Question

Problem 3-10 Balance sheet preparation [LO3-2, 3-3] Melody Lane Music Company was started by John Ross early in 2018. Initial capital was acquired by issuing shares of common stock to various investors and by obtaining a bank loan. The company operates a retail store that sells records, tapes, and compact discs. Business was so good during the first year of operations that John is considering opening a second store on the other side of town. The funds necessary for expansion will come from a new bank loan. In order to approve the loan, the bank requires financial statements. John asks for your help in preparing the balance sheet and presents you with the following information for the year ending December 31, 2018 a. Cash receipts consisted of the following From customers From issue of common stock From bank loan $475,900 200,000 110,000 b. Cash disbursements were as follows Purchase of inventory Rent Salaries Utilities Insurance Purchase of equipment and furniture $320,000 30, 000 50,000 25,000 23,000 60,000 C. The bank loan was made on March 31, 2018. A note was signed requiring payment of interest and principal on March 31, 2019 The interest rate is 12% d. The equipment and furniture were purchased on January 3, 2018, and have an estimated useful life of 10 years with no anticipated salvage value. Depreciation per year is $6,000. e. Inventories on hand at the end of the year cost $120,000. f. Amounts owed at December 31, 2018, were as follows: To suppliers of inventory To the utility company $40,000 2,000 g. Rent on the store building is $2,000 per month. On December 1, 2018, four months' rent was paid in advance h. Net income for the year was $96,000. Assume that the company is not subject to federal, state, or local income tax. i. Two hundred thousand shares of no par common stock are authorized, of which 40,000 shares were issued and are outstanding

Answer 1

Solution:

Computation of Ending cash balance
Particulars	Amount
Cash receipts:
From customer	$475,900.00
From issue of common stock	$200,000.00
From bank loan	$110,000.00
Total Receipts	$785,900.00
Cash Disbursements:
Purchase of inventory	$320,000.00
Rent	$30,000.00
Salaries	$50,000.00
Utilities	$25,000.00
Insurance	$23,000.00
Purchase of equipment and furniture	$60,000.00
Total Disbursements	$508,000.00
Ending Cash Balance	$277,900.00

Melody Lane Music Company
Balance Sheet
At December 31, 2018
Particulars		Amount
Assets:
Current Assets:
Cash		$277,900.00
Inventory		$120,000.00
Prepaid rent ($2,00*3)		$6,000.00
Total Current Assets		$403,900.00
Property Plant and Equipment:
Equipment and Furniture	$60,000.00
Less: Accumulated depreciation	-$6,000.00
Equipment and Furniture, Net		$54,000.00
Total Assets		$457,900.00
Liabilities and Stockholder's Equity:
Liabiilities:
Accounts Payable		$40,000.00
Utilities Payable		$2,000.00
Interest payable ($110,000*12%*9/12)		$9,900.00
Bank Loan		$110,000.00
Total Liabilities		$161,900.00
Stockholder's Equity:
Common stock	$200,000.00
Retained Earnings	$96,000.00
Total stockholder's Equity		$296,000.00
Total liabilities and stockholder's equity		$457,900.00