On 1/1 we sold through IPO (start up company) 100,000 shares of stock for $20/sh

Question

On 1/1 we sold through IPO (start up company) 100,000 shares of stock for $20/share even though par was only 1.00. We issued $100,000 10 year bonds and got $90,000. The bonds pay 8% interest (stated rate). Market rate is higher or lower? Also on January 1, we paid 24 months of rent by paying the landlord $48,000 cash. We purchased 10,000 units of inventory at $1.00 at the start of the month and purchased 10,000 units at $2.30 in the middle of the month and purchased 20,000 units of inventory at $3.00 at the end of the month. All on credit. By the end of the year we paid down the liability by 50%. In february 1st we purchased equipment for $50,000 financing through a 3 year note (5% interest). The interest payment is required to be paid every 12/31. The equipment has a 5 year life and no salvage value. We will depreciate all PPE through double declining balance method. We also purchased a building for $300,000 through a 20 year mortgage. The mortgage requires interest only payments every january 1st at a rate of 5%. The building has a 30 year life and no salvage. During february we sold 25,000 units of inventory at $150.00/unit; receiving $60,000 in cash and the rest are on account, 50% of the accounts receivable was collected by year end. At the time of the sale 2% of credit are deemed uncollectible. We use FIFO method. On march 1, we purchased more 5 year no salvage equipment for $50,000 cash. On december 31, of this year we sold it for $60,000 cash On 4/1 we purchased stick of another company as an investment for $30,000 cash. We consider this as an available for sale security During december our investment paid dividends of $2,000. We declared dividends to our shareholders of $10,000 but did not pay the dividends until the following year. Our total utility expense for the year was $5,000 . Our investment in the other company is now worth $34,000. We paid $10,000 in salaries subject to a 7.65% FICA tax. We withheld $500 for federal and $200 for state income tax. Tax rate is 20%. On the last day of december there was a lawsuit filed against us that our attorney says is not likely that we will lose but is reasonably possible that we will lose for $10,000. Prepare originals entries, closing entries, income statement and balance sheet for above.

Explanation / Answer

Trail balance Name Dr Cr Bank 3865908 Comon stock 100000 Premium on issue of stock. 1900000 Discount on sisue of bonds 10000 Bank Bonds 100000 2000000 Rent 24000 90000 Prepaid rent 24000 -48000 RM Purchase 93000 -46500 Creditors 46500 -2291.67 Equipment 40833.33 60000 Notes payble 50000 1845000 Interest 2291.67 -50000 Dep. 26666.67 60000 Building 290833.3 -30000 Bank Loan 300000 2000 Int on Building 13750 -5000 Prov for interst 13750 -9300 Debtors 1845000 sales 3750000 Bad debts 75000 Prov for bad dbets 75000 Cash Gain 18333.33 Inbvestmnet in share 30000 Dividend income 2000 Dividend decalred 10000 Unpaid dividend 10000 Utlity exp. 5000 salary exp. 10000 Withheld 700 Total 6366283 6366283 -0.33

Balance sheet Liab Amt Assets amt Common stock 100000 Discount 10000 Premium 1900000 Prepaid rent 24000 Bonds 100000 Equipment 40833.33 Creditors 46500 Building 290833.33 Notes payble 50000 Debtors 1845000 Bank loan 300000 Inv in share 30000 Prov for itn 13750 Bank 3865908 Prov for bad dbt 75000 Unpaid div 10000 Withheld 700 Profit 3510624.67 6106574.67 6106574.7 Income statement Sales 3750000 Less Purchase 93000 Gross profit 3657000 Exp. Rent 24000 Intrest 2291.67 Int on building 13750 Dep 26666.67 bad debts 75000 Diuv declaed 10000 Utility exp. 5000 salary exp. 10000 Total 166708.34 3490291.66 Gain 18333.33 Dividend income 2000 3510624.99 01-Jan Bank Dr 2000000 To Comon stock 100000 To premium on issue of stocj 1900000 01-Jan Bank Dr 90000 Discount on issue of bonds 10000 To Bonds 100000 01-Jan Rent Dr 24000 Prepaid rent Dr 24000 To Bank 48000 01-Jan RM Purchase 10000 To Creditors 10000 15-Jan RM Purchase 23000 To Creditors 23000 30-Jan RM Purchase 60000 To Creditors 60000 31-Dec Creditors 46500 TO Bank 46500 ( 50% paid ) 01-Feb Equipment Dr 50000 To Notes payble 50000 31-Dec Interestr 2291.667 To Bank 2291.667 31-Dec Dep. 9166.667 To Equipment 9166.667 ( dep for 11 months assumed SLM ) 01-Feb Building Dr 300000 TO Bank Loan 300000 31-Dec Interest on building 13750 To Provision for Interst 13750 31-Dec Dep 9166.667 To Building 9166.667 Feb Bank 60000 Debtors 3690000 To Sales 3750000 31-Dec Bank 1845000 To Debtors 1845000 31-Dec bad debts 75000 Tp Prov for Bad debts 75000 01-Mar Equipment 50000 To cash 50000 31-Dec Dep 8333.333 To Equipmenmt 8333.333 . 31-Dec Bank 60000 To Equipmenmt 41666.67 To Gain 18333.33 01-Apr Investmnet in share 30000 TO cash 30000 31-Dec Bank 2000 Tp dividend income 2000 31-Dec Dividend decalred 10000 To Unpaid dividend 10000 31-Dec Utility exp. 5000 To Bank 5000 31-Dec Salary exp. 10000 To Withheld 700 TO Bank 9300

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