Question

Based on the information below create the year end income statement, balance sheet, and cash flow statement.

On January 2, 2003, Alexander, together with a number of relatives and friends, established Chemalite, Inc.; 500,000 shares were issued, of which Alexander received 125,000 in exchange for his patent, and the remainder were sold to the other investors at $1 per share. During the period January 2, 2003, through June 30, 2003, Chemalite, Inc., made the following expenditures:

• January 15—Paid $7,500 in legal fees, charter costs, and printing expenses associated with the incorporation of the company.
• June 15—Spent $62,500 building the machinery that would be used to produce the first commercial models of the Chemalite.
• June 24—Purchased $75,000 worth of plastics and chemicals for use in the production of commercial Chemalites. ‘

Between January 2 and June 30, the company’s bank balance had fallen from $375,000 to $230,000.

During the last half of 2003, Chemalite, Inc., did indeed go into full operation. To prepare for the shareholders’ meeting in early January 2004, Bill Murray, the firm’s recently hired bookkeeper, produced the following data:

1. In early July 2003, a consulting engineer delivered the prototypes of the Chemalite that he had been developing, and he was paid a total of $23,750.
2. During the six months from July to December 2003, Chemalite sold $754,500 of its product. The largest single purchaser, the auto parts distributor with whom Peterson had negotiated, still owed Chemalite, Inc., $69,500. All other customers’ accounts were paid in full by year- end.
3. Additional chemicals and plastics were purchased for a total of $175,000. All of these purchases were paid for in cash.
4. Chemalite, Inc., spent $22,500 on television and trade journal advertising to introduce the product.
5. During the six months ended December 31, 2003, the company expended $350,000 on direct manufacturing labor and on manufacturing-related overhead (rent, utilities, supervisory labor). An additional $80,000 was spent on corporate salaries and other corporate expenses.
6. In early July, a further $150,000 was spent on machinery to be used in the production of Chemalites.
7. During the period, the company had borrowed $50,000 for a short time and repaid the loan by year-end. The interest paid on the loan amounted to $750.

In preparing his state-of-the-corporation report, Alexander noted with some anxiety that the company’s bank balance had fallen a further $117,000 from the $230,000 reported in June to only $113,000. It bothered him because he believed that the company was really doing quite well, and he failed to understand why the bank account did not appear to reflect this condition. In surveying the cash outflows incurred by Chemalite, Inc., over the entire year, he noted the following:

1. The machinery used in the production of the Chemalites was general purpose machinery, not restricted to Chemalite production, that might reasonably be expected to last for 10 years—six months of which had already passed.
2. There was still a stock at December 31 of $55,000 worth of plastics and chemicals in the warehouse; however, there were no finished or partially finished Chemalites at yearend.
3. Although the patent that the company had acquired from Alexander had a legal life of 20 years, he expected competitors to develop equivalent products that did not use the patented technique in about five years.
4. Alexander was quite confused by the worth of the prototypes. They had directly resulted in the development of the product the company was presently selling, so perhaps their value had actually increased over the last six months of 2003.
5. The committee organizing The Olympic Games, Athens 2004, had placed a firm order with the company for 60,000 Chemalites at a price of $1.50 each. It was their intention to give a Chemalite to each person at the opening ceremony of the 2004 Olympic Games and to have athletes and fans light their Chemalites, symbolic of the Olympic flame.

Answer 1

Note: Assumed that the patents are amortised over 5 years. Also Machinery has been depreciated for 10 years. For current year depreciation is considered for half year as machinery was purchased during the mid year.

Also assumed that preliminary expenses incurred towards incorporation of the company is expensed during the same year.