Question

Reconstructing the income statement and balance sheet. (Adapted from a problem by Stephen A. Zeff.) Portobello Co., a retailer, is in its 10th year of operation. On December 28, 2008, three days before the close of its fiscal year, a flash flood devastated the company’s administrative office and destroyed almost all of its accounting records. The company saved the balance sheet on December 31, 2007 (see Exhibit 2.15), the checkbook, the bank statements, and some soggy remains of the specific accounts receivable and accounts payable balances. Based on a review of the surviving documents and a series of interviews with company employees, you obtain the following information.

(1) The company’s insurance agency advises that a four-year insurance policy has six months to run as of December 31, 2008. The policy cost $12,000 when the company paid the four-year premium during 2005.

(2) During 2008, the company’s board of directors declared $6,000 of dividends, of which the firm paid $3,000 in cash to shareholders during 2008 and will pay the remainder during 2009. Early in 2008, the company also paid dividends of $1,800 cash that the board of directors had declared during 2007.

(3) On April 1, 2008, the company received from Appleton Co. $10,900 cash, which included principal of $10,000 and interest, in full settlement of Appleton’s ninemonth note dated July 1, 2007. According to the terms of the note, Appleton paid all interest at maturity on April 1, 2008. (4) The amount owed by the company to merchandise suppliers on December 31, 2008, was $20,000 less than the amount owed on December 31, 2007. During 2008, the company paid $115,000 to merchandise suppliers. The cost of merchandise inventory on December 31, 2008, based on a physical count, was $18,000 larger than the balance in the Merchandise Inventory account on the December 31, 2007, balance sheet. On December 8, 2008, the company exchanged shares of its common stock for merchandise inventory costing $11,000. The company’s policy is to purchase all merchandise on account.

(5) The company purchased delivery trucks on March 1, 2008, for $60,000. To finance the acquisition, it gave the seller a $60,000 four-year note that bears interest at 10% per year. The company must pay interest on the note each six months, beginning September 1, 2008. The company made the required payment on this date. The delivery trucks have an expected useful life of 10 years and an estimated salvage value of $6,000. The company uses the straight-line depreciation method.

(6) The company’s computer system has a six-year total expected life and zero expected salvage value.

(7) The company makes all sales on account and recognizes revenue at the time of shipment to customers. During 2008, the company received $210,000 cash from its customers. The company’s accountant reconstructed the Accounts Receivable subsidiary ledger, the detailed record of the amount owed to the company by each customer. It showed that customers owed the company $51,000 on December 31, 2008. A close examination revealed that $1,400 of the cash received from customers during 2008 applies to merchandise that the company will not ship until 2009. Also, $600 of the cash received from customers during 2007 applies to merchandise not shipped to customers until 2008.

(8) The company paid $85,000 in cash to employees during 2008. Of this amount, $6,500 relates to services that employees performed during 2007, and $4,000 relates to services that employees will perform during 2009. Employees performed the remainder of the services during 2008. On December 31, 2008, the company owes employees $1,300 for services performed during the last several days of 2008.

(9) The company paid $27,000 in cash for property and income taxes during 2008. Of this amount, $10,000 relates to income taxes applicable to 2007, and $3,000 relates to property taxes applicable to 2009. The company owes $4,000 in income taxes on December 31, 2008.

(10) The company entered into a contract with a management consulting firm for consulting services. The total contract price is $48,000. The contract requires the company to pay the first installment of $12,000 cash on January 1, 2009, and the company intends to do so. The consulting firm had performed 10% of the estimated total consulting services under the contract by December 31, 2008.

Prepare an income statement for 2008 and a balance sheet on December 31, 2008

Portobello Co Balance Sheet December 31, 2007 (Problem 38) EXHIBIT 2.15 18,600 33,000 Interest Receivable. Merchandise Inventories Prepaid Insurance. 4,500 88,700 Computer System: 78,000 LIABILITIES AND SHAREHOLDERS EQUITY Accounts Payable for Merchandise . . . . . . . . . . . . . . . . . . . Dividend Payable 36,000 1,800 6,500 $ 40,000 45,800 85,000 $140,700 .. .

Answer 1

Income Statement:

Portobello Co.
Income Statement
For the year ended December 31, 2008
	$	$
Sales Revenue	227,200
Cost of Goods Sold	88,000
Gross Profit		139,200
Less: Operating Expenses
Salaries Expense	75,800
Insurance Expense	3,000
Property Tax Expense	14,000
Consulting Fees Expense	4,800
Depreciation Expense: Computer System	13,000
Depreciation Expense: Delivery Trucks	4,500
Interest Expense	5,000
Total Operating Expenses		120,100
Income from Operations		19,100
Other Income
Interest Revenue		300
Taxable Income		19,400
Income Tax Expense		4,000
Net Income		15,400

Balance Sheet:

Portobello Co.
Balance Sheet
December 31, 2008
Assets	$	$
Cash		4,700
Accounts Receivable		51,000
Advance to Employees		4,000
Merchandise Inventories		40,000
Prepaid Insurance		1,500
Prepaid Property Taxes		3,000
Total Current Assets		104,200
Computer System
At Cost	78,000
Less: Accumulated Depreciation	(39,000)
Net		39,000
Delivery Trucks
At Cost	60,000
Less: Accumulated Depreciation	(4,500)	55,500
Total Assets		198,700
Liabilities and Shareholders' Equity
Accounts Payable		16,000
Salaries Payable		1,300
Income Taxes Payable		4,000
Advance from Customers		1,400
Consulting Fees Payable		4,800
Interest Payable		2,000
Dividends Payable		3,000
Total Current Liabilities		32,500
Long Term Liabilities
Notes Payable		60,000
Total Liabilities		92,500
Common Stock	51,000
Retained Earnings	55,200
Total Shareholders' Equity		106,200
Total Liabilities and Shareholders' Equity		198,700

Workings:

Cash:

Beginning balance	18,600	4.	115,000
7.	208,600	9	14,000
7.	1,400	9	10,000
3.	10,000	9	3,000
3.	600	5	3,000
3.	300	2	3,000
		2	1,800
		8	6,500
		8	74,500
		8	4,000
Ending balance	4,700