Cash Accounts Receivable Prepaid Advertising

1 165000 2700 2 11 2200 9 6000 3000 17

11 93800 14400 3
5000 4 3000
15000 4a Buildings and Renovations
100000 5a 3 5000
6700 6 4 20000
1000 7 25000
500 8
6000 9
62000 12 Software
45500 7 1000 100 14
900
Tape Inventory Land
5 100000 18021 15 3 43000
18750 Mortgage Payable
100729 33600 3

Equipments Accumulated Depreciation

6 6700 1170 13

Sales Revenue
96000 11
Accounts Payable Accrued Interest Expense A
4a 15000 15000 4 2900 16
5a 100000 100000 5
18750 10 2900 Software Amortization
18750 14 100
100 D
100
Common Stock Retained Earnings
165000 1 5609 J Interest Expenses
16 2900
 165000 2900 G
2900
Tape Amortization Depreciation Expenses
15 18021 13 1170 Trial Balance as of June 20,1989
18021 B 1170 C Account Debit Credit
18021 1170 cash 45500
acc receivable 2200
Salaries and Wages Legal fees prepaird adverti 3000
12 62000 2 2700 building & Reno 25000
62000 E 2700 F acc payable 18750
62000 2700 software 900
tape inventory 100729
Advertising Expenses Office Supplies Expenses land 43000
17 3000 8 500 mortgage payable 33600
3000 H 500 I accumulated depre. 1170
3000 500 Equipments 6700
Sales Revenue 96000
SW amortization 100
Retained earnrevenue - expenses common stock 165000
5609 accrues interest expense 2900
interst expense 2900
tape amortizati 18021
depreciation exp 1170
salaries & wages 62000
legal fees 2700
advertising expe 3000
office supplies 500
total 317420 317420
Events and transactions – November 1988 through June 1989
1)      Common stock issued for $165,000.
2)      Legal fees of $2,700 paid in cash.
3)      Building and land purchased for $5,000 and $43,000 respectively. Mortgage obtained for $33,600; remainder of $14,400 paid in cash.
4)      Renovation work of $20,000 incurred; $5,000 paid when the work began.
a.       The remaining $15,000 paid when the work was completed at the end of December.
5)      Rental tape inventory purchased for $100,000 on account.
a.       Entire amount subsequently paid for in cash by 12/31/88
6)      Equipment purchased for $6,700 cash
7)      Software purchased for $1,000 cash
8)      Office supplies purchased for $500 cash. Assume it is treated as an expense when delivered
9)      Advertising contract covering 1/2/89 through 12/31/89 paid for in cash for $6,000 initially recorded as prepaid advertising.
10)   “New release” tapes purchased on June 1 for $18,750 on account remained unpaid at 6/30/89.
11)   Sales for the six-months ended 6/30/89 were $96,000. $2,200 remained in accounts receivable at 6/30/89
12)   Salaries and wages paid during this six month period totalled $62,000
Additionally the following accrual entries are necessary. Assumptions are noted following the transactions
Building
13)   Depreciation recorded for the building, renovations and equipment as follow:
Renovatio
($5,000/2
ns
5 years) = $ 100
Equipmen
($20,000/
@6
tmonths
($6,700/ 400
25 years)
5
@6 years) 670
@ 6
months $1,170
months
This assumes that depreciation does not begin until 1/2/89, when operations began, even though the renovations were completed and the equi
14)   Amortization recorded for the software as follows
($1,000/5 years) @ 6 months = $100
Again, this asset is not depreciated until operations commence on 1/2/89
The above also assumes that the software is depreciated (rather than expensed) over the same life as the computer and the other equipment. T

($100,000 recorded for the regular and “new release” video tapes as follows:
15)   Amortization
Regular /3years) =$16,667
New @6
$18,750
months
Releases ($3,750/3
20% years) @
($15,000/ 104
1 month
80% 1year) @ =1,250
1 month $18,021
 The regular tapes are amortized over 3 years. The new releases were purchased in multiple copies of the same title; 10 copies of each title were
16)   Interest on the mortgage accrued for $2,900
17)   Advertising expense recorded as follows
($6,000/12 months) X 6 months = $3,000
We are recording here advertising expense from January 1989 through June 1989.
of $14,400 paid in cash.

d advertising.

completed and the equipment was purchased by 12/31/88.

