CHINA TRADE, INC.

Project Statement

It is mid-September, nearly two years after you received your degree. While attending National, you became acquainted with fellow students Mae Ling and James Madison. They have recently established a company to import art objects from China to sell to specialty stores in your area.

Last July, Ling and Madison formed a corporation under the name China Trade, Inc. They have asked you to set up an accounting system and to do the accounting for their first month of operations, including the preparation of financial statements for August. They provided you with copies a purchase invoice and their check register. (See Appendix I).

Ling and Madison informed you that the financial statements will be audited by a prospective investor who is willing to pay up to 10 times annualized earnings per share for 50% of their holdings.

Accounting principles to be observed

Financial statements are to be prepared under the accrual basis of accounting.

A perpetual inventory approach in which the Inventory account is increased by purchases and reduced by when sold with an offsetting charge to Cost of Goods Sold is to be used.

Depreciation expense will be calculated under the straight line method with a 5-year life used for equipment and vehicles. Assets acquired before the 15th or disposed of after the 15th of a month are to be depreciated for the full month of acquisition or disposition.

Purchases of merchandise are to flow through Accounts Payable but operating expenses be posted to Cash when paid or accrued by an adjusting journal entry at the end of the period.

All sales transactions, whether Cash, C.O.D. or Credit, are to flow through Accounts Receivable.

Company Management Policies

Sales and Receivables

Normal terms of sale: Net 10 days, no cash discount, credit limit $2,500

No finance charge will be applied to past due balances

Purchases and Accounts Payable

Vendors are not expected to offer cash discounts

Merchandise purchases are to be charged to inventory

Age vendor invoices by invoice date rather than due date

Inventory

The sale of inventory to retailers for resale is exempt from sales tax

Financial Transactions

The following transactions took place during the month of August as evidenced by the supporting documents in Appendix I:

Aug 1 The corporation opened a bank account at the First National Bank with a deposit totaling $10,000. The deposit consisted of a $5,000 investment by Mae Ling and an additional $5,000 by James Madison. In return, the corporation issued 500 shares of common stock to Ling and an equal number to Madison. (See the deposit on 8/1 in the Check Register.)

Aug 2 Paid one month's rent for office space.

Aug 3 Purchased a pre-owned 2013 Ford Suburban van for $15,000 from Vans Unlimited: $4,000 in cash, remainder as a loan from the First National Bank in the form of a 12% (interest) note payable in 48 equal monthly installments.

Aug 6 Purchased on net 30-day terms and received delivery of art works from Shanghai Export Company (see vendor invoice no. 08-1234 in Appendix I).

Aug 17 Delivered to The Gift Gallery on C.O.D. terms five ivory sculptures for $5,000. (China Trade sales Invoice no. 10001). Received payment in full upon delivery.

Aug 18 Delivered to Vanity Faire six Chinese paintings with an invoice for $7,800 with Net 10 terms. (Sales Invoice No. 10002).

Aug 28 Miscellaneous expenses were paid.

Aug 29 Received payment of $2,000 on account from Vanity Faire.

Aug 30 The Board of Directors declared a dividend of $1.00 per share and checks were drawn the same day.

Aug 31 Partial payment made to Shanghai Export Co.

Part 1 – Record Transactions in Excel

OK, you can do this. After all there are only ten transactions to be recorded. You’ve never used QuickBooks, but you have used Excel in a previous accounting class, so you want be safe and not look like an idiot in front of your friends. They are paying for you to help them, so you want to get this right.

Use the provided Excel Workbook to get started. Be sure to rename the file name to include your Team Name.

Record the August transactions in proper journal entry format using the Chart of Accounts in Appendix I. The first journal entry has been provided.

Prepare a Trial Balance for the above journal entries on the second tab. Be sure that the total of all debits equals the total of all credits.

From this trial balance, prepare the income statement and balance sheet reports in good format in the supplied Excel spreadsheets. Be sure the report titles are proper.

