Question & Answer: The students names are: Victoria, Matt, Jean & Tracy……

The students names are: Victoria, Matt, Jean & Tracy.
	They form a company (partnership) and name it “Chicago Summers”. They decide to use the same name for the ice cream shop.
	The students divide the duties – Matt and Victoria will make the purchases needed to produce the Ice Creams. They will hire
	two helpers to be at the ice cream shop during business hours, prepare and sell the ice cream. Jean will supervise the employees
	She also will be in charge of counting the materials at the end of each business day and communicate to Victoria and Matt how
	much more they need to purchase. Tracy is in charge of keeping the accounting records of the company as well as preparing the financial
	statements for each month

	Here are the transactions Chicago Summers company incurs during the month of June & July 2015:

	June Transactions

	Setting up the shop
	6/1	Each of the students/owners invests $15,000 of cash in the Chicago Summer Company.
		The students open a business checking account with City Bank and deposit their initial investments.
	6/1	They sign a 2-year lease to rent a space on Michigan Avenue for the Chicago Summers Ice cream shop.
		Monthly rent of the space is $2000, payable on the first day of each month.
	6/2	They purchase Ice cream Equipments, on account for 12,600, payable in three equal installments, in the next three months
		The first installment is due for payment in July 2nd. It is estimated that the equipment has a life of 7 years with no
		salvage value.
	6/2	They purchase Furniture for the Ice Cream Shop on account for 10,000 on account, payable in 45 days.
		It is estimated that the furniture will be used for 5 years, with no salvage value.
	6/2	They purchase a laptop for $1200 on account to be used exclusively in keeping track of the accounting records.
		Payment for the computer is due in 45 days. Estimated life of the laptop is 3 years with no salvage value.
	6/2	They purchase a QuickBooks software, to be used in Accounting, for $1500 on account – payable in 45 days.
		It is estimated that the software will be used for 10 years.
	6/5	They call a technician to install the Ice Cream equipment. Estimated bill of the technician is $700. At the end of the
		month, the company has not yet received the bill, however, the technician completed in full his installation work.
	6/5	They hire two employees. Total salary cost for the two employees is $1500 a month, payable at the end of
		the month.

	Starting the Operations
	6/5	Victoria & Matt are in charge of purchasing the key materials to make the ice cream. At the beginning of the month
		they purchase the following:

		Description	Quantity in LB	Price	Total Cost
		Milk	200	$ 1.25	$ 250.00
		Sugar	200	$ 0.75	$ 150.00
		Vanilla	1	$ 500.00	$ 500.00
		Cacao	200	$ 3.00	$ 600.00
		Butter	200	$ 2.00	$ 400.00

	6/5	They incur freight costs of $50, which they pay in full

	6/15	Victoria and Matt purchase additional materials. Because of market changes, they realize that prices for their key
		ingredients have gone up.
		Description	Quantity in LB	Price	Total Cost
		Milk	200	$ 1.35	$ 270.00
		Sugar	200	$ 0.90	$ 180.00
		Butter	100	$ 2.20	$ 220.00


	6/30	Throughout the month, the Chicago Summers ice cream shop is able to generate a total of $6,000 in cash sales.


	Inventory
	6/30	Jean is in charge of keeping track of key material quantities. She knows that most of the materials purchased
		during the month have been used in making ice cream. However some quantities still are left unused. These will be
		used in the next month’s production of ice cream. At the end of the month, Jean performs a physical count of the
		materials left. Below is the result of the count.
		Description	Quantity in LB
		Milk	50
		Sugar	70
		Vanilla	0.5
		Cacao	50
		Butter	90

	June’s financial statement
	6/30	Tracy is in charge of keeping the accounting records. She records all the economic events presented above by doing the following:
		Preparing the journal entries,
		Posting the appropriate journal entries in the T accounts
		Preparing the Trial balance for the month of June
		Completing the Balance Sheet and Income Statement for the month of June

	July Transactions
	7/1	The company paid the monthly rent
	‘7/1	Paid on account for an ad in the local radio station for $700
	7/2	Paid the first installment due for the purchase of the Ice Cream Equipment (total $4200)
	7/5	Purchased the following inventory items:
		Description	Quantity in LB	Price	Total Cost
		Milk	200	$ 1.30	$ 260.00
		Sugar	200	$ 0.90	$ 180.00
		Cacao	100	$ 2.80	$ 280.00
		Butter	100	$ 1.90	$ 190.00

	7/5	Incurred $50 of freight cost, which they paid in cash

		All the inventory left over from June and purchased July was fully utilized in making the ice creams in July

	7/15	Paid in full the Furniture purchased on account in June.
	7/15	Paid in full the cost of the laptop
	7/15	Paid in full the cost of the QuickBooks software
	7/30	Paid the salaries of the two employees
	7/30	Collected $7,000 in cash sales

	Instructions

	I June Financial Statements
	Assume you are doing Tracy’s job:
	Analyze each of June’s transactions and prepare the journal entries

	Calculate the depreciation and amortization expenses for the month of June for the tangible and intangible assets

	Calculate Cost of Goods Sold assuming the company uses a periodic inventory system and FIFO for cost method

	Post the appropriate journal entries in T accounts

	Prepare a trial balance

	Prepare the Balance Sheet and Income Statement for the month of June.

