Question

On July 2, 2019, you decided to start up a new business – SmartReader Inc., an off-campus bookstore where students can buy textbooks and supplies at reduced prices. The following are summary transactions for the period July 2, 2019 to October 31, 2019, the company’s year end.

1. You and several other shareholders invested $20,000 in return for shares in the company.
2. A suitable location is found and rent is $1,000 per month. The lease agreement is for one year (i.e., ends on June 30, 2020). The entire rent for one year is due upon signing of the lease on July 2, 2019.
3. A 6-month bank loan in the amount of $20,000 was obtained on August 1, 2019. The annual interest rate is 9%.
4. Furniture and fixtures are purchased at a cost of $15,000. These are purchased for cash.
5. Books and supplies of $50,000 was purchased on account.
6. An insurance policy was purchased for $1,200 cash. The policy takes effect on July 2, 2019 and expires on June 30, 2020.
7. An additional $120,000 of inventory was purchased on account.
8. Sales for the period ended October 31, 2019 were:

Cash sales - $190,000

Sales on account - $6,000

       Cost of goods sold related to the sales amounts to $130,000.

9. A total of $4,000 of the sales made on account were collected.
10. Additional cash disbursements for the year were as follows:

Wages and salaries	$36,000
Advertising	2,000
Miscellaneous expense	1,500
Dividends to shareholders	10,000
Payments on account re: purchases of inventory	120,000
	$169,500

The following adjustments at year end must be made:

11. The furniture and fixtures are expected to last a total of 10 years with no residual value. The straight-line method is used.
12. The adjustment for insurance expense.
13. The interest payable on the bank loan. Credit to “Accrued Liabilities”.
14. Invoices received but not yet paid amount to $700 for miscellaneous expenses. Credit Accrued Liabilities.
15. Employees are owed a total of $600 for wages and salaries. Credit to “Accrued Liabilities”.
16. The adjustment for rent expense.
17. The expected income tax rate is 30%. Credit to “Accrued Liabilities”.

Required: Prepare the following statements with proper headings:

• Multi-step income statement
• Statement of Changes in Equity
• Statement of Financial Position

Answer 1

SmartReader Inc.
Income Statement for year ending October 31,2019
Particulars	$	$
Revenue
Cash sales	190000
Sales on account	6000
Total Revenue		196000
Expenses
Cost of goods sold	130000
Wages and salaries	36600		=36000+600
Advertising	2000
Miscellaneous expense	2200		=1500+700
Depreciation on furniture and fixtures	500		=15000/10*4/12
Insurance Expense	400		=1200*4/12
Interest expense on the bank loan	450		=20000*9%*3/12
Rent Expense	4000		=1000*4
Total Expenses		176150
Income before Taxes		19850
-Tax @30%		-5955
Net Income		13895
-Dividends to shareholders		-10000
Transferred to Retained Earnings		3895

SmartReader Inc.
Statement of Financial Position as at October 31,2019
Assets	$	$
Non-Current Assets:
Furniture and Fixtures	14500	14500	=15000-500
Current Assets:
Prepaid Insurance	800		=1200-400
Inventory	40000		=50000+120000-130000
Accounts Receivable	2000		=6000-4000
Cash	48300	91100	=20000+20000-15000-1200+4000+190000-36000-2000-1500-10000-120000
Total Assets		105600
Equity & Liabilities	$	$
Share Capital	20000
Retained Earnings	3895
Total Equity		23895
Non-Current Liabilities:
Bank Loan	20000	20000
Current Liabilities:
Accounts Payable	50000		=50000+120000-120000
Accrued Liabilities	7705		=450+700+600+5955
Rent Payable	4000	61705
Total Equity & Liabilities		105600

SmartReader Inc.
Statement of changes in equity for year ending October 31,2019
	Share Capital	Retained Earnings	Total
Balance as on July 2, 2019	$0	$0	$0
Shares issued	$20,000	$0	$20,000
Net Income	$0	$13,895	$13,895
Less: Dividends	$0	-$10,000	-$10,000
Balance as at October 31,2019	$20,000	$3,895	$23,895