After the above transactions have been recorded, verify that the Cash in Bank balance is $2,000 and the Net Income amount is $3,100.00.

APPENDIX I

STANDARD CHART OF ACCOUNTS

These are typical accounts for a small company. Those marked with an asterisk are appropriate for this case.

Current Assets

Equity

*101

Cash in Bank

*300

Common stock

109

Petty Cash

310

Additional Paid-in Capital

*110

Accounts receivable

*320

Dividends

*111

Allowance for doubtful accts

330

Treasury stock

*120

Inventory

*340

Retained earnings

*130

Prepaid Expenses & deposits

Income

Prop., Plant & Equip. (Fixed Assets)

*400

Sales

140

Land

Cost of Sales

141

Accumulated Depreciation

*500

Cost of Goods Sold

145

Building

146

Accumulated Depreciation

Operating Expenses

150

Leasehold Improvements

*605

Advertising

151

Accumulated Depreciation

610

Amort. Leasehold Improvements

155

Furniture and Fixtures

615

Automobile Expense

156

Accumulated Depreciation

*620

Bad Debt Expense

*160

Equipment

625

Bank Service Charge

*161

Accumulated Depreciation

630

Commissions

*165

Automotive Equipment

635

Contributions

*166

Accumulated Depreciation

*640

Depreciation

645

Dues and Subscriptions

Other Assets

650

Entertainment

170

Long-term investments

655

Insurance

175

Due from officer

660

Licenses and Permits

665

Office Expense

Current Liabilities

670

Postage

*200

Accounts payable

675

Professional Fees

205

Notes Payable

*680

Rent Expense

210

Accrued Expenses Payable

685

Rental of Equipment

*220

Fed Income Tax Withheld

690

Repair and Maintenance

*225

FICA & Medicare Withheld

*695

Salaries and Wages

*230

State Income Tax Withheld

700

Taxes-Payroll

*235

State Disability Withheld

705

Taxes-Real Estate

*250

Sales Tax Payable

710

Taxes-Sales and Use

*260

Income Tax Payable

*715

Telephone

270

Current Portion LT Debt

720

Travel

725

Utilities

Long-Term Liabilities

280

Mortgage payable

Other Income (Expense)

*285

Long-term note payable

750

Interest Income

Interest Expense

290

Due to officer

755

Interest Income

Interest Expense

Miscellaneous Income

760

765

Miscellaneous Expense

*780

Income Tax Expense

CHECK REGISTER

Date

Num

Name

Payment

Deposit

Balance

8/1/xx

DEP

LING AND MADISON

10,000.00

10,000.00

Mae Ling

5,000.00

James Madison

5,000.00

8/2/xx

1001

SIMPSON REALTY CO.

1,000.00

9,000.00

Rent for month of August

8/3/xx

1002

VANS UNLIMITED

4,000.00

5,000.00

Down payment on $15,000 van

8/17/xx

DEP

THE GIFT GALLERY

5,000.00

10,000.00

8/28/xx

1003

JOHN J. JONES

600.00

9,400.00

Wages 80 hours @ $10

Gross pay

800.00

FICA and Medicare

-60.00

Federal withholding tax

-100.00

State withholding tax

-30.00

State disability insurance

-10.00

8/28/xx

1004

AT&T

1,100.00

8,300.00

New telephone system

1,000.00

Telephone service deposit

100.00

8/28/xx

1005

ANDERSON'S DIRECT MAIL

1,300.00

7,000.00

Direct mail advertising

8/29/xx

DEP

VANITY FAIRE

2,000.00

9,000.00

Check 54321 on Aug 18 invoice

8/30/xx

1006

MAE LING

500.00

8,500.00

Dividend

8/30/xx

1007

JAMES MADISON

500.00

8,000.00

Dividend

8/31/xx

1008

SHANGHAI EXPORT CO.

6,000.00

2,000.00

Paid on Aug 6 invoice