Question

8

Tony and Suzie graduate from college in May 2021 and begin developing their new business. They begin by offering clinics for basic outdoor activities such as mountain biking or kayaking. Upon developing a customer base, they’ll hold their first adventure races. These races will involve four-person teams that race from one checkpoint to the next using a combination of kayaking, mountain biking, orienteering, and trail running. In the long run, they plan to sell outdoor gear and develop a ropes course for outdoor enthusiasts.

On July 1, 2021, Tony and Suzie organize their new company as a corporation, Great Adventures Inc. The articles of incorporation state that the corporation will sell 39,000 shares of common stock for $1 each. Each share of stock represents a unit of ownership. Tony and Suzie will act as co-presidents of the company. The following transactions occur from July 1 through December 31.

Jul.		1		Sell $19,500 of common stock to Suzie.
Jul.		1		Sell $19,500 of common stock to Tony.
Jul.		1		Purchase a one-year insurance policy for $5,880 ($490 per month) to cover injuries to participants during outdoor clinics.
Jul.		2		Pay legal fees of $1,700 associated with incorporation.
Jul.		4		Purchase office supplies of $2,000 on account.
Jul.		7		Pay for advertising of $210 to a local newspaper for an upcoming mountain biking clinic to be held on July 15. Attendees will be charged $50 on the day of the clinic.
Jul.		8		Purchase 10 mountain bikes, paying $17,000 cash.
Jul.		15		On the day of the clinic, Great Adventures receives cash of $2,500 from 50 bikers. Tony conducts the mountain biking clinic.
Jul.		22		Because of the success of the first mountain biking clinic, Tony holds another mountain biking clinic and the company receives $3,000.
Jul.		24		Pay $740 to a local radio station for advertising to appear immediately. A kayaking clinic will be held on August 10, and attendees can pay $120 in advance or $170 on the day of the clinic.
Jul.		30		Great Adventures receives cash of $6,000 in advance from 50 kayakers for the upcoming kayak clinic.
Aug.		1		Great Adventures obtains a $34,000 low-interest loan for the company from the city council, which has recently passed an initiative encouraging business development related to outdoor activities. The loan is due in three years, and 6% annual interest is due each year on July 31.
Aug.		4		The company purchases 14 kayaks, paying $17,000 cash.
Aug.		10		Twenty additional kayakers pay $3,400 ($170 each), in addition to the $6,000 that was paid in advance on July 30, on the day of the clinic. Tony conducts the first kayak clinic.
Aug.		17		Tony conducts a second kayak clinic, and the company receives $11,100 cash.
Aug.		24		Office supplies of $2,000 purchased on July 4 are paid in full.
Sep.		1		To provide better storage of mountain bikes and kayaks when not in use, the company rents a storage shed for one year, paying $4,320 ($360 per month) in advance.
Sep.		21		Tony conducts a rock-climbing clinic. The company receives $13,900 cash.
Oct.		17		Tony conducts an orienteering clinic. Participants practice how to understand a topographical map, read an altimeter, use a compass, and orient through heavily wooded areas. The company receives $18,900 cash.
Dec.		1		Tony decides to hold the company’s first adventure race on December 15. Four-person teams will race from checkpoint to checkpoint using a combination of mountain biking, kayaking, orienteering, trail running, and rock-climbing skills. The first team in each category to complete all checkpoints in order wins. The entry fee for each team is $560.
Dec.		5		To help organize and promote the race, Tony hires his college roommate, Victor. Victor will be paid $30 in salary for each team that competes in the race. His salary will be paid after the race.
Dec.		8		The company pays $1,800 to purchase a permit from a state park where the race will be held. The amount is recorded as a miscellaneous expense.
Dec.		12		The company purchases racing supplies for $2,300 on account due in 30 days. Supplies include trophies for the top-finishing teams in each category, promotional shirts, snack foods and drinks for participants, and field markers to prepare the racecourse.
Dec.		15		The company receives $22,400 cash from a total of forty teams, and the race is held.
Dec.		16		The company pays Victor’s salary of $1,200.
Dec.		31		The company pays a dividend of $4,900 ($2,450 to Tony and $2,450 to Suzie).
Dec.		31		Using his personal money, Tony purchases a diamond ring for $4,800. Tony surprises Suzie by proposing that they get married. Suzie accepts and they get married!

The following information relates to year-end adjusting entries as of December 31, 2021.

