Daisy-Fresh Dry Cleaning is in the process of preparing its annual financial statements. The owner of the business is not an accountant, but likes to prepare the financial statements himself. Most of the business transactions are straightforward and can be easily recorded; however, the owner is having trouble determining how to account for the following events that occurred in during the year:
1. On January 1, the company purchased a three-year insurance policy for $3,000. Because the entire amount had to be paid when the policy took effect, the owner charged $3,000 to expense in the current year.
2. On July 1, the company bought a new dry-cleaning machine for $10,000. Although it is expected to have a five-year life, the owner thinks he would only get $2,000 for it if he sold it now, so he recorded an asset of $2,000 and an expense of $8,000.
3. On October 31, the company borrowed $10,000 from a bank. Since the loan does not have to be repaid until four years later, the owner does not think it should be reported as a payable on this year's statement of financial position.
4. No interest has to be paid on the loan until October 31 of next year, so the owner did not record any interest this year.
5. On December 31, the company declared and paid a dividend of $10,000. Because it is not an expenditure that will produce future benefits and is therefore not an asset, the owner recorded this payment as an expense.
Required
Advise the owner as to how the above transactions should be recorded and reported in the financial statements for the current year.