Question 2 of 7: Financial Statements — Happy Harley Motorcycles Inc.

Question 2: Financial Statements — Happy Harley Motorcycles Inc. (28 marks, alternative to Question 3)

Question text not reproduced: the examination questions are © Engineers and Geoscientists BC. Open the official past paper (linked at the top of this page) to read the question, then follow the worked solution below.

Given. Opening (Jan 1/2011) balances and eleven January transactions (a)–(k) for Happy Harley Motorcycles Inc.

Find. (i) An income statement for January 2011; (ii) a classified balance sheet as at January 31, 2011.

Approach. Screen every transaction for whether it affects an income-statement account (revenue/expense), and confirm the opening trial balance is itself in balance before rolling the transactions forward account-by-account into the closing balance sheet.

1. Part (i) — screen each transaction for an income-statement effect. (a) $500 deposit: the motorcycle rebuild has not yet been performed, so this is unearned/deferred revenue (a liability), not January revenue. (b) $500 one month's rent, earned in January: rent revenue. (c) $16,000 for 10 delivered (completed) motorcycles: service revenue, earned and collected in the same transaction. (d) $8,000 collected on account: settles existing Accounts Receivable from a prior period’s revenue — no new revenue in January. (e) $420 January electricity, payable in February: an expense of January under accrual accounting regardless of when it is paid. (f) Ordering $800 of supplies: no entry — under accrual accounting a transaction is recorded only when an exchange has occurred (goods/services received or a legal obligation created); placing an order commits neither party until the supplies are delivered. (g) $1,900 paid on account: settles Trade Payables — no income-statement effect. (h) $850 tool contributed by a shareholder: a capital contribution (Equipment for Share Capital) — no revenue is recognized for receiving an asset from an owner. (i) $8,500 wages for January work: wages expense. (j) $3,000 dividend, declared and paid: reduces retained earnings directly, bypassing the income statement. (k) $800 supplies received and paid for: an asset purchase, not an expense until used. $$\text{Revenue}=\underbrace{500}_{(b)}+\underbrace{16{,}000}_{(c)}=\boxed{\$16{,}500},\qquad \text{Expenses}=\underbrace{420}_{(e)}+\underbrace{8{,}500}_{(i)}=\boxed{\$8{,}920}.$$
2. Net income for January. $$\text{Net income}=16{,}500-8{,}920=\boxed{\$7{,}580}.$$
3. Part (ii) — roll each balance-sheet account forward to Jan 31/2011. Cash collects every cash inflow/outflow (a)–(k): $10{,}000+500+500+16{,}000+8{,}000-1{,}900-8{,}500-3{,}000-800=\boxed{\$20{,}800}$. Accounts receivable falls by the (d) collection: $50{,}000-8{,}000=\boxed{\$42{,}000}$. Supplies rises by the (k) purchase only — the (f) order is not recorded: $24{,}000+800=\boxed{\$24{,}800}$. Equipment rises by the (h) contribution: $16{,}000+850=\boxed{\$16{,}850}$. Land and Building are unchanged by any January transaction.
4. Liabilities and equity at Jan 31/2011. Trade payables: $16{,}000+420_{(e)}-1{,}900_{(g)}=\boxed{\$14{,}520}$. Deferred revenue: $6{,}400+500_{(a)}=\boxed{\$6{,}900}$. Note payable is unchanged at $\$80{,}000$ (still >12 months from maturity). Share capital: $16{,}000+850_{(h)}=\boxed{\$16{,}850}$. Retained earnings: $57{,}600+7{,}580_{\text{net income}}-3{,}000_{(j)}=\boxed{\$62{,}180}$.