Solution The first step is to determine ‘the capital balance at the beginning and end of the year. The formula is “total assets minus total liabilities equals capital balance”. December 81 January 1 Assets: Cash 890,000 ~ 600,000 Notes receivable 600,000 200,000. Accounts receivable 1,000,000 800,000 Inventory 500,000 800,000 Equipment 550,000. __ 600,000 Total 3,540,000 3,000,000 Liabilities: Notes payable 250,000 350,000 Accounts payable 500,000 600,000 Accrued interest payable 20,000 40,000 Unearned rent income 20,000 60,000 Total 790,000 1,050,000 - Capital balance 100 100 The net income may now be computed using the single entry formula fora proprietorship: Capital — December 31 2,750,000 Add: Withdrawals 200,000 Total 2,950,000 Less: Capital - January 1 1,950,000 Additional investment 300,000 2,250,000 Net income 700,000 Thus, the formal income statement must show net income of P700,000. The following computations are necessary for the preparation of the traditional income statement. 429Computation of sales Notes receivable — December 31 Accounts receivable — December 31 Collections of accounts receivable Collections of notes receivable Sales discounts Sales returns Accounts written off — bad debts Total Less: Notes receivable — January 1 200,000 Accounts receivable — January 1 800,000 Sales on account Cash sales Total sales Computation of purchases Notes payable — December 31 Accounts payable - December 31 Payment of accounts payable Payment of notes payable Purchase discounts Total Less: Notes payable - January 1 350,000 Accounts payable-January1 600,000 Purchases.on account Cash purchases Total purchases Computation of interest expense Interest paid Add: Accrued interest payable — December 31 Total Less: Accrued interest payable ~ January 1 Interest expense 430 : 600,000 1,000,000 1,500,000 * 500,000 50,000 150,000 30,000 3,830,000 1,000,000 2,830,000 400,000 3,230,000 250,000 500,000 750,000 650,000 40,000 ~ 2,190,000 “950,000 1,240,000 300,000 1,540,000 50,000 20,000 70,000 40,000 30,000Computation of rent income Rent received 80,000 Add: Unearned rent income — January 1 60,000 Total 140,000 Less: Unearned rent income — December 31 20,000 Rent income 120,000 Computation of gain on sale Sale price 60,000 Less: Carrying amount of equipment sold 50,000 Gain on sale of equipment 10,000 Computation of depreciation Equipment - January 1 600,000 Add: Equipment acquired 200,000 Total 800,000 Less: Equipment — December 31 560,000 Carryingamountofequipmentsold _ 60,000 600,000 Depreciation 200,000 entNegros Store Income Statement Year Ended December 81, 2021 Net sales (Note 1) 3,030,000 Cost of goods sold (Note 2) 1,800,000 Gross income 1,230,000 Other income (Note 3) "130,000 Total income 1,360,000 Expenses: Expenses 400,000 Depreciation 200,000 Bad debts 30,000 Interest expense 30,000 _ 660,000 Net income 700,000 Note that the net income is the same as the amount computed under the single entry formula. Note 1- Net sales Sales 3,230,000 Sales discounts (50,000) Sales returns (150,000) Net sales 3,030,000 Note 2 - Cost of goods sold Inventory - January 1 800,000 Purchases 1,540,000 Purchase discounts (40,000) 1,500,000 Goods available for sale 2,300,000 Inventory — December 31 (500,000) Cost of goods sold 1,800,000 = Note 3 - Other income Rent income 120,000 Gain on sale of equipment 10,000 210,00" Total other income 130,000 == 432Negros Store Statement of Financial Position December 81, 2021 Assets Current assets: Cash 890,000 Notes receivable 600,000 Accounts receivable 1,000,000 Inventory 500,000 Noncurrent asset: Equipment Total assets Liabilities and Equity Current liabilities: Notes payable 250,000 Accounts payable 500,000 Accrued interest payable 20,000 Unearned rent income 20,000 Equity: Capital - January I 1,950,000 Add: Net income 700,000 Additional investment 300,000 Total 2,950,000 Less: Withdrawals 200,000 Total liabilities and equity 2,990,000 550,000 3,540,000 790,000 2,750,000 3,540,000Hlustration 2 Silay Company reported the following comparative statement of financial position at the current year-end: Assets Cash Notes receivable Accounts receivable Inventory Prepaid expenses Investment (at cost) ~ Equipment (net) Liabilities and Equity Notes payable Accounts payable ‘Accrued interest payable ‘Accrued expenses Bonds payable Share capital, P100 par Share premium Retained earnings December 81 January 1 780,000 370,000 150,000 200,000 1,000,000. 