Question

1. Charles Diggs began his new business, called Diggs Systems Company, on January 1. 20xx. The company writes computer programs with special applications for businesses that own small computers. During the first six months of operation, the business was so successful that Diggs had to hire new employees on several occasions. Yet, he continually had to put off creditors because he lacked the funds to pay them. He wants to apply for a bank loan, but after preparing a statement showing the totals of receipts of cash and payments of cash, he wonders whether a bank will make a loan to him on the basis of what seem to be poor results. Deciding that he needs some accounting help, Diggs asks you to review the statement and the company's operating results.

Diggs Systems Company

Statement of Cash Receipts and Payments

For the Six Months Ended June 30, 20xx

Cash Receipts:
Investment by Charles Diggs							$47,000
Fees for Computer Services							75,600
Total Receipts							122,600
Cash Outflows:
Wages							38,650
Insurance							3,250
Rent							12,600
Supplies							6,321
Office Equipment							14,360
Dividends paid to Shareholder							2,000
Computer Rental							24,000
Maintenance							2,460
Service Van							14,450
Utilities
Total Cash Payments							118,091
Cash Balance							$4,509

                                                                            

After verifying the information in Digg’s statement, you obtain these additional facts about Diggs Systems Company:

a. In addition to the amount received from customers, programming services totaling $29,100 have been performed but are not yet paid for.

b. Employees have been paid all the wages owed to them except for $1,050 earned since the last payday. The next regular payday is July 3.

c. The insurance account represents a two year policy purchased on January 3.

d. The Rent account represents rent of $1,800 per month, including the rent for July.

e. In examining the expenditures for supplies, you find invoices for $1,850 that have not been paid, and an inventory count of the supplies reveals $2,625 of unused supplies are on hand.

f. The office equipment is fully paid for. You estimate it will last four years and be worthless at the end of that time.

g. The computer rental agreement provides for a security deposit of $6,000 plus monthly payments· of $3,000.

h. The maintenance account represents a one year maintenance agreement, paid in advance on January 2.

i. The Service Van account represents the down payment on a van purchased on June 1 for $45,000. The van has useful life of 10 years. It has an estimated residual value of $5,500.

A. Prepare an Income Statement, Balance Sheet, Statement of Cash Flows and Statement of Retained Earnings. In addition, prepare the adjusting J/E entries for transaction a through i.

Answer 1

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