Patty's Pet Shop experienced the following business events during its first year of operation:1) Borrowed $50,000 from the bank.2) Purchased merchandise on account, $44,000, terms 1/10, n/30.3) Paid for the merchandise purchased within the discount period.4) Sold merchandise on account for $51,000. The inventory sold had a cost of $28,000.5) Collected $41,500 on the merchandise sold on account.6) Paid operating expense of $17,000.7) Recognized accrued interest expense of $2,000.Required: a) What is the balance of the cash account at the end of Year 1?b) What are total assets at the end of Year 1?c) What is gross margin for Year 1?d) What is operating income for Year 1?e) What is net income for Year 1? f) What are total liabilities at the end of Year 1?g) What is total retained earnings

Question

at the end of Year 1?

What will be an ideal response?

Answer 1

a) $30,940 
b) $56,000
c) $23,000
d) $6,000
e) $4,000
f) $52,000
g) $4,000

Refer to account balances set forth below:
a) Ending balance of cash = $30,940 
b) Total assets = Cash of $30,940 + Accounts receivable of $9,500 + Inventory of $15,560 = $56,000
c) Gross margin = Net sales of $51,000 ? Cost of goods sold of $28,000 = $23,000
d) Operating income = Sales of $51,000 ? Cost of goods sold of $28,000 ? Operating expenses of $17,000 = $6,000
e) Net income = Operating income of $6,000 (see part d) ? Interest expense of $2,000 = $4,000
f) Total liabilities = Accounts payable of $2,000 + Notes payable of $50,000 = $52,000
g) Ending retained earnings = Net income of $4,000

Summary of impact of each event on related account balances:


Event 3: 
Purchase discount = (Purchase of $12,500 ? Return of $1,250) × 2% = $225
Cash payment = Balance in accounts payable of ($12,500 ? $1,250 ? $225) = $11,025