It was a stormy night in September 2017 when Durham, North Carolina experienced the highest snowfall in over 3 decades. As Rahul Vashishtha, a chemical engineer, watched the snowfall outside his office he wondered how one could cope with the freezing weather without suffering hypothermia. Epiphany struck! He approached his colleague, Xu Jiang, a PhD in chemistry, to explore the idea of creating a heat-preserving t-shirt using novel low thermal conductivity materials. Xu thought deeply about how to make this project viable and suggested that polyester materials treated with tetracyclene-benzoate (a complex chemical compound) may preserve body heat at freezing temperatures. Neither Rahul nor Xu had any business experience and they met John Heater, a CPA, car enthusiast, and part-time mechanic to help launching this idea. Xu quipped, John can really add a lot of...Heat...to our business idea, and suggested that John bring his business acumen to the team. Thus, Ra-X-Heat t-shirt was born. On October 5, 2017, Ra-X-Heat Inc. was incorporated in the state of North Carolina. Like most companies in the United States, the three entrepreneurs decided that the fiscal year end would be December 31. Utilizing his knowledge of the market, John suggests a retail price of $15 per standard t-shirt. For customized orders, he suggests the sale price should reflect the degree of customization.

Ra-X-Heat Inc.s activities subsequent to incorporation are as follows:

1) October 6, 2017: To capitalize (provide cash to) the firm, each owner agreed to pay $2 per share for 50,000 shares, for a total of 150,000 shares and cash of $300,000.

2) October 15, 2017: Rahul and Xu start conducting experiments to develop efficient methods to chemically treat t-shirts. These experiments are critical for developing shirt production schematics and prototypes that will be used by an outside factory. However, only about half of the experiments were successful and used for their chemical treatment methodology. The total cost of chemicals and other materials used in the experiment was $40,000 and the amount was paid in cash.

3) October 28, 2017: Ra-X-Heat Inc. pays $30,000 in cash to advertise their innovative t-shirts, focusing on the novel heat-preserving technology. Ads will run in print via newspaper, over the air during rush hour on popular radio stations, and online.

4) November 1, 2017: Ra-X-Heat Inc. agrees to a month-to-month rental of furnished office space, for $1,800 per month, payable at the first of each month. The rent includes all utility charges. Ra-X-Heat Inc. pays the rent for both November and December 2017 in cash on November 1 and begins to occupy the rented space on that date.

5) November 7, 2017: Ra-X-Heat Inc. hires a part time technician, who will work as needed but no more than one day a week. Ra-X-Heat Inc. agrees to pay $24,000 annually and the person begins work November 15. Rahul, Xu, nor John receives a salary. Salaries are paid monthly, at the end of each month.

6) November 20, 2017: Ra-X-Heat Inc. signs an agreement with a supplier who will produce t-shirts for Ra-X- Heat. The price list is $2.50 per t-shirt for regular orders and $7.50 per t-shirt for custom t-shirt orders. Because Ra-X-Heat Inc. is a new business with no credit history, the supplier initially requires that Ra-X-Heat Inc. pay all amounts owed in cash upon delivery.

7) December 18, 2017: Ra-X-Heat Inc. takes delivery of 1,200 regular t-shirts from its supplier. So far, it has made no sales and has received no orders from customers.

8) December 31, 2017: Ra-X-Heat Inc. closes its books and prepares financial statements.

9) May 2018 (various days): Ra-X-Heat Inc. receives orders for 1,000 standard t-shirts, for immediate delivery. The t-shirts are delivered, and the customers pay the standard price ($15 per t-shirt) in cash.

10) June 6, 2018: Ra-X-Heat Inc. places an order with its supplier for another 2,000 regular t-shirts.

11) June 20, 2018: Ra-X-Heat Inc. takes delivery of the 2,000 regular t-shirts, and pays as agreed.

