Question

JackJoe, Inc. sells toy mice to high end pet stores. It was formed on Jan 1, 20x4 with a sale of $1 par value common stock and the issuance of a Bond. Following is JackJoe's trial balance after the first year of operation, through December 1 20x4. This trial balance does not reflect the transactions that occurred during the last month of the year or adjustments that are necessary, as described by the additional information. The Bond payable was sold on Jan 1 20X4 and is due in 4 years, interest of 7% is payable annually on Dec. 31.
	JackJoe, Inc.
	Trial Balance
	As of December 1, 20X4
			Debits		Credits
		Cash	$ 19,000		$ -
		Accounts receivable	12,000		-
		Supplies	5,000		-
		Inventory	25,000		-
		Equipment	30,000		-
		Accumulated depreciation	-		-
		Accounts payable	-		10,000
		Bond payable	-		32,000
		Premium on bond			400
		Interest payable	-		-
		Capital stock ($1 par)	-		25,000
		Additional paid in capital			-
		Dividend	-		-
		Sales	-		64,000
		Sales - Discounts	-		-
		Cost of goods sold	-		-
		Rent expense	16,400		-
		Salaries expense	24,000		-
		Depreciation expense	-		-
		Supplies expense	-		-
		Interest expense	-		-
			$ 131,400		$ 131,400
1. JackJoe's president, Elizabeth, decided the company needed more capital, so she sold 10,000 shares of stock on December 22th for $19,000
2. JackJoe received payment to settle a $12,000 Account receivable on December 21. The terms of the receivable were 3/10, N 30 and the payment reflected that it was within the discount period.
3. JackJoe sold $25,000 of toy mice, on December 22. The terms of the sale were 2/10, N 30. JackJoe uses a periodic inventory system.
4. JackJoe performed a physical inventory at yearend and no inventory remained. JackJoe's accounting policy is FIFO periodic.
5. The equipment was purchased near the beginning of the year. It has a 3 year life with no salvage value
6. Record the first interest payment on the bond.
7. Supplies on hand at year end were counted, and amount to $200.
8. The board of directors declared a dividend of 50 cents per share on Dec. 31. The date of record is Jan 15, 20x5 and the payment date is Feb 1, 20x5.
(a) Set up a chart of accounts (5 points)
(b) Set up a General Ledger and drop in the Dec. 1 account balances (5 points)
(c) Set up a General Journal
(d) Prepare the necessary entries through December 31, 20X4. (40 points)
(e) Post journal entries and determine the adjusted balances of the accounts.
(f) Prepare the adjusted trial balance. (5 points)
(g) Prepare the multi-step income statement, statement of retained earnings and classified balance sheet with a detailed stockholders' equity section (25 points)
(h) Calculate the current ratio and gross profit percentage, explain what these ratios tell you about JackJoe's business. (10 points)
(i) Tell me the impact of journal entry #2, #5 and #6 on direct cash flows (inflow, outflow, no impact) and the appropriate section. (10 points)

Answer 1

The impact of entry 2 will result in increase of cash inflow under cash flow from operating activities. Under entry 5, depreciation will be charged resulting in non-cash expenditure, that's why it will be added to net profit to calculate cash flow from operating activities. As per entry 6, bond premium will be amortised which will not affect any cash flow, as a result of which it will also be added to net profit for computing cash flow from operating activities.