts Cash Accounts receivable Inventory Equipment Accumulated depreciation Customer database Accumulated amortization Accounts payable Accrued liabilities Notes payable Common stock Additional paid in capital Retained earnings Sales revenues Cost of goods sold Depreciation expense Amortization expense Operating expenses Interest expense Income tax expense Total Financial Statements Extreme Edge, Inc Income Statement For the Year Ended December 31, 2014 Sales revenue Less: Cost of goods sold Gross profit Operating expenses Depreciation expense Amortization expense Other operating expenses Income from operations Interest (financing) expense Pretax income Income tax expense (4096) Net income Earnings per share (EPS) 26 2:39 PM 9/10/2020 Chap 2 (1) - Compatibility Mode - Word O Search Insert Draw Design Layout References Mailings Review View Help Extreme Edge, Inc. Statement of Shareholders' Equity For the Year Ended December 31, 2014 Beginning contributed capital Capital contributed in 2014 Capital withdrawn in 2014 Ending contributed capital Beginning retained earnings Net income in 2014 Dividends declared in 2014 Ending retained earnings Total shareholders' equity Extreme Edge, Inc. Balance Sheet December 31, 2014 Asses: Cash Accounts receivable, et Inventory Total Current Assets Property, plant and equipment: Equipment Less: accumulated depreciation Equipment, net Intangible assets: Customer database Less: accumulated amortization Customer database, net Total Assets Liabilities: Accounts payable Accrued liabilities Total Current Liabilities Long-term Liabilities: Notes payable Total Liabilities Shareholders' Equity (SE): Common stock (CS) SI par Additional paid-in-capital C/S Total Contributed Capital Retained earnings Total Shareholders' Equity Total Liabilities and SE 27 here to search O > E CA W TE Eggert Accedi A LCHE LG Other per E251 25 II W a. Required: Do the following for 2014: Record the transactions in the general journal. b. Post the entries to the ledger. (Hint: Don't forget to post the ending 2013 balances as your first entry for all balance sheet accounts) c. Construct a trial balance. d. Present the financial statements in good form. Close the temporary accounts. e