Question

Question 1 a) Alaina’s Bandana Corporation (ABC) is in its first year of operations. Using the information below, prepare a year-end income statement and balance sheet for the business (Remember to increase/reduce equity by the amount of income/loss). 1. Through 2020, ABC purchased 5,000 bandanas at an average cost of $2 per bandana. Alaina marked up her bandanas to 2.5 times purchase price and sold all items in the same year. On December 31st, Alaina had $5,950 cash in her corporate bank account and no remaining inventory, so she ordered 2,000 bandanas (with cash) at a cost of $2.10 each (they were delivered to her the same day). 2. Alaina is paid a monthly salary of $1,000 from ABC. Also, she rents a sales booth on weekends, so she can sell bandanas in person (in addition to online). The booth costs her $500 per month. 3. At the start of the year, Alaina invested $5,000 into her business (100 common shares). She also obtained a bank loan of $5,000 (ABC has only paid annual interest of 5%). Other than the bank loan and a $4,200 accounts payable balance, ABC holds no debts. 4. At the start of the year, Alaina purchased furniture for $3,000 (expected life of 15 years with no salvage value) and sewing equipment for $2,000 (expected life of 10 years with no salvage value). Both assets are depreciated using the straight-line method. b) In 2021, Alaina plans to double her salary and spend $2,500 on marketing. She projects her cost to rise to $2.25 per bandana, but she expects to sell twice as many units as last year, at a price of $6 apiece. Assuming the other expenses remain constant, what does ABC’s second year look like? Write a short essay on what Alaina should expect and give her appropriate business advice (You may use the projections below as part of your analysis).

Ratio December 31, 2021 projection

Current ratio 1.50

Debt-to-Assets 0.60

Question 2 For each bank reconciliation item, describe the appropriate action an accountant should take. If a journal entry is needed, please make one (assume a date of July 31st). a) Of three cheques written in July (no. 15 for $35.00, no. 16 for $49.32, and no. 17 for $231.09), two cheques (no. 15 and no. 17) are outstanding. b) A customer visited the company bank and deposited $300 to settle a bill from last month. c) The bank charged account management fees of $8.50 and overdraft fees of $20. d) A customer wired $400 for work completed last week. The electricity bill of $235.70 and gas bill of $201.78 were automatically withdrawn. The company policy is to record e-transfers when they show up on the bank statement. e) On the evening of July 31st, a company employee deposited an envelope containing a $375 cheque in the bank mail slot. The transaction was not included in the July bank statement.

Answer 1

Q1 :

Answer :

Workings are in the detailed explanation box. Refer that box for all the projections.

Business advice to Alina:

• Based on the projections, profit is expected in the second year from loss of the first year which is a very good sign of the business. She should work hard to meet the expectation as growing sales into double is a challenging task within second year.
• She would have enough cash balance as of 2021, to pay off the loan so she could do that to save interest cost on loan. However, if she further need cash for purchase she could look for creditors who can sell goods on credit.

Salary expectation to double the self pay is not quite reasonable as she could invest the same amount for business rather than paying herself in first few years.

Q2 :

Answer :

Step-by-step explanation

Situation:- Action taken Entry to be passed Dr. Cr.

1. Deducted from balance of bank No entry is required
2. Added over the book balance Cash 300

To Accounts Receivable 300

3 Deducted from the book balance Bank Charges 8.5

Overdraft Fees 20

To Cash 28.5

4 Customer wire being added in the book

balance. Utilities bill-deducted from book

balance Cash ...Dr. 400

To Accounts Receivable 400

Utilities expenses 437.48

To Cash 437.48

5 Added in bank balance No entry is required.

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