Question

Use T-accounts to record the 4 months’ of transactions noted below for this new start-up company. Record all entries affecting the income statement into “Equity” since

there are no separate T-accounts set up for the individual income statement accounts. Once all transactions have been posted, populate the net ending balance for each account for the accounts listed below.

Month 1

$2,000,000 sale of stock occurs with all cash received by the company.

$3,000,000 bank loan received from the company’s bank at the end of the month – interest will start accruing next month (interest rate is 1% per month). Principal and interest cash payments will be made in a lump-sum payment at the end of the loan period.

Factory is leased at the beginning of the month and prepaid for the entire year up-front at a cost of $720,000. The first month of lease expense is expensed to the

income statement now.

$2,400,000 investment in factory equipment is made. Total purchase price is payable in 30 days. Equipment will be depreciated on a straight line basis over 10

years. First month of depreciation expense is recorded now.

Business insurance with coverage for the upcoming year is purchased at the beginning of the month at a cost of $360,000. The policy is prepaid for at the time of

purchase. The first month of insurance expense is charged to the income statement now.

$800,000 of inventory is purchased and received and will be paid to the suppliers in 30 days.

Month 2:

$550,000 in sales are recorded on 30-day credit terms. The cost of the inventoried product sold is $500,000.

Payment for factory equipment purchased in month 1 is made.

Payment for inventory purchased in month 1 is made.

Additional inventory valued at $500,000 is purchased and received. The supplier requires a 50% down payment at the time of inventory receipt with the remaining 50% due within 30 days.

A bad debt reserve of $20,000 is created/recorded since some of the amounts in accounts receivable will no longer be collectible.

2nd month of depreciation expense is recorded.

2nd month of prepaid insurance expense is recorded.

2nd month of prepaid lease expense is recorded.

The first month of interest expense related to the bank loan received during month 1 is accrued.

Month 3:

$800,000 is sold to customers on 30-day credit terms. The cost of the inventoried product sold is $800,000.

3rd month of depreciation expense is recorded.

3rd month of prepaid insurance expense is recorded.

3rd month of prepaid lease expense is recorded.

Payment for inventory purchased in month 2 is made. An additional $300,000 of inventory is purchased from the same supplier with the supplier requiring a 50%

down payment at the time of inventory receipt and the remaining 50% due within 30 days.

An additional bad debt reserve of $25,000 is created/recorded since additional outstanding accounts receivables have been determined to no longer be collectible.

Payment for 90% of the receivables generated during month 2 is received.

The second month of interest expense related to the bank loan received during month 1 is accrued.

Month 4:

4th month of depreciation expense is recorded.

4th month of prepaid insurance expense is recorded.

4th month of prepaid lease expense is recorded.

$600,000 is sold to customers. The cost of the inventoried product sold is $400,000. 50% of the sales are paid for at time of delivery to customer during this

month with the remainder due within 30 days.

Payment for inventory purchased on terms in month 3 is made. An additional $200,000 of inventory is purchased from the same supplier with payment due within

30 days.

$25,000 of inventory has been discovered to be obsolete with no market value whatsoever. The entire amount is scrapped and written off during this month.

Payment for 5% of the receivables generated during month 2 and 90% of the receivables generated during month 3 is received.

The third month of interest expense related to the bank loan received during month 1 is accrued.

A $20,000 dividend is paid during month 4 to shareholders.

Find the net balances for each of the Balance Sheet accounts listed below must be populated/answered:

Cash:

Net Receivables:

Inventory:

Prepaid Expenses:

Property, Plant, & Equipment:

Total Assets:

Accounts Payable:

Debt:

Stockholders' Equity:

Total Liabilities & Stockholders' Equity:

Ensure all answers are posted in the following format: 1,000,000 In other words, do
NOT include a $ sign in your answer and do include commas as noted in the example. Do
NOT include any decimal point or fractions. If you do not submit your answer in this
format, even though you may have calculated the correct answer, the automated grading
of this exam question may mark your response as being incorrect.

