Question

Bill Baker opened a small bagel shop last year and has retained you as his accountant. Bill is undecided as to whether or not he should incorporate or remain a sole proprietor.  Bill is single and does not own any real estate so, for tax purposes, he only has one exemption of $4,150 and uses the standard deduction of $12,000 for tax purposes.  He provides you with the following information from 2018.

2018 Events   

1. Invested  $20,000 cash to start the business
2. Signed a 4 year loan for $60,000 at a rate of 8%
3. Paid $40,000 cash to purchase Equipment with a salvage value of $5,000 and a useful life of 5 years or 50,000 hours
4. Received $200,000 cash from sales of bagels to university students and other customers throughout the year.
5. Delivered bagels to area businesses and billed them $40,000.  
6. Purchased of $100,000 of supplies on account
7. Paid rent of $12,000, insurance of $3,600, utilities of $8,000 and $2,400 for advertising and promotion during the year.
8. Paid payroll of $80,000 ($40,000 of which was paid to Bill) and calculated employer payroll taxes at a rate of 10%.
9. Received payments of $20,000 cash on account from customers
10. Made payments of $80,000 on account.
11. Recognized 1 year of depreciation expense on the new equipment (use the straight line method)
12. Counted $30,000 of supplies remaining at year end
13. Because of the business was so successful in its first year of business, he distributed/withdrew an additional $8,000 of earnings.

Required:

1. Create a chart of accounts/general ledger
2. Record journal entries for the transactions below, post to the general ledger.  
3. Prepare a worksheet with a trial balance and Income Statement and a Balance Sheet (as a sole proprietor and corporation) for the year ended 12/31/18.  Assume a corporate tax rate of 20% and a personal rate of 15% if he incorporates, and a personal rate of 20% if he does not.

Answer 1

Journal Entries

ledger accounts

Trial balance

Income statement & balance sheetSince there is no transaction related to interest on loan , therefore not taken into consideration.