Question

Main Squeeze had the following transactions as a result of it’s first summer in operation (May through September);

a. Paid for $260 worth of advertisements all of which ran during the summer.
b. Sold $10,920 worth of lemonade, receiving $9,600 in cash with the rest owed by customers from special catering events.
c. Paid $500 for inventory ordered in May, and ordered $3,200 more inventory throughout the season of which all was paid for except $450 outstanding at the end of
d. Made monthly lease payments of $500 from May to September.
e. Paid $850 on note payable, $50 of which was interest.
f. Paid a part-time employee $1,500 per month for May, June, July, and August. September pay is still outstanding.
g. Paid deposit for next years lease of $250
h. Sold prepaid gift cards totaling $650 to customers to use the next season.

Required

1.Prepare Journal Entries to record the above transactions, checking that debits equal credits

2.Prepare a multi-step income statement of earnings for the summer ended September 30 based only on the above transactions.

3.Calculate the net profit margin at September 30th (use earnings before taxes instead of Net earnings) What does this ratio indicate about the ability of Main Squeeze to control operations?

Answer 1

JOURNAL
Date	Particulars	Debit	Credit
a	Advertisement expense	260
	Cash		260
	(Being advertisement paid)
b	Cash	9600
	Accounts receivable	1320
	Revenue		10920
	(Being revenue earned)
c	Inventory	3700
	Cash		3250
	Accounts payable		450
	(Being inventory purchasd)
d	Lease expense	2500
	Cash		2500
	(Being lease payment made)
e	Note payable	800
	Interest on note payable	50
	Cash		850
	(Being payment made)
f	Salary expense	7500
	Cash		6000
	Salary payable		1500
	(Being expense recorded)
g	Advance Lease	250
	Cash		250
	(Being payment made)
h	Cash	650
	Unearned revenye		650
	(Being gift cards sold)

Income Statement
Revenue		10920
Less: Operating expense
Advertisement expense	260
Lease expense	2500
Salary expense	7500	10260
Earning before interest & tax		660
Less: Non operating expense
Interest on note payable		50
Earning before tax		610
Profit Margin= Earning before tax/Revenue
610/10920		6%