The

Clayton

Company is a retail company that began operations on

OctoberOctober

1,

20182018 ,

when it incorporated in the state of North Carolina. The

ClaytonClayton

Company is authorized to issue

250 comma 000250,000

shares of $1 par value common stock and

40 comma 00040,000

shares of

88 %,

$ 20$20

par value preferred stock. The company sells a product that includes a one-year warranty and records estimated warranty payable each month. Customers are charged a

66 %

state sales tax. The company uses a perpetual inventory system. There are three employees that are paid a monthly salary on the last day of the month.

Following is the chart of accounts for The

ClaytonClayton

Company. As a new business, all beginning balances are $0.

The

ClaytonClayton

Company completed the following transactions during the last quarter of

20182018 ,

its first year of operations:

1.

In preparation for recording the transactions, prepare:

a.

An amortization schedule for the first 3 months of the mortgage payable issued on

OctoberOctober

1. Round interest calculations to the nearest dollar.

b.

Payroll registers for

OctoberOctober ,

NovemberNovember ,

and

DecemberDecember.

All employees worked

OctoberOctober

1 through

DecemberDecember

31 and are subject to the following FICA taxes: OASDI:

6.26.2 %

on first

$ 118 comma 500$118,500

earned; Medicare:

1.451.45 %

up to

$ 200 comma 000$200,000 ,

2.352.35 %

on earnings above

$ 200 comma 000$200,000.

Additional payroll information includes:

	Monthly	Federal	Health
Employee	Salary	Income Tax	Insurance
Keirsten Jackson	$5,800	$1,740	$320
Marg Silva	5,500	1,100	320
Shelly McDaniel	2,700	405	320

c.

Calculations for employer payroll taxes liabilities for

OctoberOctober ,

NovemberNovember ,

and

DecemberDecember :

OASDI:

6.26.2 %

on first

$ 118 comma 500$118,500

earned; Medicare:

1.451.45 %;

SUTA:

5.45.4 %

on first

$ 7 comma 000$7,000

earned; FUTA:

0.60.6 %

on first

$ 7 comma 000$7,000

earned.

2.

Record the transactions in the general journal. Omit explanations.

3.

Post to the general ledger.

4.

Record adjusting entries for the three month period ended

DecemberDecember

31,

20182018 :

a.

Depreciation on the Building, straight-line,

4040

years, no residual value.

b.

Depreciation on Store Fixtures, straight-line,

2020

years, no residual value.

c.

Accrued interest expense on the note payable for the store fixtures.

d.

Accrued interest expense on the mortgage payable.

e.

Accrued income tax expense of

$ 31 comma 000$31,000.

5.

Post adjusting entries and prepare an adjusted trial balance.

6.

Prepare a multi-step income statement and statement of retained earnings for the quarter ended

DecemberDecember

31,

20182018.

Prepare a classified balance sheet as of

DecemberDecember

31,

20182018.

Assume that

$ 18 comma 573$18,573

of the mortgage payable is due within the next year.

7.

Evaluate the company's success for the first quarter of operations by calculating the following ratios. The market price of the common stock is

$ 40$40

on

DecemberDecember

31,

20182018.

Round to two decimal places.

a.

Times interest earned

b.

Debt to equity

c.

Earnings per share

d.

Price/earnings ratio

e.

Rate of return on common stock

8.

The

ClaytonClayton

Company wants to expand and is considering options for raising additional cash. The company estimates net income before the expansion of

$ 260 comma 000$260,000

in

20192019

and that the expansion will provide additional operating income of

$ 60 comma 000$60,000

in

20192019.

The company intends to sell the shares of treasury stock, so use issued shares for the analysis rather than current shares outstanding. Compare these options, assuming a

4040 %

income tax rate:Plan 1: Issue

20 comma 00020,000

additional shares of common stock for

$ 40$40

per sharePlan 2: Issue

$ 150 comma 000$150,000

in

1010 -year,

2020 %

bonds payable.Which option will contribute more net income in

20192019 ?

Which option provides the highest EPS?