Question

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Part II: One comprehensive question:

Q1

Sammi Sung is a recent business school graduate and budding entrepreneur. Sammi thinks that hot, fresh, and delicious cookies available all day long on university campuses is a surefire way to make money. Sammi had been toying with this idea for a couple of years and recently he finalized what he thinks is the perfect chocolate chip cookie recipe. His friends think the cookies are the best they ever tasted. Sammi has also developed a couple of other equally delicious varieties of cookies. Sammi wants to test his business idea so he decides to incorporate a company called Kookie Dough, Inc. (Kookie) and arranges to set up a shop in the food court on the university campus.

It’s now December 27, 2019 and Kookie has closed for the winter break. Sammi has been working almost continuously since Kookie opened its doors. He’s had no time to keep any accounting records and he’s asked you to “pull things together” for him. After summarizing the data Sammi provided, you have the following information

for 2019:

i. July 4: Sammi incorporates Kookie and contributes $20,000 in cash in exchange for Kookie shares.

ii. August 1: Signs a two-year lease with the university for a small space in the food court. Monthly rent is $1,000. In addition, Kookie must pay 2 percent of sales in additional rent at the end of the year. No rent is required for August. Kookie writes a cheque for $3,000 for rent for September through November. (ADJ required for requirement 4)

iii. August 4: Purchases a cookie oven, refrigerator, display cases, cash register, and other required items from a distributor for $22,000. Pays $12,000 in cash and agrees to pay the remainder on February 15, 2020. Sammi estimates that all the equipment will have a useful life of five years. Kookie begins using the equipment on September 1. (ADJ required for requirement 4)

iv. August 10: Kookie arranged a $20,000 loan from David Dragon, a rich investor who likes to invest in new small businesses. The interest rate on the loan is 9 percent, payable on December 31 of each year. $10,000 of the loan must be repaid on August 1, 2020 and the remainder on August 1, 2021. (ADJ required for requirement 4)

v. During August: Renovates and repairs the shop. A contractor is paid $7,000 in cash.

vi. October 1: Kookie purchases a one-year insurance policy for $1,600. (ADJ required for requirement 4)

vii. December 1: Kookie writes a $3,000 cheque to the university for rent for December through February. (ADJ required for requirement 4)

viii. December 18: Caters a holiday party for one of the faculties. Bills the faculty $300 and expects to be paid in early January.

ix. During 2019: Purchases ingredients for cookies, drinks, etc. for $18,000. On December 27, there is inventory on hand that cost $800.

x. During 2019: Sells cookies and drinks to customers for $42,000. All sales were for cash.

xi. During 2019: Pays employees $11,200. As of the end of December, employees are owed $500. (ADJ required for requirement 4) Note record the $500 as an adjusting entry.

xii. During 2019: Pays utilities of $1,200. Utilities are paid in full to the end of December.

xiii. During 2019: Kookie incurred other expenses amounting to $9,500. All were paid in cash.

xiv. During 2019: Sammi took $5,000 to meet his personal needs. (Hint: use retained earnings as your credit entry)

Additional Information:

The following are the list of accounts you should use to prepare all your entries. Note if there are no specific account to record your entry, pick an account that best represents what you are trying to record. You may also create your own account if it helps you complete the exercise. A full solution set should utilize all accounts listed. Refer to Chapter 3 of your textbook to assist with completing this exercise.

Account Name	Element
Cash	Asset
Accounts receivable	Asset
Inventory	Asset
Prepaid assets	Asset
Property, plant, and equipment	Asset
Accumulated depreciation	Contra Asset
Wages payable	Liability
Interest payable	Liability
Accounts payable	Liability
Note payable-current portion	Liability
Note payable-long-term portion	Liability
Common shares	Equity
Retained earnings	Equity
Sales	Revenue
Cost of sales	Expense
Rent expense	Expense
Utilities expense	Expense
Interest expense	Expense
Wage expense	Expense
Other expense	Expense
Depreciation expense	Expense

Required:

1. Use the list of accounts provided and prepare T accounts. Note since this is a new business opening balances will be zero.

2. Record journal entries for transactions (i) through (xiv), and post them to the T-accounts.

3. Prepare an unadjusted trial balance.

4. Record and post the adjusting journal entries as required. Entries that require adjusting entries have been noted.

5. Prepare an adjusted trial balance.

6. Prepare an income statement, statement of retained earnings, and balance sheet.

7. Prepare and post the closing journal entries.

8. Prepare a post-closing trial balance.

Answer 1

In the books of Kookie Dough Inc. :

Transaction	Date	Account Titles	Debit	Credit
2019			$	$
i.	July 4	Cash	20,000
		Common Shares		20,000
ii.	Aug 1	Prepaid Assets	3,000
		Cash		3,000
iii.	Aug 4	Property Plant and Equipment	22,000
		Cash		12,000
		Accounts Payable		10,000
iv.	Aug 10	Cash	20,000
		Notes Payable		20,000
v.		Other Expense	7,000
		Cash		7,000
vi.	Oct 1	Prepaid Assets	1,600
		Cash		1,600
vii.	Dec 1	Prepaid Assets	3,000
		Cash		3,000
viii.	Dec 18	Accounts Receivable	300
		Sales		300
ix.		Inventory	18,000
		Cash		18,000
x.		Cash	42,000
		Sales		42,000
xi.		Wages Expense	11,200
		Cash		11,200
xii.		Utilities Expense	1,200
		Cash		1,200
xiii.		Other Expenses	9,500
		Cash		9,500
xiv.		Retained Earnings	5,000
		Cash		5,000
Adjusting Entries
Adj.	Dec 31	Rent Expense	4,846
		Prepaid Assets		4,846
Adj.	Dec 31	Depreciation Expense ( 22,000 / 5 x 4/12 )	1,467
		Accumulated Depreciation		1,467
Adj.	Dec 31	Interest Expense ( 20,000 x 9 % x 113 / 360)	565
		Interest Payable		565
Adj.	Dec 31	Insurance Expense	400
		Prepaid Assets		400
Adj.	Dec 31	Wages Expense	500
		Wages Payable		500