The following transactions apply to Farmer€™s Equipment Sales Corp. for 2016:

1. The business was started when Farmer€™s received $60,000 from the issue of common stock.

2. Purchased $160,000 of merchandise on account.

3. Sold merchandise for $220,000 cash (not including sales tax). Sales tax of 8 percent is collected when the merchandise is sold. The merchandise had a cost of $140,000.

4. Provided a six-month warranty on the merchandise sold. Based on industry estimates, the warranty claims would amount to 4 percent of merchandise sales.

5. Paid the sales tax to the state agency on $180,000 of the sales.

6. On September 1, 2016, borrowed $40,000 from the local bank. The note had a 6 percent interest rate and matures on March 1, 2017.

7. Paid $6,600 for warranty repairs during the year.

8. Paid operating expenses of $61,000 for the year.

9. Paid $145,000 of accounts payable.

10. Recorded accrued interest at the end of the year.

Required

a. Show the effect of these transactions on the financial statements using a horizontal statements model like the one shown here. Use + for increase, - for decrease, and NA for not affected. In the Cash Flow column, indicate whether the item is an operating activity (OA), investing activity (IA), or financing activity (FA). The first transaction is recorded as an example.

b. Prepare the journal entries for the above transactions and post them to the appropriate T-accounts.
c. Prepare the income statement, balance sheet, and statement of cash flows for 2016.
d. What is the total amount of current liabilities at December 31, 2016?

Transcribed Image Text:

AssetsLiabilitiesEquityRev Rev. - Exp. = Net Inc. Cash Flow NA NA NA NA + FA