Case Melissa Young had always been encouraged by her accounting professor to apply her accounting skills as much as possible.

Case

Melissa Young had always been encouraged by her accounting professor to apply her accounting skills as much as possible. When her uncle asked her to prepare his accounting records for a company he owns, called Bob’s Repairs Ltd., she readily agreed.

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Case Melissa Young had always been encouraged by her accounting professor to apply her accounting skills as much as possible.
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The company has two employees who repair and service all computers used by four large companies in the area. Melissa spoke to her professor, who suggested that, due to the size of the business, she could record the company’s transactions on a spreadsheet with the column headings representing the names of accounts that would appear in order on the income statement and statement of financial position. Each row of the spreadsheet could act like a journal entry. In addition, each column could act like a T account showing all debit and credit entries to an account. Melissa could add up the columns on the spreadsheet to determine the balance in each account at the end of the year. She could then build her financial statements on the spreadsheet by referencing the amounts for each item or category on the financial statements from the column totals.

Her uncle gave her the following information regarding its first year of operations, ending August 31, 2018:

1.When the corporation was formed on September 1, 2017, common shares were sold to the sole shareholder, Uncle Bob, for $10,000 cash.

2.Uncle Bob added up all of the invoices the company issued to its customers and the total came to $229,400. All of these were issued on credit.

3.The company received $190,000 cash from customers when they paid their invoices.

4.The company rents a small repair shop for $3,500 per month. The shop was rented for the full year and all rent was paid in cash. In addition, the landlord required the company to pay one month’s rent in advance.

5.Salaries to employees totalled $120,000 for the year and were paid in cash.

6.Uncle Bob determined from a review of numerous invoices that the office expenses for the year were $36,400. Of these, all were paid except $4,000 that was still owing.

7.In late August, a new customer approached the company and signed a contract for service to be done to its computers starting in October 2018. The customer paid the company $2,000 in advance to secure the service.

8.Uncle Bob estimated that, given the net income earned by the company this year, income tax  

   expense should be $6,200 but this would not have to be paid for another two months.

9.The company declared and paid $1,000 of dividends to shareholders at the end of the year.

Required

(a) Prepare an equation analysis of the effects of the above transactions on the expanded accounting equation. If you have access to spreadsheet software, prepare the analysis on a spreadsheet as suggested. If not, prepare the analysis manually.

(b)  Prepare an income statement, statement of changes in equity, and statement of financial position for the year.

(c)  There were seven transactions that affected cash. Which of these related to operating activities? What was their total effect? What would Uncle Bob think about the operating cash flow? Which cash flows would be considered financing activities? Did the company need these cash flows?

(d) The company could not borrow any money from a bank to help start operations. Why do you think this happened?

(e) If the income taxes were due next week, would the company be able to pay them?

(f)  Why does the company have to pay income tax? Should Uncle Bob personally pay tax on any of the net income earned by the company?

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