Ballard Yoga- Part VI

Practice Exercise
Accounting 215: Accounting and Financial Reporting
Foster School of Business, University of Washington
Professor Peter Demerjian
After a number of years as a successful CPA at a national firm, you decide to quit the rat race and pursue
your true loveyoga. You decide that Seattles Ballard neighborhood would be perfect place to open an
Ashtanga Yoga studio. Even better, your friend Solomon, who studied in Mysore with Sri K. Pattabhi
Jois, has just moved to town and is willing to teach in your new studio. You hurriedly prepare to open the
studio, Ballard Yoga, by October 1.
December, 2014
The following transactions take place during December.
1. You receive cash totaling $3,460 for class taught during December. You also sell two one-year
passes for $960 each. These passes entitle the holder to unlimited class for one year, and were
sold on December 15.
2. Your instructor earns wages totaling $1,500. $500 is paid on December 15, $500 on December
30, and $500 will be paid on January 14.
3. You purchase inventory on account for $800.
4. Utility use totals $300, payable in January.
5. Rent totals $1,000, paid in cash on December 1.
6. You sell inventory for $600 in cash. You cannot determine the cost of inventory when you make
the sale.
7. You agree to provide classes at the local university. The deals calls for three months of classes,
taught in January, February, and March. They will pay you $4,500 in April, after the class is
done.
8. On December 1, someone breaks into the studio and steals half of the class equipment. The
inventory was locked in a closet and none was taken.
9. On December 31, your insurance reimburses you in cash for the original cost of the equipment.
10. On that day you receive the insurance proceeds, you use them to purchase more equipment.
11. Your uncle decides he does not want you to pay back the loan. However, he asks that the debt be
converted into partial ownership in the studio.
12. You pay yourself and your uncle dividends of $250 apiece.
Other notes:
You do an inventory count on December 31. The ending inventory has a cost of $1,150.
The tax rate on positive pre-tax net income is 30%; negative net income is not taxed, and losses
are not carried forward for tax purposes. Taxes are due to be paid in April of next year.
You pay any outstanding short-term payables from November.
Required: Prepare the Income Statement, Statement of Shareholders Equity, and Balance Sheet for the
Ballard Yoga for December 31. Remember, you are responsible for making any past adjustments resulting
from prior transactions.

Transactions (note: not required, here for illustration)

1a.

Cash

3,460
Service revenue

1b.

Cash

3,460
1,920

Service revenue
Unearned revenue

80
1,840

Note: Since the passes were sold on December 15, one-half of one month (i.e. 1/24th of the total
revenue) needed to be recognized in December; the remainder will be earned in the future.
2.

3.

4.

5.

6.

Wage expense
Cash
Wage payable

1,500

Inventory
Accounts payable

800

Utility expense
Utility payable

300

Rent expense
Cash

1,000

Cash

600

1,000
500

800

300

1,000

Sales revenue

600

Note: Since the cost is not given, will be solved as an adjustment; see adjustment #6.
7.

<no entry>
Note: No cash changed hands and no work has been done; revenue recognition rules do not allow
anything to be recorded here.

8.

Theft loss
Accumulated Depreciation
PP&E

230
20
250

Note: The theft loss is the net of the goods that were stolen. Once stolen, the goods must be
removed from the balance sheet. This means getting the net value off, which includes the gross
value of the PP&E (the credit) and the accumulated depreciation (with a debit) since this is the
contra-account.
9.

Cash

250
Insurance proceeds

10.

PP&E

250
250

Cash

250

11.

12.

Loan payable
Contributed capital

2,000

Retained earnings
Cash

500

2,000

500

(payment on November short-term payables)

13.

14.

Adj1

Adj2

Adj3

Wages payable
Cash

300

Utility payable
Cash

150

Insurance expense
Prepaid insurance

200

Unearned revenue
Service revenue

250

300

150

200

250

Depreciation expense
10
Accumulate depreciation

10

Note: Since the PP&E was stolen on December 1 and not replaced until December 31, you should
only recognize depreciation for the 250 that was part of the studio for the month. If the theft had
happened later (or the reimbursement/repurchase earlier), depreciation would be recognized on a
pro-rated basis depending on for how long during the month the assets were held. Well talk more
about this in Chapter 8.
Adj4

Adj5

Interest receivable
Interest income

Cost of goods sold

Inventory

355

355

Note: You need to use the ending balance of inventory (1,150) to figure out cost of goods sold.
We know that purchases of inventory are debits (increase the balance) while recognition of cost
of goods sold related to sales are credits (decrease the balance). If one of these is missing, but we
have the beginning and ending balances, we can determine the missing quantity. This is best
illustrated with a T-account:
Inventory
705
(3) 800 ???

1,150

The missing amount, the credit is the amount of inventory that was sold. In equation form, this is:
705 + 800 x = 1,150. Solving for x yields 355, which is the amount of the inventory credit. This
must be offset with Cost of Goods Sold:
Inventory
705
(3)
800 355 (adj5)

Cost of Goods Sold

(adj5) 355

1,150
Adj6

Income tax expense

Income tax payable

355
316
316

Note: You need to calculate the pretax income after recording all transactions and adjustments.
The pretax income here is 1,053, yielding tax expense of 316 (1,053 * 0.3, with a little rounding).

