Ralphy started a business on April 1, 2001, and had the following transactions o
ID: 2603097 • Letter: R
Question
Ralphy started a business on April 1, 2001, and had the following transactions on April 1:
a. Issued 20,000 shares of $5 par value common stock for $100,000 cash.
b. Bought equipment to be used for making products, for $60,000. The equipment has a six-year life and is to be depreciated on a straight-line basis, with no salvage value.
c. Paid $4,000 for one year’s rent on a building.
d. Bought $30,000 of inventory on credit.
e. Bought $25,000 of Yahoo common stock as a short-term investment.
f. Issued a bond with a face value of $20,000 and an interest rate of 10%. Interest is to be paid annually.
Between April 1 and December 31, the following transactions occurred:
g. Sold inventory that cost $25,000 for $40,000. All sales were on credit.
h. Paid $15,000 to suppliers of inventory for the credit purchase in (d) above.
i. Collected $30,000 from customers on their accounts.
j. A customer owing $200 declared bankruptcy, and notice was received that the customer would pay only $50 of this debt. The $50 payment was enclosed.
k. Salaries and wages of $6,000 were paid.
On December 31:
l. Salaries and wages of $1,000 had been earned but not paid.
m. The market value of Ralphy’s inventory was $12,500.
Required
1. Enter the above transactions in T-accounts. Use appropriate account titles.
2. Enter all adjusting and closing entries required at December 31.
3. Prepare a balance sheet for December 31.
4. Prepare an income statement for the period April 1 to December 31.
Explanation / Answer
Ref m Market value of the inventory is higher than book value Inventory should be valued at cost or market value, whichever is lower Hence no adjustment is required since market value is higher than cost T-Accounts Ref Date CASH Debit Credit a .April1 Common stock $100,000 b .April1 Equipment $60,000 c .April 1 Rent expenses $4,000 e .April 1 Short term investment $25,000 f .April1 Bonds payable $20,000 h Accounts payable $15,000 i Accounts receivable $30,000 j Accounts receivable $50 k Salaries & wages expenses $6,000 BALANCE $40,050 Ref Date SHORT TERM INVESTMENT Debit Credit e .April 1 Cash $25,000 Ref. Date ACCOUNTS RECEIVABLE Debit Credit g Sales $40,000 i Cash $30,000 j Accounts receivable $50 j Bad debts expenses $150 BALANCE $9,800 Ref Date PREPAID EXPENSES Debit Credit c .Dec31 Rent expenses $1,000 (4000/12)*3 1000 Ref Date INVENTORY Debit Credit d .April 1 Accounts payable $30,000 g Cost of goods sold $25,000 BALANCE $5,000 Ref Date EQUIPMENT Debit Credit b Date Cash $60,000 Ref Date ACCUMULATED DEPRECIATION Debit Credit b .Dec 31 Depreciation expenses $7,500 (60000/6)*(9/12) 7500 Ref Date ACCOUNTS PAYABLE Debit Credit d .April 1 Accounts payable $30,000 h Cash $15,000 BALANCE $15,000 Ref Date INTEREST PAYABLE Debit Credit f .Dec31 Interest payable $1,500 (20000*0.1)*(9/12)= 1500 Ref Date SALARIES & WAGES PAYABLE Debit Credit i .Dec 31 Salaries & Wages expenses $1,000 Ref Date BONDS PAYABLE Debit Credit f .April1 Cash $20,000 Ref Date COMMON STOCK Debit Credit a .April1 Common stock $100,000 Ref Date SALES Debit Credit g Accounts Receivable $40,000 Ref Date COST OF GOODS SOLD Debit Credit g Inventory $25,000 Ref Date DEPRECIATION EXPENSES Debit Credit b .Dec 31 Accumulated depreciation $7,500 (60000/6)*(9/12) 7500 Ref Date INTEREST EXPENSES Debit Credit f .Dec31 Interest payable $1,500 (20000*0.1)*(9/12)= 1500 Ref Date SALARIES & WAGES EXPENSES Debit Credit k Cash $6,000 i .Dec 31 Salaries & Wages payable $1,000 BALANCE $7,000 Ref Date RENT EXPENSES Debit Credit c .April 1 Cash $4,000 c .Dec31 Prepaid expenses $1,000 (4000/12)*3 1000 BALANCE $3,000 Ref Date BAD DEBT EXPENSES Debit Credit j Accounts receivable $150 INCOME STATEMENT FOR THE PERIOD APRIL 1 TO DECEMBER 31 A Sales $40,000 B Cost of goods sold $25,000 C=A-B Gross Income $15,000 Operating Expenses: D Depreciation expenses $7,500 E Rent expenses $3,000 F Salaries $ wages expenses $7,000 G Interest expenses $1,500 H Bad debt expenses $150 I=D+E+F+G+H Total operating expensess $19,150 J=C-I NetProfit/(Loss) ($4,150) BALANCE SHEET AS AT DECEMBER 31 Current Assets A Cash $40,050 B Short term investment $25,000 C Accounts receivable $9,800 D Prepaid expenses $1,000 E Inventory $5,000 F=A+B+C+D+E Total Current assets $80,850 Fixed assets F Equipment $60,000 G Accumulated depreciation ($7,500) H=F+G Net fixed assets $52,500 I=F+H Total Assets $133,350 Current Liabilities: J Accounts payable $15,000 K Salaries & wages payable $1,000 L Interest payable $1,500 M=J+K+L Total current liabilities $17,500 Long term liabilities: N Bonds payable $20,000 P=M+N Total liabilities $37,500 Shareholders Equity: Q Common stock $100,000 R Losses ($4,150) S=Q+R Total shareholders equity $95,850 T=P+S Total liabilities & shareholders equity $133,350
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