Intermediate Accounting 1
Fall 2015 Evening
Classics, Inc. Case
After working for a large accounting firm, Lisa Ingram considered several different business opportunities but finally settled on establishing a “consignment” clothing store on West End Avenue, Nashville, Tennessee. The store would buy high-end used clothing from people who would wear certain new clothing only once or twice, and, occasionally, she would buy other clothing, used but in excellent condition. The store had special appeal among residents on West End Avenue and in Belle Meade.
A good friend in law school advised her to incorporate, primarily to minimize legal liability. On January 1, 2015 Lisa capitalized (financed) the company with $70,000 of her funds, from savings. In addition, she convinced her uncle to loan the company $200,000 on a note (dated March 1, 2015) at 8% interest per year. Lisa deposited the $70,000 in the newly-opened bank account in return for 1,000 shares of common stock purchased at $70 per share ($50 par value). She deposited the $200,000 in the same account on March 1. Interest was payable to her uncle on September 1 of each year, with $40,000 of the principal also due on that date. The company established December 31 as its fiscal year end.
The new corporation, Classics, Inc. began operations on January 1, 2015 with the following transactions: (1) purchased “one-time” inventory on account totaling $50,000, paying 70% of the balance by year end, and (2) paid (on January 1, 2015) two year’s (24 months) store rent totaling $48,000. During each month (beginning with Feb 1, 2015) the company paid, in cash, the normal operating expenses (utilities, supplies, wages, advertising, etc.) amounting to $8,000 per month. Classics made additional inventory purchases during the remainder of the year and in the following year, which can be calculated using the Gross Profit Method. The company continued to pay 70% of inventory purchases by year end. Ending inventory (Dec 31, 2015) should equal the cost of goods sold for the next month (January). (Sales for January, 2016 are expected to be $75,000.)
During each month (beginning Jan 1, 2015), the company had sales totaling $60,000, collecting 90% by year end, with the balance being paid in the following year. The inventory markup policy provided for a gross profit percentage of 40% of sales. On January 1, 2015, the company purchased equipment, making annual payments (each Jan 1, first pmt due 1-1-16)) of $42,731, calculated at 6% compounded annually, over a 5-year period. (You should calculate the present value “cost” of the equipment.) (Prepare an amortization schedule in Excel). The equipment has a 5-year life, $10,000 salvage value, and the company uses the straight line method of depreciation.
The company pays a federal income tax rate of 30%. This payment is generally made when the return is filed on March 15, the following year. The income tax accrual should be your last adjusting entry.
1. Prepare December 31, 2015 financial statements (Income Statement, Statement of Stockholder’s Equity, and Balance Sheet). Use Excel to show all work and for preparing each financial statement.
2. Hint: using journal entries will generally save time. It is not necessary to show all journal entries, but you must show the year end adjusting entries, and the equipment note amortization schedule for all 5 years, as well as the 3 financial statements.