David Hamilton had worked as the senior technician at a large electronics sales and service company for more than 15 years. Just over two years ago, he decided that what he really wanted was to be self-employed. After turning in his resignation, he started his own company. Hamilton announced the opening of Hamilton’s Electronics Services, Inc. (Hamilton’s), an electronics repair company that serviced all makes and models of electronic equipment. As he reflected on his company’s first two years of operation, he thought about how busy he had been. He was grateful that he had hired Janet Lucas, a local CPA, to handle the accounting for his company after its first year of operation, and he had renewed his contract with her for its second year. Hamilton provided Lucas with all the company’s invoices, bank statements, and a lot of other miscellaneous business-related information. He had asked Lucas to reconstruct, in summary form, all the company’s transactions that had occurred during its second year and to provide him with an income statement for its second year of operations and a balance sheet at the end of that year.

Lucas got to work immediately. She had the company’s balance sheet for the end of the first year (Exhibit 1). As she had discovered the previous year, the information Hamilton had provided her with contained everything she needed to complete a summary analysis of transactions, to transfer all the data into individual accounts, and to prepare an income statement and a balance sheet for the company’s second year.

From the information Hamilton had given her, Lucas prepared the following summary of things that had occurred during the company’s second year of operations.

1. Throughout the year, the company purchased parts and supplies inventory totaling $75,000. Of the $75,000, $10,000 was cash paid at the time of purchase, and the remaining $65,000 was purchased on account.
2. Total sales for the year were $330,000. Of those, $110,000 were sales on account, $60,000 were cash sales, and $160,000 were credit card sales. The credit card company charged Hamilton’s a 2% fee for each sale.
3. The original cost of the parts and supplies inventory used was $69,000.
4. Rent for the facility in which the company operated remained at $1,000 throughout the year. The company had paid for the first two months’ rent during December of the prior year. It paid for the remaining 10 months’ rent during the current year.
5. The cost of insurance for the year was $1,200, paid in cash.
6. The company included $5,000 in employees’ paychecks in January for work done in the prior year.

Hamilton decided to write off three accounts during the year because those customers were not likely to pay the combined $4,000 they owed Hamilton’s.

During the year, employees, including Hamilton, earned $200,000 in salaries and wages, of which $194,000 was included in paychecks to the employees during the year, and the remaining $6,000 would be included in their January paychecks the following year.

Remaining operating expenses totaled $10,000, all paid in cash.

On April 15, the company paid its prior year’s taxes of $2,258.

On October 1, the company made an interest payment of $3,000 to the local bank. The payment was related to the $25,000 loan the company had obtained the prior October 1 that carried a 12% interest rate, with interest being payable annually on October 1.

In December, the company paid the rent for the following January in advance.

ThetotalamountthatcustomersowedHamilton’sattheendoftheyear,afterthethreeaccountshad been written off, totaled $20,000.

Hamilton’sstillowedsuppliers$10,000attheendofthesecondyearfortheinventoryithadpurchased. In addition to his salary, the company paid a $10,000 dividend to Hamilton.

The company’s tax rate was 15%. Hamilton planned to wait until April 15 of his company’s third year to pay the income tax bill for its second year of operations.

The company still had the truck and equipment it had purchased at the beginning of its first year of operation. At that time, it had paid $30,000 for the truck and $20,000 for the equipment. It was assumed that the truck would have a useful life of five years, and the equipment would have a useful life of four years. Neither the truck nor the equipment was expected to have any salvage value.

Required

1. Prepare all journal entries required for Hamilton’s second year of operations.
2. Post this information to T-accounts.
3. Prepare an income statement that summarizes the results of operations for the second year.
4. Prepare a balance sheet as of December 31.
5. Prepare a statement of cash flow for the second year.
6. Based on your review of the financial statements, what is your assessment of the company’s performance during its first two years of operations?

Exhibit 1

Hamilton’s Electronics Services, Inc.: The Second Year

Balance Sheet as of December 31, End of First Year

Assets

Cash
Accounts receivable
Parts and supplies inventory Prepaid rent
Investment in XYZ, Inc. PP&E

Total Assets

Liabilities

Accounts payable Wages payable Interest payable Loan payable Taxes payable

Stockholders’ Equity

Capital stock Retained earnings

Total Liabilities and Stockholders’ Equity

Source: Created by author.

$ 9,000 22,000 8,500 2,000 55,000 37,500

$134,000

$ 8,200 5,000 750 25,000 2,258

80,000 12,792

$134,000