TASK. Solve the case based on the following information: William Waterspout set up a retailing business selling gardening tools, called Toolgarden on 1 November 2017.

During the first 2 months of operations ended 31 December 2017 the following business events took place:

Nov. 1 William Waterspout invested 100,000 in the business.

2 Prepaid rent of 6,000 for the following 6 months (Rented a building to use as an office and storerooms from November 2017 to April 2018).

3 Purchased equipment for the office for 23,000 paying immediately.

5 Purchased gardening tools to the inventory from a supplier for 10,000 on credit.

10 Sold gardening tools to a customer for 6,500 on credit.

15 Purchased gardening tools from a supplier for 2,400 on credit.

18 Paid for the purchase of 5 November.

19 Received payment from the customer on the sale of 10 November.

30 Took a 5-year bank loan of 30,000.

Dec. 1 Sold gardening tools to a customer for 8,500 on credit.

5 Paid salaries to employees of 5,000.

7 Paid for the purchase of 15 November.

16 William Waterspout withdrew 8,000 from the business and used 2,500 of this to install a swimming pool in his own garden. 30 Paid 2,000 for 2 months utilities (electricity, water, telephone, etc.)

Consider the following additional information at the year-end for adjusting entries:

Dec. 31 Accrued salary expense for December is 4,500.

31 Prepaid rent still in force (unexpired) is 4,000.

31 Depreciation on office equipment is recorded on the straight-line basis and calculated per month. The equipment is estimated to have the residual value of 5,000. The useful life is 3 years. Consider November as a full month.

31 Accrued interest expense for the time the loan has been outstanding. The bank loan has an interest rate of 6% per annum.

It is also known that closing inventory as at 31 December 2017 is 4,100.

Required:

1. Measure business activities:

a. Record the above transactions in appropriate T-accounts. Use the following list of accounts and group them as asset, liability and equity (including revenue and expense) accounts in the ledger: Assets: Cash and bank balance; Trade receivables; Purchases; Office equipment. Liabilities: Trade payables; Bank loan payable. Equity: W.Waterspout, Capital; Drawings; Sales revenue; Salary expense; Rent expense; Utilities expense.

b. Record the year-end adjustments in the appropriate T-accounts. (If an adjustment needs an account that is not yet there, open it and give it an appropriate name)

c. Balance off the T-accounts.

d. Prepare the trial balance as at 31 December 2017.

2. Use your trial balance to prepare the following financial statements: a. the statement of profit or loss for the two months ended on 31 December 2017 b. the statement of financial position as at 31 December 2017 (classify assets and liabilities into non-current and current).

3. Communicate the results: write a brief comment on the result of Gardentools financial performance during their first 2 months of operations.

a. Calculate the gross profit margin, give your opinion about the profitability. The average profit margin in the given industry is 37%. b. What recommendations would you like to give to the owner of the business?