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Comprehensive Question (50 pts.) Bitter Lake, Inc. is a corporation that sells beach recreation items, including surfboards, boogie boards, and related apparel. They sell to specialty retail stores as well as directly to customers. The following is their balance sheet for the 2012 year-end Bitter Lake, Inc.: Balance Sheet for the year ended December 31,2012 ASSETS Current Assets: Cash Shorn-term investments Accounts receiv able Inventory Prepaid advertis ing 23851 Total curent asscts PP&E (net) Long-tem investnents Total assets LIA BILITIES AND SHAREHOLDERS BQUITY Current Liabilitics Wages payabk Accounts payable Loan payable- current portion Total cument labilities Loan payable Total labilities Sharcholders'cquty Common stock Addsional paid-in capial Retained carnings Total sharcholders' equity Total labilities and sharchoders equity Bitter Lake, Inc. had the following transactions (and no others) during 2013: 1. They paid all wages owed to employees for work performed in 2012. 2. They paid $512 for purchases made on account in 2012 3. They received $7,671 cash related to sales recognized prior to 2013. 4. They purchased, on account, $17,944 of surf shorts and sunglasses to sell. 5. They made sales to local retail stores for $22,594;$6,617 was on account and the 3 6. 7. 8. remainder was for cash. The cost of the sales was $12,734 They made sales directly to customers for $22,271, all for cash. The cost of the sales was $9,888 Employees earned $6,217 for work during 2013; $457 is payable in January, 2014 and the rest was paid in cash. They incurred and paid selling and administrative expenses of $4,390 On January 15,2013, they issued 200 shares of $2 par common stock; the total cash received was $85 per share. 9. 10. They declare a dividend of $1.40 per share on June 30, 2013. It is paid on August 15 2013. Note: All common stock issued prior to 2013 has a par value of $2 per share.

Answer 1

Journal entries in the books of Bitter Lake, INC.
1)	Wages payable		Dr.	234
	To Cash				234
	(being outstanding wages paid)
2)	Accounts payable		Dr.	512
	To Cash				512
	(being outstanding creditors paid)
3)	Cash		Dr.	7671
	To Accounts Receivable				7671
	(being payments received from accounts receivable)
4)	Purchases		Dr.	17944
	To Accounts Payable				17944
	(being purchases on account for surf shorts and sunglasses)
5)	Accounts receivable		Dr.	6617
	Cash		Dr.	15977
	To Sales				22594
	(being sales to local retail stores)
6)	Cash		Dr.	22271
	To Sales				22271
	(being sales to customers directly)
7)	Salary Expenses		Dr.	6217
	To Cash				5760
	To Wages Payable				457
	(being entry for salary)
8)	Selling and Administrative Expenses		Dr.	4390
	To Cash				4390
	(being entry for selling and administrative expenses)
9)	Cash		Dr.	17000
	To Common Stock				400
	To Securities Premium				16600
	(being issue of common stock)
10) i)	Dividends paid		Dr.	560
	Cash				560
	(being entry for dividend paid)
ii)	Retained Earnings		Dr.	560
	To Dividends				560
	(being entry for transfer of dividend account to Retained Earnings)
11)	Cash		Dr	5600
	To Contract				5600
	(being entry for signing of contract and receipt of amount)
12)	Manufacturing Equipment		Dr	15000
	To Cash				15000
	(being entry for purchase of manufacturing equipment)
13)	Loan Payable		Dr	1500
	Interest on Loan		Dr	1530
	To Cash				3030
	(being entry for payment of loan)
a)	Advertisement expense		Dr.	4000
	To Prepaid Advertising				4000
	(being entry for prepaid advertising transfer)
b)	Depreciation		Dr.	2000
	To PPE				2000
	(being entry for depreciation of PPE)
c)	Loss by theft		Dr	5143
	To Inventory				5143
	(being entry for inventory stolen)
d)	no entry
e)	Retained Earinings		Dr.	1092.3
	To Provision for Taxation				1092.3
	(being entry for provision for taxation)

           Workings for Adjustments:

a)
period of contact	1st July 2011 to 30 June 2014
prepaid period on 31.12.2012		1.5 years
outstanding balance		6000
prepaid period on 31.12.2013		0.5 years
so, prepaid amount=		6000/1.5*0.5
		2000
expense amount=		6000-2000
		4000
b)
PPE on 31.12.2012 =   46000
depreciation provided = 3 years
Remaining useful life = 23 years
Depreciation per annum =
	46000/23
	= 2000
c)
Inventory stolen= 23851 -18708
=	5143
e)
Profit and Loss Account
Particulars	Amount	Particulars	Amount
Purchases	17944	sales	44865
Salary	6217
Selling and Administrative expense	4390
Interest on Loan	1530
Advertisement Exp	4000
Depreciation Exp	2000
Loss by theft	5143
Net profit	3641
	44865		44865
Net Profit	3641
Tax Rate	30%
Tax Amount	3641*30%
	=1092.30