PART ONE Mei-ling Lee spent much of her childhood learning the art of cookie-mak
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Question
PART ONE
Mei-ling Lee spent much of her childhood learning the art of cookie-making from her grandmother. They passed many happy hours mastering every type of cookie imaginable and later creating new recipes that were both healthy and delicious. Now at the start of her second year in college, Mei-ling is investigating various possibilities for starting her own business as part of the requirements of the entrepreneurship program in which she is enrolled.
A long-time friend insists that Mei-ling has to somehow include cookies in her business plan. After a series of brainstorming sessions, Mei-ling settles on the idea of operating a cookie-making school. She will start on a part-time basis and offer her services in people’s homes. Now that she has started thinking about it, the possibilities seem endless. During the fall, she will concentrate on holiday cookies. She will offer individual lessons and group sessions (which will probably be more entertainment than education for the participants). Mei-ling also decides to include children in her target market.
After researching the different forms of business organization, Mei-ling Lee decides to operate “Matcha Creations” as a corporation. She then starts the process of getting the business running. In November 2017, the following activities take place.
Nov. 8 Mei-ling sells her investments and receives NT$520, which she deposits in her personal
bank account.
8 She opens a bank account under the name “Matcha Creations” and transfers NT$500
from her personal account to the new account in exchange for common stock.
11 Mei-ling pays NT$65 to have advertising brochures and posters printed. She plans to
distribute these as opportunities arise.
13 She buys baking supplies, such as flour, sugar, butter, and chocolate chips, for NT$125 Cash.
14 Mei-ling starts to gather some baking equipment to take with her when teaching the
cookie classes. She has an excellent top-of-the-line food processor and mixer that
originally cost her NT$750. Mei-ling decides to start using it only in her new business.
She estimates that the equipment is currently worth NT$300. She invests the equipment
in the business in exchange for ordinary shares.
16 Mei-ling realizes that her initial cash investment is not enough. Her grandmother lends
her NT$2,000 cash, for which Mei-ling signs a note payable in the name of the business.
Mei-ling deposits the money in the business bank account. (Hint: The note does not have
to be repaid for 24 months. As a result, the notes payable should be reported in the accounts
as the last liability and also on the statement of financial position as the last liability.)
17 She buys more baking equipment for NT$900 cash.
20 She teaches her first class and collects NT$125 cash.
25 Mei-ling books a second class for December 4 for NT$150. She receives NT$30 cash
in advance as a down payment.
30 Mei-ling pays NT$1,320 for a one-year insurance policy that will expire on December
1, 2018.
INSTRUCTIONS
(a) Prepare journal entries to record the November transactions.
(b) Post the journal entries to general ledger accounts.
(c) Prepare a trial balance at November 30.
PART TWO
It is the end of November and Mei-ling has been in touch with her grandmother. Her grandmother asked Mei-ling how well things went in her first month of business. Mei-ling, too, would like to know if the company has been profitable or not during November. Mei-ling realizes that in order to determine Matcha Creations’ income, she must first make adjustments.
Mei-ling puts together the following additional information.
1. A count reveals that NT$35 of baking supplies were used during November.
2. Mei-ling estimates that all of her baking equipment will have a useful life of 5 years or 60 months. (Assume Mei-ling decides to record a full month’s worth of depreciation, regardless of when the equipment was obtained by the business.)
3. Mei-ling’s grandmother has decided to charge interest of 6% on the note payable extended on November 16. The loan plus interest is to be repaid in 24 months. (Assume that half a month of interest accrued during November.)
4. On November 30, a friend of Mei-ling’s asks her to teach a class at the neighborhood school. Mei-ling agrees and teaches a group of 35 first-grade students how to make holiday cookies. The next day, Mei-ling prepares an invoice for NT$300 and leaves it with the school principal. The principal says that he will pass the invoice along to the head office, and it will be paid sometime in December.
5. Mei-ling receives a utilities bill for NT$45. The bill is for utilities consumed by Mei-ling’s business during November and is due December 15.
INSTRUCTIONS
Using the trial balance, and based on the new information above, do the following.
(a) Prepare and post the adjusting journal entries.
(b) Prepare an adjusted trial balance.
(c) Using the adjusted trial balance, calculate Matcha Creations’ net income or net loss for the month of November 2017.
PART THREE
Mei-ling had a very busy December. At the end of the month, after journalizing and posting the December transactions and adjusting entries, Mei-ling prepared the following adjusted trial balance.
Matcha Creations
Adjusted Trial Balance
December 31, 2017
Debit Credit
Cash NT$1,180
Accounts Receivable 875
Supplies 350
Prepaid Insurance 1,210
Equipment 1,200
Accumulated Depreciation-Equipment NT$ 40
Accounts Payable 75
Salaries and Wages Payable 56
Unearned Service Revenue 300
Notes Payable 2,000
Interest Payable 15
Share Capital—Ordinary 800
Dividends 500
Service Revenue 4,515
Salaries and Wages Expense 1,006
Utilities Expense 125
Advertising Expense 165
Supplies Expense 1,025
Depreciation Expense 40
Insurance Expense 110
Interest Expense 15
NT$7,801 NT$7,801
INSTRUCTIONS
Using the information in the adjusted trial balance, do the following.
(a) Prepare an income statement and a retained earnings statement for the 2 months ended December 31, 2017, and a classified statement of financial position at December 31, 2017. The note payable has a stated interest rate of 6%, and the principal and interest are due on November 16, 2019.
(b) Mei-ling has decided that her year-end will be December 31, 2017. Prepare closing entries as of December 31, 2017.
(c) Prepare a post-closing trial balance
Explanation / Answer
PART - 1
(1) Journal entries
(a) Nov 8
DR Cash NT$500
Common Stock NT$500
(To record cash invested in business for common stock)
(b) Nov 11
DR Advertising expenses NT$65
Cash NT$65
(To record advertising expense paid)
(c) Nov 13
DR Baking Supplies NT$125
Cash NT$125
(To record baking supplies purchased for cash)
(d) Nov 14
DR equipment NT$300
Common Stock NT$300
(To record equipment invested for common stock)
(e) Nov 16
DR Cash NT$2,000
Notes Payable NT$2,000
(To record cash received against notes payable)
(f) Nov 17
DR Equipment NT$900
Cash NT$900
(To record purchase of equipment)
(g) Nov 20
DR Cash NT$125
Revenue NT$125
(To record cash revenue)
(h) Nov 25
DR Cash $30
Deferred Revenue $30
(To record advance cash received in liue of revenue)
Note: $150 cannot be recorded as revenue because revenue can't be recognize until the service is actually performed.
(i) Nov 30
DR Insurance expence NT$120
DR Prepaid Insurance NT$1200
Cash $1320
(To record cash paid for insurance expiring after 11 months)
(2) Ledger
NOTE: Out of too many questions posted, first 2 questions (under Part I) are answered in full. Please do not post too many questions clubbed under a single question.
DR CASH Date Description $ Date Description $ Nov 8 To Common Stock 500 Nov 13 By Baking Supplies 125 Nov 11 To Advertising Expense 65 Nov 17 By Equipment 900 Nov 16 To Notes Payable 2,000 Nov 30 By Insurance Expense 120 Nov 20 To Revenue 125 By Prepaid Insurance 1200 Nov 25 To Deferred Revenue 30 Nov 30 By Balance 375 2720 2720Related Questions
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