Question

The Pillow Co. prepares financial statements every month. The Pillow Co.'s transactions for Transaction Analysis the first month of operations were: Tms Date Description 1 Jan. 2 Issued 4,000 shares of S1 Par Value Common Stock for $68 per share for cash. 2 Jan. 3 Paid Insurance expense for the year, $24,000 3 Jan 8 Purchased Advertising for $1,400 cash. 4 Jan. 10 Purchased 4,000 pillows for inventory @S16 per unit on account. 5 Jan 11 Purchased Land for $92,000 cash. 6 Jan. 14 Purchased Building for $60,000 cash. 7 Jan. 20 Purchased Equipment for $60,000, paid $40,000 cash issued Note Payable for balance. 8 Jan. 22 Sold 2,960 pillows @ $26 on account. 9 Jan. 24 Paid Maintenance expenses, $1,100. 10 Jan. 24 Received $40,000 from customers for payment from sales on account 11 Jan. 28 Paid $32,000 of amount due from purchases of inventory on account. 12 Jan. 31 Paid $16,000 of Note Payable from (7). 13 Jan. 31 Received Utility bill, $400. 14 Jan. 31 Wages due to employees $12,000. Required: a. 1. Show the effects of the above transactions on the Accounting Equation, include an Expanded Accounting Equation 2. Prepare journal entries for the above transactions. Post the journal entries to T-accounts. 3. Prepare adjusting entries for the following: Insurance expense for January, b. Depreciation of building, assume Pillow Co. uses the straight-line method. The building is expected to have a useful life of 20 years, with no salvage value. c. Depreciation of the equipment using the straight-line method, with an expected useful life of 8 years and no salvage value. d. Accrual of utilities for January Accrual of wages for January f. Accrual of interest expense on the Note Payable, assume the interest rate is 10 percent per year. 4. Prepare the following financial statements: a. Income Statement. b. Balance Sheet Statement of Cash Flows. d. Statement of Retained Earings. e. c.

Answer 1

1. accounting equation

assets = liabilties + shareholder's equity fund

322,275 = 48,433 + 283842

322,275 = 322,275

2 journal entries and T accounts

Journal Entry Transacti CREDITS on No. 1 Date Account DEBITS Jan-02 Cash Account 2,72,000 common stock amount received in exchange of 4,000 common stock 2,72,000 2 24,000 Jan-03 Insurance Cash Insurance expenes paid 24,000 3 1,400 Jan-08 Advertising Cash Account purchasing advertising 1,400 4 64000 Jun-10 Purchase account Account Payable purchase of 4000 inventory at 16/unit 64000

5 92000 Jun-11 Land Cash Purchase of Land 92000 6 60000 Jan-14 Building Cash Purchase of Building 60000 7 60000 Jan-20 Equipment Cash Account Note payable Equipment Purchased 40000 20000 8 76960 Jan-22 Sales Account Receivable Sold 2960 pillows @ 26 per unit 76960 9 1100 Jan-24 Maintenance Expenses Cash Account paid maintenance expenses 1100

10 40000 Jan-24 Accounts Receivables Cash Account received from customers 10000 11 Jan-28 Account Payable 32000 Cash Account amount paid towards purchase of inventory on account 32000 12 16000 Jan-31 Note Payable Cash Account 16000 13 400 Jan-31 Utility Utility Payable being bill received 400 14 12000 Jan-31 wages wages due being wages due to employees 12000

Cash Account Equipment Credit Debit Jan-20 60,000 Debit Credit Jan-02 2,72,000 Jan-03 24,000 Jan-24 40000 Jan-08 1400 Jan-11 92000 Jan-14 60000 Jan-20 40000 Jan-24 1100 Jan-28 32000 Jan-31 16000 balance 45500 3,12,000 3,12,000 Utility Credit Debit Jan-31 400 Common Stock Debit Credit Jan-02 2,72,000

Land Debit Jan-11 92,000 Credit Note Payable Debit Credit Jan-31 16000 Jan-20 20,000 Insurance Building Debit Credit Jan-14 60,000 Jan-14 Credit Debit Jan-05 24000 Advertising Debit Jan-08 1400 Sales Debit Credit Credit Jan-22 76960

Purchase Debit Jan-10 64000 Credit Maintenance Expenses Debit Credit Jan-24 1100 Accounts Receivable Debit Credit Jan-22 76960 Jan-24 40000 Accounts Payable Debit Credit Jan-28 32000 Jan-10 64000 Utility Payable Debit Wages Payable Debit Credit Credit Jan-31 400 Jan-31 12000

Wages Debit Jan-31 12000 Credit Jan-31

3. adjustment entries

a. insurance expenses

insurance paid for the year $ 24000

insurance for the month = $24000/12

= 2000

b.Depreciation on Building

Building Cost = $ 60,000

usefull life = 20 years

method = strightline method

depreciation for the year = 60000/20 = 3000

depreciation for the month = 3000/12=250

c. Depreication on Equipements

Equipement Building Cost = $ 60,000

usefull life = 8 years

method = strightline method

depreciation for the year = 60000/8 = 7500

depreciation for the month = 7500/12=625

d. Accrual Utiltiy 400

e. Wages payable 12000

f. Accrual Interest on Note Payable.

Rate of Interest 10%

Note payable outstanding = 20000-16000=4000

Interest for the year = 4000X10%

Interest for the month = 400/12=$33.33

4. a Income Statement

76,960 47,360 29,600 INCOME STATEMENT Sales Revenue cost of goods sold purchase 64,000 Less: Closing Stock 16,640 Gross Profit Wages 12,000 Utility 400 Maintenance Expenses 1,100 Advertisement 1,400 Insurance 2,000 Depreciation on Buildin 250 Depreciation on Equipment 625 Interest Exp 33 Net Income 17,808 11,792

4.b Balance Sheet

BALANCE SHEET Assets Cash Accounts Receivable Inventory Prepaid Expenses Total Current Assets 45,500 Current Liabilites 36,960 Note Payable 16,640 Account Payable 22,000 Interest Payable 1,21,100 Utility Payable Wages Payable Total Current Liabilites 92,000 60,000 Stockeholder's Equity 60,000 Common Stock -875 Retained Earnings 2,11,125 4,000 32,000 33 400 12,000 48,433 Property, Plant & Equipement Land Building Equipment Less: Acc. Depreciation 2,72,000 11,792 2,83,792 Total Assets 3,32,225 Total Liabilites and Equi 3,32,225

4.c Cash Flow Statement

Cash Flow Statement using Indirect Method cash flow from operating activities Net Income Adjustment to Reconcile net income to Depreciation on Fixed Assets 11,792 875 -36,960 -16,640 -22,000 (Increase)Decrease in Current Assets: Inventory Accounts Receivable Prepaid Insurance Increase(Decrease) in Current Liabilties: Accured Expense Note Payable Accounts Payable Net cash flow from Operating Activties 12,433 4,000 32,000 -14,500 Cash flow from Investing Activities Land Purchase Building Purchase Equipments Purchase Net Cash Flow from Investing Activites -92,000 -60,000 -60,000 -2,12,000 Cash Flow from Financing Activity Common Stock Closing Cash 2,72,000 45,500

4.d statement of retained earnings

retained earnings at the begninning -

Add: Net Profit $11,792

Less: Dividend paid    -

Retained earnings at the end $ 11,792