Recording transactions III Peerless Company is a distributor of wide-screen, high-definition television sets and related equipment.

The company was formed in September x1 and its balance sheet just prior to the start of trading is as follows:

Peerless Company Balance sheet at 30/9/x1 Current assets Current liabilities Cash 18,500 Accounts payable 43,400 Advance to employee 300 Deposit from customer 800 Inventory 38,000 44,200 Prepaid rent

(for three months) 6,000 62,800 Fixed assets Shareholders’ equity Shop fittings 19,000 Share capital 54,000 Office equipment 7,400 Organisation costs 9,000 Total assets 98,200 Total equities 98,200 The company’s first retail outlet opened its doors for business on 1 October. The company’s transactions in October are summarised below.

1 TVs and videos are sold for 40,000 (euros), 22,000 on account, the balance for cash. Cash sales include delivery of the TV set to the customer who paid a deposit of 800 in September. The cost of items sold is 20,000.

2 The company collects 7,000 of amounts owed by customers.

3 It pays 34,000 to suppliers for inventory and office equipment it purchased on account in September.

4 The company has two employees. Each earns a salary of 1,000 in the month. Because of the 300 advance to one of them in September, salary payments in October are only 1,700.

CHAPTER 3 • THE INCOME STATEMENT 59 5 Rent expense is recognised. Rent consists of a monthly fixed charge of 2,000 and a variable charge of 1.5% of sales revenue. The rent prepayment at end-September represents three months of the fixed charge which was paid in advance in late September. The variable charge is to be paid in cash.

6 The company recognises depreciation of 200 on the shop fittings and 100 on the office equipment.

(The shop fittings are expected to have a 71/2-year life and salvage value of 1,000; the office equipment a six-year life and salvage value of 200. The straight-line method of depreciation is used. The assets are depreciated from the start of October when operations begin.)

7 Organisation costs are amortised at the rate of 100 a month.

8 The income tax rate is 40%. No tax is paid in October.

Required

(a) Record the above transactions and events in 1 to 8 on a worksheet similar to that used in Exhibits 3.1–3.3.

(b) Prepare for the benefit of the company’s management an income statement for October and a balance sheet at 31 October x1.

Check figure:

Total assets at 31/10/x1 78,400 AppenedixLO1