	II July Financial Statements
	Repeat the steps above for July:
	Analyze each of July’s transactions and prepare the journal entries

	Calculate the depreciation and amortization expenses for the month of July for the tangible and intangible assets

	Calculate Cost of Goods Sold assuming the company uses a periodic inventory system and FIFO for cost method

	Post the appropriate journal entries in T accounts

	Prepare a trial balance

	Prepare the Balance Sheet and Income Statement for the month of July

Expert Answer

ANSWERS

Working Notes for June and July

1.Value of Closing Stock as per FIFO

For valuation, rates of the latest purchase made will be used in the FIFO

June
Closing Material	Quantity (Q)	Rates as per FIFO for valuation (R)	Closing inventory valued at ( Q*R)
Milk	50	1.35	67.5
Sugar	70	0.9	63
Vanilla	0.5	500	250
Cocoa	50	3	150
Butter	90	2.2	198
TOTAL value of Closing inventory for June			728.5
TOTAL value of Closing inventory for July			NIL (as no closing stock left)

Cost of Goods Sold

	June	July
Opening Inventory	NIL	728.5 (WN1)
(+) Purchases	2570	910
(-)Closing Inventory	728.5 (WN1)	NIL
Cost of Goods Sold	1841.5	1638.5

Depreciation and amortisation schedule

Assets	Life (years)	Purchases	Annual Depreciation	June Depreciation	Closing (June)	July Depreciation	Closing (July)
TANGIBLE
Equipment	7	12600	1800	150	12450	150	12300
Furniture	5	10000	2000	166.66	9833.33	166.66	9666.66
Laptop	3	1200	400	33.33	1166.66	33.33	1133.33
TOTAL				349.99	23449.99	349.99	23099.99
INTANGIBLE
Software	10	1500	150	12.5	137.5	12.5	125

Technical Fees	7	700	100	8.33	91.66	8.33	83.33

Note: Technical fees bill hasn’t been received. However, its estimated cost is accounted for and amortised in the Profit and Loss account just like Euipment’s. It is capitalised separately and not with Equipment, as the amount is an estimate. In future when the amount becomes known, adequate required can be taken to reverse/add amortisation.

Journal Entries for June and July

Date	Accounts	Debit	Credit
6/1	Cash	60000
	Capital a/c of-
	Victoria		15000
	Matt		15000
	Jean		15000
	Tracy		15000

6/1	Bank	60000
	Cash		60000

6/1	Rent expense	2000
	Expense payable		2000

6/2	Equipment	12600
	Furniture	10000
	Laptop	1200
	Software	1500
	Accounts payable		25300

6/2	Technical Fees	700
	Provision for expense		700

6/5	Purchase	1900
	Freight	50
	Bank		1950

6/15	Purchase	670
	Bank		670

6/30	Cash	6000
	Sales		6000

6/30	Salary expense	1500
	Expense payable		1500

6/30	Depreciation WN3	362.49
	Accumulated Depreciation Reserve		362.49

6/30	Amortisation of expense	8.33
	Technical Fees		8.33

7/1	Expense Payable	2000
	Bank		2000
	*Rent paid for June

7/1	Rent expense	2000
	Expense payable		2000
	*Due for july

7/1	Advertisement	700
	Bank		700

7/2	Accounts payable	4200
	Bank		4200
	*Equipemt installment

7/5	Purchase	910
	Freight	50
	Bank		960

7/15	Accounts payable	12700
	Bank		12700
	*paid for laptop, software, furniture

7/30	Expense payable	1500
	Bank		1500
	*June salary paid

7/30	Cash	7000
	Sales		7000

7/31	Salary Expense	1500
	Expense payable		1500

7/31	Depreciation WN3	362.49
	Accumulated Depreciation Reserve		362.49

7/31	Amortisation of expense	8.33
	Technical Fees		8.33

Trail balance for June and July

Accounts	June		July
	Dr	Cr	Dr	Cr
Cash	6000		13000
Capital a/c–
Victoria		15000		15000
Matt		15000		15000
Jean		15000		15000
Tracy		15000		15000
Bank	57380		35320
Rent expense	2000		4000
Expense Payable		3500		3500
Equipment	12600		12600
Furniture	10000		10000
Laptop	1200		1200
Software	1500		1500
Accounts payable		25300		8400
Technical Fees	691.66		683.33
Provision for exp		700		700
Purchases	2570		3480
Freight	50		100
Sales		6000		13000
Salary Expense	1500		3000
Depreciation exp	362.49		724.98
Accumulated Depreciation Reserve		362.49		724.98
Amortisation of expenses	8.33		16.66
Advertisement exp			700
TOTAL	95862.5	95862.5	86325	86325

Income Statement

			June	July
Revenue from Operation
Sales			6000	13000

Expenses
	Cost of Goods Sold		1841.5	1638.5
	Rent Expense		2000	4000
	Depreciation		362.49	724.98
	Amortisation		8.33	16.66
	Freight		50	100
	Salary expenses		1500	3000
	Advertisment			700
		TOTAL	5762.32	10180.14
	Net Income		237.68	2819.86

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