Question

Classic Automobiles of Huntsville Ltd. was formed on January 1, 2016 when Classic issued common shares for $300,000. Early in January 2016, Classic made the following cash payments:

· $150,000 for equipment

· $120,000 for inventory (four cars at $30,000 each)

· $20,000 for 2016 rent on a store building

In February 2016, Classic purchased six cars for inventory on account. Cost of this inventory was $240,000 ($40,000.00 each). Before year-end, Classic paid $200,000 of this debt. Classic uses the FIFO method to account for inventory.

During 2016, Classic sold eight vintage autos for a total of $500,000. Before year-end, Classic collected 80% of this amount.

The business employs three people. The combined annual payroll is $95,000, of which Classic owes $4,000 at year-end. At the end of the year, Classic paid an income tax of $10,000.

Late in 2016, Classic declared and paid cash dividends of $11,000.

For equipment, Classic uses the straight-line depreciation method over five years with zero residual value.

1. Prepare Classic Automobiles of Huntsville Ltd.’s income statement for the year ended December 31, 2016.

2. Prepare Classic’s balance sheet on December 31, 2016.

3. Prepare Classic’s statement of cash flows for the year ended December 31, 2016. Format cash flows from operating activities by using the indirect method.

4. Comment on the business performance based on the statement of cash flows.

Answer 1

Prepare journal entry as follows:

Trn.	Account Titles	Debit	Credit
a)	Cash	$300,000
	Common stock		$300,000
	(To record issue of common stock)
b)	Equipment	$150,000
	Inventory	$120,000
	Rent Expense	$20,000
	Cash		$290,000
c)	Inventory	$240,000
	Accounts payable		$240,000
d)	Accounts payable	$200,000
	Cash		$200,000
e)	Accounts Receivable	$500,000
	Sales [8 cars × $62,500]		$500,000
f)	COGS [(4 cars × $30,000) + (4 cars × $40,000)]	$280,000
	Inventory		$280,000
g)	Cash [$500,000 × 80%]	$400,000
	Accounts Receivable		$400,000
h)	Salaries Expense	$91,000
	Cash		$91,000
i)	Salaries Expense	$4,000
	Salaries payable		$4,000
j)	Income tax expense	$10,000
	Cash		$10,000
k)	Dividends	$11,000
	Cash		$11,000
l)	Depreciation Expense	$30,000
	Accumulated depreciation-equipment		$30,000
	[$150,000 ÷ 5 years]

___________________________________________________________________________

Income statement
Sales	$500,000
Less: COGS	($280,000)
Gross profit		$220,000
Less: Operating expense
Salaries Expense	$95,000
Rent Expense	$20,000
Depreciation expense	$30,000	$145,000
Profit before tax		$75,000
Less: Income tax		($10,000)
Profit after tax		$65,000

Cash					Accounts Receivable
a)	$300,000	b)	$290,000		e)	$500,000	g)	$400,000
g)	$400,000	d)	$200,000
		h)	$91,000		End. Bal.	$100,000
		j)	$10,000
		k)	$11,000		Accounts payable
					d)	$200,000	c)	$240,000
End. Bal.	$98,000
							End. Bal.	$40,000
Inventory
b)	$120,000	f)	$280,000
c)	$240,000
End. Bal.	$80,000