Question

A-310

Fall 2018

Quiz 1

The following information relates to Vida Fitness Club which was started by Mark Cooper and includes one fitness club that sells athletic apparel and provides personal training. On July 1, 2018, Mark decided to incorporate and open his club. At the time of incorporation he had one investor who was eager to provide capital. The company uses the accrual method of accounting and made the following transactions during the months of July and August.

Transactions for July:

DATE	TRANSACTION
1	Mark donated athletic equipment with a value of $150,000 and $250,000 cash in exchange for an equity stake. The sole investor purchased 100,000 shares of $10.00 par value stock in exchange for an investment of $1,060,000.
1	The company paid for a year lease on a building in advance. The monthly rent for this building is $15,250.
1	Purchased additional athletic equipment from Jillian Michaels for $130,700. Mark put down $30,700 and signed a 10 month Note Payable with annual interest of 10% for the remainder. The note calls for monthly payments of $10,000. The first payment is due August 1. Interest is paid quarterly.
1	Purchased athletic apparel from Adidas on credit for $75,200.
1	Paid the premium on two-year insurance policy, $26,750.
9	Had a “great” grand opening and sold $25,000 worth of his inventory for $100,000. Of this $100,000 worth of sales, $75,000 was cash and $25,000 was charged by customers to an in store credit card. In addition, Mark sold 25 annual memberships; customers pay $2,500 annually for unlimited athletic classes. All of the memberships were paid on the spot with cash.
12	Customers who opened in store credit made payments of $ 5,750 on their accounts.
20	Paid utility bills, $25,800.
25	Purchased office supplies on credit from Staples, $22,250.
25	Paid employees for the month, $10,500.

·         Prepare the journal entries for the month of July and then prepare the adjusting entries for the month of July given the following additional information:

a)      One month’s insurance has expired.

b)      One month’s rent has expired.

c)      The remaining inventory of office supplies is $2,250.

d)     Interest has accrued on the note payable.

e)      One month’s worth of memberships have elapsed.

Transactions for August:

DATE	TRANSACTION
1	More athletic apparel was sold for $66,000, which had a cost to Mark of $26,000. All of these sales were cash sales.
1	Sold 25 more annual memberships at $2,500 each.
1	Made monthly payment to Jillian Michaels, $10,000.
19	Paid utility bills, $21,000.
20	Paid Adidas on account $15, 800.
28	Purchased additional office supplies on credit from Staples $1,500.
28	Paid employees for the month, $9,500.

·         Prepare the journal entries for the month of August and then prepare the adjusting entries for the month of August given the following additional information:

f)       One month’s insurance has expired.

g)      One month’s rent has expired.

h)      The remaining inventory of office supplies is $150.

i)        Interest has accrued on the note payable.

j)        Another month’s worth of memberships have elapsed.

k)      The tax rate for the company is 35% and income taxes will be paid next month. This amount is due if there is income, otherwise income tax is zero.

·         Prepare an adjusted trial balance after entries for August 31, 2018.

·         Prepare financial statements for the 2 months ending August 31, 2018. (Income Statement, Balance Sheet, Statement of Retained Earnings)

Answer 1

	JOURNAL ENTRY FOR THE MONTH OF JULY
	Date	Account Title	Debit	Credit
	1	Equipment	$150,000
		Cash	$250,000
		Common stock		$400,000
	1	Cash	$1,060,000
		Common Stock		$1,000,000
		Additional paid up capital		$60,000
	1	Prepaid Rent	$183,000		(15250*12)	183000
		Cash		$183,000
	1	Equipment	$130,700
		Cash		$30,700
		Note Payable		$100,000
	1	Inventory	$75,200
		Accounts payable		$75,200
	1	Prepaid Insurance	$26,750
		Cash		$26,750
	9	Cash	$75,000
		Accounts Receivable	$25,000
		Sales		$100,000
	9	Cost of goods sold	$25,000
		Inventory		$25,000
	9	Cash	$62,500		(2500*25)	62500
		Unearned revenue		$62,500
	12	Cash	$5,750
		Accounts Receivable		$5,750
	20	Utility expense	$25,800
		Cash		$25,800
	25	Supplies	$22,250
		Accounts Payable		$22,250
	25	Wages expense	$10,500
		Cash		$10,500
	ADJUSTING JOURNAL ENTRY FOR THE MONTH OF JULY
	a)	Insurance expense	$1,115		(26750/(2*12)
		Prepaid inurance		$1,115
	b)	Rent Expense	$15,250
		Prepaid Rent		$15,250
	c)	Supplies expense	$20,000		(22250-2250)
		Supplies		$20,000
	d)	Interest expense	$            833		(100000*(0.1/12)
		Interest Payable		$            833
	e)	Unearned Revenue	$5,208		(62500/12)
		Service revenue		$5,208
	JOURNAL ENTRY FOR THE MONTH OF AUGUST
	1	Cash	$66,000
		Sales		$66,000
		Cost of goods sold	$26,000
		Inventory		$26,000
	1	Cash	$62,500		(25*2500)
		Unearned Revenue		$62,500
	1	Note Payable	$10,000
		Cash		$10,000
	19	Utility expenses	$21,000
		cash		$21,000
	20	Accounts Payable	$15,800
		cash		$15,800
	28	Supplies	$1,500
		Accounbts payable		$1,500
	28	Wages expense	$9,500
		Cash		$9,500
	ADJUSTING JOURNAL ENTRY FOR THE MONTH OF AUGUST
	f)	Insurance expense	$1,115
		Prepaid inurance		$1,115
	g)	Rent Expense	$15,250
		Prepaid Rent		$15,250
	h)	Supplies expense	$3,600		(2250+1500-150)
		Supplies		$3,600
	i)	Interest expense	$            833
		Interest Payable		$            833
	j)	Unearned Revenue	$10,417		(5208.3+5208.3)
		Service revenue		$10,417