Question

With the help of a loan from a friend, you started a shop six months ago specialising in the sale of quality outdoor jackets. The following information gives the details behind your first six months of trading.

Sales
You have sold 200 jackets @ £200 per jacket. All these sales were for cash. Additionally, there was a bulk purchase, two months ago, of 40 jackets by the local university. You gave the university a 10% discount and allowed it three months to pay.

Purchases
You have paid £160 for every jacket and currently have 30 jackets in your inventory. You still owe your suppliers the money for the last delivery of 10 jackets.

Expenses
Shop rental is £1,200 per annum, payable in advance. The wage costs (all paid) were £6,000 for the six months. You have spent £200 on petrol and other motor expenses. Rates for the shop premises are £600 per annum, which you still have to pay.

Motor Vehicle
You bought, and paid for, a delivery van in the first month at a cost of £10,000. You expect it will last four years after which you hope to be able to sell it for £2,000.

Investment
You have invested £20,000 in the business and persuaded a friend to lend you £4,000 which is interest free and not repayable for five years.

Required:

Your friend would like to see how his loan is doing and has asked for an income statement and a balance sheet for trading to date.

Answer 1

Journal entries	Debit	Credit
Sales
Cash	40000
Sales revenue		40000
(200*200)
Accounts receivable	7200
Sales revenue		7200
(40*200*(1-10%))
Purchases
Merchandise Inventory(200+40+30)*160	43200
Cash(270-10)*160		41600
Accounts payable(10*160)		1600
Cost of goods sold(270-30)*160	38400
Merchandise Inventory		38400
Expenses
Rent expense(6 mths.)	600
Prepaid rent(6 mths.)	600
Wags expense	6000
Fuel expense	200
Rates expense	600
Cash		7400
Accounts payable		600
Motor Vehicle
Vehicle	10000
Cash		10000
Depreciation expense-Vehicle	1000
Acc depn.-Vehicle		1000
(10000-2000)/4/2
Cash(20000+4000)	24000
Own Capital		20000
Loan from friend		4000
	171800	171800

			Net Ledger balance
LEDGER ACCOUNTS	Debit	Credit	Debit	Credit
Acc depn.-Vehicle		1000		1000
Accounts payable		600
Accounts payable(10*160)		1600		2200
Accounts receivable	7200		7200
Cash	40000
Cash		7400
Cash		10000
Cash(20000+4000)	24000
Cash(270-10)*160		41600	5000
Cost of Goods sold	38400		38400
Depreciation expense-Vehicle	1000		1000
Fuel expense	200		200
Merchandise Inventory	43200
Merchandise Inventory		38400	4800
Loan from friend		4000		4000
Own Capital		20000		20000
Prepaid rent(6 mths.)	600		600
Rates expense	600		600
Rent expense(6 mths.)	600		600
Sales revenue		40000
Sales revenue		7200		47200
Vehicle	10000		10000
Wags expense	6000		6000
	171800	171800	74400	74400

Trial balance for the 6 mths
Account Title	Debit	Credit
Cash	5000
Accounts receivable	7200
Prepaid rent(6 mths.)	600
Merchandise Inventory	4800
Vehicle	10000
Acc depn.-Vehicle		1000
Accounts payable		2200
Loan from friend		4000
Own Capital		20000
Sales revenue		47200
Cost of Goods sold	38400
Depreciation expense-Vehicle	1000
Fuel expense	200
Rent expense(6 mths.)	600
Rates expense	600
Wags expense	6000
Total	74400	74400

Income statement
Sales revenue		47200
Less:Cost of Goods sold		38400
Gross profit		8800
Less: Operating expenses:
Depreciation expense-Vehicle	1000
Fuel expense	200
Rent expense(6 mths.)	600
Rates expense	600
Wags expense	6000	8400
Net income		400

Balance for the period ended 6 mths
Assets
Cash	5000
Accounts receivable	7200
Prepaid rent(6 mths.)	600
Merchandise Inventory	4800
Total current assets		17600
Vehicle	10000
Less:Acc depn.-Vehicle	-1000	9000
Total assets		26600
Liabilities & Owner's Equity
Liabilities
Accounts payable	2200
Total current liabilities		2200
Non-current liabilities
Loan from friend		4000
Total liabilities		6200
Owner's Equity
Own Capital	20000
Net income for the 6 mths.	400
Total Owner's Equity		20400
Total Liabilities & Owner's Equity		26600