Question

The Donahoo Western Furnishings Company was formed on December 31, 2014 with $1,000,000 in equity plus $500,000 in long-term debt. On January 1, 2015, all of the firm's capital was held in cash. The following transactions occurred during January 2015:

January 2: Donahoo purchased $1,000,000 worth of furniture for resale. It paid $500,000 in cash and financed the balance using trade credit that required payment in 60 days.

January 3: Donahoo sold $250,000 worth of furniture that it had paid $200,000 to acquire. The entire sale was on credit terms of net 90 days.

January 15: Donahoo purchased more furniture for $200,000. This time, it used trade credit for the entire amount of the purchase, with credit terms of net 60 days.

January 31: Donahoo sold $500,000 worth of furniture, for which it had paid $400,000. The furniture was sold for 10% cash down, with the remainder payable in 90 days. In addition, the firm paid a cash dividend of $100,000 to its stockholders and paid off $250,000 of its long-term debt.

Submit answers to the 4 questions below.

1. Prepare Donahoo's balance sheet as of December 31, 2014.

2. What did the balance sheet look like after each of the transactions in January?

3. Ignoring taxes, calculate the income Donahoo earned during January. Prepare an income statement for the month. Recognize an interest expense of 1% for the month (12% annually) on the $500,000 long-term debt, which has not been paid, but is owed.

4. What was Donahoo's cash flow for the month of January.

Answer 1

Donahoo Western Furnishings Company Journal Enteries Debit in $ Credit in $ Particulars Date 31.12.2014 Cash a/c 1500000 Dr. To Common Stock 1000000 500000 To Long Term Debt |(Capital Introduced) 2.1.2015 Inventory a/c Dr. 1000000 To Cash 500000 ts Payable (Furniture Inventory purchased) To Accou 5000 Accounts Receivable a/c Dr 3.1.2015 250000 To Sales 250000 (Sales on account) Cost of goods sold a/c Dr. 200000 To Inventory 200000 (To record cost of goods sold) 15.1.2015 Inventory a/c Dr. 200000 To Accounts Payable 200000 |(Furniture Inventory purchased) 31.1.2015 Cash a/c Dr. 50000 Accounts Receivable a/c Dr. 450000 To Sales 500000 (Sales on account) Cost of goods sold a/c 400000 Dr. To Inventory 400000 (To record cost of goods sold) 31.1.2015 Dividend a/c Dr. 100000 To Cash 100000 |(Dividend paid in cash) Long Term Debt a/c Dr. 250000 To Cash 250000 (Long Term Debt paid in cash) Interest Expense a/c 31,1.2015 Dr. 5000 To Interest Payable 5000 (Interest accrued) 500000 x 1%

Trial Balance For the Month ending 31.1.2015 Debit in $ Credit in $ Particulars Cash 700000 Accounts Receivable 700000 600000 Inventory Accounts Payable Interest Payable 700000 5000 250000 Long Term Debt 1000000 Common Stock Dividend 100000 Sales 750 0 Cost of goods sold 600000 Interest Expense 5000 Totals 2705000 2705000 Statement of Income For the Month ending 31.1.2015 Sales 750000 Cost of goods sold -600000 Interest Expense -5000 Net Income 145000 Statement of Retained Earnings For the Month ending 31.1.2015 Net Income 145000 Dividend -100000 45000

Balance sheet As at 31.1.2015 Amounts in $ Amounts in $ Liabilities Amounts in $ Amounts in $ Assets Current Liabilities Current Assets Accounts Payable Interest Payable Cash 700000 700000 Accounts Receivable 700000 5000 705000 2000000 Inventory 600000 Non Current Liabilities Long Term Debt 250000 Shareholders Equity Com on Stock 1000000 Retained Earnings 45000 1045000 2000000 Total Liabilities Total Assets 2000000 Statement of Cashflows For the Month ending 31.1.2015 Cashflow from Operating Activity Net Income 145000 Adjustments: Increase in Accounts Receivable -700000 Increase in Inventory -600000 Increase in Accounts Payable 700000 Increase in Interest Payable Cash used for Operating Activity 5000 -595000 -450000 Cashflow from Investing Activity Cash used for Investing Activity 0 Cashflow from Financing Activity Dividend paid -100000 Common Stock issued 1000000 Long Term Debt issued Cash generated from Financing 250000 1150000 Net Increase In Cash 700000 Beginning Cash Balance Ending Cash Balance 0 700000