T-Accounts (note: not required, here for illustration)

Cash
4,855
(1a) 3,460 1,000 (2)
(1b) 1,920 1,000 (5)
(6) 600 250 (10)
(9) 250 500 (12)
300 (13)
150 (14)

PP&E
500
(10) 250 250 (8)

Utility Payable
150
(14) 150 300 (4)

500

Service Revenue
3,460 (1a)
80 (1b)
250 (adj2)
3,790

300

Acc. Dep: PP&E

40
(8) 20 10 (adj3)

Unearned Revenue
250
(adj2) 250 1,840 (1b)

Sales Revenue
600 (6)

Utility Expense
(4) 300

300
Insurance Expense
(adj1) 200

7,885
CD
3,000

30
Interest Receivable
16
(adj4) 8

1,840
Loan Payable
2,000
(11) 2,000

600
Cost of Goods Sold

200
Depreciation Expense

(adj5) 355

(adj3) 10

355

10

3,000
Prepaid Expense
800
200 (adj1)

24

Wages Payable
300
(13) 300 500 (2)

Contributed Capital
9,000
2,000 (11)

Wage Expense

Interest Income

(2) 1,500

8 (adj4)

600
Inventory
705
(3) 800 355 (adj5)

500
Accounts Payable

11,000
Retained Earnings
1,864

800 (3)
1,150

1,500
Rent Expense

8
Theft Loss

(5) 1,000

(8) 230

1,000

230

(div) 500 737 (ni)

800
Income Tax Payable
316 (adj6)

316

1,627

Income Tax Expense

(adj6) 316

316

Insurance Proceeds
250 (9)

250

Trial Balance (note: not required, here for illustration)

Ballard Yoga
Trial Balance (pre-closing)
December 31, 2014
Account
DEBIT CREDIT
Cash
7,885
Prepaid Insurance
600
CD
3,000
Inventory
1,150
PP&E
500
Acc. Dep: PP&E
30
Intererest Receivable
24
Wage Payable
500
Utility Payable
300
Accounts Payable
800
Unearned Revenue
1,840
Income Tax Payable
316
Contributed Capital
11,000
Retained Earnings
2,364
Service Revenue
3,790
Sales Revenue
600
Cost of Goods Sold
355
Wage Expense
1,500
Rent Expense
1,000
Utility Expense
300
Insurance Expense
200
Depreciation Expense
10
Theft Loss
230
Insurance Proceeds
250
Interest Income
8
Income Tax Expense
316
Total
19,434 19,434

Ballard Yoga
Income Statement
December 31, 2014
Service Revenue
Sales Revenue
Total Revenue

3,790
600
4,390

Operating Expenses
Cost of Goods Sold
Wage Expense
Rent Expense
Utility Expense
Insurance Expense
Depreciation Expense
Total Operating Expenese

355
1,500
1,000
300
200
10
3,365

Operating Income

1,025

Other income (expense)

Theft Loss
Insurance Proceeds
Interest Income
Total Other Income (Expense)
Pretax Income
Income Tax Expense
Net Income

(230)
250
8
28
1,053
316
737

Closing Journal Entry (note: not required, here for illustration)

Service revenue
Sales revenue
Insurance proceeds
Interest income
Cost of goods sold
Wage expense
Rent expense
Utility expense
Insurance expense
Depreciation expense
Theft loss
Income tax expense
Retained earnings

3,790
600
250
8
355
1,500
1,000
300
200
10
230
316
737

Trial Balance (note: not required, here for illustration)

Ballard Yoga
Trial Balance (post-closing)
December 31, 2014
Account
DEBIT CREDIT
Cash
7,885
Prepaid Insurance
600
CD
3,000
Inventory
1,150
PP&E
500
Acc. Dep: PP&E
30
Intererest Receivable
24
Wage Payable
500
Utility Payable
300
Accounts Payable
800
Unearned Revenue
1,840
Income Tax Payable
316
Contributed Capital
11,000
Retained Earnings
1,627
Total
14,786 14,786

Ballard Yoga
Statement of Changes in Shareholders' Equity
December 31, 2014

Balance at September 1, 2014

Additional stock issuance
Net income
Dividends
Balance at September 30, 2014

Contributed
Capital
9,000
2,000

11,000

Retained
Earnings
(1,864)
737
(500)
(1,627)

Total
Shareholders'
Equity
7,136
2,000
737
(500)
9,373

Ballard Yoga
Balance Sheets
ASSETS
Current Assets:
Cash
Inventory
Prepaid Insurance
CD
Interest Receivable
Total Current Assets
PP&E (net)
Total Assets
LIABILITIES AND EQUITY
Current Liabilities:
Wage Payable
Utility Payable
Accounts Payable
Unearned Revenue
Income Tax Payable
Total Current Liabilities
Loan Payable
Total Liabilities
Shareholders' Equity
Contributed Capital
Retained Earnings
Total Shareholders' Equity
Total Liabilities and Equity

Dec 2014 Nov 2014

7,885
1,150
600
3,000
24
12,659
470
13,129

4,855
705
800
3,000
16
9,376
460
9,836

500
300
800
1,840
316
3,756

300
150
0
250
0
700

2,000

3,756

2,700

11,000
(1,627)
9,373
13,129

9,000
(1,864)
7,136
9,836