Franny’s Fabrics Corporation started operations on January 1, 2016. It had the following transactions during the year.
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a. |
Jan 1 |
Issued $10,000 share capital to the shareholders in return for cash. |
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b. |
Jan 1 |
Obtained a bank loan totalling $40,000. The annual interest rate is 5%. The loan will be repaid in equal yearly instalments of $10,000 plus interest starting on January 1, 2017. |
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c. |
Jan 1 |
Obtained the use of land valued at $20,000 and buildings valued at $80,000 through a finance lease. The implicit interest rate is 10% per year. Under the terms of the agreement, Franny’s will pay yearly lease payments of $40,211 for three years commencing December 31, 2016. Useful life of the building is 40 years with no residual value. Franny’s uses the straight-line method of depreciation and the ½ year rule for calculating depreciation in the year of acquisition an disposal. |
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d. |
Jan 2 |
Purchased merchandize on account from a supplier for $40,000 plus GST (5%). |
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e. |
Jan.8 |
Sold $10,000 of fabric to a customer on credit and added GST. Cost of the fabric sold was $6,000. Franny’s uses the perpetual inventory method. |
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f. |
Jan 15 |
Paid an employee S. Smith net salary for Jan. 1-15. Gross salary for the period is $1,500. Deductions from gross pay are as follows: |
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Employee income taxes |
15% |
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Government pension |
4% |
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Company pension plan |
10% |
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Company health insurance |
5% |
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g. |
Jan 21 |
Purchased merchandize inventory on account for $6,000 plus GST. |
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| h. | Jan 22 | Paid supplier in cash re. transaction d. above. | |||
| i. | Jan 23 | Sold $60,000 of fabric to a customer plus $3,000 GST. The customer paid in cash. Cost of goods sold was $15,000. | |||
| j. | Jan 31 | Paid S. Smith salary for January 16-31, less deductions calculated as in f. above. | |||
| k. | Feb 15 | Paid payroll deductions for January. | |||
| l. | Feb 15 | Paid GST owing at January 31. | |||
| m. | Dec 31 | Paid the first finance lease payment in cash. | |||
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n. |
Dec 31 | A lawsuit was filed against Franny’s. It is possible that the lawsuit will be successful. If so, the estimated award is $10,000. | |||
| o. | Dec 31 | An invoice was received by Franny’s from its lawyer. Fees to the year-end amounted to $5,000 plus GST. | |||
Additional information: The corporate income tax rate is 30% of income before income taxes.
Required:
- Prepare journal entries to record the transactions. Show necessary calculations. Descriptions and general ledger account number are not necessary.
- Post the entries to general ledger T-accounts.
- Prepare adjusting entries at December 31, 2016 and post these to general ledger T-accounts.
- Prepare a classified income statement and statement of changes in equity for the year ended December 31, 2016 and a classified balance sheet at December 31, 2016. Consider payroll expenses and depreciation to be selling expenses.
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