the other equipment. The case does not specify a life for the software. Arguments for shorter lives (due to expected obsolescence) or longer lives (since the software is intangible
copies of each title were purchased versus the usual 2 for regular tapes. The case states that little or no benefit will be derived from the extra 8 copies of these new release titles a
he software is intangible ad does not “wear out”) can be made.
hese new release titles after one year. We have therefore amortized these extra 8 copies over a period of 1 year. The remaining 2 copies are amortized over the usual 3 year perio
ver the usual 3 year period.
Balance sheet of Thumbs_up_video

Cash
1)      Common stock issued for $165,000. + $ 165,000

2)      Legal fees of $2,700 paid in cash. $ (2,700)

3)      Building and land purchased for $5,000 and $43,000 respectively. Mortgage
$ obtained
(14,400) for $33,6

4)      Renovation work of $20,000 incurred; $5,000 paid when the work began. $ (5,000)
a.       The remaining $15,000 paid when the work was completed at the end of December.
$ (15,000)

5)      Rental tape inventory purchased for $100,000 on account.

a.       Entire amount subsequently paid for in cash by 12/31/88 $ (100,000)

6)      Equipment purchased for $6,700 cash $ (6,700)

7)      Software purchased for $1,000 cash $ (1,000)

8)      Office supplies purchased for $500 cash. Assume it is treated as an expense$ when(500)
delivered

9)      Advertising contract covering 1/2/89 through 12/31/89 paid for in cash for $$6,000 initially reco
(6,000)

10)   “New release” tapes purchased on June 1 for $18,750 on account remained unpaid at 6/30/89.

11)   Sales for the six-months ended 6/30/89 were $96,000. $2,200 remained in accounts
+ $ 93,800receivable a

12)   Salaries and wages paid during this six month period totalled $62,000 $ (62,000)

13)   Depreciation recorded for the building, renovations and equipment : 1170

14) software amortization : $100

15) tape amortisation is $18,021

16)   Interest on the mortgage accrued for $2,900

17)   Advertising expense recorded for 6 months
+ $ 45,500

Total Assets
 Assets

+ Acco. Rec. + Prepaid Advertising + Tape inventory +

+ $ 100,000

unpaid at 6/30/89. +$ 18,750

+$ 2,200

$ (18,021)
 3000
+$ 2,200 +$ 3,000 + $ 100,729

otal Assets $ 225,859

Financial Statement of Thumbs up Video as of June 30 1989

ASSETS Liabilities
Cash + $ 45,500 Accounts Payable + $ 18,750
Account recei+ $ 2,200 Accrued Interst Payable + $ 2,900
Prepaid Adver+ $ 3,000 Mortgage Payable + $ 33,600
Tape Invento + $ 100,729 Equity
Land + $ 43,000 Common Stock + $ 165,000
Buildings & R+ $ 25,000 Revenues + $ 96,000
Computer Sof+ $ 900 Expenses $ (90,391)
Accumulated $ (1,170)
Equipment + $ 6,700

Total: + $ 225,859 Total + $ 225,859

Retained Earnings= +$ 5,609

 Assets

Land + Buildings & Renovations + Computer Software + Accumulated Depreciation

+$ 43,000 +$ 5,000

+$ 20,000

+$ 1,000

$ (1,170)

$ (100)
+ $ 43,000 + $ 25,000 +$ 900 $ (1,170)
 Liabilities Equity

Accrued
Accounts Interest Mortgage Common
+ Equipment + Payable Payable Payable Stock -
+ $ 165,000

+$ 33,600

+$ 15,000
$ (15,000)

+ $ 100,000
$ (100,000)

+$ 6,700

+$ 18,750

+$ 2,900
+$ 6,700 + $ 18,750 + $ 2,900 + $ 33,600 + $ 165,000

Total L + E $ 225,859 Retained Ear

 Equity

Revenues - Expenses

$ (2,700) Legal fees expense

$ (500) Supplies Expense

$ (6,000) Advertising Expense

+$ 96,000

$ (62,000) Salaries expense

$ (1,170) Depreciation expense

$ (100) Software Amortisation

$ (18,021) Tape amortisation

$ (2,900) Accrued Interst Expense

 3000 Adjusting for prepaid advertising expense
+ $ 96,000 $ (90,391)

+$ 5,609
Q3 :

Income Statement : From Nov 1988 to June 1989

Revenues(fro 96000

Expenses:
Legal expens -2700
Supplies -500
Advertising E -3000
Salary & Wag -62000
Accrued Inter -2900
Depreciation -1170
Tape Amortis -18021
Total Expense -90291

Net Income: 5709

Dividends :

Retained earn 5709