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1943191

Lurch Company acquired land and constructed a new building to avoid paying rent. It also acquired a new machine. During the year it sold inventory, purchased new inventory, declared and paid dividends. It recorded depreciation expense on the new machine and interest expense on a note used to finance the building construction. Income taxes were accrued at year-end based on taxable income. Financial statements were prepared showing the resulting balance sheet accounts, income statement, and retained earnings for the fiscal year ended December 31, 2010.

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84 views

1943191

Lurch Company acquired land and constructed a new building to avoid paying rent. It also acquired a new machine. During the year it sold inventory, purchased new inventory, declared and paid dividends. It recorded depreciation expense on the new machine and interest expense on a note used to finance the building construction. Income taxes were accrued at year-end based on taxable income. Financial statements were prepared showing the resulting balance sheet accounts, income statement, and retained earnings for the fiscal year ended December 31, 2010.

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mohitgaba19
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Comprehensive The Lurch Company’s December 31, 2009 balance sheet follows:

During 2010, the following transactions occurred:


1. To avoid paying monthly rent of $5,000 on existing plant facilities, the company decided to buy a
tract of land and construct a building of its own on it. On January 2, 2010, Lurch exchanged 6,000
shares of its common stock to acquire the land; the stock was selling for $25 per share. Construction
of the building also began on January 2, 2010. At the time, Lurch borrowed funds by issuing a one-
year, $500,000 note at 12% to help finance the project. The principal and interest on the note are due
January 3, 2011. Construction costs (paid in cash) that occurred evenly throughout the year totaled
$700,000. The building was completed on December 30, 2010, and the move-in to the new building
was to occur during the next week.
2. On January 2, 2010, Lurch exchanged its one existing machine plus $50,000 for a newer machine
with a fair value of $430,000. The new machine is to be depreciated using straight-line depreciation
based on an economic life of five years and a residual value of $55,000.
3. Lurch uses a FIFO perpetual inventory system. Lurch sold $350,000 of its inventory for $700,000
cash, paid for its beginning accounts payable, and purchased $480,000 of inventory on account during
the year.
4. On July 31, 2010, Lurch declared and paid a $2.50 per share cash dividend to its shareholders.
5. Lurch is subject to a 30% income tax rate, and income taxes are accrued at year-end.
Required
Prepare Lurch’s income statement and statement of retained earnings for the fiscal year ended
December 31, 2010, and a balance sheet as of December 31, 2010. Show all supporting journal entries
and computations made during 2010. (Contributed by Scott I. Jerris)
JOURNAL ENTRIES
S.No Accounts Title Debit Credit
1 Land $ 150,000
Common Stock $ 60,000
Additional paid in capital $ 90,000

2 Cash $ 500,000
Notes Payable $ 500,000

3 Building $ 700,000
Cash $ 700,000

4 New Machine $ 430,000

Accumulated Depreciation $ 135,000

Old Machine $ 500,000


Cash $ 50,000
Gain on disposal of old machine $ 15,000
($ 430,000 add $ 135,000 less $ 500,000 less $ 50,000)

5 Depreciation expense $ 75,000


Accumulated Depreciation $ 75,000
($ 430,000 less $ 55,000)/5 years

6 Cash $ 700,000
Sales revenue $ 700,000

7 Cost of goods sold $ 350,000


Inventory $ 350,000

8 Accounts Payable $ 400,000


Cash $ 400,000

9 Inventory $ 480,000
Accounts Payable $ 480,000
10 Dividends $ 90,000
Cash $ 90,000

11 Interest expense $ 60,000


Interest payable
MIRAYA GABA 36000
NEHA DAHDA ARUNESH VASDEV AARIN VASDEV
(6,000 shares *$ 25 per share)
(6,000 sharAssets
($ 150,000 Cash
Inventory
Prepaid Rent
Machine
less: accumulated depreciation
Total Assets

Liabilities & Equities

Accounts Payable

Common Stock, $ 10 par

Additional paid in capital


Retained Earnings
5000
8.4
700000
500000
42857.14

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