340a Fall 2002 Supplemental Homework #1

This assignment is to be completed without the help of others. (Of course, I will answer any questions that
you have.) The journal entries and general ledger must be done by hand. You are encouraged to present
the trial balances and financial statements as printouts from a computer spreadsheet (such as EXCEL). No
accounting software programs are allowed.

Alli is going to open an auto dealership. She will sell two year old Saturns. The dealership will be known
as Lease's Up Saturn. Alli has negotiated an exclusive deal with Saturn to acquire the cars for $12,000. She
has located her dealership in beautiful Star City, next to a state park that attracts locals and tourists
throughout the year for the amazing rock formations and star gazing. (Ignore the sales tax in this problem)

The following economic events occurred in March and April of 2001, the first two months of Alli's
business.

1) March 1, 2001: Alli started her business by investing $175,000. She issued herself 175 shares of "no
par value" common stock.

2) March 1, 2001: Alli borrowed a 5 year $225,000 8% bank loan that requires the payment of interest
semi-annually on September 1 and March 1, of each year.

3) March 1, 2001: Alli signed an agreement to rent the building that she will use for her dealership. The
agreement required that she pay the rent for the next 12 months up front. Thus, she paid $24,000 to cover
the coming year's rent.

4) March 1, 2001: Alli purchased an auto diagnostic system to use in the business. The system costs
$18,000 and she paid cash. She expects the equipment to be useful for 5 years and plans to depreciate it
using the straight-line depreciation method. She chose this method because it allocates the cost evenly
across the 5 years. She expects the system to have no salvage value.

5) March 1, 2001: Alli purchased furniture for the office for $4,000 and paid cash. She decided that the
furniture should be useful for 10 years and will have no salvage value. Again, she chose to use the straight-
line depreciation method to allocate the cost of the furniture across the 10 year useful life.

6) March 1, 2001: Alli purchased other office supplies from Office Max for $750 on credit. She decided
that these supplies will be used up fairly quickly and consequently, do not have future economic benefit.

7) March 1, 2001: Alli purchased property insurance for the business and paid cash. The insurance cost
$1500 and provides coverage for the coming 12 months. The coverage protects her from loss due to theft,
fire, flood, and hail storm damage.

8) March 3, 2001: Alli purchased 10 Saturns costing $12,000 each. She paid cash.

9) March 3, 2001: Alli's employees, Saleswoman Libby and Molly the Mechanic began working. Libby
earns $1000 each month plus commissions equal to $750 per car sold by the dealership. Molly earns $2500
per month straight salary. The two employees are paid on the fifth day of the month for the previous
month's work.

10) March 18, 2001: Alli paid $750 to Office Max to pay off the balance due on her earlier supplies
purchase.

11) March 22, 2001: Alli paid $800 for newspaper print ads to advertise her business.

12) March 24, 2001: The dealership sold a car to Customer Carla for $16,000 on credit.
13) March 27, 2001: The dealership sold 3 cars to Customers Bert,Ernie, and Elmo for $17,000 each. Bert
and Ernie paid cash and Elmo purchased his car on credit.

14) March 30, 2001: Expecting business to pick up quickly, Alli purchased 10 Saturns for $12,000 each, all
on account with Saturn.

15) March 31, 2001: Alli closed the books for March.

16) April 5, 2001: Alli paid her employees' salaries and commissions that they earned in March.

17) April 6, 2001: Libby had a great day. The dealership sold 5 cars for $20,000 each. The customers all
paid cash.

18) April 6, 2001: Customer Carla paid her account in full.

19) April 14, 2001: Libby covered the parking lot with star-shaped balloons for the Annual Stargazers
Festival, costing $150. The dealership sold 4 cars for $16,000 each. The customers paid cash.

20) April 15, 2001: Star City was struck by a meteor shower - the first in recorded history for that part of
the country. Lease's Up lost 4 cars, all flattened by 2 giant meteors. Luckily, everything inside the building
was spared. Alli called her insurance agent to see if the meteor shower could be considered as a really big
hail storm. The insurance agent laughed so hard that he fell off of his chair and broke his arm.

21) April 25, 2001: Alli is notified by the insurance agent that he has filed suit against her for his broken
arm. Alli contacts her brother, BR, an attorney and he gives her his expert opinion, " I would say there is
only a remote possibility that a judge will find you liable for the broken arm.".

22) April 26, 2001: Alli pays Saturn for 5 of the cars bought on March 30.

22) April 30, 2001: Alli closed the books for April.

Other information:
The income tax rate is 30%.
The attached chart of accounts lists all of the accounts you will need except one that you will need to create
as a result of the meteor shower.

Hint: In order to balance at the end of April, you will need to make sure that you exclude any loss from the
meteor shower from your income tax expense entry and include the following adjusting entry AFTER all of
the others.
Income taxes payable $14,400
Loss account from meteor shower $14,400
To recognize the tax benefit of the loss from the meteor shower.

Required:
1. Record the necessary journal entries for March. If no entry is needed, please explain why no entry is
needed.
2. Post the entries made during March to a general ledger (hint: Make a g/l using T-accounts).
3. Prepare an unadjusted trial balance at 3/31/01.
4. Prepare the adjusting entries for March.
5. Prepared the adjusted trial balance.
6. Perform the closing process.
7. Prepare the post-closing trial balance.
8. Prepare a balance sheet, a multi-step income statement and a statement of cash flows for March , in good
form.
9. Repeat all of the above for April.
IMPORTANT INFORMATION: On September 24, Class meeting #10, we will have a 40 minute quiz
over this assignment. In particular, for the quiz you should be able to complete steps 3 through 7 above.
You will need to know how to use the general ledger to prepare a trial balance, how to make adjusting
entries, how to prepare an adjusted trial balance, and how to recognize which accounts should be closed in
the closing process. The quiz will not use the numbers from this assignment, but will be very similar. The
quiz will be worth 50 points. The quiz will be much easier for you if you have already completed steps 3
through 7 before September 24.

Chart of accounts for Lease's Up Saturn

Cash
Accounts Receivable
Inventory
Prepaid Insurance
Prepaid Rent
Property and Equipment
Accumulated Depreciation - Property and Equipment
Office Furniture
Accumulated Depreciation - Office Furniture
Accounts Payable
Bank Note Payable
Interest Payable
Income Taxes Payable
Wages and Commissions Payable
Common Stock (no par value)
Retained Earnings
Sales
Cost of Goods Sold
Wages and Commissions Expense
Supplies Expense
Advertising Expense
Depreciation Expense
Insurance Expense
Rent expense
Interest Expense
Income Tax Expense
???Meteor shower losses account??? - you decide