1. Depreciation of the mountain bikes purchased on July 8 and kayaks purchased on August 4 totals $8,600.
2. Six months’ of the one-year insurance policy purchased on July 1 has expired.
3. Four months of the one-year rental agreement purchased on September 1 has expired.
4. Of the $2,000 of office supplies purchased on July 4, $370 remains.
5. Interest expense on the $34,000 loan obtained from the city council on August 1 should be recorded.
6. Of the $2,300 of racing supplies purchased on December 12, $260 remains.
7. Suzie calculates that the company owes $14,600 in income taxes.

5. For the period July 1 to December 31, 2021, prepare an income statement, statement of stockholders’ equity and classified balance sheet.

Stmt of Income Stockholders Balance Statement Equity For the period July 1 to December 3 1 , prepare an income statement. GREAT ADVEJRES, Inc. Income Statement December 31, 2021 Revenues: Total Revenues Expenses: Total Expense

Answer 1

Great Adventures Journal Enteries Date Particulars 1.7.2021 Cash a/c Dr. To Common Stock (Being Equal no. of stock issued to Tony and Suzie) Debit in $Credit in $ 39000 39000 5880 1.7.2021 Prepaid Insurance a/c Dr. To Cash (Being Insurance paid in cash) 360 per month Trial Balance For the period ending 31.7.2021 Particulars Debit in $ Credit in $ Cash 24970 Prepaid Insurance 5880 Office Supplies 2000 Equipment(Bikes) 17000 Accounts Payable 2000 Common Stock 39000 Service revenue (Racing) 5500 Unearned Kayaking Service 6000 Legal Fees 1700 Advertising Expense Totals 52500 52500 5880 1700 2.7.2021 Legal Fees a/c Dr. To Cash (Being Legal Fees paid in Cash) 1700 950 2000 4.7.2021 Office Supplies a/c Dr. To Accounts Payable (Being Supplies purchased on account) 2000 210 7.7.2021 Advertising Expense a/c Dr. To Cash (Being advertising expense paid to newspaper) 210 17000 8.7.2021 Mountain Bikes a/c Dr. To Cash (Being 10 Mountain Bikes purchased for cash) 17000 2500 15.7.2021 Cash a/c Dr. To Service revenue (Racing) (Being cash collected from Mountain Bike attendees) 2500 3000 22.7.2021 Cash a/c Dr. To Service revenue (Racing) (Being cash collected from Mountain Bike attendees) 3000 740 24.7.2021 Advertising Expense a/c Dr. To Cash (Being advertising expense paid to local radio station) 6000 30.7.2021 Cash a/c Dr. To Unearned Kayaking Service (Being Advance received for Kayaking service) 6000

Journal Enteries Date Particulars 1.8.2021 Cash a/c Dr. To Loan (Being Loan taken from city council) Debit in $Credit in $ 34000 34000 4.8.2021 17000 Kayaks a/c Dr. To Cash (Kayaks purchased in cash) 17000 3400 6000 10.8.2021 Cash a/c Dr. Deferred revenue a/c Dr. To Service revenue (Clinic) (Being revenue recognized) 9400 11100 17.8.2021 Cash a/c Dr. To Service revenue (Clinic) 11100 20001 24.8.2021 Accounts Payable a/c Dr. To Cash (Being Accounts Payable paid in cash) 2000 4320 1.9.2021 Prepaid rent a/c Dr. To Cash (Being rent paid in cash) 360 per month 4320 13900 21.9.2021 Cash a/c Dr. To Service revenue (Clinic) (Being services performed for cash) 13900 18900 17.10.2021 Cash a/c Dr. To Service revenue (Clinic) (Being services performed for cash) 18900 1800 8.12.2021 Miscellaneous expense a/c Dr. To Cash (Being permit purchased in cash) 1800 23001 12.12.2021 Racing Supplies a/c Dr. To Accounts Payable (Being Racing supplies purchased on account) 2300 22400 15.12.2021 Cash a/c Dr. To Service revenue (Racing) (Being services performed for cash) 22400 12001 16.12.2021 Salary expense a/c Dr. To Cash (Being salary paid to Victor in cash) 1200 4900 31.12.2021 Dividend a/c Dr. To Cash (Being dividend paid to Tony and Suzie) 4900 31.12.2021 No Entry

