Question

Lurch Company’s December 31, 2015, balance sheet follows:

Lurch Company Balance Sheet December 31, 2015

1 Assets

2 Cash    $540,000.00

3 Inventory    450,000.00

4 Prepaid rent 60,000.00

5 Machine    $500,000.00

6 Less: Accumulated depreciation (135,000.00) 365,000.00

7    $1,415,000.00

8

9 Liabilities and Equity

10 Accounts payable $400,000.00

11 Common stock, $10 par    300,000.00

12 Additional paid-in capital 515,000.00

13 Retained earnings    200,000.00

14    $1,415,000.00

During 2016, the following transactions occurred:

1. To avoid paying monthly rent of $5,000 on existing plant facilities, the company decided to buy a tract of land and construct a building of its own on it. On January 2, 2016, Lurch exchanged 6,000 shares of its common stock to acquire the land; the stock was selling for $25 per share. Construction of the building also began on January 2, 2016. At the time, Lurch borrowed funds by issuing a 1-year, $500,000 note at 12% to help finance the project. The principal and interest on the note are due January 3, 2017. Construction costs (paid in cash) that occurred evenly throughout the year totaled $700,000. The building was completed on December 30, 2016, and the move-in to the new building was to occur during the next week.

2. On January 2, 2016, Lurch exchanged its one existing machine plus $50,000 for a newer machine with a fair value of $430,000. The new machine is to be depreciated using straight-line depreciation based on an economic life of 5 years and a residual value of $55,000.

3. Lurch uses a FIFO perpetual inventory system. Lurch sold $350,000 of its inventory for $700,000 cash, paid for its beginning accounts payable, and purchased $480,000 of inventory on account during the year.

4. On July 31, 2016, Lurch declared and paid a $2.50 per share cash dividend to its shareholders.

5. Lurch is subject to a 30% income tax rate, and income taxes are accrued at year-end.

Required: Prepare Lurch’s income statement and statement of retained earnings for the fiscal year ended December 31, 2016, and a balance sheet as of December 31, 2016. Show all supporting journal entries and computations made during 2016.

Answer 1

Lurch Company’s December 31, 2015, balance sheet follows:

Lurch Company Balance Sheet December 31, 2015