700,000 1,500,000 1,600,000 100,000 130,000 100,000 400,000 1,200,000 1,000,000 400,000 700,000 500,000 750,000 860,000 30,000 me 30,000 20,000 500,000 500,000 1,000,000 1,000,000 1,000,000 1,000,000 _'s20,000 _'520,000 4,830,000 4,400,000 An analysis of the cash receipts and cash disbursements disclosed the following: Cash balance ~January 1 370,000 Cash receipts: Collections from customers 8,000,000 Proceeds from note receivable discounted with face value of P200,000 180,000 12% one-year note issued to bank, dated March 1 300,000 Sale of investment 250,000 3,730,000 Total 4,100,000 Cash disbursements: Payments to trade creditors 2,000,000 enses 70,000 Dividends 400,000 Equipment 250,000 3,320,000 Cash balance — December 31 _780,000 434Computation of net income The net income is computed using the single entry formule, Retained earnings - December 31 Add: Dividends sae Total 1,220,000 Less: Retained earnings — January 1 520,000 Net income 700,000 Computation of sales Notes receivable - December 31 150,000 Accounts receivable — December 31 1,000,000 Collections from customers 3,000,000 Note receivable discounted 200,000 Total 4,350,000 Less: Notes receivable — January 1 200,000 Accounts receivable — January 1 700,000 900,000 3,450,000 Sales on account Observe that the note receivable discounted is added back at face value. Computation of purchases Notes payable - December 31 700,000 Less: Note payable ~ bank 300,000 Notes payable - trade 400,000 Accounts payable — December 31 750,000 Payments to trade creditors 2,000,000 Total 3,150,000 Less: Notes payable ~ January 1 500,000 ‘Accounts payable-January1 860,000 —_1,360,000 1,790,000 Purchases on account Observe that the note payable-bank is deducted from the totai notes payable on December 31 because the note did not arise from purchase of merchandise. The note is the result of borrowing from the bank. 435Computation of expenses Expenses paid Add: Prepaid expenses - January 1 Accrued expenses ~ December 31 Total Less: Prepaid expenses — December 31 100,000 Accrued expenses ~ January 1 20,000 Expenses Computation of depreciation Equipment - January 1 ‘Add: Equipment acquired ‘Total Less: Equipment — December 31 Depreciation Computation of interest expense Interest accrued on bank note payable (800,000 x 12% x 10/12) Loss on note discounting Face value of note discounted Proceeds from discounting Loss on note discounting Loss on sale of investment Sale price Less: Cost of investment sold: Investment — January 1 400,000 Investment — December 31 100,000 Loss on sale of investment 436 670,000 180,000 30,000 830,000 120,000 7 1,000,000 250,000 1,250,000 1,200,000 50,000 * 200,000 180,000 20,000 250,000 300,000 (50, 000)Silay. Company Income Statement Year Ended December 81, 2021 Sales Cost of goods sold (Note 1) Gross income Expenses: Expenses 710,000 Depreciation 50,000 Loss on sale of investment Loss on note discounting Interest expense Net income Note 1 — Cost of goods sold Inventory —- January 1 Purchases Goods available for sale Inventory — December 31 Cost of goods sold 3,450,000 1,890,000 1,560,000 860,000 1,600,000, 1,790,000 3,390,000 (1,500,000) 1,890,000 Observe that the income statement shows a net income which is the same as the net income computed under the single entry formula.