Question

In: Accounting

You set up your own business in merchandising sector in Scranton, PA - opening a luxury...

You set up your own business in merchandising sector in Scranton, PA - opening a luxury watch shop on 1/1/2020.

The following is related information about the business:

-   Specific sub-sector: Merchandising sector.

-   Location: Scranton, PA

-   Business model: merchandiser - buying and selling luxury watches.

-   Investment by owner: $1,000,000

- You hired a shop manager. In order to handle different aspects of business, you had one employee responsible for the purchasing, receiving, and storing of watches purchased. A second employee is responsible for the maintenance of account receivable records and collection from customers. A third employee has responsibility for personal records, timekeeping, preparation of payrolls, and distribution of payroll checks. As a part of his job, the shop manager would do some internal control functions. In addition, you hired one security officer, and 4 full-time sales assistants.

Requirements:

  1. You are given the following economic events of the business in 2020

1/1/2020: Opened the business, invested $1,000,000 cash in the business.

1/1/2020: bought a building for the business purpose for $100,000 cash. The building has a useful economic life of 10 years.

1/1/2020: purchased 100 luxury watches for $200,000 with $100,000 cash payment, the remaining amount payable on 2/1/2021. (each watch costs $2,000)

3/1/2020: purchased 50 luxury watches for $250,000 with cash. Each watch costs $5,000.

4/1/2020: purchased 40 luxury watches for $240,000 with cash. Each costs $6,000.

6/1/2020: Sold 130 watched for $1,300,000. Of which $300,000 cash was received at the time of sale. The remaining amount to be received on 5/2/2021.

7/1/2020: paid $1,200 in advance for 12 months’ property insurance (7/1/20 to 7/1/21).

8/1/2020: borrowed $500,000 from a local Chase bank. Interest rate is 12%/year. Interest is paid every 6 months- the first payment date is 2/1/2021. Principal would be paid on 8/1/2021.

9/1/2020: to expand business, you rent a showroom in the next building. Paid $24,000 cash in advance for 12 month’s rent.

12/31/2020: Paid 2020 utilities expense, advertising expense, and miscellaneous expense for $5000, $15,000, and $4,000, respectively.

Salary is paid on the last day of each month. Each month’s salary expense is $20,000.

Notes:

  • On 12/31/2020: Physical inventory showed that there were 60 luxury watches on hand at the end of the period. The company used periodic inventory system, and used FIFO costing method.
  • Your business used straight-line depreciation method for all fixed assets.
  • Ignore tax.

Requirement: Prepare an excel file that includes

Tab 2 titled “income statement”: prepare a multiple-step income statement for year ended 12/31/2020.

Solutions

Expert Solution

INCOME STATEMENT AS AT 12/31/2020

Particulars Amount Amount
Sales 1300000

Cost of goods sold;

Opening stock

Add:

Purchases on 1/1/2020 (100 watches @ 2000)

Purchases on 3/1/2020 (50 watches @ 5000)

Purchases on 4/1/2020 (40 watches @6000)

Less: Closing stock (Working Note : 1)

0

200000

250000

240000

(340000)

(350000)

Gross Profit(1300000-350000)

950000

Indirect Expenses:

Depreciation (100000/10)

Insurance

Rent Advance

Utility

Advertising Expenses

Miscellaneous Expenses

Salary (20000*12)

Interest Expenses (500000*12%)

10000

1200

24000

5000

15000

4000

240000

60000

(359200)

Net Profit (950000-359200) 590800

Woking Note 1

Here we use the FIFO (First In First Out) method for Inventory. So the calculation is as follows;


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