Adjusting Enteries Date Particulars 31.12.2021 Depreciation a/c Dr. To Accumulated Depreciation (Being depreciation charged to asset) Debit in $ Credit in $ 8600 86001 31.12.2021 Insurance expense a/c Dr. 2940 To Prepaid Insurance (Being Insurance expense charged to Prepaid insurance) 2940 31.12.2021 Rent expense a/c Dr. 1440 To Prepaid Rent (Being rent expense charged to Prepaid Rent) 360 x 4 = 1440 1440 2330 2330 31.12.2021 Office Supplies expense a/c Dr. To Office Supplies (Being Supplies expense charged to Office Supplies.) 2000 - 370 31.12.2021 Interest expense a/c Dr. To Interest payable 34000 * 6% * 5/12 (Being Interest expense accrued) 850 850 2040 31.12.2021 Racing Supplies expense a/c Dr. 2040 To Racing Supplies (Being racing supplies expense charged to racing supplies) 2300 - 260 31.12.2021 Income tax expense a/c Dr. 14600 To Income tax payable (Being income tax accrued) 14600 Closing Enteries Date Particulars 31.12.2021 Income Summary a/c Dr. To Advertising expense To Legal fees expense To Miscellaneous expense To Salary expense To Depreciation To Insurance expense To Rent expense To Office Supplies expense To Racing Supplies expense To Interest expense To Income tax expense (Being expenses closed to Income summary) Debit in $ Credit in $ 38450) 950 1700 1800 1200 8600 2940 1440 2330 2040 850 14600 75700 5500 31.12.2021 Service revenue (Clinic) a/c Dr. Service revenue (Racing) a/c Dr. To Income Summary (Being Revenues closed to Income summary) 81200 42750 31.12.2021 Income Summary a/c Dr. To Retained Earnings |(Being profit transferred to retained earnings) 42750 4900 31.12.2021 Retained Earnings a/c Dr. To Dividends (Being dividends charge to Retained Earnings) 4900

Adjusted Trial Balance As at 31.12.2021 Adjusted Post Closing Debit in $ Credit in $ Debit in $ Credit in $ 97450 2940 2880 -330 260 17000 97450 2940 2880 -330 260 17000 8600 8600 17000 17000 2300 850 14600 2300 850 14600 34000 34000 39000 Particulars Assets Cash Prepaid insurance Prepaid rent Supplies (Office) Racing Supplies Equipment(Bikes) Accumulated Depreciation Kayaks Liabilities Accounts payable Interest payable Income tax payable Deferred revenue Loan Equity Common stock Retained Earnings Dividend Revenue Service revenue (Clinic) Service revenue (Racing) Expenses Advertising expense Legal fees expense Miscellaneous expense Salary expense Depreciation Insurance expense Rent expense Office Supplies expense Racing Supplies expense Interest expense Income tax expense Total 39000 37850 4900 75700 5500 950 1700 1800 1200 8600 2940 1440 2330 2040 850 14600 180550 180550 137200 137200

75700 5500 81200 Statement of Income For the period ending 31.12.2021 Service revenue (Clinic) Service revenue (Racing) Totals Less: Advertising expense Legal fees expense Miscellaneous expense Salary expense Depreciation Insurance expense Rent expense Office Supplies expense Racing Supplies expense Interest expense Income tax expense Net Income 950 1700 1800 1200 8600 2940 1440 2330 2040 850 14600 38450 42750 Statement of Retained Earnings Net Income Less:Dividends 31.12.2021 42750 -4900 37850 Statement of Retained Earnings For the period ending 31.12.2021 1.8.2021 Add:Net Income Less:Dividends Common Retained Stock Earnings 39000 42750 -4900 39000 37850 Total Equity 39000 42750 -4900 76850

Amounts in $ Amounts in $ Balance sheet As at 31.12.2021 Assets Current Assets Cash Prepaid insurance Prepaid rent Supplies (Office) Racing Supplies Amounts in $ Amounts in $ Liabilities Current Liabilities 97450 Accounts payable 2940 Interest payable 2880 Income tax payable -330 260 103200 Non Current Liabilities Loan 2300 850 14600 17750 34000 Non Current Assets Equipment(Bikes) Kayaks Accumulated Depreciation Total Assets 17000 17000 -8600 Shareholders Equity Common stock 39000 25400 Retained Earnings 37850 128600 Total Liabilities & Shareholders Eq. 76850 128600