Analysis of Transactions. Preparation of Statements (Alternates are 2-48, 2-50,

Question

Analysis of Transactions. Preparation of Statements (Alternates are 2-48, 2-50, 2-52, and 2-54.) The Montero Company, a wholesale distributor of furnace and air conditioning equipment, began business on July 1, 20X2. The following summarized transactions occurred during July: Montero's stockholders contributed $300,000 in cash in exchange for their common stock. On July 1, Montero signed a 1-year lease on a warehouse, paying $48,000 cash in advance for occupancy of 12 months. On July 1, Montero acquired warehouse equipment for $100,000. A cash down payment of $40,000 was made, and a note payable was signed for the balance. On July 1, Montero paid $24,000 cash for a 2-year insurance policy covering fire, casualty, and related risks. Montero acquired assorted merchandise for $35,000 cash. Montero acquired assorted merchandise for $190,000 on open account. Total sales were $205,000, of which $30,000 were for cash. Cost of inventory sold was $155,000. Rent expense was recognized for the month of July. Depreciation expense of $2,000 was recognized for the month. Insurance expense was recognized for the month. Collected $45,000 from credit customers, m. Disbursed $80,000 to trade creditors. For simplicity, ignore all other possible expenses. Required By using the balance sheet equation format demonstrated in Exhibit2-3 (p. 49), prepare an analysis of each transaction. Show all amounts in thousands. What do transactions (h)-(m) illustrate about the theory of assets and expenses? (Use a Prepaid Insurance account, which is not illustrated in Exhibit 2-3.) Prepare an income statement for July on the accrual basis. Ignore income taxes.

Explanation / Answer

a. Shareholders Contribution in common stock

Cash account and Capital account will increase by $300000,

Journal entry would be

Account title

Debit

Credit

Cash

300000

Capital (common stock)

300000

b) $48000 cash paid in advance for lease of warehouse, therefore the cash will credited by 48000 and there would be prepaid expense of $48000 which is shown as current assets under balance sheet

c) Purchase of equipment will increase fixed assets and down payment will decrease cash and note payable will increase liability, journal entry would be

Account title

Debit

Credit

Equipment

100000

Cash

40000

Note payable

60000

d) Payment for insurance policy for 2 years in cash will decrease cash and increase prepaid expense and debit insurance expense

Account title

Debit

Credit

Insurance expense (for 1 year)

12000

Prepaid insurance expense

12000

Cash

24000

e) Acquired merchandise for cash will decrease cash balance by 35000.

f) Acquired merchandise on open account will increase current liability by 190000

g) Sales shown in income statement and cash sale increase cash balance and balance sale will increase account receivable account

h) Inventory cost of 155000 will decrease inventory by 155000

i) Rent expense of 4000 will shown under income statement

j) Depreciation will decrease asset and shown under income statement (depreciation debit and asset credit)

k) insurance expense recognised for month of July..   Insurance expense will debit by 1000 only

l) collection from customer will increase cash balance(asset) and decrease account receivable account(asset)

m) disbursed to trade creditor will decrease cash balance(asset) by 80000 and debit account payable account (liability)

Account title

Debit

Credit

Cash

300000

Capital (common stock)

300000

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