Question

CHAPTER 3 Adjusting Accounts for Francials CASES AND PROJECTS 2.55. Preparing Adjusting Entries, Financial Statements, and Closing Entries Seaside Surf Shop began operations on July 1, 2014, with an initial investment of $50.000. Dur- ing the initial 3 months of operations, the following cash transactions were recorded in the firm's checking account. LO: Cash receipts Cash payments Initial investment by owner....... $ 50,000 Rent ... Collected from customers ....... ........... $ 24,000 81,000 Fixtures and equipment ......... Borrowed from bank 7/1/2014 ... 10,000 Merchandise inventory .......... 62,000 Total cash receipts..... $141,000 Salaries ....... 6,000 Other expenses.... 13,000 Total cash payments............ $130,000 Additional information 1. Most sales were for cash, however, the store accepted a limited amount of credit sales; at Sep- tember 30, 2014, customers owed the store $9,000. 2. Rent was paid on July 1 for six months. 3. Salaries of $3,000 per month are paid on the 1st of each month for salaries earned in the month prior. 4. Inventories are purchased for cash; at September 30, 2014, inventory worth $21,000 was available. 5. Fixtures and equipment were expected to last five years with zero salvage value. 6. The bank charges 12% annual interest (1% per month) on its bank loan. Required a. Prepare any necessary adjusting entries at September 30, 2014,(1) using the financial state- ment effects template, and (2) in journal entry form. b. Set up T-accounts and post the adjusting entries to them. c. Prepare its initial three-month income statement for 2014 and its balance sheet at September 30, 2014. (Ignore taxes.) d. Analyse the statements from part c and assess the company's performance over its initial 3 months.

Mainly qs A & C.

Answer 1

Adjustment entries in this problem are:

Rent

Salaries

Depreciation

Interest on loan.

Please go through the following attachments for solution.
a) Adjusting Entries in 1) financial Statement efffect Balance sheet Income statement = Liabilities + Contributed Capital + Earned Capital Revenue - Expense - Profit Transaction Cash + Non Cash Rent, 24,000 for 6m, -12,000 Prepaid rent -12000 Rent Expense -12000 Rent Expense -12000 Loss Salaries payable 3000 Salaries payable -3000 Salaries expense -3000 -3000 Salaries expense Loss Fixtures & equipment 25,000/5*3/12=1250 -1250 Accu. Depreciation -1250 Depreciation Expense -1250 -1250 Depreciation Exp Loss Interest on loan 10.000*1%*3=300 3001 Interest payable -300 Interest expense -300 -300 Interest expense Loss a) Adjusting Entries in 2) Journal Entries form Transaction Account title Debit Credit Rent, 24,000 for 6m, Rent Expense 12000 Prepaid Rent (Being rent paid for 6 months, 3 months rent is expired.) 12000 Salaries payable Salaries expense 3000 Salaries payable (Being salaries payable is a liability, it has to be credited) 3000 Fixtures & equipment Depreciation Expense 1250 Accu. Depreciation 1250 (Being, 3 months depreciation has to be charged to income statement) Interest on loan 300 Interest expense Interest payable (Being interest on loan for 3 months has to be charged to income statement) 300

b) T accounts Prepaid Rent Rent Expense 12000 Rent Expense 12000 Prepaid Rent Salaries expense Salaries payable 3000 Salaries payable Salaries expens 3000 Depreciation Expense Accu. Depreciation 1250 Accu. Depreciation Depreciation Ex 1250 Interest expense 300 Interest payable Interest payable Interest expens 300

Income statement Particulars Amount Calculation Revenue L 90000 81000+9000 Cash + Credit sales Less: Expenses Cost of Goods sold Rent Expense Depreciation Expense Salaries Expense Interest Expense Other Expenses Net Income 41000 62000-21000 Purchases-Closing stock 12000 1250 9000 3000*3 300 13000 13450 Balance sheet Assets Cash Inventory Receivables Prepaid Rent Fixtures & Equipment Total Assets 11000 141000-130000 21000 9000 12000 23750 25000-1250 76750 Liabilities and Equity Liabilities Salaries Payable 3000 Interest payable 300 Bank loan 10000 Equity Capital 50000 Net Profit 13450 Total liabilities and Equity 13300 63,450 76750 d) Based on the income statement, there is a net income of 13,450. Since there is a profit the company is running with good profit margin.