Analysis of transactions and preparation of the income statement and balance sheet.

Colby opened a remote bookstore in downtown Waterville on July 1, Year 1. Transactions and events of Colbys Downtown Book during Year 1 follow. The firm uses the calendar year (December 31 fiscal year-end) as its reporting period.

(1) July 1, Year 1: Receives $25,000 from Professor Downs for 25,000 shares of the bookstore's $1 par value common stock.

(2) July 1, Year 1: Obtains a $30,000 loan from a local bank for working capital needs. The loan bears interest at 6% per year. The loan is repayable with interest on June 30, Year

(3) July 1, Year 1: Signs a rental agreement for three years at an annual rental of $20,000. Pays the first year's rent in advance.

(4) July 1, Year 1: Acquires bookshelves for $4,000 cash. The bookshelves have an estimated useful life of five years and zero salvage value.

(5) July 1, Year 1: Acquires computers for $10,000 cash. The computers have an estimated useful life of three years and $1,000 salvage value.

(6) July 1, Year 1: Makes security deposits with various book distributors totaling $8,000. The deposits are refundable on June 30, Year 2, if the bookstore pays on time all amounts due for books purchased from the distributors between July 1, Year 1, and June 30, Year 2.

(7) During Year 1: Purchases books on account from various distributors costing $160,000.

(8) During Year 1: Sells books that cost It$140,000 for $172,800 to customers. Of the total sales, $24,600 is for cash, and $148,200 is on account.

(9) During Year 1: Returns unsold books and books ordered in error costing $14,600. The firm had not yet paid for these books.

(10) During Year 1: Collects $142,400 from sales on account.

(11) During Year 1: Pays employees compensation of $16,700. (12) During Year 1: Pays book distributors $139,800 of the amounts due for purchases on account.

(13) December 28, Year 1: Receives advances from customers of $850 for special- order books that the bookstore will order and expects to receive during Year 2.

(14) December 31, Year 1: Records an appropriate amount of interest expense on the loan in (2) for Year 1.

(15) December 31, Year 1: Records an appropriate amount of rent expense for Year 1.

(16) December 31, Year 1: Records an appropriate amount of depreciation expense on the bookshelves in (4).

(17) December 31, Year 1: Records an appropriate amount of depreciation expense on the computers in (5).

(18) December 31, Year 1: Records an appropriate amount of income tax expense for Year 1. The income tax rate is 40%. The taxes are payable on March 15, Year 2.

a. Create journal entries where appropriate for each item above. b. Using T-accounts, enter the 18 transactions and events above. c. Prepare an income statement for the six months ending December 31, Year 1. Close accounts, then d. Prepare a balance sheet on December 31, Year 1.