Paula Abboud, a connoisseur of fine chocolate, opened Paula’s Passions Inc. in Collegetown on February 1, 2011. The shop specializes in a selection of gourmet chocolate candies and a line of gourmet ice cream. You have been hired as manager. Your duties include maintaining the store’s financial records. The following transactions occurred in February 2011, the first month of operations:

a. Received contributions of $15,000 in total from four shareholders to form the corporation.

b. Paid store rent for three months at $800 per month (recorded as prepayment).

c. Purchased supplies for $400 cash.

d. Purchased on account and received candy for $5,000, due in 60 days.

e. Obtained a $10,000 loan at the bank and signed a note at 12 percent annual interest. The principal and interest are due in a lump sum in two years.

f. Used the money from

(e) to purchase a computer for $2,000 (for recordkeeping and inventory tracking). The rest was used to buy furniture and fixtures for the store.

g. Placed a grand-opening advertisement in the local paper for $425 cash.

h. Made sales on Valentine’s Day totalling $1,800; $1,525 was in cash and the rest on accounts.

The cost of the candy sold was $1,000.

i. Made a $500 payment on trade payables.

j. Incurred and paid employee wages of $510.

k. Collected trade receivables of $50 from customers.

/. Made a repair on one of the display cases for $134 cash.

m. Made cash sales of $2,600 during the rest of the month. The cost of the goods sold was $1,400.

n. Incurred interest expense of $400, payable in the future.

Required:
1. Set up appropriate T-accounts for cash, trade receivables, supplies, merchandise inventory, prepaid rent, equipment, furniture and fixtures, trade payables, notes payable, interest payable, share capital, sales revenue, cost of sales, advertising expense, wages expense, repair expense, and interest expense. All accounts begin with zero balances.
2. Record in the T-accounts the effects of each transaction for Paula’s Passions in February, referencing each transaction in the accounts with the transaction letter. Show the ending balances in the T-accounts.
3. Prepare an income statement for February 2011.
4. Write a short memo to Paula offering your opinion on the results of operations during the first month of business.

5. After three years in business, you are being evaluated for a promotion. One measure is how efficiently you managed the assets of the business. The following data are available:

Compute the total asset turnover ratio and the return on assets for 2012 and 2013 and evaluate the results. Do you think you should be promoted? Why? The company is subject to an income tax rate of 30 percent.

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2013* 2012 2011 Total assets $80,000 $45,000 $35,000 Total liabilities 45,000 20,000 15,000 Total shareholders' equity 35,000 25,000 20,000 Total sales 85,000 75,000 50,000 Profit 20,000 10,000 4,000 "At the end of 2013, Paula decided to open a second store, requiring loans and inventory purchases prior to the opening in early 2014.