Question

The Donahoo Western Furnishings Company was formed on December 31, 2014 with $1,000,000 in equity plus $500,000 in long-term debt. On January 1, 2015, all of the firm's capital was held in cash. The following transactions occurred during January 2015:

January 2: Donahoo purchased $1,000,000 worth of furniture for resale. It paid $500,000 in cash and financed the balance using trade credit that required payment in 60 days.

January 3: Donahoo sold $250,000 worth of furniture that it had paid $200,000 to acquire. The entire sale was on credit terms of net 90 days.

January 15: Donahoo purchased more furniture for $200,000. This time, it used trade credit for the entire amount of the purchase, with credit terms of net 60 days.

January 31: Donahoo sold $500,000 worth of furniture, for which it had paid $400,000. The furniture was sold for 10% cash down, with the remainder payable in 90 days. In addition, the firm paid a cash dividend of $100,000 to its stockholders and paid off $250,000 of its long-term debt.

Submit answers to the 4 questions below.

1. Prepare Donahoo's balance sheet as of December 31, 2014.

2. What did the balance sheet look like after each of the transactions in January?

3. Ignoring taxes, calculate the income Donahoo earned during January. Prepare an income statement for the month. Recognize an interest expense of 1% for the month (12% annually) on the $500,000 long-term debt, which has not been paid, but is owed.

4. What was Donahoo's cash flow for the month of January.

Answer 1