Question

1/1/2020: Opened the business, invested $1,000,000 cash in the business.

1/1/2020: bought a building for the business purpose for $100,000 cash. The building has a useful economic life of 10 years.

1/1/2020: purchased 100 luxury watches for $200,000 with $100,000 cash payment, the remaining amount payable on 2/1/2021. (each watch costs $2,000)

3/1/2020: purchased 50 luxury watches for $250,000 with cash. Each watch costs $5,000.

4/1/2020: purchased 40 luxury watches for $240,000 with cash. Each costs $6,000.

6/1/2020: Sold 130 watched for $1,300,000. Of which $300,000 cash was received at the time of sale. The remaining amount to be received on 5/2/2021.

7/1/2020: paid $1,200 in advance for 12 months’ property insurance (7/1/20 to 7/1/21).

8/1/2020: borrowed $500,000 from a local Chase bank. Interest rate is 12%/year. Interest is paid every 6 months- the first payment date is 2/1/2021. Principal would be paid on 8/1/2021.

9/1/2020: to expand business, you rent a showroom in the next building. Paid $24,000 cash in advance for 12 month’s rent.

12/31/2020: Paid 2020 utilities expense, advertising expense, and miscellaneous expense for $5000, $15,000, and $4,000, respectively.

Salary is paid on the last day of each month. Each month’s salary expense is $20,000.

Notes:

• On 12/31/2020: Physical inventory showed that there were 60 luxury watches on hand at the end of the period. The company used periodic inventory system, and used FIFO costing method.
• Your business used straight-line depreciation method for all fixed assets.
• Ignore tax.

Requirement:

1. Prepare all journal entries, adjusting entries, closing entries needed for the period ending on 12/31/2020 based on above economic events

Answer 1

Date	Accounst title	DR	cR
Jan-20	Cash	$1,000,000
	Owner equity		$1,000,000
01-01-20	Building	$100,000
	Cash		$100,000
01/01 2020	Purchases	$200,000
	Cash		$100,000
	Accounts payable		100000
03-01-20	Purchases	$250,000
	Cash		$250,000
04-01-20	Purchases	$240,000
	Cash		$240,000
06-01-20	Accounst receivable	$1,000,000
	Cash	$300,000
	Sales		1300000
07-01-20	Prepaid Insurance	$1,200
	Cash		$1,200
08-01-20	CAsh	$500,000
	Bank loan payable		$500,000
09-01-20	Prepaid Rent	$24,000
	Cash		$24,000
12/31/2020	Utilities expenses	$5,000
	Advertising expenses	15000
	Miscelleneous expenses	4000
	Cash		$24,000
	Salaries expenses	240000
	Cash		240000
12/31/2020	Cost of good sold (100*2000)+(30*5000)	350000
	Ending Inventory (40*6000)+(20*5000)	340000
	Purchases		690000
	Adjusting entries
a	Insurance expenses (1200/12*6)	$600
	Prepaid Insurance		$600
b)	Rent expenses (24000/12*4)	$8,000
	Prepaid Rent		$8,000
c	Depreciation expenses-building	$10,000
	Accumulated depreciation-Building (100000/10)		$10,000
d	Interest expenses	$25,000
	Interest payable		$25,000
	(500000*12%*5/12)
	Closing entry
Event	Accounst title	DR	cR
a)	Sales	$1,300,000
	Income summary		$1,300,000
b)	Income summary	$657,600
	Utilities expenses		$5,000
	Advertising expenses		15000
	Miscelleneous expenses		4000
	Salaries expenses		$240,000
	Cost of good sold (100*2000)+(30*5000)		350000
	Insurance expenses (1200/12*6)		$600
	Rent expenses (24000/12*4)		$8,000
	Depreciation expenses-building		$10,000
	Interest expenses		$25,000
c)	Income summary	$642,400
	Owner Equity		$642,400
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