Question

Moira and Johnny graduate from college in May 2020 and begin developing their new business. They begin by offering clinics for basic acting skills such as improv or dramatic reading. Upon developing a customer base, they'll hold their acting retreat. These retreats will involve four- person teams that put together plays, skits, etc. to perform at the end of the retreat. In the long run, they plan to sell stage makeup/costuming and develop an acting studio for blossoming talent On July 1, 2020, Moira and Johnny organize their new company as a corporation, The Crowening Inc. The articles of incorporation state that the corporation may sell 200,000 shares of common stock with a par value of $2. Each share of stock represents a unit of ownership. Moira and Johnny will act as co-presidents of the company. The following transactions occur from July 1 through December 31. Jul. 1 Sell $10,000 of common stock to Johnny at par. Jul. 1 Sell $10,000 of common stock to Moira at par. Jul. 1 Purchase a one-year insurance policy for $4,080 ($340 per month) to cover injuries to participants from any bird-related accidents. Jul. 2 Pay legal fees of $1,000 associated with incorporation. Jul. 4 Issue an additional 5,000 shares of common stock to Moira in exchange for land worth $32,000. Jul. 7 Sell 140,000 shares of common stock on the market for $26/each. Jul. 8 To raise capital to fund the building of the acting studio, The Crowening issues $300,000 of 12%, 5-year bonds. They will pay interest quarterly. The market rate is 4% Jul. 15 After the bond issuance, Johnny and Moira realize they won't need all $300,000. They decide to use the excess ($60,000) to invest. They purchase $20,000 of short term trading securities and invest $40,000 in Ray's Rags, a costuming company. Their investment in Ray's represents a 40% ownership stake in the company. Jul. 22 Moira runs her first acting clinic. She received $45,000 for the clinic, which cost her $10,000 to conduct. 70% of this $45,000 was received in cash, with the rest being on account, due in 6 months. NOTE: Use CASH for Cr. In COGS entry. Jul. 24 Repurchase 30,000 shares of stock as treasury stock for $16/share. Jul. 30 The Crowening receives $90,000 in advance for a clinic to be held on August 17. Aug. 1 Declare a cash dividend of $0.30/share. The date of record will be August 15. Date of payment will be January 3. Aug. 4 The company purchases acting props for $8,000 cash total. Aug. 10 The company purchases lighting equipment on account for $16,000. Aug. 17 Moira conducts her second acting clinic. Aug. 24 Office supplies are purchased on account for $2,000. Focus

Please answer this problem to the best of your ability. It is for Managerial Accounting.

Answer 1

Journal Entries for each transaction:

