McDowell Company began the Year 3 accounting period with $50,000 cash, $72,000 inventory, $55,000 common stock, and $67,000 retained earnings. During Year 3, McDowell experienced the following events:
1. Sold merchandise costing $52,000 for $85,700 on account to Anderson Sporting Goods.
2. Delivered the goods to Anderson under terms FOB destination. Freight costs were $600 cash.
3. Received returned goods from Anderson. The goods cost McDowell $7,000 and were sold to Anderson for $9,200.
4. Granted Anderson a $2,000 allowance for damaged goods that Anderson agreed to keep.
5. Collected partial payment of $68,000 cash from accounts receivable.

Required
a. Record the events in a horizontal financial statements model like the one shown next.

b. Prepare an income statement, a balance sheet, and a statement of cash flows.
c. Why would Anderson agree to keep the damaged goods? Who benefits more?

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Balance Sheet Income Statement Statement of Cash Flows Stk. Equlty Ret. Earn. Assets Accts. Rec. Com. Stk. Exp. Net Inc. Cash Inv. Rev.