Question

Barbara Jones opened Barb’s Book Business on February 1. You have been hired to maintain the company’s financial records. The following transactions occurred in February, the first month of operations.

a. Received shareholders’ cash contributions on February 1 totaling $17,000 to form the corporation; issued 1,000 shares of common stock.

b. Paid $3,495 cash on February 2 for three months’ rent for office space. TIP: For convenience, simply record the full amount of the payment as an asset (Prepaid Rent). At the end of the month, this account will be adjusted to its proper balance.

c. Purchased and received supplies on February 3 for $595 cash.

d. Signed a promissory note on February 4, payable in two years; deposited $16,700 in the company’s bank account.

e. On February 5, paid cash to buy equipment for $4,200 and land for $12,500.

f. Placed an advertisement in the local paper on February 6 for $910 cash.

g. Recorded sales on February 7 totaling $2,450; $1,510 was in cash and the rest on accounts receivable.

h. Collected accounts receivable of $136 from customers on February 8.

i. On February 9, repaired one of the computers for $172 cash. TIP: Most repairs involve costs that do not provide additional future economic benefits.

j. Incurred and paid employee wages on February 28 of $445.

_______________________________________________

Required:

1. Prepare the journal entry for each of the above transactions.

2. Post the transaction activity from requirement 1 to the T-Accounts below. All accounts begin with zero balances because this is the first month of operations.

3. Prepare an unadjusted trial balance at the end of February.

4-a. Refer to the revenues and expenses shown on the unadjusted trial balance. Based on this information, calculate preliminary net income and net profit margin?

4-b. Determine whether the net profit margin is better or worse than the 13.5 percent earned by a close competitor.

Answer 1

Barb's Book Business Journal entries Date Account 1-Feb Cash Common Stock Debit $ 17,000 $ 17,000 $ 3,495 2-Feb Prepaid Rent Cash $ 3,495 $ 595 3-Feb Supplies Cash $ 595 $ 16,700 4-Feb Cash Notes Payable $ 16,700 5-Feb Equipment Land Cash $ $ 4,200 12,500 $ 16,700 $ 910 6-Feb Advertisement expense Cash $ 910 7-Feb Cash Accounts Receivable Sales $ $ 1,510 940 $ 2,450 $ 136 8-Feb Cash Accounts Receivable $ 136 $ 172 9-Feb Repairs expense Cash $ 172 $ 445 28-Feb Wages expense Cash $ 445

Credit Credit Date Debit Date Credit Accounts Receivable 7-Feb $ 940 8-Feb $ 136 Date Debit Date Supplies 3 -Feb $ 595 Date Debit Date Prepaid Rent 2-Feb $ 3,495 Barb's Book Business T Accounts Date Debit Date Credit Cash 1-Feb $ 17,000 2-Feb $ 3,495 4-Feb $ 16,700 3-Feb $ 595 7-Feb $ 1,510 5-Feb $ 16,700 8-Feb $ 136 6-Feb $ 910 9-Feb $ 172 28-Feb $ 445 Bal. Bal. Bal. $ 13,029 Land 5-Feb $ 12,500 Bal. $ 804 Equipment 5-Feb $ 4,200 $ 595 Notes Payable 4-Feb $ 16,700 $ 3,495 Common Stock 1-Feb $ 17,000 Bal. $ 16,700 $ 17,000 $ 12,500 Sales Bal. $ 4,200 Advertisement expense 6 -Feb $ 910 Wages expense 28-Feb $ 445 Bal. Repairs expense 9-Feb $ 172 7-Feb $ 2,450 Bal. $ 2,450 Bal. $ 910 Bal. $ 445 Bal. $ 172

Barb's Book Business Account Names Cash Accounts Receivable Supplies Prepaid Rent Land Equipment Notes Payable Common Stock Sales Advertisement expense Wages expense Repairs expense Totals Unadjusted TB Debit Credit 13,029 804 595 3,495 12,500 4,200 16,700 17,000 2,450 910 445 172 36,150 36,150

2,450 Barb's Book Business Income Statement For the Month Ended February 28 Revenues Sales Expenses Advertisement expense Wages expense Repairs expense Total Expenses Preliminary Net Income 910 445 172 1,527 923 Net profit margin Net Income/Sales =923/2,450 37.7% Net profit margin Net profit margin is BETTER than the 13.5 percent earned by a close competitor