At the end of her first year of university, Amr decided that he wanted to set up
ID: 2420394 • Letter: A
Question
At the end of her first year of university, Amr decided that he wanted to set up a courier service. He invested savings of $800 in the company in exchange for Common Shares. In addition, his parents loaned the company $2,200 to help it get started. Since this was a business venture, he insisted on paying interest on this loan and his parents agreed to charge an annual rate of 6%.
Amr bought a used vehicle for $4,000 for the business, paying $750 as a down payment, and financing the rest at an interest rate of 12% per year. He estimated the car could be sold at the end of the summer for $3,500.
His Company, Road Runner Inc, began operations on May 1, and continued until August 31. Although he did not keep formal records, he noted the following information about his business:
1.During the summer the company made payments of $623 on the car, which included interest of $123 and principal of $500.
2.No payments of interest or principal were made on the loan from his parents.
3. He paid himself a salary of $1,500 per month for the four months the business operated.
4. Payments in cash for other operating costs, including advertising, insurance and gas totaled $1,100. In addition, there were unpaid bills totaling $100 at the end of August.
5.Courier charges collected from customers totaled $9,300. In addition, customers still owed $300 for services performed in the last two weeks of August.
6.After the close of business on August 31, there was a balance of $3,807 in the company’s bank account, plus change in the car totaling $20.
Required:
Prepare Journal Entries for all the above transactions.
Prepare an Income Statement for the company for the 4 month period ending on August 31.
Prepare a Balance Sheet for the company as of August 31.
Comment on the profitability of Amr’s business and his financial position as of August 31. If he dissolves the business before he returns to university, will there be enough cash to pay off the liabilities?
Explanation / Answer
Journal entries in the books of Road Runner Inc:
Income Statement for the period ending August 31:
Balance Sheet as of August 31:
Transaction Account Titles Debit Credit $ $ Cash 3,000 Common stock 800 Loan from parents 2,200 Vehicle 4,000 Cash 750 Notes payable 3,250 Notes payable 500 Interest expense 123 Cash 623 Interest expense 44 Interest expense payable 44 Salaries expense 6,000 Cash 6,000 Miscellaneous expenses 1,200 Cash 1,100 Expenses payable 100 Cash 9,300 Accounts receivable 300 9,600Related Questions
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