Razul and Amy decided to start a partnership called SA Consulting on January 1, 2020. Each of them contributed a number of items to the partnership, which are listed below. All tangible assets are listed at their market value. Amy Cash Razul Cash $48,100 Equipment 197,900 Bank Loan 86,000 Furniture Accounts Payable $65,200 79,800 42,000 On March 1, Razul and Amy added a new partner to the business, Sheila. Sheila will contribute $95,000 and receive a 28% share of the business. Use the capital balances from January 1 to determine any bonuses. Assume the existing partners will split any bonus evenly. During the year, Razul and Amy withdrew $23,800 and $19,100 respectively and the business reported a net income of $465,000. Their partnership agreement provided for sharing of net income (loss) on the following basis: 1. Salary of $68,500 is allocated to Razul, $53,000 to Amy, and $21,600 to Sheila. 2. Interest is allocated at 8% of each partner's opening capital balance. 3. Remainder is shared where Razul gets 37%, Amy gets 29%, and Sheila gets 34%. a) Prepare the journal entries to record the contributions of each partner to start the partnership. 8 Marks 0 a) Prepare the journal entries to record the contributions of each partner to start the partnership. 8 Marks Date Account Title and Explanation Debit Credit b) Prepare a schedule showing the changes in capital and ending capital balances after the admission of Sheila. Razul Amy Sheila Total c) Prepare the journal entry to record the admission of the new partner on March 1. 4 Marks Date Account Title and Explanation Debit Credit d) Prepare the journal entry to record the partner withdrawals of cash. 3 Marks Date Account Title and Explanation Debit Credit g) After divding the income for the year, all parties agreed to liquidate the partnership. The values of the assets and liabilities are shown below. The furniture is sold for $77,760 and all other assets are sold at their given values. Any gains or losses from liquidation are split evenly among all partners. Cash Accounts Receivable Net Equipment Net Furniture Accounts Payable Bank Loan $542,870 55,000 257,270 95,760 50,400 120,400 Prepare the journal entries to sell the assets, distribute any gains or losses to the partners, pay the liabilities and distribute the cash to the partners. Date Account Title and Explanation Debit Credit Razul took the proceeds from dissolving the partnership and purchased a corporation selling electrical parts used for large production companies. He employs several people, but is looking to expand his operations further. In addition to expanding the sales of electrical parts, he also wants to start selling heating, ventilation and air conditioning (HVAC) parts and machinery through a separate division of the company called 'HVAC Parts & Machinery.' Currently, Razul owns all the shares in the corporation. To raise the needed cash, he decides to offer common and preferred shares for sale to investors starting in 2021. Below is the balance sheet at the end of 2020. Assets Cash Accounts Receivable Prepaid Insurance Inventory Property, Plant & Equipment Accumulated Depreciation Holister Electric Inc. Balance Sheet As at December 31, 2020 Liabilities $22,410 Accounts Payable 16,700 Unearned Revenue 5,500 Bank Loan 81,400 Total Liabilities 215,000 Shareholders' Equity -28,000 Common Shares - 80,000 issued Retained Earnings Total Shareholder's Equity $313,010 Liabilities & Owner's Equity $15,400 8,100 25,000 48,500 80,000 184,510 264,510 $313,010 Total Assets At 2020, Razul has authorized 150,000 common shares and 16,000 preferred shares. The preferred shares will be cumulative and pay $4 dividends. The 80,000 shares issued were issued to Razul. He will maintain control of the company and sit on the board of directors. Transactions during 2021 a) On January 1, Holister purchased a strategic investment of 16,100 shares in Gregor Inc. for $13 per share. This represents 32% of Gregor Inc. common shares. On December 31, Gregor Inc. declares and pays a $71,000 dividend and reports a net income of $380,000. Holister will use the equity method to record this investment. b) On January 1, Razul has located a few private investors that wish to purchase shares in the new corporation. Some want common shares, while other are interested in preferred shares. Holister Electric Inc. issued 40,000 common shares for $100,000 cash and issued 7,000 preferred shares for $28,000 cash. c) On March 1, Holister Electric Inc. issued and sold $180,000, 8 year bonds with an interest rate of 9%. The market rate at the time of issue was 10%. Any premium or discount on the bond is amortized using the effective interest rate method. Interest will be paid annually on February 28. The Present value of 1 and annuity of 1 of 10% for 6 periods are 0.4665 and 5.3349, respectively. Use a 4 decimal factor for the bond calculation. d) On April 1, the company has extra cash on hand and would like to invest it in short-term bonds issued by Gamma Ltd. The company bought 21, $1,200 short term (one-year) bonds at par on this date and intended to sell these bonds before maturity. The interest rate on the bond is 12%, payable annually at March 31. On December 31, 2021, each bond was trading in the market at $1,300. On January 1, 2022, all bonds were sold for $29,000. e) On July 1, Holister purchased a $60,000, 7 year bond paying 8%. Interest is paid every 6 months on December 31 and June 30. The company plans to hold onto the bond until it matures. f) On November 23, the company purchased 2,800 shares of Daenerys Inc. at $23 per share for the purpose of trading. The shares are less than 6% of the total shares of Daenerys Inc. and are a non-strategic investment. By December 31, the price per share had gone up to $25 per share. g) During 2021, Holister Electric Inc. has performed well, so the board of directors decided to pay dividends. On November 30, 2021, the company