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Answer:
Income statement
Revenue $0
Expenses:
Insurance expense ($34)
Net income ($34)
Balance sheet
Assets
Cash $28,276
Inventory $10,000
Prepaid insurance $1,190
Land $12,000
Total assets $51,466
Liabilities
Accounts payable $5,000
Notes payable $21,500
Total liabilities $26,500
Equity
Capital $25,000
Retained earnings ($34) $24,966
Total equity
Liabilities + equity $51,466
Explanation:
1. On January 1, Peter incorporates Peter Stores, Inc., a DVD store. He contributes $25,000 cash. Peter is the sole owner.
Dr Cash 25,000
Cr Capital 25,000
2. On January 1, the corporation borrows $12,500 from a bank.
Dr Cash 12,500
Cr Notes payable 12,500
3. On January 1, the business buys inventory (merchandize for sale) in the amount of $5,000 paying cash.
Dr Inventory 5,000
Cr Cash 5,000
4. On January 1, the business purchases a three-year insurance policy for $1,224 paying cash.
Dr Prepaid insurance 1,224
Cr Cash 1,224
5. The company buys inventory for $5,000, agreeing to pay within 60 days.
Dr Inventory 5,000
Cr Account payable 5,000
6. The company purchases land for $24,000 by paying cash $6,000 and taking a 10-year mortgage for $18,000 (assume zero interest rate).
Dr Land 24,000
Cr Cash 6,000
Cr Notes payable 18,000
7. The company sells half of this land for $12,000. It receives $3,000 cash and the buyer assumes $9,000 of the mortgage; that is, the company is no responsible for this half.
Dr Cash 3,000
Dr Notes payable 9,000
Cr Land 12,000
8. Peter receives an acquisition offer of $53,000 for the business; he rejects the offer, because it is evident that the market value of the store's assets is $56,000.
no journal entry
Income statement
- Revenue $0
Expenses:
- Insurance expense ($34)
- Net income ($34)
Balance sheet
Assets
- Cash $28,276
- Inventory $10,000
- Prepaid insurance $1,190
- Land $12,000
- Total assets $51,466
Liabilities
- Accounts payable $5,000
- Notes payable $21,500
- Total liabilities $26,500
Equity
- Capital $25,000
- Retained earnings ($34) $24,966
- Total equity
- Liabilities + equity $51,466
Explanation:
- 1. Dr. Cash 25,000
Cr. Capital 25,000
- 2. Dr. Cash 12,500
Cr. Notes payable 12,500
- 3. Dr. Inventory 5,000
Cr. Cash 5,000
- 4. Dr. Prepaid insurance 1,224
Cr. Cash 1,224
- 5. Dr. Inventory 5,000
Cr. Account payable 5,000
- 6. Dr. Land 24,000
Cr. Cash 6,000
Cr. Notes payable 18,000
- 7. Dr. Cash 3,000
Dr. Notes payable 9,000
Cr. Land 12,000
- 8. No journal entry.
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