Clayton Computers was started in 2014. The company experienced the following acc

Question

Clayton Computers was started in 2014. The company experienced the following accounting events during its first year of operation.

1. Started business when it acquired $25,000 cash from the issue of common stock.

2. Purchased merchandise with a list price of $23,000 on account, terms 2/10, n/30.

3. Paid off one-half of the accounts payable balance within the discount period.

4. Sold merchandise on account that had a list price of $24,000. Credit terms were 1/20, n/30. The merchandise had cost Clayton Computers $14,000.

5. Collected cash from the account receivable within the discount period.

6. Paid $1,700 cash for operating expenses.

7. Paid the balance due on accounts payable. The payment was not made within the discount period.

Questions:

A.) Record the events in a horizontal statements model below. In the Cash Flows column, use the letters OA to designate operating activity, IA for investing activity, FA for financing activity, NC for net change in cash and NA to indicate accounts not affected by the event. The first event is recorded as an example.

B.) What is the amount of gross margin for the period?

C.) What is the net income for the period?

Explanation / Answer

A) Clayton Computers (All amounts in $) Horizontal Statements for the first year of Operations = 2014 Sr.No. Transaction Details Revenue Expenses Assets Liabilities Cash Flow + - + - + - + - + - 1 Cash from Common Stock 25000 25000 25000 FA 2 Purchased Merchandise on A/c 23000 23000 23000 23000 OA 3 Paid half of Accounts Payable 230 11500 11270 11270 OA 4 Sale on Account 24000 14000 240 23760 14000 14000 23760 OA 5 Cash from Accounts Receivable 23760 23760 23760 OA 6 Cash for Operating Expenses 1700 1700 1700 OA 7 Balance of Accounts Payable 11500 11500 11500 OA B) Gross Margin for the period = Sales - Cost of Goods Sold Hence, Gross Margin = $ 24,000 - $ 14,000 = $ 10,000. C) Net Income for the period = Gross Margin - Expenses Hence, Net Income for the period = $ 10,000 - $ 1,700 = $ 8,300.

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