12) July 1, 2018: Ra-X-Heat Inc. receives an order for 500 customized t-shirts. The customer agrees to pay $30 per t-shirt and requires delivery no later than August 5, 2018. Ra-X-Heat Inc. agrees to allow this customer to

pay the amount owed in January 2019. Ra-X-Heats technician makes the necessary plans to customize the t- shirts, and sends the template to Ra-X-Heats supplier, who prepares the requested customized print for the

500 t-shirts at the pre-agreed upon price of $7.50/shirt. The t-shirt supplier agrees to allow Ra-X-Heat Inc. to pay for the t-shirts after Ra-X-Heat Inc. collects from its customer. Ra-X-Heat Inc. takes delivery of the 500 customized t-shirts on July 31, inspects them for quality, and delivers the order to the customer on August 5.

13) During the remainder of 2018, Ra-X-Heat Inc. sells and delivers to customers another 2,100 standard t-shirts to customers who agree to pay for the t-shirts in 2019. Rent remains at the 2017 level. Salary for the part-time technician was increased to $26,000 for the entire 2018 fiscal year.

14) September 30, 2018: Ra-X-Heat Inc. receives an order for 2,000 highly customized t-shirts. The design will take several months to finalize and produce. The customer agrees to wait until February 2019 to take delivery and to pay $35 per shirt upon delivery. Ra-X-Heats technician begins the necessary customization work, which is not completed by December 31, 2018.

15) December 15, 2018: Ra-X-Heat Inc. places an order for equipment that will allow it to produce some orders in-house, as well as the necessary chemical compounds to treat the shirts. Ra-X-Heat Inc. takes delivery of the equipment on December 31, 2018, paying the full cost of $22,000 in cash. The equipment is expected to be placed into service in January 2019 and will last 4 years.

16) December 30, 2018: Ra-X-Heat Inc. declares and pays a cash dividend of $0.02 per share.

17) December 31, 2018: Ra-X-Heat Inc. closes its books and prepares financial statements.

CASE REQUIREMENTS In answering Part A and Part B, ignore all tax effects and ignore the costs that Ra-X-Heat Inc. (or its customers) would incur for the shipping and handling of t-shirts. Part A Purpose: To reinforce your understanding of how economic transactions manifest in financial statements. 1. Show how Ra-X-Heat Inc. would record each 2017 event and transaction with the balance sheet method. Recording events and transactions is a necessary step in preparing financial statements. Note: Because our objective is to make you better users of accounting information rather than turn you into accountants, during class sessions we will primarily be using the balance sheet equation approach (Assets = Liabilities + Shareholders Equity) for recording transactions. This approach allows us to direct our focus on the economic essence of the transactions. 2. Prepare a balance sheet and an income statement for Ra-X-Heat Inc. for the fiscal year ending December 31, 2017.

Part B Purpose: To reinforce your understanding of the beginning balances in balance sheet accounts, and of the links between (articulation of) the income statement and the balance sheet. 1. Show how Ra-X-Heat Inc. would record each 2018 event and transaction. 2. Prepare a balance sheet and an income statement for Ra-X-Heat Inc. for the fiscal year ending December 31, 2018.

(Note: Do not turn in this transaction sheet. You only need to submit the Financial statements. This tab is only to help you prepare the financial statements.) Ra-X-Heat Incorporated Transaction Summary (Fiscal Year Ending December 31, 2017) Assets Liabilities + Equity Accounts: Transaction Number = = = Ra-X-Heat Incorporated Transaction Summary (Fiscal Year Ending December 31, 2018) Assets Liabilities + Equity Accounts: Transaction Number = = = = Ra-X-Heat Incorporated Income Statement for Fiscal Year Ended December 31, 2017 Sales Expenses: Net Income Ra-X-Heat Incorporated Income Statement for Fiscal Year Ended December 31, 2018 Sales Expenses: Net Income Ra-X-Heat Incorporated Balance Sheet as of December 31, 2017 Assets: Liabilities & Owners' Equity: Total Total Ra-X-Heat Incorporated Balance Sheet as of December 31, 2018 Assets: Liabilities & Owners' Equity: Total Total