Answer 1

The Journal Entries are as follows :

Month 1 2000000 Cash - Dr To Stock (Capital) 2000000 3000000 Bank A/C-Dr To Loan A/C 3000000 Lease Rental A/C-Dr Advance Lease Rental A/c - Dr To Bank A/C 60000 660000 720000 2400000 Factory Equipment - Dr To Equipment Vendor 2400000 20000 Depriciation A/c - Dr To Factory Equipment 20000 Business Insurance A/c - Dr Advance Insurance Payment A/c - Dr To Bank 30000 330000 360000 800000 Inventory A/c - Dr To Inventory Supplier 800000

Month 2 550000 Debtor A/c - Dr To Sales 550000 2400000 Equipment Vendor - Dr To Bank 2400000 800000 Inventory Supplier - Dr To Bank 800000 500000 Inventory A/C- Dr To Bank A/C To Inventory Supplier 250000 250000 20000 Provision for Bad Debt - Dr To Debtor A/C 20000 20000 Depriciation A/C- Dr To Factory Equipment 20000 30000 Business Insurance A/C- Dr To Advance Insurance Payment A/C 30000 60000 Lease Rental A/C-Dr Advance Lease Rental A/C 60000 30000 Interest on Bank Loan To Loan A/C 30000

Month 3 800000 Debtors A/C- Dr To Sales 800000 20000 Depriciation A/c - Dr To Factory Equipment 20000 30000 Business Insurance A/C- Dr To Advance Insurance Payment A/C 30000 60000 Lease Rental A/C-Dr Advance Lease Rental A/C 60000 250000 Inventory Supplier - Dr To Bank 250000 300000 Inventory A/c Dr To Inventory Supplier To Bank 150000 150000 25000 Provision for Bad Debt - Dr To Debtor A/C 25000 495000 Bank A/C- Dr To Debtor A/C 495000 30000 Interest on Bank Loan To Loan A/C 30000

​​​​​​

Month 4 20000 Depriciation A/c - Dr To Factory Equipment 20000 30000 Business Insurance A/C-Dr To Advance Insurance Payment A/C 30000 60000 Lease Rental A/C-Dr Advance Lease Rental A/C 60000 Debtor A/C-Dr Bank A/C- Dr To Sales 300000 300000 600000 150000 Inventory Supplier - Dr To Bank 150000 200000 Inventory A/c-Dr To Inventory Supplier 200000 25000 Inventory write off - Dr To Inventory A/C 25000 747500 Bank A/c - Dr To Debtors A/C 747500

30000 Interest on Bank Loan To Loan A/C 30000 20000 Dividend A/C- Dr To Bank A/C 20000

Closing Balances of All The Accounts were :

| 2,000,000 2,000,000 (557,500) 3,090,000 240,000 480,000 2,320,000 Cash Capital Bank A/C Loan A/C Lease Rental A/C Advance Lease Rental Factory Equipment Equipment Vendor Depriciation A/C Business Insurance Advance Insurance Payment Inventory A/C Inventory Supplier Debtor A/C Sales A/C Provision for Bad debt Interest On Bank Loan Inventory Write Off Dividend A/C 80,000 120,000 240,000 1,775,000 200,000 362,500 1,950,000 45,000 90,000 25,000 20.000 7,240,000 7,240,000

The Net Balances of Each of the Balance Sheet Accouts are as follows:

Cash Alc Net Receivables Inventory Prepaid Expenses PP & E Total Assets Accounts Payable Debt Equity Total Liability & Equity 2,000,000 362,500 1,775,000 720,000 2,320,000 6,620,000 200,000 3,090,000 2,000,000 6,620,000

NOTE : We had made all the payments from the Bank Account itself. So this will become an OD account that is why apperaing as Negative balance. Alternatively, we can also make some payments out of Cash available. But in absence of any information available, we had taken that stand.