P3-2 Miloslav began a magazine delivery service, which he named Miloslav’s Magaz

Question

P3-2    Miloslav began a magazine delivery service, which he named Miloslav’s Magazines, on January 1, 2001. The following transactions occurred during 2001:

a. Sold stock for $3,000 cash on January 1.

b.         Borrowed $20,000 cash on April 1. The interest rate on the loan is 12% annually, and the interest is due each December 31, until the note is repaid.

c.         Bought a bicycle for $1,000 cash on January 1. The bicycle has an estimated life of five years, and no salvage value.

d. Bought 10,000 magazines for $2.00 cash each on April 5.

e.         Sold magazines at various times for a total of $22,500. All sales were on account.

f. Collected $20,500 from customers.

g. Paid himself a salary of $3,000 cash.

h. Paid the stockholders a dividend of $50 on the $3,000 in stock.

i. Paid the interest on the loan in b.

j.          On December 31, Miloslav determined by a physical count that there were 1,000 magazines left in the storage bin at the warehouse.

Required

Prepare journal entries for the above transactions. Post the journal entries to appropriate T-accounts. Prepare any necessary adjusting and closing entries needed at December 31, 2001. Prepare a December 31, 2001 balance sheet and an income statement for the year ended December 31, 2001.

Explanation / Answer

JOURNAL ENTRY Ref Date Account Title and description Debit Credit a Jan1, 2001 Cash $3,000 Common stock $3,000 (To record issuance of common stock) b Jan1, 2001 Cash $20,000 loan payable $20,000 (To record loan with 12% annual interest) c Jan1, 2001 Bi cycle asset $1,000 Cash $1,000 (To record purchase of bicycle) d April 5, 2001 Purchase $20,000 cash $20,000 (To record purchase of magazines) e Sales $22,500 Accounts receivable $22,500 (To record sales of magazines) f Cash $20,500 Accounts receivable $20,500 (To record collection from accounts receivable) g Salaries expense $3,000 Cash $3,000 (To record salaries expense) h Dividend $50 cash $50 (to record payment of dividend) i Dec. 31 Interest expense $2,400 (20000*0.12) Cash $2,400 (To record payment of interest) j Dec 31 Purchase $20,000 Closing inventory $2,000 Cost of goods sold $18,000 (To record closing inventory & cost of goods sold) k Dec. 31 Depreciation expense $200 (1000/5) Accumulated depreciation $200 T-Accounts Ref Date CASH Debit Credit a Jan1, 2001 Common stock $3,000 b Jan1, 2001 Loan Payable $20,000 c Jan1, 2001 Bi cycle asset $1,000 d April 5, 2001 Purchase $20,000 f Accounts receivable $20,500 g Salaries expense $3,000 h Dividend $50 i Dec. 31 Interest expense $2,400 BALANCE $17,050 Ref Date ACCOUNTS RECEIVALE Debit Credit e Sales $22,500 f Cash $20,500 BALANCE $2,000 Ref Date BCYCLE ASSET Debit Credit c Jan1, 2001 Bi cycle asset $1,000 Ref Date ACCUMULATED DEPRECIATION Debit Credit k Dec. 31 Depreciation expense $200 Ref Date LOAN PAYABLE Debit Credit b Jan1, 2001 Cash $20,000 Ref Date COMMON STOCK Debit Credit a Jan1, 2001 Cash $3,000 Ref Date SALES Debit Credit e Accounts receivable $22,500 Ref Date PURCHASE Debit Credit d April 5, 2001 Cash $20,000 Ref Date SALARIES EXPENSE Debit Credit g Cash $3,000 Ref Date INTEREST EXPENSE Debit Credit i Dec. 31 Cash $2,400 Ref Date DIVIDEND Debit Credit h Cash $50 Ref Date DEPRECIATION EXPNSE Debit Credit k Dec. 31 Accumulated depreciation $200 INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2001 A Sales $22,500 B Purchase $20,000 C Less: Closing Inventory $2,000 D=B-C Cost of goods sold $18,000 E=A-D Gross Income $4,500 Operating expenses: F Salaries expense $3,000 G Depreciation expense $200 H Interest expense $2,400 I=F+G+H Total Operating Expenses $5,600 J=E-I Net Income /(Loss) ($1,100) BALANCE SHEET AS AT DECEMBER 31, 2001 ASSETS: K Cash $17,050 L Accounts receivable $2,000 M Closing stock $2,000 N Bicycle asset $1,000 P Accumulated depreciation ($200) Q=K+L+M+N+P Total Assets $21,850 LIABILITIES: R Loan payable $20,000 S=R Total Liabilities $20,000 Shareholders Equity T Common Stock $3,000 U Dividend ($50) V=J Net Loss ($1,100) W=T+U+V Total Shareholders equity $1,850 X=S+W Total liabilities and shareholders equity $21,850

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