Question

1. The Toronto Diner, opened as a sole proprietorship by Felix Fudd, recorded the following transactions during its initial mon of operations:

a. Rented facilities for $3,000 per month and paid the lessor $9,000 for the first three months

. b. Purchased equipment costing $30,000 on the first of the month. The diner put 20 percent down and borrowed the remainder from Second Bank. (Equipment will be depreciated over sixty months using the straight-line method. Assume a $3,000 salvage value.)

c. Sold 1,800 meals during the month at an average sales price of $15. Twenty percent of the meals were sold on account, while the remainder were cash sales. None of the charges were collected by the end of the month.

d. Cost of food sold percentage is 30%. Food purchases totaled $10,000 during the first month, of which 60 % were paid for during the month.

e. Paid labor costs of 30 % of sales during the month.

f. Paid all other expenses, which totaled $6,000 with cash. g. Felix opened the business on the first of the month by investing $50,000 h. Felix’s tax rate is 30%. Taxes will be paid subsequent to the first month. Determine the net income for the first month of business by filling in the correct amounts below using the information above. Revenue Net sales Expenses Cost of Goods Sold Wages expense Rent Expense Depreciation Expense Other expenses Income before income taxes Income tax expense Net Income 2. Determine the total sources and use of cash for the first month by filling in the correct amounts below using the information from question 7. Cash sources and uses: Paid rent for next 3 months Down payment for equipment Cash sales Food purchases Labor Other expenses Felix equity

Answer 1

Income Statement For the First Month
Sales Revenue (1800 X $15)		27,000
Less: Cost of goods Sold (27,000 X 30%)	8,100
Labor Costs (27000 X 30%)	8,100
Rent Expense	3,000
Depreciation Expense (30000 - 3000)/60	450
Other Exp.	6,000	25,650
Operating Income		1,350
Less: Income tax expense @30%		405
Net Income		945

Total Sources of Cash
Cash Sales ($27,000 X 80%)	21,600
Coomon Stock Issued	50,000
Total Cash Recd.	71,600
Total Uses of Cash
Rent Paid	9,000
Downpayment of Equipment (30000 X 20%)	6,000
Purchases (10,000 X 60%)	6,000
Labor Cost	8,100
Other Expenses Paid	6,000
Total Cash Used	35,100