Case: Read the case Carmen Braun (A) provided and answer the following

questions

1. Identify and list all the assets (with the corresponding amounts) of the

business as at December 31, 2002.

2. Prepare journal entries for the year 2003 transactions.

3. Prepare the ledger accounts for the 2003 transactions, balance them off,

and extract a trial balance.

Hint: The figures identified in question 1 above will be the opening

balances, (balance b/f, or balance b/d) in your ledger accounts in question

3.

Example:

If the balance of cash as at December 31, 2002 was $ 54,000, then in the

year 2003, the first entry in the cash book will be as shown below;

Cash Book

Date Details Amount ($) Date Details Amount($)
1/1/2003 Balance b/f 54,000

During a trip to Germany in 2002, Carmen Braun came across a type of cement mixer that had recently appeared on the German market. She believed that the machine would sell very well in Spain, and so contacted the manufacturer. During the talks she had with the German company, it was decided that the best way to expand the business to Spain would be to import the mixers from Germany throughout 2003 and then start manufacturing them in Barcelona in 2004. Later, other types of construction machinery produced by the German company would be added to the range.

Carmen Braun did not have financial resources to start the business on her own. Accordingly, in September 2002, she approached her uncle, Gabriel Nadal, who was quite wealthy. Nadal agreed to become a financial partner, and on October 1, 2002 a joint stock company was formed with 320,000 of capital, paid in equal shares by the two partners, Braun and Nadal.

To provide for possible cash shortages in the early stages, they applied for a bank loan of 40,000, which was made available at the end of 2002.

By coincidence, also in 2002, Carmen heard about an industrial building that had been put up for sale by its owner, Bruno Roca. The building was suitable for their purposes, so Carmen decided to seize the opportunity and bought it for 250,000 on December 30, 2002. She paid 200,000 in cash and undertook to pay the remaining 50,000 on December 30, 2003. Of those 250,000, she estimated that 150,000 were for the land, and 100,000 the cost of the building. She considered that the building would have a useful life of 20 years.

On December 30, 2002, Carmen purchased the furniture and equipment she thought was required. She paid 10,000 in cash.

On December 31, 2002, Nadal and Braun had a meeting to discuss the companys situation. By way of financial information, apart from the facts mentioned above, Carmen brought to the meeting a summary of the cashbook for the last quarter of 2002, which is reproduced in Exhibit 1. She also explained that, at that time, there were 30 mixers in the warehouse, which had cost, all in, 600 each to import. Of the resulting total of 18,000, 9,000 were owed to the German manufacturer. As yet, no mixers had been sold.

When Nadal saw the information that Carmen had brought with her, he considered it completely inadequate. He said that he needed, at the very least, to see the companys balance sheet as of December 31, 2002, and gave his niece two days to prepare that information, pointing out to her that no gains or losses should be recognized until operations began in 2003.

Carmen knew nothing about accounting, which she considered a boring and useless subject. However, she thought it best not to say so to her uncle and decided to somehow or other supply him with the information he wanted.

2003, went by very quickly. Braun threw herself into the task of running the company, without bothering to keep account of her transactions, which to her was a completely unappealing chore. She confined herself to tracking cash flows, that is, receipts and payments. The transactions that took place during 2003 were as follows:

310 mixers were imported on credit, for a total amount of 186,000

100 mixers were sold for cash, at 1,000 per unit.

200 mixers were sold on credit, at 1,030 per unit.

A total of 170,000 was received from customers to whom mixers had been sold on credit.

A total of 174,000 was paid to the supplier of the mixers.

Expenses incurred in selling and administrative activities amounted to 51,000, paid in cash.

The 50,000 owed for purchase of the building and the land was paid.

The 40,000 of the bank loan was paid.

The interest on the bank loan amounted to 2,000, which was paid at the end of the year.

At the end of December, Carmen decided to invest part of the cash that she did not expect to need immediately - 20,000- in marketable securities.

On December 23, Carmen received a letter from her uncle. He had recently moved to a different city and in his letter he wrote:

I will be coming to see you around the middle of January to find out how our company is getting on. I would like you to have ready the income statement for 2003 and the balance sheet as of December 31, 2003. And also, of course, a cash flow statement for 2003. To calculate the amount of income tax, assume a rate of 30%. Please prepare all this information using International Financial Reporting Standards.

After reading the letter, Carmen decided to draw up the financial statements that her uncle had requested, proceeding as follows: taking the balance sheet at December 2002, as her starting point, one by one she made all necessary changes to reflect the effects of transactions 1 to 10 above. She also took into account the fact that income tax for 2003 had not been paid yet.

Lastly, she decided to show in the resulting financial statements the consequences of her proposal to pay a dividend of 10,000 on December 31, 2003.

Exhibit 1

Summary of cash book

(Fourth Quarter of 2002 in euros)

Receipts Payments

Gabriel Nadal 160,000 Payment to Bruno Roca 200,000

Paid to German manufacturer 9,000

Carmen Braun 160,000 Furniture and equipment 10,000

Trip to Germany 5,000

Bank loan 40,000 Organization expenses 11,000

Balance at December 31, 2002 125,000

360,000 360,000