70.2K

Verified Solution

Link Copied!

The Clayton Company is a retail company that began operations on October 1, 2018 , when it incorporated in the state of North Carolina. The Clayton Company is authorized to issue 250,000 shares of $1 par value common stock and 40,000 shares of 8 %, $20 par value preferred stock. The company sells a product that includes a one-year warranty and records estimated warranty payable each month. Customers are charged a 6 % state sales tax. The company uses a perpetual inventory system. There are three employees that are paid a monthly salary on the last day of the month.

In preparation for recording the transactions, prepare An amortization schedule for the first 3 months of the mortgage payable issued on October 1. Round interest calculations to the nearest dollar.

1.	In preparation for recording the transactions, prepare:
a.	An amortization schedule for the first 3 months of the mortgage payable issued on October 1. Round interest calculations to the nearest dollar.
b.	Payroll registers for October, November, and December. All employees worked October 1 through December 31 and are subject to the following FICA taxes: OASDI: 6.2% on first $ 118,500 earned; Medicare: 1.45 % up to $ 200,000, 2.35 % on earnings above $200,000. Additional payroll information includes:

Employee	Monthly Salary	Federal Income Tax	Health Insurance
Keirsten Jackson	$5,800	$1,740	$320
Marg Silva	5,500	1,100	320
Shelly McDaniel	2,700	405	320

c.	Calculations for employer payroll taxes liabilities for October, November, and December: OASDI: 6.2 % on first $118,500 earned; Medicare: 1.45 %; SUTA: 5.4 % on first $7,000 earned; FUTA: 0.6% on first $7,000 earned.

2.	Record the transactions in the general journal. Omit explanations.
3.	Post to the general ledger.
4.	Record adjusting entries for the three-month period ended December 31, 2018 :
a.	Depreciation on the Building, straight-line, 40 years, no residual value.
b.	Depreciation on Store Fixtures, straight-line, 20 years, no residual value.
c.	Accrued interest expense on the note payable for the store fixtures.
d.	Accrued interest expense on the mortgage payable.
e.	Accrued income tax expense of $31,000.

5.	Post adjusting entries and prepare an adjusted trial balance.
6.	Prepare a multi-step income statement and statement of retained earnings for the quarter ended December 31, 2018. Prepare a classified balance sheet as of December 31, 2018. Assume that $18,573 of the mortgage payable is due within the next year.
7.	Evaluate the company's success for the first quarter of operations by calculating the following ratios. The market price of the common stock is $40 on December 31,2018. Round to two decimal places.

a.	Times interest earned
	b. Debt to equity
	c. Earning per share
	d. Price/earnings ratio
	e. Rate of return on common stock

8.

The Clayton Company wants to expand and is considering options for raising additional cash. The company estimates net income before the expansion of $260,000 in 2019 and that the expansion will provide an additional operating income of $60,000 in 2019. The company intends to sell the shares of treasury stock, so use issued shares for the analysis rather than current shares outstanding. Compare these options, assuming a 40 % income tax rate:

Plan 1: Issue 20,000 additional shares of common stock for $40 per share

Plan 2: Issue $150,000 in 10 -year, 20 % bonds payable.

Which option will contribute more net income in 2019? Which option provides the highest EPS?

10/01/2018	Beginning Balance	Principal Payment	Interest Expenses	Total Payment	Ending Balance
11/01/2018
12/01/2018
01/01/2019

Answer & Explanation Solved by verified expert

See Answer