Question

Tony and Suzie graduate from college in May 2018 and begin developing their new business. They begin by offering clinics for basic outdoor activities such as mountain biking or kayaking. Upon developing a customer base, they’ll hold their first adventure races. These races will involve four-person teams that race from one checkpoint to the next using a combination of kayaking, mountain biking, orienteering, and trail running. In the long run, they plan to sell outdoor gear and develop a ropes course for outdoor enthusiasts.

On July 1, 2018, Tony and Suzie organize their new company as a corporation, Great Adventures Inc. The articles of incorporation state that the corporation will sell 36,000 shares of common stock for $1 each. Each share of stock represents a unit of ownership. Tony and Suzie will act as co-presidents of the company. The following transactions occur from July 1 through December 31.

  

Jul.		1		Sell $18,000 of common stock to Suzie.
Jul.		1		Sell $18,000 of common stock to Tony.
Jul.		1		Purchase a one-year insurance policy for $4,560 ($380 per month) to cover injuries to participants during outdoor clinics.
Jul.		2		Pay legal fees of $1,900 associated with incorporation.
Jul.		4		Purchase office supplies of $1,000 on account.
Jul.		7		Pay for advertising of $270 to a local newspaper for an upcoming mountain biking clinic to be held on July 15. Attendees will be charged $60 on the day of the clinic.
Jul.		8		Purchase 10 mountain bikes, paying $16,300 cash.
Jul.		15		On the day of the clinic, Great Adventures receives cash of $4,800 from 80 bikers. Tony conducts the mountain biking clinic.
Jul.		22		Because of the success of the first mountain biking clinic, Tony holds another mountain biking clinic and the company receives $5,250.
Jul.		24		Pay for advertising of $700 to a local radio station for a kayaking clinic to be held on August 10. Attendees can pay $140 in advance or $190 on the day of the clinic.
Jul.		30		Great Adventures receives cash of $9,800 in advance from 70 kayakers for the upcoming kayak clinic.

Aug.	1		Great Adventures obtains a $46,000 low-interest loan for the company from the city council, which has recently passed an initiative encouraging business development related to outdoor activities. The loan is due in three years, and 6% annual interest is due each year on July 31.
Aug.	4		The company purchases 14 kayaks, paying $21,000 cash.
Aug.	10		Twenty additional kayakers pay $3,800 ($190 each), in addition to the $9,800 that was paid in advance on July 30, on the day of the clinic. Tony conducts the first kayak clinic.
Aug.	17		Tony conducts a second kayak clinic, and the company receives $12,200 cash.
Aug.	24		Office supplies of $1,000 purchased on July 4 are paid in full.
Sep.	1		To provide better storage of mountain bikes and kayaks when not in use, the company rents a storage shed, purchasing a one-year rental policy for $3,840 ($320 per month).
Sep.	21		Tony conducts a rock-climbing clinic. The company receives $13,300 cash.
Oct.	17		Tony conducts an orienteering clinic. Participants practice how to understand a topographical map, read an altimeter, use a compass, and orient through heavily wooded areas. The company receives $18,400 cash.
Dec.	1		Tony decides to hold the company’s first adventure race on December 15. Four-person teams will race from checkpoint to checkpoint using a combination of mountain biking, kayaking, orienteering, trail running, and rock-climbing skills. The first team in each category to complete all checkpoints in order wins. The entry fee for each team is $690.
Dec.	5		To help organize and promote the race, Tony hires his college roommate, Victor. Victor will be paid $50 in salary for each team that competes in the race. His salary will be paid after the race.
Dec.	8		The company pays $1,000 to purchase a permit from a state park where the race will be held. The amount is recorded as a miscellaneous expense.
Dec.	12		The company purchases racing supplies for $2,800 on account due in 30 days. Supplies include trophies for the top-finishing teams in each category, promotional shirts, snack foods and drinks for participants, and field markers to prepare the racecourse.
Dec.	15		The company receives $27,600 cash from a total of forty teams, and the race is held.
Dec.	16		The company pays Victor’s salary of $2,000.
Dec.	31		The company pays a dividend of $4,900 ($2,450 to Tony and $2,450 to Suzie).
Dec.	31		Using his personal money, Tony purchases a diamond ring for $4,000. Tony surprises Suzie by proposing that they get married. Suzie accepts and they get married!

    

The following information relates to year-end adjusting entries as of December 31, 2018.

1. Depreciation of the mountain bikes purchased on July 8 and kayaks purchased on August 4 totals $7,460.
2. Six months’ worth of insurance has expired.
3. Four months’ worth of rent has expired.
4. Of the $1,000 of office supplies purchased on July 4, $240 remains.
5. Interest expense on the $46,000 loan obtained from the city council on August 1 should be recorded.
6. Of the $2,800 of racing supplies purchased on December 12, $250 remains.
7. Suzie calculates that the company owes $13,700 in income taxes.

Requiremets:

1.	Record each of the transactions listed above in the 'General Journal' tab (these are shown as items 1 - 27). Review the 'General Ledger' and the 'Trial Balance' tabs to see the effect of the transactions on the account balances.
2.	Record the adjusting entries in the 'General Journal' tab (these are shown as items 28-34).
3.	Review the adjusted 'Trial Balance' as of December 31, 2018.
4.	Prepare an income statement for the period ended December 31, 2018, in the 'Income Statement' tab.
5.	Prepare a classified balance sheet as of December 31, 2018 in the 'Balance Sheet' tab.
6.	Record the closing entries in the 'General Journal' tab (these are shown as items 35-37).

Answer 1

Journal entries:

The transactions of an organization are recorded in the books of accounts through journal entries. The analyzation and journalizing of transactions is the second step in the accounting cycle. These journal entries are used to post the transactions into ledger.

Trial Balance

This is a list of closing balances of all accounts as at a particular date.These are closing balances of all ledger accounts at a particular date.

Income Summary

It is a temporary account where temporary accounts are closed

Adjusting Enteries :

To give effect to accrual basis of accounting adjusting enteries are required because at the end of accounting period there are certain expenses which are incurred but not paid or revenue earned but cash not received. The purpose of adjusting entries is to adjust revenues and expenses to the accounting period in which they occurred.

Balance sheet :

Balance sheet is a presentation of Assets, Liabilities and Equity which are permanent accounts. Further Assets are presented as Current Assets, Intangible Non-Current Assets, Tangible Non-Current Assets

Income Statement

Income statement is also known as profit and loss account or Revenue account.Net of Revenue over expenses is presented in income statement for the given accounting period .

Retained Earnings :

Retained Earnings are cumulative earnings of the company since time of its incorporation less the dividends paid.

Unearned Service Revenue

Unearned Service Revenue is the advance received for service to be performed in the coming period. So as and when the service is performed the portion of unearned service revenue need to be recognized as revenue in the income statement.