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Financial Statements

Three former software engineers have decided to pool a variety of work experiences by opening a store near a college campus to sell wireless equipment to students. The first products were Blackberries and Nokia cell phones. The business has been incorporated as Campus Wireless. The following transactions occurred during October:

a. On October 1, 20X1, each of the three invested $10,000 in cash in exchange for 1,000 shares of stock each.

b. The corporation quickly acquired $40,000 in inventory, half of which had to be paid for in cash. The other half was acquired on open accounts that were payable after 30 days.

c. A store was rented for $500 monthly. A lease was signed for one year on October 1. The first two monthsâ?? rent was paid in advance. Monthly payments were to be made on the second of each month.

d. Advertising during October was purchased on open account for $3,000 from a newspaper owned by one of the stockholders. Additional advertising services of $6,000 were acquired for cash.

e. Sales were $60,000. Merchandise was sold for twice its purchase cost. Sales of $50,000 were on open account, and the remaining $10,000 were for cash.

f. Wages and salaries incurred in October amounted to $11,000, of which $4,000 was paid in cash.

g. Miscellaneous services paid for in cash were $1,510.

h. On October 1, fixtures and equipment were purchased for $6,000 with a down payment of $1,000 plus a $5,000 note payable in one year.

i. See transaction h and make the October 31 adjustment for interest expense accrued at 9.6%. (The interest is not due until the note matures.)

j. See transaction h and make the October 31 adjustment for depreciation expense on a straight-line basis. The estimated life of the fixtures and equipment is 10 years with no expected residual value. Straight-line depreciation here would be $6,000 ÷ 10 years = $600 per year, or $50 per month.

k. Cash dividends of $5,000 were declared and disbursed to stockholders on October 30.

1. Using the accrual basis of accounting, prepare an analysis of transactions, employing the equation approach demonstrated in Exhibit 15-1, page 684. Use the following headings: Cash, Accounts Receivable, Inventory, Prepaid Rent, Fixtures and Equipment, Accounts Payable, Notes Payable, Accrued Wages Payable, Accrued Interest Payable, Paid-In Capital, and Retained Earnings.

2. Prepare a balance sheet and a multiple-step income statement. Also show the components of the change in retained earnings.

3. What advice would you give the owners based on the information compiled in the financial statements?

Solution Summary

The solution explains how to record the transactions and prepare the financial statements