Question

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

Prepare a balance sheet as of 12/31/2020

Answer 1

WN1.Closing Stock Valuation by FIFO Method : 60 Watches

Particulars	Amount
40 watches @6000 purchased on 4/1/20	240000
20 watches@5000 purchased on 3/1/20	100000
	340000

WN 2:Cost of Goods sold

Particulars	Amount
Opening Stock	0
Pur	690000
Less: Closing stock ( WN 1)	-340000
Cost of Goods Sold	350000

WN 3: Depreciation Working as per Straight line Method

Particulars	Amount
Cost	100000
Useful life	10 years
Depreciation	10000

Cash Account
Date	Particulars	Amount	Date	Particulars	Amount
01/01/2020	Capital	1000000	01/01/2020	Building	100000
06/01/2020	Sales	300000	01/01/2020	Purchases	100000
08/01/2020	Loan from Chase Bank	500000	1/31/20	Salary exp	20000
			02/01/2020	Account payable	100000
			2/28/20	Salary exp	20000
			03/01/2020	Purchases	250000
			3/31/20	Salary exp	20000
			04/01/2020	Purchases	240000
			4/30/20	Salary exp	20000
			5/30/20	Salary exp	20000
			6/30/20	Salary exp	20000
			07/01/2020	Property Insurance	600
			07/01/2020	Prepaid Insurance	600
			7/31/20	Salary exp	20000
			8/31/20	Salary exp	20000
			09/01/2020	Showroom Rent	8000
			09/01/2020	Prepaid Rent	16000
			9/30/20	Salary exp	20000
			10/31/20	Salary exp	20000
			11/30/20	Salary exp	20000
			12/31/20	Salary exp	20000
			12/31/20	Utility exp	5000
			12/31/20	Advertisement	15000
			12/31/20	Misclleneous exp	4000
			12/31/20	Balnce c/d	720800
	Total	1800000		Total	1800000

Account payable

Date	Particulars	Amount	Date	Particulars	Amount
02/01/2020	Cash	100000	01/01/2020	Purchases	100000
	Total	100000		Total	100000

Account Receivable

Date	Particulars	Amount	Date	Particulars	Amount
06/01/2020	Sales	1000000	12/31/20	Balance c/d	1000000
	Total	1000000		Total	100000

Balance Sheet as on 31 December 2020

Particulars	Amount	Amount
ASSETS
Current Assets
Cash & Cash equivalents		$720,800
Account Receivable		$1,000,000
Supplies		$340,000
Prepaid Insurance		$600
Prepaid Rent		$16,000
Total Current assets		$2,077,400
Non Current assets
Property Plant & equipment
Building	100000
Less: Accumulated Depreciation	-10000	$90,000
Total Non Current assets		$90,000
Total assets		$2,167,400
LIABILITIES & EQUITY
Current Liabilities
AccruedInterest On loan		$25,000
Loan from Chess Bank		$500,000
Total Current Liabilities		$525,000
Owner's Equity
Capital contribution	$1,000,000
Add: Profit for the year	$642,400
Total Equity		$1,642,400
Total Liabilities & Equity		$2,167,400

Income Statement for the year ended 31 December 2020

Particulars	Amount
Revenue	$1,300,000
Cost of Goods sold	$350,000
Employee benefit Expenses	$240,000
Depreciation & Amortization Expense	$10,000
Other Expenses ( Note 1 )	$32,600
Finance Cost	$25,000
Profit Before Tax	$642,400
Income Tax Expenses	$0
Profit for the year from Continuing Operations	$642,400
Loss for the year from Discontinued Operations	$0
Profit for the year	$642,400

WN 1: Other Expenses

Particulars	Amount
Property Insurance	600
Rent	8000
Utility exp	5000
Advertisement	15000
Misclleneous exp	4000
Total	32600