Question

Melody Lane Music Company was started by John Ross early in 2013. 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	$	360,000
From issue of common stock		100,000
From bank loan		100,000

b.	Cash disbursements were as follows:

Purchase of inventory	$	300,000
Rent		15,000
Salaries		30,000
Utilities		5,000
Insurance		3,000
Purchase of equipment and furniture		40,000

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 $4,000.
e.	Inventories on hand at the end of the year cost $100,000.
f.	Amounts owed at December 31, 2018, were as follows:

To suppliers of inventory	$	20,000
To the utility company		1,000

g.	Rent on the store building is $1,000 per month. On December 1, 2018, four months' rent was paid in advance.

h.	Net income for the year was $76,000. Assume that the company is not subject to income tax.

i.	One hundred thousand shares of no par common stock are authorized, of which 20,000 shares were issued and are outstanding.

Prepare an income statement for Melody Lane Music Company for the year ended December 31, 2018. Please show all supporting calculations.

Answer 1

Total purchases = Cash paid for purchases+Amount owed to suppliers

= $300,000+$20,000 =$320,000

Cost of goods sold for the year 2018 = Beginning Inventory+Total purchases-Ending Inventory

= $0+$320,000-$100,000 = $220,000

Interest on loan from April 1 to Dec 31 = Amount borrowed*interest rate*9/12

= $100,000*12%*9/12 = $9,000

Income Statement for the year ending December 31, 2018 is shown as follows:-

Melody Lane Music Company

   Income Statement for the year ending Dec 31, 2018 (Amounts in $)

Sales Revenue (Assuming all sales in cash)		360,000
Less: Cost of goods sold		(220,000)
Gross Profit (A)		140,000
Operating Expenses
Rent ($1,000*12 months)	12,000
Salaries	30,000
Utilities (5,000+1,000)	6,000
Interest on bank loan	9,000
Depreciation	4,000
Insurance	3,000
Total Operating Expenses (B)		64,000
Net Income (A-B)		76,000