Question

1. Charles Diggs began his new business, called Diggs Systems Company, on January 1. 20xx. The company writes computer programs with special applications for businesses that own small computers. During the first six months of operation, the business was so successful that Diggs had to hire new employees on several occasions. Yet, he continually had to put off creditors because he lacked the funds to pay them. He wants to apply for a bank loan, but after preparing a statement showing the totals of receipts of cash and payments of cash, he wonders whether a bank will make a loan to him on the basis of what seem to be poor results. Deciding that he needs some accounting help, Diggs asks you to review the statement and the company's operating results.

Diggs Systems Company

Statement of Cash Receipts and Payments

For the Six Months Ended June 30, 20xx

Cash Receipts:
Investment by Charles Diggs							$47,000
Fees for Computer Services							75,600
Total Receipts							122,600
Cash Outflows:
Wages							38,650
Insurance							3,250
Rent							12,600
Supplies							6,321
Office Equipment							14,360
Dividends paid to Shareholder							2,000
Computer Rental							24,000
Maintenance							2,460
Service Van							14,450
Utilities
Total Cash Payments							118,091
Cash Balance							$4,509

                                                                            

After verifying the information in Digg’s statement, you obtain these additional facts about Diggs Systems Company:

a. In addition to the amount received from customers, programming services totaling $29,100 have been performed but are not yet paid for.

b. Employees have been paid all the wages owed to them except for $1,050 earned since the last payday. The next regular payday is July 3.

c. The insurance account represents a two year policy purchased on January 3.

d. The Rent account represents rent of $1,800 per month, including the rent for July.

e. In examining the expenditures for supplies, you find invoices for $1,850 that have not been paid, and an inventory count of the supplies reveals $2,625 of unused supplies are on hand.

f. The office equipment is fully paid for. You estimate it will last four years and be worthless at the end of that time.  

g. The computer rental agreement provides for a security deposit of $6,000 plus monthly payments· of $3,000.

h. The maintenance account represents a one year maintenance agreement, paid in advance on January 2.

i. The Service Van account represents the down payment on a van purchased on June 1 for $45,000. The van has useful life of 10 years. It has an estimated residual value of $5,500.

A. Prepare an Income Statement, Balance Sheet, Statement of Cash Flows and Statement of Retained Earnings. In addition, prepare the adjusting J/E entries for transaction a through i.

Answer 1

(a)

Adjustment Entries

Date	Description	Debit	Credit
(a)	Accounts receivable	29100
	Programming service revenue		29100
	( being revenue earned but not received)
(b)	Wages	1050
	Unpaid wages		1050
	( being wages unpaid from the last paydey to 30th june)
(C)	Prepaid insureance	2438
	Insureance		2438
	( being prepaid insureance adjusted for 18 months)
(d)	Prepaid rent	1800
	Rent		1800
	(being prepaid rent for july adjusted)
(e)	Supplies	1850
	Accounts payble		1850
	( being amount for supplies not paid)
	Inventory for supplies	2625
	Supplies		2625
	( being inventory for supplies adjusted)
(f)	Depriciation	1795
	Accumulated depriciation Office equipment		1795
	( depriciaton charged on office equipment for 6 months)
(g)	Security deposit	6000
	Computer rental		6000
	( being security deposite adjusted)
(h)	Prepaid maintenance	1230
	Maintenance		1230
	( being prepaid maintenance adjusted for 6 months)
(i)	Service van ( 45000 - 14450)	30550
	Accounts payble		30550
	( being service van purchased on account adjusted)
	Depriciation - Service van	1975
	Accumulated depriciation		1975
	(being depriciation charged on service van for 6 months)

Workings

1) Insureance expense for 6 months = ($ 3250 / 2 years ) X 6/12 = 812

Prepaid Insureance = ( 3250 - 812 ) = $2438

2) Rent of july = $ 12600/ 7 months = $ 1800

3) Depriciation for office equipment = ( $ 14360 / 4 years ) X 6/12 = $ 1795

4) Security deposit for computer rental agreementis a capital payment which cannot be considered for income statement.

5) Prepaid maintenance for 6 months = $ 2460 X 6/12 = $ 1230

6) Accounts pyable for purchase of van = ( 45000 - 14450 ) = $ 30550

7) Depriciation on van = [( 45000 - 5500 ) / 10 years] X 6/12 = $ 1975

Income Statement As At : June 30th 20XX

Description	Amount	Amount
Revenue
Fees for computer services	75600
Programming revenue services	29100
Total Revenue		104700
Less: Operating Expenses
Wages ( 38650 + 1050 )	39700
Insureance ( 3250 - 2438 )	812
Rent ( 12600 - 1800 )	10800
Supplies ( 6321 + 1850 - 2625 )	5546
Depriciation - Office equipment	1795
Depriciation - Service van	1975
Computer rental ( 24000 - 6000 )	18000
Maintenence ( 2460 - 1230 )	1230
Total Operating Exp[enses		79858
Net Income		24842

Balance Sheet As At : June 30th 20XX

Description	Amount	Amount
Assets
Current Assets
Cash	4509
Inventory supplies	2625
Prepaid rent	1800
Prepaid insureance	2438
pREPAID MAINTENENCE	1230
Accounts receivable	29100
Total Current Assets		41702
Non-Current Assets
Office equipment, net ( 14360 - 1795 )	12565
Service van ( 45000 - 1975 )	43025
Security deposite	6000
Total Non-Current Assets		61590
Total Assets		103292
Liabilities and Shareholders Equity
Current Liability
Unpaid wages	1050
Accounts payble - supplies	1850
Accounts Payble - service VAN	30550
Total Current Liabilities		33450
Shareholders Equity
Common Stock	47000
Retained Earnings	22842
Total Shareholders Equity		69842
Total Liabilities nad Shareholders Equity		103292

Retained Earnings As at june 30th 20XX

Description	Amount
Net Income	24842
Less : Dividend	2000
Retained Earnings on 30 th june 20XX	22842

Cash Flow Statement

Description	Amount	Amount
Cassh Flow from Operation
Fees from computer services	75600
Wages paid	(38650)
Insureance paid	(3250)
Rent paid	(12600)
Supplies purchased	( 6321)
Computer rental paid	(18000)
Maintenence paid	(2460)
Cash Flow from Operation		(5681)
Cash Flow from Investing Activities
Office equipment	(14360)
Down payment for service van	(14450)
Security deposite computer rental agreement	(6000)
Cash Flow from Investing Activities		(34810)
Cash Flow from Financing Activities
Issue of common stock	47000
Payment of dividend	( 2000)
Cash Flow from Financing		45000
Net Cash Inflow / ( Outflow)		4509
Add: Opening Cash Balance		Nil
Closing Cash Balance		4509

Note

1) It is assumed that the security deposite made is a long - term asset.