In: Accounting
Johanna Strauss had worked for more than 25 years as the
executive assistant of top managers in large Canadian corporations.
After retirement she decided to go on a trip around the world until
she gets bored or drops dead. After 20 months in her 'voyage'
Johanna decided to return to Toronto due to a complicated health
condition. After the initial treatment was completed Johanna needed
to have regular check ups and not being confident in herself as
before she decided to stay in Toronto all the time. Johanna has
been always extremely active and in this new stage of her life she
couldn't sit still. At this stage she was not interested in working
for others as her health made her not very reliable, so she decided
to start her own business with a passion she discovered in her
'voyage': prepare and serve tea as it should be done. Her target
market or audiences are selected meetings organized by top
executives or their partners in their houses.
On January 1st 2016 Johanna or Lady Leaf as she wanted to be called
set up a company to formalize the tea service she has been
experiencing with her friends and acquaintances. A friend help her
to prepare a business plan that was ready to be presented at her
friend's bank so she can get some extra financing if needed, in the
meantime this friend was so sure about Johanna's idea that decided
to lend her $10,000 for 5 years with an interest rate of 3% per
year. On January 2nd Johanna sets up her company: Tea Experience
with a capital of 10,000 shares valued at $5 each. A lawyer
produced all the needed paperwork.
On January 3rd Johanna opens a bank account under the name of Tea
Experience Corp. depositing the $10,000 from her plus the $10,000
loaned by her friend. On January 4th Johanna transfers ownership of
her sets of tea equipment to the company. All of her tea equipment
is high end while one is very rare and exclusive. The equipment has
a fair market value of $7,500 and is estimated to last for 5 years
and then, if not broken, can be sold for $1,500. She also made sure
to transfer the insurance contract for her tea equipment from her
to the company as well, the contract started on October 1st 2015.
The insurance premium is $900 per year and it was paid in full when
signed on October 1st 2015. On the same day Johanna signs in for
the services of a ride sharing app that would allow her to call a
car to go and come back from the places of the customers that hire
her.
The following is a list of transactions that occurred during the
first month of operations of "Tea Experience Corp":
January 4th Completed the purchase of an exquisite wood box fitted
to carry and maintain intact the quality of tea leaves for $3,000.
The box, which will be paid in full on January 5th 2017, will be
used during 5 full years with no resale value at the end.
January 5th Completed the purchase of an exquisite selection of tea
leaves and mixtures for $2,000. 50% was paid in cash, the other 50%
will be paid in 30 days.
January 7th Great start of business serving several events for a
large and well known international charity. Got a cheque for $3,000
for her services and $2,000 in account to be collected on Jan
31st.
January 7th Paid $400 of transportation to the ride sharing
service.
January 15th Hired a carpenter to improve the look of her exquisite
wood box (this will not change the value or the useful life of the
box). The work is completed and Johanna paid $300 on January 20th
and promised to pay the rest ($700) on February 20th.
January 20th Provided her services for two small events. One
promised to pay $500 of February 10th, while the other will pay the
$500 by the end of February.
January 20th Provided services in an afternoon event at a local
church. Johanna collected $200 for all her services.
January 20th Paid $100 of transportation to the ride sharing
service.
January 23rd Paid for a new professional outfit $80 (clothes) and a
hair salon $40 that included labour, materials and tax. This was
needed so she can be presentable at the high end event she will be
providing services on January 25th.
January 23rd Ordered 300 personal cards and 100 brochures. Total
paid for the rush order is $500 ($1 each personal card and $2 each
brochure). Johanna will start distributing them at the high end
event of January 25th.
January 25th One big event was serviced. The bill of $4,000 was
paid 50% before the beginning of the event and the rest in 30 days.
Johanna was able to distribute 100 personal cards and 20
brochures.
January 29th Received the bill from the lawyer that helped her to
set up the company for $900 payable by February 15th.
January 30th Received a deposit of $800 for servicing a mid
afternoon get together on February 29th. The group wanted to
reserve the date to do something special in her house as it only
happens once every 4 years.
January 31st Having consumed 100% of the tea at hand she purchases
on account more tea for $1,000.
Additional information
January 31st The online bank statement for the month of January
shows bank fees of $25.
January 31st The phone bill for $120 was received for the month of
January, the payment is due on February 9th.
January 31st Johanna does not collect $2,000 from a service
provided on Jan 7th.
Prepare "T" Accounts in ACCRUAL and CASH basis, the Income
statement, Statement of Retained Earnings and Balance Sheet.
Revenue | Advertising Expense | Bank fees |
Depreciation Expense | Expense on Equipment | CGS |
Insurance Expense | Interest Expense | Phone Expense |
Purchases | Selling Expenses | AR |
Transportation Expense | Accumulated Depreciation | Cash |
Organization Costs | Prepaid Advertising | Inventory |
Prepaid insurance | Tea equipment | Tea Equipment (Box) |
Advances from customers | Equipment Payable | AP |
Interest Payable | Organization Costs Payable | Loan Payable |
Phone payable | Common Shares | Retained Earnings |
Solution.
Tea Experience's Journal entries:
January 1st-To Record Money lent by friend
Debit, Cash account-------------------$10,000
Credit, Notes Payable--------------------------------$10,000
January 2nd-To Record Issue Equity stock(10000 shares at $5 each )
Debit, Cash account-------------------$50,000
Credit, Owner's Equity Account--------------------$50,000
January 3rd-To Record Own contribution
Debit, Cash account-------------------$10,000
Credit, Owner's Equity Account--------------------$10,000
January 4th-To Record Transfer of Equipment into business
Debit, Equipment Account-------------$7,500
Credit, Owner's Equity Account---------------------$7,500
Note;
Depreciation on the Equipment,$1,200[($7500-$1500)/5 years], will have to determined at the end of her financial year, that is 31 December 2016. The entry for this will be, Debit, Depreciation expense account, $1,200 and Credit, Accumulated Depreciation account,$1,200. The Depreciation charge for the year is an income statement item as an expense. While the Accumulated Depreciation account,$1,200 is a balance sheet item that will reduce the net book value of the Equipment.
The insurance premium , $900 is an income statement item as an expense. Since it has already been incurred, it will have to be recorded as follows;
Debit, Insurance Premium Expense account, $900
Credit, Cash account, $900
The amount paid to a car service will be considered an expense that will be offset in the income statement in determining the profit for the business.
1.) What is the amount of Selling Expenses at the end of January 31 (after AJE)? Use accrual accounting.
between $101 and $200
2.) What is the amount of Accounts Receivable at the end of January 31 (after AJE)? Use cash accounting.
between $3,401 and $6,000
3.) What is the amount of Advertising Expense at the end of January 31 (after AJE)? Use accrual accounting.
more than $150
4.) What is the amount of Advertising Expense at the end of January 31 (after AJE)? Use cash accounting.
between $401 and $600
5.) What is the amount of Phone Expense at the end of January 31 (after AJE)? Use accrual accounting.
between $101 and $150
6.) What is the sum of all expense at the end of January 31 (after AJE)? Use cash accounting.
between $4,001 and $5,000
7.) What is the amount of Interest Payable at the end of January 31 (after AJE)? Use cash accounting.
between $20 and $30
8.) What is the amount of Interest Expense at the end of January 31 (after AJE)? Use accrual accounting.
between $21 and $30
9.) What is the amount of Expense on Equipment at the end of January 31 (after AJE)? Use accrual accounting.
between $701 and $1,000
10.) What is the amount of unearned revenues or advances from customers at the end of January 31 (after AJE)? Use accrual accounting.
more than $750
T- accounts: