Question

Dottic Digs, Ine (B) DD-Case Dottie inherits $25,000 from an uncle. She decides to start a women's clothing business. Dottie forms an Illinois Corporation (C) with the name Dottie Digss, Inc. ("DD") She purchases 5,000 shares of common stock, par valuc of $10 per share, for $50,000 using her nherilance and savings. She persuades her father and the owner-manager of a local busincss to serve with her as the three directors without compensation The boaid elects Dottie as President at an annual salary of $45,000. DD rents space in a strip mall for 5% of net sales plus $1,250 per montb for utilities During the first ycar ended March 31, 1993, Dottie keeps all financial records herself. Her CPA provided help as needed. During the year, DD borrowed $50,000 at 10% from Dottie's father. Sales were better han she expocted, but Dottie is unhappy that the bank account, which started with her $50,000 investment, is now depleted to $5,590. She assumes that the loss for the first year equals the decrease in cash of $44,410. The general ledger accounts that follow are in balance, but Dottie does not know how to prepare financial statements or how to interpret them Only cash receipts and disbursements have been posted to reflect the March 31, 1993 balances. Thesc data are given in DD-1 Exlibit I The following items are to be recorded by joumal entries: $103,978 36,805 193,490 6,700 6,500 4,500 Unpaid invoices for merchandise purchases Sales on account, not yet collected Ending inventory, lower of cost or market Estinated ycar's wear on Prop, Plant, & Equip Insurance premiums paid that relate to next year Corp income tax liability for year nded 3.31-93 Accrued expenses: 1,975 4,975 5,000 Payroll taxes due but not paid Rent due but unpaid Sales salaries since last payroll Assignment (I) Prepare year-end journal entries for the above items to adjust account balances to accrual basis. (2) Prepare Balance Sheet as of March 31, 1993 and Income Statement for the year then ended from the adjusted balances. (3) Why do you think DD performance (is) or (is not) acceptable for this first year?

Answer 1

1. journal entries:

Purchases A/c Dr. $103978

To supplier $103978

Debtors A/c Dr. $36805

To Sales $36805

No entry for recording closing stock.

Depreciation A/c Dr. 6700

To Profit and Loss A/c 6700

Advance Insurance premium A/C Dr. 6500

To cash 6500

Profit and Loss A/c Dr. 4500

To Income Tax 4500

Outstanding Payroll taxes A/c Dr. 1975

TO payroll taxes 1975

outstanding rent a/c dr. 4975

to rent payable 4975

outstanding salary A/c Dr. 5000

to salary payble 5000

Yes the performance of DD is acceptable in the first year since the sales was more than she expected. Moreover she needs to establish her business first and then need to look for profits.