Question

You have decided to go into the business of selling Motorcycles. You have incorporated your business under the name of Miller Corporation

On January 1, 20X1, you begin by depositing $50,000 cash in the

new corporate bank account ? $30,000 of the money is yours and $20,000

is borrowed from your Uncle Mike. For the $30,000, which is yours,

you (as Miller Corporation) issue yourself 300 shares of common

stock. For the $20,000 borrowed from your uncle, you sign a note agr

eeing to pay back that amount on December 31, 20X3 and promise to pay

interest of 8% at the end of each year. In addition to the cash you invested on January 1st, you also invested a piece of land that you own into the business on August 1stthat is worth $60,000 in exchange for 600 more shares of stock.

On January 1, 20X1, you bought 20 Motorcycles for $4,000 each.

During the year, you sold 16 Motorcycles for $8,500 each. You also paid a security deposit of $2,000 (when you rented your office space); advertising expense of $6,000; 12 months’ rent of $24,000; utilities of $4,000; and Su

pplies of $2,000. You pay the first year’s interest to Uncle Mike onDecember31,20X1. Your tax rate is 21% of your income before taxes and you pay 50% of these taxes.

Prepare the Journal Entries (including the closing entry), T?accounts, and all four Financial Statements

Answer 1

	Journal Entries
Date (20X1)		Dr	Cr
1-Jan	Cash	$       50,000.00
	To Share Application Money		$    30,000.00
	To Loan		$    20,000.00
	(Capital introduced and loan taken for business)
1-Jan	Bank account	$       50,000.00
	To Cash		$    50,000.00
	(Cash deposited into bank)
1-Jan	Share Application Money	$       30,000.00
	To Common Stock		$    30,000.00
	(being 300 Common stock issued)
1-Jan	Land account	$       60,000.00
	To Common Stock		$    60,000.00
	(being Land introduced and common stock issued as consideration)
1-Jan	Purchases	$       80,000.00
	To bank		$    80,000.00
	(being 20 motor cycle purchased for 80000)
20X1	Bank Account	$     136,000.00
	To Sales		$ 136,000.00
	(Being 16 motor cycle sold during the year)
20X1	Security Deposit	$          2,000.00
	To bank		$      2,000.00
	(Being Security deposit paid)
20X1	Advertisement Expenses	$          6,000.00
	Rent	$       24,000.00
	Utilities	$          4,000.00
	Supplies	$          2,000.00
	To bank account		$    36,000.00
	(being expenses paid during the year)
31-Dec	Interest on loan	$          1,600.00
	To bank		$      1,600.00
	(being interest on loan paid )
31-Dec	Income tax	$          7,560.00
	To Tax payable		$      3,780.00
	To Bank Account		$      3,780.00
	(being 50% tax amount paid)
31-Dec	Closing Stock	$       16,000.00
	To Profit and Loss Account		$    16,000.00
	(being stock left unsold 4 motor cycle @4000 each)

Bank Account
To Cash	$                     50,000.00	By Purchases	$    80,000.00
To Sales	$                   136,000.00	By security Deposit	$      2,000.00
		By Advertisement Expenses	$      6,000.00
		By Rent	$    24,000.00
		By Utilities	$      4,000.00
		By Supplies	$      2,000.00
		By Interest on Loan	$      1,600.00
		By Income Tax	$      3,780.00
		By balance C/d	$    62,620.00
	$                   186,000.00		$ 186,000.00

Income Statement
Sales	$     136,000.00
Cost of goods sold (Puchases-closing stock)	$       64,000.00
Gross profit	$       72,000.00
Operating Expenses:
Advertisement Expenses	$          6,000.00
Interest on Loan	1600
Rent	$       24,000.00
Utilities	$          4,000.00
Supplies	$          2,000.00
Total Operating Expenses	$       37,600.00
Operating Icome	$       34,400.00
Income Taxes	$          7,560.00
Net Income	$       26,840.00

Balance sheet
For the Year Ended 31st December 20X1
Liabilities	Amount	Assets	Amount
Common Stock	$                     90,000.00	Land	$    60,000.00
Loan	$                     20,000.00	Bank Account	$    62,620.00
Income tax Payable	$                       3,780.00	Closing Stock	$    16,000.00
Retained Earnings	$                     26,840.00	Security Deposit	$      2,000.00
	$                   140,620.00		$ 140,620.00

Cash Flow Statement
For the year ended 31-12-20X1
Cash Flow from Operating Activities:	Amount in Dallor	Amount in Dallor
Net Income		$                                     26,840.00
Add: Adjustments
Increase in Current Asset(security deposit)	$                     (2,000.00)
Increase in Inventory	$                   (16,000.00)
Provision for Income tax	$                       7,560.00
Income tax Paid	$                     (3,780.00)
		$                                   (14,220.00)
A. Cash Flow from Operating Activities		$                                     12,620.00
B. Cash Used in Investing Activities		$                                                    -
Cash Flow from Financing Activities:
Loan Taken	$                     20,000.00
Issue of Common stock in Cash	$                     30,000.00
C. Cash Flow from Financing Activities		$                                     50,000.00
Increase (Decrease) in cash [A+B+C]		$                                     62,620.00
Add: cash at the beginning		$                                                    -
Cash at the end		$                                     62,620.00

Statement of Retained Earnings
Owner Capital, January 1, 20X1	$                                                                                      -
Owner Investment during 20X1	$                                                                       90,000.00
Net Income, 2017	$                                                                       26,840.00
Owner Withdrawals	$                                                                                      -
Owner Capital, Dec. 31,	$                                                                     116,840.00