On August 18^th, 2019, she borrowed $28,000 from her cousin, Emily to start the business. Three days later she opened the companys bank account, depositing the loan and $30,500 of her own money. Later that week she signed a one year lease for a third floor office. The office lease was considered a good deal, placing her in a technology business park. The lease cost was $3,200 per month, requiring a standard one months rent payment in August for Septembers rent, plus a $3,500 security deposit. She also purchased computer equipment, software, and office furniture needed for her business. She ordered business stationery, cards, and various other office supplies, costing $1,550 that were delivered on August 28^th. On August 30th, she signed a one year umbrella business insurance policy for $2,100 that covered a state required liability insurance, plus renters insurance for everything in her leased office.

Teal Digital Consulting opened for business on September 1, 2019. During a hangout chat, her cousin Emily helped her list out the new companys resources and obligations before she began to seek her first contracts. On the first day the business opened, Megan had spent all but $16,450 of the companys cash. Below is Megans list of her companys assets and liabilities as of September 1^st, 2019 the first day of business.

Assets, Liabilities, and Owners Equity

Cash in bank $16,450, Loan $28,000

Office supplies 1,550, Megans equity $30,500

Computers $17,000, Software $6,200, Furniture and fixtures $8,500

Prepaid rent $3,200, Prepaid insurance $2,100, Lease Deposit $3,500

Megan was a little worried that the cash had gone so quickly, but she also had confidence in herself and her willingness to work hard.

In the first few days, Megan lined up two UX research projects, one for the game Diablo-League, and the other for the next generation Sphere game system. She worked half of each day on managing the two projects, and the other half managing the business and looking for new clients. During the first part of October she had hired three prior UM-D classmates to handle the current projects, as well as an office secretary/receptionist. She also worked on referrals to obtain additional clients to create a steady work stream for her new employees. Megan was not a quantitative person, and just felt far too busy to work on the financial side of the business. When clients paid Teal Digital Consulting, the money went into the bank account. Her four employees were paid weekly, and she paid rent and other bills when they were received. In the ninth week of operations, Megan and her cousin were on their weekly hangout chat and she asked her how things were going. Megan really could not answer many of Emilys questions. It was time to find out how well Teal Digital Consulting was doing for its first two months of operations.

Megan found the following information she had accumulated during the two months of operations:

1. Clients had paid $49,500 for completed work, and Diablo-League still owed a total of $10,500 for work that had been completed and delivered to them in late October. There were no projects underway, as the office closed for Halloween on October 31^st.

2. Additional office supplies had been purchased for cash for $1,500, and office supplies that had cost $1,300 were still on hand.

3. Rent of $3,200 was paid at the end of October and September ($6,400 in total). Utility bills (electric, water, cell phones, internet, etc) of $1,975, a repair of equipment of $3,800, and $36,000 in salaries where paid to the companys four employees (plus $6,000 paid to Megan).

4. Additional office equipment for $7,000 and a one year software lease for $1,300 was purchased on October 30. Half of that amount was paid for, and the remainder due one month later.

As Megan thought about the first two months operations, she was perplexed by the fact that cash in the bank had decreased even though she was sure the business was operating profitably.

She also wondered how to account for the following:

1. She had agreed to pay her cousin 3% interest on her loan, but no interest had been paid yet.

2. The computers and software were working out well, but Megan knew that they had a technological life of no more than three years from the time that she had purchased them. Furniture had a 5 year useful life, while equipment and other assets had a 4 year useful life. She was uncertain about how to handle the software lease.

In brief, Megan felt that the first two months had been successful, but she was puzzled about how to draft meaningful reports to mail to her cousin.

You are a friend of Megan and a recent graduate of the University of Michigan-Dearborns MBA program. You are looking for work as a business consultant. Knowing your excellent credentials, Megan has asked you to help her get her report on the status of her business and make any recommendations that you can to help her make her business a success. She cannot pay you, but she would be willing to give you a 5% ownership in the company for your work. Having taken financial accounting, you believe you have the adequate business skills, and you accept her offer. You want the report to be very professional so you decide to perform the following:

Other assumptions:

• The books are to be prepared using the accrual method of accounting.
• The average tax rate is 21%.
• Depreciation is computed using the straight line method.
• The business started on 9-1-19 when it was formed
• Ratio analysis may be necessary for number 8. You should discuss ratios that could be important.

Questions:

1. Record journal entries to summarize the transactions from August 18 to October 31.
2. Set up T accounts to post the entries with proper references, since the company does not yet have a general ledger.