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. Holister Electric Inc. Balance Sheet As at December 31, 2020 Assets Cash Liabilities $25,000 Accounts Payable $12,200 Accounts Receivable 13,500 Unearned Revenue 5,200 Prepaid Insurance 3,600 Bank Loan 26,000 Inventory 72,000 Total Liabilities 43,400 Property, Plant & Equipment 210,000 Shareholders' Equity Accumulated Depreciation -25,000 Common Shares - 90,000 issued 90,000 Retained Earnings 165,700 Total Shareholder's Equity 255,700 Total Assets $299,100 Liabilities & Owner's Equity $299,100 At 2020, Razul has authorized 150,000 common shares and 10,000 preferred shares. The preferred shares will be cumulative and pay $5 dividends. The 90,000 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 12,000 shares in Gregor Inc. for $11 per share. This represents 40% of Gregor Inc. common shares. On December 31, Gregor Inc. declares and pays a $60,000 dividend and reports a net income of $400,000. 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 30,000 common shares for $75,000 cash and issued 3,000 preferred shares for $12,000 cash. c) On March 1, Holister Electric Inc. issued and sold $150,000, 6 year bonds with an interest rate of 7%. The market rate at the time of issue was 8%. 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 8% for 6 periods are 0.6302 and 4.6229,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 20, $1,000 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 9%, payable annually at March 31. On December 31, 2021, each bond was trading in the market at $1,020. On January 1, 2022, all bonds were sold for $21,000. e) On July 1, Holister purchased a $50,000, 5 year bond paying 6%. 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 2,000 shares of Daenerys Inc. at $19 per share for the purpose of trading. The shares are less than 4% of the total shares of Daenerys Inc. and are a non-strategic investment. By December 31, the price per share had gone up to $22 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 $50,000, 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. Date Account Title and Explanation DR CR 38 marks 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 30%. 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. 3 4 5 6 Account Title 7 Cash 8 Accounts Receivable 9 Interest Receivable Holister Electric Inc. Adjusted Trial Balance December 31, 2021 Debit Credit $27,165 $58,341 O Prepaid Insurance $16,000 1 Short-Term Investment - Daenerys Inc. $38,000 2 Short-Term Investments - Bonds $20,000 3 Valuation Allowance for Fair Value Adjustmen 4 Inventory $110,000 5 Investment in Gregor Inc. Common shares 6 Long-Term Investment - Bond 7 Discount on Bonds 8 Property, Plant & Equipment 9 Accumulated Depreciation 0 Accounts Payable 1 Interest Payable 2 Unearned Revenue $240,000 $50,000 $65,000 $5,200 Unearned Revenue Premium on Bonds Bonds Payable Bank Loan Common Shares Preferred Shares Retained Earnings Interest Revenue Revenue from Investment in Gregor Inc. Unrealized Gain on Fair Value Adjustment Income Tax Savings - Discontinued Operations Sales Revenue $5,200 $40,000 $115,700 $690,000 Sales Discounts $8,000 Sales Returns and Allowances $10,000 Cost of Goods Sold $310,500 Depreciation Expense $25,000 Insurance Expense $2,000 Interest Expense $2,000 Loss from Discontinued Operations $14,700 Maintenance Expense $9,000 Professional Fees Expense $6,600 2 Professional Fees Expense 3 Rent Expense Salaries Expense 5 Telephone Expense 5 Travel Expense Income Tax Expense - Continuing Operations Unrealized Loss on Fair Value Adjustment Total Notes: $6,600 $38,000 $75,000 $4,000 $16,700 $1,475,310 $1,475,310 The bank loan is payable over 8 years and $5,000 will be paid by December 31, 2022. The interest on this loan is 5% per annum. Prepare a multistep income statement for the year ending December 31, 2021. Round answers to the nearest whole number. Holister Electric Inc. Income Statement For the Year Ended December 31, 2021 Sales Revenue Net Sales Less Cost of Goods Sold Gross Profit Operating Expenses Total Operating Expenses Income from Operations 29 m 7 Income from Operations 8 Other Revenue and Expenses 9 1 B Income before Tax Income Tax Expense Income from Continuing Operation Discontinued Operations Loss from Discontinued Operatio Income Tax Savings Net Income Prepare a statement of retained earnings at December 31, 2021. Round answers to the nearest whole number. 4 marks: 1 mark per line Holister Electric Inc. Statement of Retained Earnings For the Year Ended December 31, 2021 Prepare a Classified Balance Sheet at December 31, 2021. Round answers to the nearest whole number. Assets Current Assets Holister Electric Inc. Balance Sheet As at December 31, 2021 32 marks: 1 mark per line Total Current Assets Non-Current Assets Total Non-Current Assets Total Assets Liabilities Current Liabilities Total Current Liabilities Non-Current Liabilities Total Non-Current Liabilities Total Liabilities Shareholders' Equity Total Shareholders' Equity Liabilities & Shareholders' Equity 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. Holister Electric Inc. Cash Flow Statement For the Year Ended December 31, 2021 Cash Flow from Operations 5 5 7 3 0 1 2 3 Change in Cash from Operations 4 5 Cash Flow from Investments 6 2 3 Change in Cash from Operations 4 5 Cash Flow from Investments 6 7 8 0 Change in Cash from Investments 1 Cash Flow from Financing 2 w 4. 5 5 7 Change in Cash from Financing Net Increase (Decrease) in cash O Cash at the beginning of the year Cash at the end of the year