The Extra Surplus Company's Balance Sheet for December 31, 2017 and the Income Statement for 2018 are shown below. Extra Surplus Company
Balance Sheet
December 31, 2017
Assets
Cash $14,000
Accounts Receivable 7,000
Inventory 16,800
Property and Equipment, Net 28,000
$65,800
Liabilities and Stockholders' Equity
Accounts Payable $14,000
Notes Payable, Long-Term 7,000
Common Stock 28,000
Retained Earnings 16,800
$65,800
Extra Surplus Company
Income Statement
For the Year Ended December 31, 2018
Sales $23,400
Cost of Goods Sold 5,400
Salaries and Wage Expense 5,400
Interest Expense 1,800
Other Expenses 900
Net Income $9,900
Additional data:
A- Sales were $23,400; $14,400 in cash was received from customers.
B- Bought new land for cash, $18,000.
C- Sold other land for its book value of $9,000.
D- Paid $1,800 principal on the long-term note payable and $1,800 in interest.
E- Issued new shares of stock for $18,000 cash.
F- Cash dividends of $3,800 were declared and paid to stockholders.
G- Paid $10,300 on accounts payable.
H- No inventory purchases were made: other expenses were incurred on account.
I- All wages were paid in cash.
J- Other expenses were on account.
Required:
a. Prepare a balance sheet as of December 31, 2020.
b. Prepare the statement of cash flows using the direct method.

The Extra Surplus Company

Balance Sheet

December 31, 2020

Assets

Cash                                                       $14,300

Accounts Receivable                               16,000

Inventory                                                   11,400

Property and Equipment, Net                37,000

                                                             $78,700

Liabilities and Stockholders' Equity

Accounts Payable                                  $3,700

Other Expenses Payable                           900

Notes Payable, Long-Term                     5,200

Common Stock                                     46,000

Retained Earnings                                22,900

                                                            $78,700

b. The Extra Surplus Company

Statement of Cash Flows, using the direct method:

December 31, 2020

Operating activities:

Cash from customers       $14,400

Payment to suppliers         (10,300)

Payment to labor                (5,400)

Net cash from operating                   (1,300)

Investing activities:

Land sales                            9,000

Land                                   (18,000)

Net cash from investing                  (9,000)

Financing activities:

Issue of shares                   18,000

Note Payable Repayment   (1,800)

Interest paid                        (1,800)

Dividends                           (3,800)

Net cash from financing   10,600    10,600

Net Cash Inflow                                  $300

Explanation:

a) Data and Calculations:

Extra Surplus Company

Balance Sheet

December 31, 2017

Assets                                                                   Adjustment       Balance        

Cash                                                  $14,000       300                   $14,300

Accounts Receivable                           7,000     + 23,400 - 14,400 16,000

Inventory                                             16,800     - 5,400                   11,000

Property and Equipment, Net           28,000     - 9,000 + 18,000  37,000

                                                        $65,800

Liabilities and Stockholders' Equity

Accounts Payable                            $14,000     -10,300                  3,700

Notes Payable, Long-Term                 7,000       -1,800                  5,200

Common Stock                                 28,000      + 18,000             46,000

Retained Earnings                             16,800                                 22,900

                                                       $65,800

ii) Extra Surplus Company

Income Statement

For the Year Ended December 31, 2018

Sales                                    $23,400

Cost of Goods Sold                 5,400

Salaries and Wage Expense  5,400

Interest Expense                     1,800

Other Expenses                        900

Net Income                          $9,900

Cash balance (beginning) $14,000

iii) Cash Receipts:

Cash from customers       $14,400

Land sales                            9,000

Issue of shares                   18,000

Total receipts                   $41,400

iv) Cash Payments:

Land                                  $18,000

Note Payable Repayment    1,800

Interest paid                         1,800

Dividends                            3,800

Accounts Payable             10,300

Salaries & Wages               5,400

Total payments               $41,100

Cash Balance (Ending)  $14,300

v) Retained Earnings:

Net Income                             $9,900

Beginning Retained Earnings 16,800

Dividends                                  3,800

Ending Retained Earnings  $22,900

v) The Extra Surplus Company's Statement of Cash Flows can also be prepared using the indirect method.  This method starts with the net income and adjusts working capital changes after adding back non-cash flow expenses in order to arrive at the net cash from operating activities.  Other steps are similar to the direct method, which considers only the actual cash inflows and outflows.

I. In order to entice a customer to keep damaged or defective merchandise, the seller is willing to decrease the selling price.

II. The seller wants to avoid future lost sales.

III. The seller wants to keep a customer happy.

IV. Sold merchandise was defective or unacceptable.

Explanation:

Sales allowance can be defined as a reduction in the price of goods that a seller gives to a customer due to quality issues, incorrect pricing, shipping, etc.

The statements which best summarize why a seller would give a sales allowance are;

I. In order to entice a customer to keep damaged or defective merchandise, the seller is willing to decrease the selling price.

II. The seller wants to avoid future lost sales.

III. The seller wants to keep a customer happy.

IV. Sold merchandise was defective or unacceptable.