Question

Ralphy started a business on April 1, 2001, and had the following transactions on April 1:

a. Issued 20,000 shares of $5 par value common stock for $100,000 cash.

b.         Bought equipment to be used for making products, for $60,000. The equipment has a six-year life and is to be depreciated on a straight-line basis, with no salvage value.

c. Paid $4,000 for one year’s rent on a building.

d. Bought $30,000 of inventory on credit.

e. Bought $25,000 of Yahoo common stock as a short-term investment.

f.          Issued a bond with a face value of $20,000 and an interest rate of 10%. Interest is to be paid annually.

Between April 1 and December 31, the following transactions occurred:

g. Sold inventory that cost $25,000 for $40,000. All sales were on credit.

h. Paid $15,000 to suppliers of inventory for the credit purchase in (d) above.

i. Collected $30,000 from customers on their accounts.

j.          A customer owing $200 declared bankruptcy, and notice was received that the customer would pay only $50 of this debt. The $50 payment was enclosed.

k. Salaries and wages of $6,000 were paid.

On December 31:

l. Salaries and wages of $1,000 had been earned but not paid.

m.        The market value of Ralphy’s inventory was $12,500.

Required

1. Enter the above transactions in T-accounts. Use appropriate account titles.

2. Enter all adjusting and closing entries required at December 31.

3. Prepare a balance sheet for December 31.

4. Prepare an income statement for the period April 1 to December 31.

Answer 1

	Ref m	Market value of the inventory is higher than book value
		Inventory should be valued at cost or market value, whichever is lower
		Hence no adjustment is required since market value is higher than cost
			T-Accounts
	Ref	Date	CASH	Debit	Credit
	a	.April1	Common stock	$100,000
	b	.April1	Equipment		$60,000
	c	.April 1	Rent expenses		$4,000
	e	.April 1	Short term investment		$25,000
	f	.April1	Bonds payable	$20,000
	h		Accounts payable		$15,000
	i		Accounts receivable	$30,000
	j		Accounts receivable	$50
	k		Salaries & wages expenses		$6,000
			BALANCE	$40,050
	Ref	Date	SHORT TERM INVESTMENT	Debit	Credit
	e	.April 1	Cash	$25,000
	Ref.	Date	ACCOUNTS RECEIVABLE	Debit	Credit
	g		Sales	$40,000
	i		Cash		$30,000
	j		Accounts receivable		$50
	j		Bad debts expenses		$150
			BALANCE	$9,800
	Ref	Date	PREPAID EXPENSES	Debit	Credit
	c	.Dec31	Rent expenses	$1,000		(4000/12)*3		1000
	Ref	Date	INVENTORY	Debit	Credit
	d	.April 1	Accounts payable	$30,000
	g		Cost of goods sold		$25,000
			BALANCE	$5,000
	Ref	Date	EQUIPMENT	Debit	Credit
	b	Date	Cash	$60,000
	Ref	Date	ACCUMULATED DEPRECIATION	Debit	Credit
	b	.Dec 31	Depreciation expenses		$7,500	(60000/6)*(9/12)		7500
	Ref	Date	ACCOUNTS PAYABLE	Debit	Credit
	d	.April 1	Accounts payable		$30,000
	h		Cash	$15,000
			BALANCE		$15,000
	Ref	Date	INTEREST PAYABLE	Debit	Credit
	f	.Dec31	Interest payable		$1,500	(20000*0.1)*(9/12)=		1500
	Ref	Date	SALARIES & WAGES PAYABLE	Debit	Credit
	i	.Dec 31	Salaries & Wages expenses		$1,000
	Ref	Date	BONDS PAYABLE	Debit	Credit
	f	.April1	Cash		$20,000
	Ref	Date	COMMON STOCK	Debit	Credit
	a	.April1	Common stock		$100,000
	Ref	Date	SALES	Debit	Credit
	g		Accounts Receivable		$40,000
	Ref	Date	COST OF GOODS SOLD	Debit	Credit
	g		Inventory	$25,000
	Ref	Date	DEPRECIATION EXPENSES	Debit	Credit
	b	.Dec 31	Accumulated depreciation	$7,500		(60000/6)*(9/12)		7500
	Ref	Date	INTEREST EXPENSES	Debit	Credit
	f	.Dec31	Interest payable	$1,500		(20000*0.1)*(9/12)=		1500
	Ref	Date	SALARIES & WAGES EXPENSES	Debit	Credit
	k		Cash	$6,000
	i	.Dec 31	Salaries & Wages payable	$1,000
			BALANCE	$7,000
	Ref	Date	RENT EXPENSES	Debit	Credit
	c	.April 1	Cash	$4,000
	c	.Dec31	Prepaid expenses		$1,000	(4000/12)*3		1000
			BALANCE	$3,000
	Ref	Date	BAD DEBT EXPENSES	Debit	Credit
	j		Accounts receivable	$150
			INCOME STATEMENT FOR THE PERIOD APRIL 1 TO DECEMBER 31
		A	Sales		$40,000
		B	Cost of goods sold		$25,000
		C=A-B	Gross Income		$15,000
			Operating Expenses:
		D	Depreciation expenses	$7,500
		E	Rent expenses	$3,000
		F	Salaries $ wages expenses	$7,000
		G	Interest expenses	$1,500
		H	Bad debt expenses	$150
		I=D+E+F+G+H	Total operating expensess		$19,150
		J=C-I	NetProfit/(Loss)		($4,150)
			BALANCE SHEET AS AT DECEMBER 31
			Current Assets
		A	Cash	$40,050
		B	Short term investment	$25,000
		C	Accounts receivable	$9,800
		D	Prepaid expenses	$1,000
		E	Inventory	$5,000
		F=A+B+C+D+E	Total Current assets	$80,850
			Fixed assets
		F	Equipment	$60,000
		G	Accumulated depreciation	($7,500)
		H=F+G	Net fixed assets	$52,500
		I=F+H	Total Assets	$133,350
			Current Liabilities:
		J	Accounts payable	$15,000
		K	Salaries & wages payable	$1,000
		L	Interest payable	$1,500
		M=J+K+L	Total current liabilities	$17,500
			Long term liabilities:
		N	Bonds payable	$20,000
		P=M+N	Total liabilities	$37,500
			Shareholders Equity:
		Q	Common stock	$100,000
		R	Losses	($4,150)
		S=Q+R	Total shareholders equity	$95,850
		T=P+S	Total liabilities & shareholders equity	$133,350