Fluff, Inc., Year 1 - 20X1 59 You have decided that this university life is not for you. Instead, you have decided to go into the business of selling Fluffs. You decide to operate the business as a corporation, Fluff, Inc. On January 1, 20X1 you begin with $30,000 cash; $20,000 of the money is yours and $10,000 is borrowed from your Uncle Mike. For the $20,000 of yours, you issue yourself 100 shares of common stock. For the $10,000 borrowed from your uncle, you sign a note agreeing to pay back that amount on December 31, 20X4 and you will pay interest at 10% at the end of each year. On January 1, 20X1, you bought 8 Fluffs for $3,000 each. During the year you sold 5 Fluffs for $7,000 each. You also paid a security deposit of $2,000, advertising expense of $3,500 and 12 months' rent of $11,500. In addition to the cash you invested on January 1st, on August 1 you also invest a piece of land that you own into the business that is worth $40,000 in exchange for 200 more shares of stock. You pay the first year's interest to Uncle Mike of $1,000 on December 31 of 20X1. Your tax rate is 30% of your income before taxes and you paid 50% of these taxes this year and will pay the rest in 20X2. So how did you do? Prepare Journal Entries, T-Accounts, and Financial Statements Problem 4-1 Fluff Inc., Year 2-20X2 (See page 79 for beginning balances) During the second year, you bought 15 Fluffs and sold 12, same prices as year 1, but you have arranged terms that allow you to pay 40% of the purchase price in cash and the rest in one year. You now sell Fluffs for 50% down and the rest will be paid for by the customer next year. You paid rent of $12,000. You hired a worker whom you paid $11,000 (a Miami graduate). Tax rate is the same (30% of taxable income). Paid 20XI taxes. You will pay 20X2 taxes next year. You paid the interest to Mike on December 31. You paid office expenses of $13,000 and a dividend of $1,000. You also paid $3,000 for advertising in The Post. On February 1" you issued 50 shares of common stock for $12,000. You owe your employee $1,000 more in wages at the end of the year. So how did you do? Prepare Journal Entries, T-accounts and financial statements