Question

Moonlight Bay Inn is incorporated on January 2, 2014, by its three owners, each of whom contributes $20,000 in cash inexchange for shares of stock in the business. In addition to the sale of stock, the following transactions are entered into during the month ofJanuary:
January 2: A Victorian inn is purchased for $50,000 in cash. An appraisal performed on this date indicates that the land is worth $15,000, and the remaining balance of the purchase price is attributable to the house. The owners estimate that the house will have an estimated useful life of 25 years and an estimated salvage value of $5,000.
January 3: A two-year, 12%, $30,000 promissory note was signed at the Second State Bank. Interest and principal will be repaid on the maturity date of January 3, 2019.
January 4: New furniture for the inn is purchased at a cost of $15,000 incash. The furniture has an estimated useful life of 10 years and no salvage value.
January 5: A 24-month property insurance policy is purchased for $6,000 in cash.
January 6: An advertisement for the inn is placed in the local newspaper. Moonlight Bay pays $450 cash for the ad, which will run in the paper throughout January.
January 7: Cleaning supplies are purchased on account for $950. The bill is payable within 30 days.
January 15: Wages of $4,230 for the first half of the month are paid in cash.
January 16: A guest mails the business $980 in cash as a deposit for a room to be rented for two weeks. The guest plans to stay at the inn during the last week of January and the first week of February.
January 31: Cash receiptsfrom rentals of rooms for the month amount to $8,300.
January 31: Cash receiptsfrom operation of the restaurant for the month amount to $6,600.
January 31:. Each stockholder is paid $200 in cash dividends.
Required 1. Prepare journal entries to record each of the preceding transactions. Don’t forget the stock.
2. Post each of the journal entries to T accounts.
3. Prepare adjusting journal entries for each of the following transactions as of January 31.
a. Depreciation of the house
b. Depreciation of the furniture
c. Interest on the promissory note
d. Recognition of the expired portion of the insurance
e. Recognition of the earned portion of the guests’ deposit
f. Wages earned during the second half of January amount to $520 and will be paid on Feb. 3
g. Cleaning supplies on hand on January 31 amount to $230
h. A utility bill is received amounts to $740 and is payable by Feb. 5
i. Income taxes are to be accrued at a rate of 30% of income before taxes
4. Post each adjusting journal entry to T accounts
5. Prepare the following financial statements: a. Income statement for month ended January 31 b. Statement of retained earnings for the month ended January 31 c. Balance sheet at January 31
6. What are your reactions to Moonlight’s first month of operations? Is the bank comfortable with the loan it made?

Answer 1

Answer:

1. Prepare journal entries to record each of the preceding transactions.

January 2, 2014, Moonlight Bay Inn is incorporated

Dr Cash 60,000

    Cr Common stock 60,000

January 2, 2014, a Victorian Inn is purchased

Dr Land 15,000

Dr Building 35,000

    Cr Cash 50,000

January 3, 2014, promissory note signed at bank

Dr Cash 30,000

    Cr Notes payable 30,000

January 4, 2014, furniture is purchased

Dr Furniture 15,000

    Cr Cash 15,000

January 5, 2014, insurance policy is purchased

Dr prepaid insurance 6,000

    Cr cash 6,000

January 6, 2014, advertisement is placed in the local newspaper

Dr Advertising expense 450

    Cr Cash 450

January 7, 2014, cleaning supplies purchased on account

Dr Cleaning supplies 950

    Cr Accounts payable 950

January 15, 2014, wages for first 15 days are paid

Dr Wages expense 4,230

    Cr Cash 4,230  

January 16, 2014, check received form customer

Dr Cash 980

    Cr Unearned revenue 980

January 31, 2014, cash receipts from room rentals are accounted for

Dr Cash 8,300

    Cr Rental revenue 8,300

January 31, 2014, cash receipts from restaurant are accounted for

Dr Cash 6,600

    Cr Restaurant revenue 6,600

January 31, 2014, dividends are distributed

Dr Retained earnings 600

    Cr Dividends payable 600

Dr Dividends payable 600  

    Cr Cash 600

2. Post each of the journal entries to T accounts.

I used an excel spreadsheet to post the T accounts (attached file).    

3. Prepare adjusting journal entries for each of the following transactions as of January 31.

a. Depreciation of the house

depreciation expense per month = $30,000 x 1/25 x 1/12 = $116.67 ≈ $117

Dr Depreciation expense 117

    Cr Accumulated depreciation - building 117

b. Depreciation of the furniture

depreciation expense per month = $15,000 x 1/10 x 1/12 = $125

Dr Depreciation expense 125

    Cr Accumulated depreciation - furniture 125

c. Interest on the promissory note

interest expense per month = $30,000 x 12% x 28/365 = $276.16 ≈ $276

Dr Interest expense 276

    Cr Interest payable 276

d. Recognition of the expired portion of the insurance

insurance per month = $6,000 /24 = $250

Dr insurance expense 250

    Cr Prepaid insurance 250

e. Recognition of the earned portion of the guests’ deposit

Dr Unearned revenue 490

    Cr Rental revenue 490

f. Wages earned during the second half of January amount to $520 and will be paid on Feb. 3

Dr Wages expense 520

    Cr Wages payable 520

g. Cleaning supplies on hand on January 31 amount to $230

cleaning supplies expense = $950 - $230 = $720

Dr Cleaning supplies expense 720

    Cr Cleaning supplies 720

h. A utility bill is received amounts to $740 and is payable by Feb. 5

Dr Utilities expense 740

    Cr Accounts payable 740

i. Income taxes are to be accrued at a rate of 30% of income before taxes

Dr Income taxes expense

    Cr income taxes payable

4. Post each adjusting journal entry to T accounts

I used an excel spreadsheet to post the T accounts (attached file).    

5. Prepare the following financial statements: a. Income statement for month ended January 31

Income Statement

Rental revenue                       $8,790              

Restaurant revenue               $6,600

Wages expense                    ($4,750)

Advertising expense               ($450)

Depreciation expense            ($242)

Insurance expense                 ($250)

Cleaning supplies expense    ($720)

Utilities expense                      ($740)

EBIT                                        $8,238

Interest expense                     ($276)

Net income before taxes      $7,962

Income taxes                        ($2,389)

Net income after taxes         $5,573

b. Statement of retained earnings for the month ended January 31

Retained earnings at the beginning of the period:               $0

Net income:                                                                       $5,573

Dividends distributed:                                                      ($600)

Retained earnings at the end of the period                    $4,973

c. Balance sheet at January 31

Assets:

Cash $29,600

Prepaid insurance $5,750

Cleaning supplies $230

Furniture $14,875

Land $15,000

Building $34,883

Total Assets: $100,338

Liabilities and Stockholders' Equity:

Accounts payable $1,690

Unearned revenue $490

Wages payable $520

Interest payable $276

Income tax payable $2,389

Notes payable $30,000

Common stock $60,000

Retained earnings $4,973

Total Liabilities and Stockholders' Equity: $100,338

6. What are your reactions to Moonlight’s first month of operations? Is the bank comfortable with the loan it made?

Yes, the bank should be OK with the loan since the Inn was able to make a profit during the first month of operations (something very uncommon).

Download pdf