Crowening Inc. General Journal Date Particulars L.F. Dr. Cr. 1 $20,000.00 01-Jul-20 Cash Dr. To Common Stock (at par) 2 $20,000.00 (Sale of 10000 shares of Common Stock of $ 2 to Johnny - 5000 shares & to Moira - 5000 shares respectively) 01-Jul-20 Insurance Premium Dr. Prepaid Expenses To Cash 3 4 1 $2,040.00 $2,040.00 $4,080.00 (Purchase of one year Insurance policy of $340 per month to cover injuries to participants, half of which is recorded as prepaid for 6 months of the next fiscal year 2021) $1,000.00 02-Jul-20 Preliminary Expenses Dr. To Cash 5 1 $1,000.00 (Incorporation expenses to be treated as preliminary expenses and to be written off over the next 5 years) $32,000.00 04-Jul-20 Land Dr. To Common Stock (at par) To Paid in Capital in excess of par) 6 2 7 $10,000.00 $22,000.00 (Issue of Additional 5000 common stock shares to Moira in exchange of Land Worth $32000) 07-Jul-20 Cash Dr. To Common Stock (at par) To Paid in Capital (in excess of par) 1 2 7 $36,40,000.00 $2,80,000.00 $33,60,000.00 (Sale of 140000 shares of Common Stock of $ 2 on the market for $ 26/share) $3,00,000.00 08-Jul-20 Cash Dr. To 12% Bonds 1 8 $3,00,000.00 (Sale of 12%, 5 years bonds with quarterly interest) 9 $2,40,000.00 15-Jul-20 Studio Building Dr. To Cash 1 $2,40,000.00 (We assume that apart from $60,000.00 the amount of $240,000.00 is used to purchase a building) 10 15-Jul-20 Short Term Trading Securities Dr. Investment in Ray's Rags Dr. $20,000.00 $40,000.00 11 To Cash 1 $60,000.00 (Investments in Short Term Securities and 40% of Ray's Rags ownership stake) 1 22-Jul-20 Cash Dr. Accounts Receivables Dr. To Income from Acting Clinic $31,500.00 $13,500.00 12 13 $45,000.00 $10,000.00 COGS A/c Dr. To Cash 14 1 $10,000.00 (Operational Entry showing Incomes and cost of goods sold) 15 24-Jul-20 Treasury Common Stock Dr. Paid in Capital Dr. To Cash $60,000.00 $4,20,000.00 7 1 $4,80,000.00 (Repurchase of 30000 shares of stock as treasury stock) 1 $90,000.00 30-Jul-20 Cash Dr. To Advance for Clinic 16 $90,000.00 (Advance received for a clinic to be held on 17th Aug 2020) 17 $37,500.00 15-Aug-20 Dividends Dr. To Dividends Payable 18 $37,500.00 (135000 shares * $0.30) $8,000.00 04-Aug-20 Acting Props Dr. To Cash 20 1 $8,000.00 (Purchase of Acting Props) $16,000.00 10-Aug-20 Lighting Equipment Dr. To Cash 20 1 $16,000.00 (Purchase of Lighting Equipment) 16 $90,000.00 17-Aug-20 Advance for Clinic Dr. To Income from Acting Clinic 13 $90,000.00 14 $20,000.00 COGS A/c Dr. To Cash 1 $20,000.00 (Operational Entry showing Incomes and cost of goods sold) (COGS Doubles as income also doubles) 19 $2,000.00 24-Aug-20 Office Supplies Dr. To Cash 1 $2,000.00 (Purchase of Office Supplies) 01-Sep-20 Rental Expenses Dr. Prepaid Expenses Dr. To Cash 36 4 1 $1,400.00 $2,800.00 $4,200.00 (Payment for one year rental policy for storage unit) 21 $9,000.00 30-Sep-20 Interest on Bond Dr. To Cash 1 $9,000.00 (1st Quarter Interest Payment) $1,20,000.00 17-Oct-20 Dividend Receivable Dr. To Dividend Income from Ray's Rags 22 23 $1,20,000.00 1 $1,20,000.00 30-Oct-20 Cash Dr. To Dividend Receivable 22 $1,20,000.00 (Dividend of $3 per share of 40000 shares) 24 $50,000.00 08-Nov-20 Motor Vehicle Dr. To Installment Liability 25 $50,000.00 (Purchase of Company Car) 30-Nov-20 Interest Expense on Vehicle Loan Dr. Installment Liability Dr. To Cash 26 25 $166.67 $754.33 1 $921.00 (Payment of 1st Installment of Car Loan) 1 $5,000.00 01-Dec-20 Cash Dr. To Lighting Equipment To Profit on Sale of Lighting Equipment 20 $3,000.00 $2,000.00 27 (Sale of Lighting Equipment at a profit of $2000) 1 $3,50,000.00 05-Dec-20 Cash Dr. To Treasury Common Stock (at par) To Paid in Capital in excess of par) 15 $20,000.00 $3,30,000.00 7 (Resale of Treasury Common stock at Rs. 35 per share for 10000 shares) 12-Dec-20 Cash Dr. Loss on Investment To Investment in Ray's Rags 1 28 $36,000.00 $4,000.00 11 $40,000.00 (Sale of Investment due to insider trading allegations) 29 $4,95,000.00 16-Dec-20 Retained Earnings Dr. To Stock Dividends Distributable To Paid in Capital in excess of par) 30 7 $66,000.00 $4,29,000.00 Calculation: Stock Dividend Market Price of a Share 20% Distributable on 12/31 $15 165000.00 No. of Shares Currently Outstanding (Includes 10000 Treasury stock that was reissued) Stock Dividend 33,000.00 (20% x 165000) 30 $66,000.00 31-Dec-20 Stock Dividends Distributable Dr. To Common Stock (at par) 2 $66,000.00 (Stock Dividends Distributable on 12/31) $9,000.00 31-Dec-20 Interest on Bond Dr. To Cash 21 1 $9,000.00 (2st Quarter Interest Payment) 31-Dec-20 Interest Expense on Vehicle Loan Installment Liability Dr. To Cash 26 25 1 $164.15 $756.85 $921.00 (Payment of 2nd Installment of Car Loan) $7,200.00 31-Dec-20 Depreciation Dr. To Lighting Equipment & Acting Props 31 20 $7,200.00 $1,020.00 Consumption of Supplies Dr. To Office Supplies 32 19 $1,020.00 $3,000.00 Income Taxes Dr. To Income Tax Payable 33 34 $3,000.00 35 $2,000.00 Unrealised Loss on Short Term Investments To Short Term Trading Securities 10 $2,000.00 Dr. $200.00 Preliminary Expenses Written Off A/C To Preliminary Expenses 37 5 $200.00

