Prepare original entries, closing entries, income statement and balance sheet fo
ID: 2587773 • Letter: P
Question
Prepare original entries, closing entries, income statement and balance sheet for above.
On 1/1 - We sold through an IPO (start-up Company (name of your choice)) 100,000 shares of stock for $20/share even though par was only 1.00. We issued $100,000 10- Market rate is ear bonds and got $00,000. The bonds pay 8% interest (stated rate). higher or lower? Also On January 1, we pre-paid 24 months of rent by paying the landlord $48,000 cash. We purchased 10,000 units of inventory at $1.00 at the start of the month and purchased 10,000 units of inventory at $2.00 in the middle of the month and purchased 20,000 units of inventory at $3.00 at the end of the month. All on credit. By the end of the year we paid down the liability by 50% In February: On February 1 we purchased equipment for $50,000 financing through a 3 year-note (5% interest). The interest payment is required to be paid every 1231 The equipment has a 5 year life and no salvage value. We will depreciate all PPE through the Declining Balance Method. We also purchased building for $300,000 through a 20-year mortgage. The mortgage requires interest only payments every January 1st at a rate of 5%. The building has a 30 year life and no salvage During February, we sold 25,000 units of inventory at $150.00/unit; receiving $60,000 in cash and the rest are on account, 50% of the accounts receivable was collected by year-end. At the time of the sale 2% of credit sales are deemed uncollectible. We use the FIFO method On March 1, we purchased more 5-year no salvage equipment for $50,000 cash. December 31, of this year we sold it for $60,000 cash On On 4/1, we purchased stock of another company as an investment for $30,000 cash. We consider this as an Available for Sale security During December: Our investment paid dividends of $2,000. We declared dividends to our shareholders of $10,000 but did not pay the dividends until the following year. Our total utility expense for the year was $5,000. Our investment in the other company is now worth $34,000. We paid $10,000 in salaries subject to a 7.65% FICA Tax. We withheld $500 for Federal and $200 for State Income Tax. Tax rate is 20%. On the last day of December there was a lawsuit filed against us that our attorney says is not likely that we will lose but is reasonably possible that we will lose for $10,000 Prepare original entries, closing entries, income statement and balance sh above.Explanation / Answer
Accounting Entries (Assumed 2017 as year): Date Description Debit Credit 01-Jan-17 Bank A/c Dr $2,000,000 To Equity Share Capital A/c $100,000 To Securities Premiumr A/c $1,900,000 (Being Issue of 100,000 shares of par value $ 1 per share in IPO @ $ 20 Per Share) 01-Jan-17 Bank A/c Dr $90,000 To Long-Term Bonds A/c $90,000 (Being issue of 10 year bonds @ 10% Interest rate) 01-Jan-17 Prepaid Rent A/c Dr $24,000 Rent A/c Dr $24,000 To Bank A/c $48,000 (Being prepayment of rent for 24 months charged off for 12 months and balance carried to prepaid) 01-Jan-17 Inventory A/c Dr $10,000 To Accounts Payable A/c $10,000 (Being Purchase of 10,000 units @ $1 each at start of month on credit) 15-Jan-17 Inventory A/c Dr $20,000 To Accounts Payable A/c $20,000 (Being Purchase of 10,000 units @ $2 each in middle of month on credit) 31-Jan-17 Inventory A/c Dr $60,000 To Accounts Payable A/c $60,000 (Being Purchase of 20,000 units @ $3 each in middle of month on credit) 01-Feb-17 Equipment A/c Dr $50,000 To 3 Year Note A/c $50,000 (Being purchase of equipment by issuing 3 year note @ 5% Interest rate) 01-Feb-17 Building A/c Dr $300,000 To 20 Year Mortgage Loan A/c $300,000 (Being purchase of Building through 20 Year Mortgage loan @ 5% Interest rate) 28-Feb-17 Bank A/c Dr $60,000 Accounts Receivable A/c Dr $3,690,000 To Sales A/c $3,750,000 (Being Sale of 25,000 Units @ $ 150 per unit for $ 60,000 cash and balance on credit) 28-Feb-17 Cost of Goods Sold A/c Dr $45,000 To Inventory A/c $45,000 (Being cost of 25,000 Units sold recognised as expense on FIFO basis) 1st 10,000 Units @ $ 1 per unit $10,000 2nd 10,000 Units @ $ 2 per unit $20,000 Balance 5,000 Units @ $ 3 per unit $15,000 $45,000 01-Mar-17 Equipment A/c Dr $50,000 To Bank A/c $50,000 (Being purchase of equipment for cash) 01-Apr-17 Investment A/c Dr $30,000 To Bank A/c $30,000 (Being purchase of Available for sale investment for cash) 31-Dec-17 Accounts Payable A/c Dr $45,000 To Bank A/c $45,000 (Being payment of 50% of Accounts payable by year end) 31-Dec-17 Interest Expense A/c Dr $2,292 To Interest Payable A/c $2,292 (Being Interest expense accounted on 3 year note @ 5% for 11 months) 31-Dec-17 Interest Payable A/c Dr $2,292 To Bank A/c $2,292 (Being interest