Cash Accounts Receivable Prepaid Advertising

1 165000 2700 2 11 2200 9 6000 3000 17

11 93800 14400 3 2200 3000
5000 4
15000 4a Buildings and Renovations
100000 5a 3 5000
6700 6 4 20000
1000 7 25000
500 8
6000 9
62000 12 Software
45500 7 1000 100 14
900
Tape Inventory Land
5 100000 18021 15 3 43000
10 18750 43000 Mortgage Payable
100729 33600 3
33600

Equipments Accumulated Depreciation

6 6700 1170 13
6700 1170
Sales Revenue
96000 11
Accounts Payable Accrued Interest Expense A
4a 15000 15000 4 2900 16 96000
5a 100000 100000 5 2900
18750 10 Software Amortization
18750 14 100
D
100
Common Stock Retained Earnings
165000 1 J Interest Expenses
165000 16 2900
 G
2900
Tape Amortization Depreciation Expenses
15 18021 13 1170
B C
18021 1170

Salaries and Wages Legal fees

12 62000 2 2700
E F
62000 2700

Advertising Expenses Office Supplies Expenses

17 3000 8 500
H I
3000 500
Events and transactions – November 1988 through June 1989
1)      Common stock issued for $165,000.
2)      Legal fees of $2,700 paid in cash.
3)      Building and land purchased for $5,000 and $43,000 respectively. Mortgage obtained for $33,600; remainder of $14,400 paid in cash.
4)      Renovation work of $20,000 incurred; $5,000 paid when the work began.
a.       The remaining $15,000 paid when the work was completed at the end of December.
5)      Rental tape inventory purchased for $100,000 on account.
a.       Entire amount subsequently paid for in cash by 12/31/88
6)      Equipment purchased for $6,700 cash
7)      Software purchased for $1,000 cash
8)      Office supplies purchased for $500 cash. Assume it is treated as an expense when delivered
9)      Advertising contract covering 1/2/89 through 12/31/89 paid for in cash for $6,000 initially recorded as prepaid advertising.
10)   “New release” tapes purchased on June 1 for $18,750 on account remained unpaid at 6/30/89.
11)   Sales for the six-months ended 6/30/89 were $96,000. $2,200 remained in accounts receivable at 6/30/89
12)   Salaries and wages paid during this six month period totalled $62,000
Additionally the following accrual entries are necessary. Assumptions are noted following the transactions
13)   Depreciation recorded for the building, renovations and equipment as follow:
Building ($5,000/25 years) @ 6 months = $ 100
Renovations ($20,000/25 years) @ 6 months 400
Equipment ($6,700/ 5 years) @ 6 months 670
$1,170
This assumes that depreciation does not begin until 1/2/89, when operations began, even though the renovations were completed and the equipment was purchased
14)   Amortization recorded for the software as follows
($1,000/5 years) @ 6 months = $100
Again, this asset is not depreciated until operations commence on 1/2/89
The above also assumes that the software is depreciated (rather than expensed) over the same life as the computer and the other equipment. The case does not spec

15)   Amortization recorded for the regular and “new release” video tapes as follows:
Regular ($100,000/3years) @ 6 months =$16,667
New Releases $18,750
20% ($3,750/3years) @ 1 month 104
80% ($15,000/1year) @ 1 month =1,250
$18,021
 The regular tapes are amortized over 3 years. The new releases were purchased in multiple copies of the same title; 10 copies of each title were purchased versus the
16)   Interest on the mortgage accrued for $2,900
17)   Advertising expense recorded as follows
($6,000/12 months) X 6 months = $3,000
We are recording here advertising expense from January 1989 through June 1989.
quipment was purchased by 12/31/88.

t. The case does not specify a life for the software. Arguments for shorter lives (due to expected obsolescence) or longer lives (since the software is intangible ad does not “wear o
were purchased versus the usual 2 for regular tapes. The case states that little or no benefit will be derived from the extra 8 copies of these new release titles after one year. We ha
ible ad does not “wear out”) can be made.
es after one year. We have therefore amortized these extra 8 copies over a period of 1 year. The remaining 2 copies are amortized over the usual 3 year period.