Income Statement Revenue Income from Acting Clinics Income from Dividends Profit on Sale of Lighting Equipment $ 135,000 $ 120,000 $ 2,000 $ 257,000 Expenses Dividends Preliminary Expenses written off Unrealised Loss on Trading Securities Consumption of Supplies Depreciation Interest Expense on Vehicle Loan Interest on Bond Loss on Investment Rental Expenses COGS A/C Insurance Premium $ 37,500 $ 200 $ 2,000 $ 1,020 $ 7,200 $ 331 $ 18,000 $ 4,000 $ 1,400 $ 30,000 $ 2,040 $ 103,691 Net Profit Before Taxes $ 153,309 Less: Income Taxes $3,000 Net Profit after Taxes $ 150,309 Statement of Cash Flows Net Profit after Taxes $ 150,309 Add: Depreciation $ 7,200 Changes in Working Capital (Decrease) Accounts Receivables (Decrease) Prepaid Expenses (Decrease) Office Supplies (Decrease) Preliminary Expenses (Increase) Income Tax Payable $ 13,500 $ 4,840 $ 980 -$ 800 $3,000 Cash inflow from Operating Activities $ 140,389 Purchase of Assets Lighting Equipment & Acting Props Building Short Term Securities Investment in Ray's Rags Land Motor Vehicle $ 24,000 $ 2,40,000 $ 18,000 -$ 40,000 -$ 32,000 -$ 50,000 Sale of Assets Lighting Equipment Investment in Ray's Rags $ 3,000 $ 40,000 Cash Outflow from Investing Activities $ 3,61,000 $376,000 $ 60,000 $ 20,000 $ 3,721,000 $ 37,500 Common Stock Sale of Common Stock Inflow Repurchase of Common Stock Resale of Common Stock (Treasury) Paid In Capital Dividend Payable Bonds Sale of 12% Bonds Retained Earnings Installment Liability Inflow Repayment $ 300,000 $ 4,95,000 $ 50,000 $ 1,511 Cash Inflow from Financing Activities $ 3,947,989 Net Cash & Cash Equivalents at the end of the year $ 3,727,378 Ratios: 1) Acid Test Ratio Current Assets - Inventories - Other Non-Quick Assets = 92.84 Times $ 3,759,858 Current Liabilities $ 40,500 2) Debt to Equity Ratio Debt 9% $ 348,489 = / Equity $ 3,752,309 3) Return on Assets Return 4% $ 150,309 / Assets $ 4,101,298

In the given case a large amount had been raised on 7th July amounting to over $ 3 Million. It is not clear whether this amount is used for cost of Studio Building. If that is the case, only the assets will interchange between cash and Building.

The Balance Sheet has been attached for reference.

Balance Sheet Rs. Rs. $ 335,800 Equity & Liabilities Common Stock Paid In Capital Retained Earnings Treasury Stock Repurchased Reissued Assets $ 376,000 Tangiable Assets $ 3,721,000 $ 3,44,691 Current Assets $ 60,000 Cash $ 20,000 Prepaid Expenses Preliminary Expenses $ 300,000 Accounts Receivable $ 48,489 Office Supplies $ 37,500 Short Term Trading Securities $3,000 $3,727,378 $ 4,840 $800 $ 13,500 $980 $ 18,000 12% Bonds Vehicle Loan Dividend Payable Income Tax Payable $ 4,101,298 $4,101,298

It is clearly evident that there is an excess cash & cash equivalents balance available. If the cash was used for purchase of Studio Building, the Balance Sheet, Cash Flow Statement and Acid test ratio will thus change accordingly.

Please also refer the Trial Balance which serves as the basis of the above financials (refer L.F.)

Trial Balance $ 4,742,989 $4,742,989 L.F. No. Debit Credit $ 3,727,378 $376,000 $ 2,040 $4,840 $ 800 $ 32,000 $ 3,721,000 $ 300,000 $ 240,000 $ 18,000 $ 13,500 $ 135,000 $ 30,000 $ 40,000 $ 37,500 $ 37,500 1 Cash 2 Common Stock (at par) 3 Insurance Premium 4 Prepaid Expenses 5 Preliminary Expenses 6 Land 7 Paid in Capital (in excess of par) 8 12% Bonds 9 Studio Building 10 Short Term Trading Securities 12 Accounts Receivables 13 Income from Acting Clinic 14 COGS A/C 15 Treasury Common Stock 17 Dividends 18 Dividends Payable 19 Office Supplies 21 Interest on Bond 23 Dividend Income from Ray's Rags 24 Motor Vehicle 25 Installment Liability 26 Interest Expense on Vehicle Loan 20 Lighting Equipment & Acting Props 27 Profit on Sale of Lighting Equipment 28 Loss on Investment 29 Retained Earnings. 31 Depreciation 32 Consumption of Supplies 33 Income Taxes 34 Income Tax Payable 35 Unrealised Loss on Short Term Investments 36 Rental Expenses 37 Preliminary Expenses Written Off $ 980 $ 18,000 $ 120,000 $ 50,000 $48,489 $ 331 $ 13,800 $ 2,000 $4,000 $ 495,000 $ 7,200 $1,020 $3,000 $ 3,000 $ 2,000 $1,400 $ 200