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)
  1. 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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