In: Accounting
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:
1/1/2020: 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:
Requirement: Prepare an excel file that includes
Tab 2 titled “income statement”: prepare a multiple-step income statement for year ended 12/31/2020.
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;