50.1K

Verified Solution

Link Copied!

Use the information below to prepare an income statement, balance sheet, and statement of cash flows using the indirect method

Round to the nearest dollar.

Policies:

Furniture depreciation: Straight-line basis, using a five-year useful life and salvage value equal to 10% of the purchase cost.

Accounts Receivable: We expect to collect 90% of outstanding accounts receivable.

Gift cards: We expect 8% of all gift cards sold to go unused.

Ignore income taxes.

Transactions for Y1

Date: October 1

ABC Corp was formed by issuing 100,000 shares of no par-value common stock for $8 per share. The company also took out a loan for $600,000. The loan is payable in 4 equal installments of $150,000 and carries an annual interest rate of 6%. The interest and principal are due each year on October 1. The company paid $180,000 to cover rent for the next 12 months, purchased furniture for $400,000, and hired four employees, each with a salary of $10,000 per month (paid at the end of the month). Utility costs are $5,000 per month and each bill is paid at the end of the month. The company paid $60,000 for a one-year insurance policy that will cover them through September 30, Y2. To get business started, ABC purchased 10,000 units of inventory on account for $60 each.

Date: December 31

Here is a summary of our activity for the year. We sold 7,000 units of inventory for $110 each on account and sold 500 gift cards. Each card cost $800 and entitled holders to obtain 10 inventory units. We distributed 2,000 units to customers using their gift cards. To encourage sales, we adopted a very flexible return policy. As a result, 900 units were returned for full cash refunds. Given this evidence, we expect an additional 200 units to be returned next year. During the year we collected $600,000 on our accounts receivable. We did not write-off any of the accounts, but we believe that we will eventually collect 90% of the outstanding accounts. We paid cash dividends of $30,000. At the end of the year, we still owed $130,000 to suppliers for our inventory.

Answer & Explanation Solved by verified expert

See Answer