Phillip and Nancy Wilson have held jobs in a variety of businesses since they have been together. Phillip has been a sales representative manager for a pharmaceutical company. Nancy has been a legal assistant at a law firm. They both wanted to always own their own business. They have decided to open a jewelry store here in Suffolk, Virginia. They will call the jewelry store Heavenly Rocks Enterprises (HRE). They have been saving up for years to do this and want to branch out on their own now. Here is financial information on the jewelry store as they want your help because you just finished your MBA.

On January 1, HRE issued no par common stock to the Wilsons for $400,000. Early in January, Phillip signed a one year lease and secured a commercial space for $30,000 for HRE. Then the business purchased store fixtures for $80,000. Then they business purchased a vast amount of different types of jewelry. They bought watches, stones, necklaces, bracelets, etc. The total inventory costs was $350,000. Sales were pretty good so a few months later the business purchased additional inventory on account of $230,000. Before the year ended HRE paid $100,000 of this accounts payable. During the year, HRE sold 2,800 pieces of various jewelry and the average sale was $285. Before the year ended the company collected on 80% of this sales amount. The costs of goods sold for the year totaled $550,000 and the year-end inventory amount was $129,000.

The HRE employed three employees and did not pay any overtime throughout the year. The total payroll for the year was $125,000 but HRE still owes the employees $5,000 at year end. At the end of the year, HRE has paid in income tax of $12,000 so there is no reason to have an income tax payable account. The HRE believed they had a rewarding year as they started their own jewelry business. The HRE sacrificed a lot during this first year but did need some money to live on so they took dividends of $65,000 from HRE. The HRE do not know that much about accounting so they asked a friend for advice on how to account for the use of the store fixtures. They want the store fixtures depreciated over 5 years using the straight-line depreciation method with zero residual value.

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