paid on 3 year note) 31-Dec-17 Depreciation A/c Dr $20,657 To Accumulated Depreciation on Equipment A/c $20,657 (Being depreciation @ 45.07% provided on equipment purchased on 3 year note for 11 months on Declining balance method with useful life of 5 years) 31-Dec-17 Interest Expense A/c Dr $13,750 To Interest Payable A/c $13,750 (Being Interest expense accounted on 20 year Mortgage loan @ 5% for 11 months payable on 1st January) 31-Dec-17 Depreciation A/c Dr $38,253 To Accumulated Depreciation on Building A/c $38,253 (Being depreciation @ 13.91% provided on Building purchased on 20 year Mortgage loan for 11 months on Declining balance method with useful life of 30 years) 31-Dec-17 Bank A/c Dr $1,845,000 To Accounts Receivable A/c $1,845,000 (Being collection of 50% of accounts of receivable balance of $ 3,690,000) 31-Dec-17 Doubtful Debts Provision A/c Dr $73,800 To Provision for Doubtful Debts A/c $73,800 (Being provision made for 2% of credit sales of $ 3,690,000) 31-Dec-17 Depreciation A/c Dr $18,779 To Accumulated Depreciation on Equipment A/c $18,779 (Being depreciation @ 45.07% provided on equipment purchased for cash for 10 months on Declining balance method with useful life of 5 years) 31-Dec-17 Accumulated Depreciation on Equipment A/c Dr $18,779 Bank A/c Dr $60,000 To Equipment A/c $50,000 To Profit on Sale of Fixed Assets A/c $28,779 (Being sale of equipment and profit recognised on sale) 31-Dec-17 Bank A/c Dr $2,000 To Dividend Income A/c $2,000 (Being dividend received from the investment) 31-Dec-17 Dividend Expense A/c Dr $10,000 To Proposed Dividend $10,000 (Being dividend declared by Company but not paid) 31-Dec-17 Utility Expense A/c Dr $5,000 To Bank A/c $5,000 (Being utility expense paid in cash (assumed)) 31-Dec-17 Investment A/c Dr $4,000 To Gain on Fair Valuation of Investment A/c $4,000 (Being increase in fair value of investment recognised) 31-Dec-17 Salaries A/c Dr $10,000 To Bank A/c $9,235 To FICA Tax A/c $765 (Being Salaries paid after deducting 7.65% of FICA Tax) 31-Dec-17 FICA Tax A/c Dr $765 To Bank A/c $765 (Being payment of FICA Tax) assumed tax is paid in current year 31-Dec-17 Rates and taxes A/c Dr $700 To Bank A/c $700 (Being Federal tax and State income tax paid) assumed as paid 31-Dec-17 Misc Expense A/c Dr $10,000 To Provision for a Legal Suit A/c $10,000 (Being provision made for possible value of payout of legal suit) Trial Balance Description Debit Credit Bank $3,866,008 Accounts Receivable $1,845,000 Provision for doubtful debts $73,800 Inventory $45,000 Prepaid Rent $24,000 Investment $34,000 Equipment $50,000 Accumulated Depreciation on Equipment $20,657 Building $300,000 Accumulated Depreciation on Building $38,253 Equity Share Capital $100,000 Securities Premium $1,900,000 Proposed Dividend $10,000 Long Term bonds $90,000 3 Year Note $50,000 20 Year Mortgage Loan $300,000 Accounts Payable $45,000 Interest Payable $13,750 Provision for a Legal Suit $10,000 Sales $3,750,000 Profit on Sale of Fixed Assets $28,779 Dividend Income $2,000 Gain on Fair Valuation of Investment $4,000 Cost of Goods Sold $45,000 Rent $24,000 Utility Expense $5,000 Salaries $10,000 Rates and taxes $700 Misc Expense $10,000 Doubtful Debts Provision $73,800 Interest Expense $16,042 Depreciation $77,689 Dividend $10,000 $6,436,239 $6,436,239 2017 ASSETS Current Assets Bank $3,866,008 Accounts Receivables $1,845,000 Less: Provision for doubtful debts ($73,800) Inventory $45,000 Prepaid Rent $24,000 Short term Investment $34,000 Total Current Assets $5,740,208 Building $300,000 Less: Accumulated depreciation ($38,253) Equipment $50,000 Less: Accumulated depreciation ($20,657) Total Assets $6,031,298 LIABILITY AND STOCKHOLDERS EQUITY: Current Liabilities Accounts Payable $45,000 Interest Payable $13,750 Provision for tax $704,510 Provision for a Legal Suit $10,000 Proposed Dividend $10,000 Total current liabilities $783,260 Non-Current Liabilities Long Term bonds $90,000 3 Year Note $50,000 20 Year Mortgage Loan $300,000 Total Non-Current Liabilities $440,000 Total Liabilities $1,223,260 STOCKHOLDER'S EQUITY Common Stock $100,000 Securities Premium $1,900,000 Retained Earnings $2,808,038 Total Stockholder's Equity $4,808,038 Total Liability and Stockholders Equity $6,031,298 $0 Description 2017 Sales $3,750,000 Profit on Sale of Fixed Assets $28,779 Dividend Income $2,000 Gain on Fair Valuation of Investment $4,000 $3,784,779 Cost of Goods Sold $45,000 Contribution Margin $3,739,779 Selling, Administrative and General Expenses $123,500 Operating Income $3,616,279 Depreciation $77,689 Earnings before Interest and tax $3,538,590 Interest $16,042 Earnings before depreciation and tax $3,522,548 Taxes @ 20% $704,510 Net Income $2,818,038 Less: Dividend $10,000 Transferred to retained earnings $2,808,038