declared cash dividends of $72,000, which will be paid out on December 15, 2021. Use the cash dividends method and close cash dividends at the end of the year. Prepare the journal entries for the issue of shares, issue of the bonds and the dividends, plus all the investments made during the year, 2021. Also prepare adjustments at year end to accrue interest on the bond and to record change to any applicable investments. At the end of the year, Holister Electric has adjusted Trial balance. - The expansion into HVAC did not go as planned and had to be discontinued. - Below is the updated and correct balances taking into consideration the transactions happened during the year (including day-to-day transactions and the transactions above). - Complete the list by filling in the missing values from the journal entries you created during the year. *Interest payable, interest receivable ,and interest revenue balances are from the bonds issued and purchased during the year. Interest expense from bank loan are paid within the year. Assume the tax rate is 26%. Assume income tax has already been paid. You will just have to calculate the income tax expense on the income statement. Leave Income Tax Expense and Income Tax Savings blank on the Trial Balance until you calculate them on the income statement. Debit Credit $17,605 $35,700 $17,910 $64,400 $25,200 $98,500 Holister Electric Inc. Adjusted Trial Balance December 31, 2021 Account Title Cash Accounts Receivable Interest Receivable Prepaid Insurance Short-Term Investment - Daenerys Inc. Short-Term Investments - Bonds Valuation Allowance for Fair Value Adjustmen Inventory Investment in Gregor Inc. Common shares Long-Term Investment - Bond Discount on Bonds Property, Plant & Equipment Accumulated Depreciation Accounts Payable Interest Payable Unearned Revenue Premium on Bonds Bonds Payable Bank Loan Common Shares Preferred Shares $260,000 $68,000 $145,000 $8,100 $120,000 7 Retained Earnings $112,510 Interest Revenue Revenue from Investment in Gregor Inc. Unrealized Gain on Fair Value Adjustment 1 Income Tax Savings - Discontinued Operations 2 Sales Revenue $752,000 Sales Discounts $10,400 4 Sales Returns and Allowances $18,700 5 Cost of Goods Sold $338,400 Depreciation Expense $40,000 7 Insurance Expense $6,600 B Interest Expense $21,400 Loss from Discontinued Operations $172,000 Maintenance Expense $24,000 1 Professional Fees Expense $9,800 2 Rent Expense $48,600 3 Salaries Expense $89,200 4 Telephone Expense $4,200 5 Travel Expense $33,400 Income Tax Expense - Continuing Operations 7 Unrealized Loss on Fair Value Adjustment Total $1,785,798 $1,785,798 Notes: The bank loan is payable over 4 years and $30,000 will be paid by December 31, 2022. The interest on this loan is 6% 1 per annum. Prepare a multistep income statement for the year ending December 31, 2021. Round answers to the nearest whole number. 29 Marks 0 Holister Electric Inc. Income Statement For the Year Ended December 31, 2021 Prepare a Classified Balance Sheet at December 31, 2021. Round answers to the nearest whole number. Holister Electric Inc. 32 Marks 0 Balance Sheet As at December 31, 2021 Using the balance sheet from the end of last year (when the company was still a proprietorship) and the balance sheet just created, prepare a cash flow statement using the indirect method. Round answers to the nearest whole number. Note: No Property, Plant and Equipment was sold during the year. Hint : Amortized bond discount or premium should be added to the operating activities, if there is any. Carrying amount of the bonds should be presented in the financing activities. 26 Marks 0 Holister Electric Inc. Cash Flow Statement For the Year Ended December 31, 2021 Holister Electric was able to find financial statements of another company, Stark Supplies Inc., that operates in the same industry. The comparative income statement and balance sheet of this company is shown below. Stark Supplies Inc. Income Statement For the Year Ended December 31 2021 Sales Revenue $885,000 Less Cost of Goods Sold 354,000 Gross Profit 531,000 2020 $957,000 $382,800 574,200 Operating Expenses Operating Expenses Interest Expense Depreciation Expense Total Operating Expenses Income from Operations Income Tax Expense Net Income $345,000 $125,000 22,400 492,400 38,600 10,036 28,564 $472,000 $74,000 $18,600 564,600 9,600 2,496 7,104 Stark Supplies Inc. Comparative Balance Sheet As at December 31 2021 2020 Assets Current Assets Cash Accounts Receivable - Prepaid Insurance Inventory Total Current Assets Non-Current Assets Property, Plant & Equipment Accumulated Depreciation Total Non-Current Assets Total Assets $281,000 187,500 50,000 90,000 $608,500 $297,000 119,100 60,000 80,000 $556,100 475,000 -234,400 240,600 $849,100 475,000 -212,000 263,000 $819,100 Liabilities Current Liabilities Accounts Payable Unearned Revenue Total Current Liabilities Non-Current Liabilities Bank Loan Total Non-Current Liabilities Total Liabilities 91,200 26,100 $117,300 86,300 24,310 $110,610 82,000 82,000 199,300 78,000 78,000 188,610 Shareholders' Equity Common Shares Retained Earnings Total Shareholders' Equity Liabilities & Shareholders' Equity 165,000 484,800 649,800 $849,100 149,000 481,490 630,490 $819,100 Using the income statement and balance sheet from Holister Electric and Stark Supplies, calculate the appropriate ratios to determine which company is doing better in the categories listed below. Round all ratios to 2 decimal places. Write your explanations in the textbox. a) profitability for 2021 (gross profit margin, net profit margin, ROE, ROA, asset turnover) 11 Marks b) liquidity for 2021 (current ratio, quick ratio, debt-to-equity) 7 Marks c) management performance (DSO, A/R turnover, inventory days on hand, inventory turnover) 9 Marks d) Analyze and compare the performance of the two companies using at least two ratios from each category. (The analysis is not expected to exceed 250 words)