In: Accounting
Case #5: DJ John and his business of "Music on Wheels"
John has started his second year of the BAS at York University.
John was not interested in working for others so he decided to
start his own business with what is his passion: be a DJ in
parties. A family friend that works as a lending officer in one of
Canada's largest banks explained to him how the business plan has
to be presented so he can get some financing.
On January 1st 2017 John decided to set up a company to formalize
his DJ services he has been providing during last year on an
informal and sporadic basis. On January 3rd he submitted the
business plan to the bank asking for a start up loan of $25,000. On
January 5th John sets up his company: Music on Wheels Ltd with a
capital of 30,000 shares valued at $1 each. A lawyer produced all
the needed paperwork.
On January 6th John opens a bank account under the name of Music on
Wheels and on January 7th John transfers ownership of his van to
the company. The van has a fair market value of $5,000 and is
estimated to last for 50 months and then discarded. On the same day
John signs the insurance contract for the van and the music
equipment that is about to purchase. The insurance premium for the
van is $2,400 per year and for the equipment is $1,200 per
year.
On January 10th John deposited $15,000 of his personal savings in
the newly opened chequing account of his company. On the same day
the bank loan is approved and $25,000 is deposited in the bank
account.
The following is a list of transactions that occurred during the
first month of operations of "Music on Wheels":
January 11th Completed the purchase of upgraded music equipment for
$18,000; also $700 worth of music files were purchased from the
same shop. 50% was paid in cash, the other 50% will be paid in 30
days. The music equipment will be used during 24 months with no
resale value at the end, while the music files are expensed
immediately as music hits have a short life.
January 12th Great start of business being the DJ of a fundraising
event of a large international charity. Got a cheque of $1,000 for
his services and $2,000 in account to be collected on Jan
31st.
January 14th Paid a local radio $3,000 for 90 days of advertising
starting on January 15th.
January 19th Provided the music for two small events. One promised
to pay the $300 of Feb 7th, while the other will pay the $300 by
the end of January.
January 20th Hired a car painter to freshen up the look of the van
he uses to transport the equipment (this will not change the value
or the useful life of the van). The work is completed in 2 days
(Jan 21st and 22nd). John paid $200 on January 20th and promised to
pay the rest ($700) on Feb 20th.
January 20th Provided services in an afternoon event at a local
church. John collected $200 for all his services.
January 20th Paid $600 of insurance for the months of January and
February ($300 for each month).
January 23rd Paid for gasoline on the van for $80. Also did an oil
change and changed the wipes for a total of $100 that included
labour and tax.
January 24th Ordered 200 personal cards and 100 brochures. Total
cost $300.
January 26th One big event was serviced. The bill of $2,000 was
paid 50% before the beginning of the event and the rest in 30
days.
January 27th Small event was serviced collecting $300 in cash for
all fees at the end of the event.
January 28th Purchased in account music files with the last hits
for $90.
January 29th Received the bill from the lawyer that helped him to
set up the company for $1,800 payable by February 15th.
January 30th Received a deposit of $1,000 for servicing a wedding
in March. The bride wanted to reserve the date and make sure her
party will be the only one that night for Music on Wheels.
January 30th Collected the cards and brochures and paid the total.
In two days, Jan 30th and 31st, he has distributed 50 personal
cards and 25 brochures.
January 31st Collected $2,000 from the event on January 12th and
got a phone call indicating the $300 owed for the January 19th
event will be paid sometime in February.
Additional information
January 31st The online bank statement for the month of January
shows bank fees of $30.
January 31st The phone bill for $80 was received for the month of
January - payment due February 8th.
January 31st If possible pay dividends to himself of $0.10 per
share.
Prepare "T" Accounts in ACCRUAL and CASH basis for this case using
the following chart of accounts, when relevant, prepare the Income
statement, Statement of Retained Earnings and Balance Sheet and
then answer the questions.
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Question 9:
What is the balance of Advertising Expense shown in the Income Statement for the period ended on January 31? Use accrual accounting.
less than $100
between $501 and $800
between $201 and $500
between $100 and $200
more than $800
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Question10:
What is the balance of Phone Payable shown in the Balance Sheet as of January 31? Use accrual accounting.
between $101 and $250
between $10 and $100
more than $300
between $251 and $300
less than $10
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Question11:
What is the balance of Office Supplies Expense shown in the Income Statement for the period ended on January 31? Use accrual accounting.
less than $10
more than $300
between $101 and $250
between $251 and $300
between $10 and $100
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Question12:
What was the total value of depreciation (van and equipment) for the month of January? Use cash accounting.
$0
between $201 and $500
between $501 and $800
between $1 and $200
more than $800
ADVERTISEMENT EXPENSE ACCOUNT | |||
PARTICULARS | DR AMT | PARTICULARS | CR AMT |
RADIO ADVT | 500 | ||
(3000*0.5/3) | |||
TOTAL | 500 | TOTAL | 0 |
PHONE PAYABLE | |||
PARTICULARS | DR AMT | PARTICULARS | CR AMT |
PHONE EXPENSE | 80 | ||
TOTAL | 0 | TOTAL | 80 |
OFFICE EXPENSE | |||
PARTICULARS | DR AMT | PARTICULARS | CR AMT |
TOTAL | 0 | TOTAL | 0 |
DEPRECIATION | |||
PARTICULARS | DR AMT | PARTICULARS | CR AMT |
DEPRECIATION ON VAN | 100 | ||
(5000/50) | |||
MUSIC EQUIPMENT DEPN | 750 | ||
(18000/24) | |||
TOTAL | 850 | TOTAL | 0 |
QUESTION 9 | ADVERTISEMENT EXPENSE | ||
ANSWER | 201 TO 500 | ||
QUESTION 10 | PHONE PAYABLE | ||
ANSWER | BETWEEN 10 TO 100 | ||
QUESTION 11 | OFFICE SUPPLIES | ||
ANSWER | LESS THAN 10 | ||
QUESTION 12 | DEPRECIATION | ||
ANSWER | MORE THAN 800 |