Reconstructing the income statement and balance sheet. (Adapted from a problem by Stephen A. Zeff.) Portobello Co.,

Question:

Reconstructing the income statement and balance sheet. (Adapted from a problem by Stephen A. Zeff.) Portobello Co., a firm that sells merchandise to retail customers, is in its tenth year of operation. On December 28, Year 10, three days before the close of its fiscal year, a flash flood devastated the company's administrative office and destroyed almost all of its accounting records. The company was able to save the balance sheet on December 31, Year 9 (see Exhibit 3.24), the checkbook, the bank statements, and some soggy remains of the specific accounts receivable and accounts payable balances. Based on a review of the surviving documents and a series of interviews with company employees, you obtain the following information.

(1) The company's insurance agency advises that a four-year insurance policy has six months to run as of December 31, Year 10. The policy cost $\$ 12,000$ when the company paid the four-year premium during Year 7.

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(2) During Year 10, the company's board of directors declared $\$ 6,000$ of dividends, of which the firm paid $\$ 3,000$ in cash to shareholders during Year 10 and will pay the remainder during Year 11. Early in Year 10 the company also paid dividends of $\$ 1,800$ cash that the board of directors had declared during Year 9 .
(3) On April 1, Year 10, the company received from Appleton Co. $\$ 10,900$ cash, which included principal of $\$ 10,000$ and interest, in full settlement of Appleton's nine-month note dated July 1, Year 9. According to the terms of the note, Appleton paid all interest at maturity on April 1, Year 10.
(4) The amount owed by the company to merchandise suppliers on December 31, Year 10, was $\$ 20,000$ less than the amount owed on December 31, Year 9 . During Year 10 , the company paid $\$ 115,000$ to merchandise suppliers. The cost of merchandise inventory on December 31, Year 10, based on a physical count, was $\$ 18,000$ larger than the balance in the Merchandise Inventory account on the December 31, Year 9, balance sheet. On December 8, Year 10, the company exchanged shares of its common stock for merchandise inventory costing $\$ 11,000$. The company's policy is to purchase all merchandise on account.

(5) The company purchased delivery trucks on March 1, Year 10, for $\$ 60,000$. To finance the acquisition, it gave the seller a $\$ 60,000$ four-year note that bears interest at 10 percent per year. The company must pay interest on the note each six months, beginning September 1, Year 10. The company made the required payment on this date. The delivery trucks have an expected useful life of 10 years and an estimated salvage value of $\$ 6,000$. The company uses the straightline depreciation method.
(6) The company's computer system has a six-year total expected life and zero expected salvage value.
(7) The company makes all sales on account and recognizes revenue at the time of shipment to customers. During Year 10, the company received $\$ 210,000$ cash from its customers. The company's accountant reconstructed the Accounts Receivable subsidiary ledger, the detailed record of the amount owed to the company by each customer. It showed that customers owed the company $\$ 51,000$ on December 31, Year 10. A close examination revealed that $\$ 1,400$ of the cash received from customers during Year 10 applies to merchandise that the company will not ship until Year 11. Also, $\$ 600$ of the cash received from customers before the end of Year 9 applies to merchandise not shipped to customers until Year 10.
(8) The company paid $\$ 85,000$ in cash to employees during Year 10. Of this amount, $\$ 6,500$ relates to services that employees performed during Year 9 , and $\$ 4,000$ relates to services that employees will perform during Year 11. Employees performed the remainder of the services during Year 10. On December 31, Year 10, the company owes employees $\$ 1,300$ for services performed during the last several days of Year 10 .
(9) The company paid $\$ 27,000$ in cash for property and income taxes during Year 10. Of this amount, $\$ 10,000$ relates to income taxes applicable to Year 9 , and $\$ 3,000$ relates to property taxes applicable to Year 11 . The company owes $\$ 4,000$ in income taxes on December 31, Year 10.
(10) The company entered into a contract with a management consulting firm for consulting services. The total contract price is $\$ 48,000$. The contract requires the company to pay the first installment of $\$ 12,000$ cash on January 1, Year 11, and the company intends to do so. The consulting firm had performed 10 percent of the estimated total consulting services under the contract by December 31, Year 10.
Prepare an income statement for Year 10 and a balance sheet on December 31, Year 10. (Hint: Set up T-accounts for each of the accounts on the December 31, Year 9, balance sheet, and enter the appropriate amounts at that time. Next, enter the information for each of the 10 items, listed above, in the T-accounts, adding income statement and additional balance sheet accounts as needed.)