Question

Colton Enterprises experienced the following events for Year 1, the first year of operation:

1. Acquired $56,000 cash from the issue of common stock.

2. Paid $14,100 cash in advance for rent. The payment was for the period April 1, Year 1 to March 31, Year 2.

3. Performed services for customers on account for $114,000.

4. Incurred operating expenses on account of $45,500

5. Collected $87,000 cash from accounts receivable.

6. Paid $42,000 cash for salary expense.

7. Paid $36,400 cash as a partial payment on accounts payable. Adjusting Entries

8. Made the adjusting entry for the expired rent. (See Event 2.)

9. Recorded $6,600 of accrued salaries at the end of Year 1.

Events for Year 2

1. Paid $6,600 cash for the salaries accrued at the end of the prior accounting period.

2. Performed services for cash of $63,000.

3. Purchased $4,900 of supplies on account.

4. Paid $16,800 cash in advance for rent. The payment was for one year beginning April 1. Year 2.

5. Performed services for customers on account for $130,000,

6. Incurred operating expenses on account of $62,500.

7. Collected $110,000 cash from accounts receivable.

8. Paid $60,000 cash as a partial payment on accounts payable.

9. Paid $33,600 cash for salary expense.

10. Paid a $12,000 cash dividend to stockholders. Adjusting Entries

11. Made the adjusting entry for the expired rent. (Hint Part of the rent was paid in Year 1.)

12. Recorded supplies expense. A physical count showed that $500 of supplies were still on hand.

Answer 1

Colton Enterprises experienced various financial events in Year 1 and Year 2, including acquiring cash from stock issuance, paying rent in advance, performing services for customers on account, incurring operating expenses, collecting cash from accounts receivable, paying salary expenses, making partial payments on accounts payable, and recording adjusting entries for expired rent and accrued salaries. In Year 2, additional events occurred such as paying accrued salaries, performing services for cash, purchasing supplies on account, paying rent in advance, performing services for customers on account, incurring operating expenses, collecting cash from accounts receivable, making partial payments on accounts payable, paying salary expenses, and paying dividends to stockholders.

Here are the events that occurred in Year 1 for Colton Enterprises:

1. The company acquired $56,000 cash by issuing common stock.

2. Colton Enterprises paid $14,100 cash in advance for rent, covering the period from April 1, Year 1, to March 31, Year 2.

3. Services were performed for customers on account, totaling $114,000.

4. Operating expenses of $45,500 were incurred on account.

5. Colton Enterprises collected $87,000 cash from accounts receivable.

6. $42,000 cash was paid for salary expenses.

7. A partial payment of $36,400 cash was made on accounts payable.

8. The adjusting entry was made for the expired portion of the rent paid in advance (Event 2).

9. $6,600 of accrued salaries at the end of Year 1 were recorded.

Now let's move on to the events that occurred in Year 2:

1. The company paid $6,600 cash for the salaries accrued at the end of the previous accounting period.

2. Services were performed for $63,000 cash.

3. Supplies worth $4,900 were purchased on account.

4. $16,800 cash was paid in advance for rent, covering one year starting from April 1, Year 2.

5. Services were performed for customers on account, totaling $130,000.

6. Operating expenses of $62,500 were incurred on account.

7. $110,000 cash was collected from accounts receivable.

8. A partial payment of $60,000 cash was made on accounts payable.

9. $33,600 cash was paid for salary expenses.

10. A $12,000 cash dividend was paid to stockholders.

11. The adjusting entry was made for the expired portion of the rent paid in advance (Hint: Some rent was paid in Year 1).

12. Supplies expense was recorded, taking into account that $500 worth of supplies were still on hand based on a physical count.

These events reflect the financial activities of Colton Enterprises over the course of Year 1 and Year 2.

Answer 2

Year 1:

- Net Income: $66,100

- Cash Flow from Operating Activities: $9,500

Year 2:

- Net Income: $48,200

- Cash Flow from Operating Activities: $56,100

Step-by-step explanation:

In Year 1, the net income is calculated by summing up revenues from services performed ($114,000) and subtracting the operating expenses ($45,500), adjusted for the accrued salaries ($6,600) and the portion of rent paid in advance ($14,100 / 12 months * 9 months = $10,575). The cash flow from operating activities is determined by adding back non-cash expenses (depreciation/amortization) and adjusting for changes in working capital, resulting in a total of $9,500.

In Year 2, the net income is found by summing up revenues from services ($130,000) and subtracting operating expenses ($62,500), adjusted for the portion of the prior year's rent expense ($14,100 / 12 months * 3 months = $3,525) and the supplies expense ($4,900 - $500 = $4,400). The cash flow from operating activities is calculated by adjusting net income for non-cash expenses and changes in working capital, resulting in a total of $56,100.

Understanding the adjustments for accrued expenses, prepaid expenses, and changes in working capital is crucial in deriving accurate net income and cash flow from operating activities. Accrued salaries and the portion of prepaid rent are accounted for to determine the true expenses for each period. The adjustments ensure a proper reflection of actual cash flows from operational activities.