Question

Fill out Financial Statement Effects Template based on the following information:

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

	Balance Sheet		Income Statement
	Transaction	Cash Asset	+	Noncash asset	=	Liabilities	+	Contibuted Capital	+	Earned Capital			Revenue	-	Expenses	=	Net Income
1	Paid to engineer for prototypes	-23750	+	23750	=	0	+	0	+	0			0	-	0	=	0
2	Sales	685000	+	69500	=	0	+	0	+	754500			754500	-	0	=	754500
3	Additional chemicals and plastic purchased	-175000	+	175000	=	0	+	0	+	0			0	-	0	=
4	Advertising exp	-22500	+	0	=	0	+	0	+	-22500			0	-	22500	=	-22500
5	Direct Manufacturing Overheads	-350000	+	0	=	0	+	0	+	-350000			0	-	350000	=	-350000
6	Salaries & Other Expenses	-80000	+	0	=	0	+	0	+	-80000			0	-	80000	=	-80000
7	Machinery Purchased	-150000	+	150000	=	0	+	0	+	0			0	-	0	=
8	Short Term Loan	50000	+	0	=	50000	+	0	+	0			0	-	0	=
9	Loan Repayment with Interest	-50750	+	0	=	-50000	+	0	+	-750			0	-	750	=	-750
10	Depreciation on Machinery	0	+	-7500	=	0	+	0	+	-7500			0	-	-7500	=	-7500
11	Order Received from The Olympic Games committee	0	+	0	=	0	+	0	+	0			0	-	0	=	0
	Total	-117000		410750		0		0		293750			754500		445750		293750

Notes :

(1) In Point 11 above, only memorandum entry for customer order will be passed . As only order is received and no transaction affecting the financial statements was carried out, it will not have any effect in the statement until the order is executed.