Garys Computer Maintenance Ltd. (GCML) is a small computer repair shop owned and operated by Gary Armstrong.
Question:
Gary’s Computer Maintenance Ltd. (GCML) is a small computer repair shop owned and operated by Gary Armstrong. Gary’s wife Susan is a 50 percent shareholder in GCML but she isn’t involved in the operations of the company. GCML has been in business for three years since being incorporated in 2010. Because he has been so busy recently and lacks expertise in financial matters, Gary has asked you to prepare the financial statements for GCML for 2013. Gary provides you with the company’s balance sheet for the year ended December 31, 2012 and the following information about GCML’s activities in the year.
i. Information about GCML's activities during 2013: In August 2013 GCML signed a lease for a new shop on the main street in town. Monthly rent is $900. GCML paid six months' rent in advance when it signed the lease. The lease came into effect when GCML occupied the new shop on November 1, 2013. GCML paid rent of $7,500 in cash from January though October 2013 for its previous location. ii. During 2013 GCML earned revenues of $141,000. Credit sales accounted for $56,000 of the revenues earned. iii. GCML purchased equipment for $9,000 cash during 2013. iv. During 2013 GCML purchased inventory of parts and supplies for $39,000. All inventory purchases were on credit. v. During 2013 GCML collected $48,750 in amounts due from customers. vi. GCML paid suppliers $18,000 for inventory it purchased during 2013. It also paid $19,500 to suppliers for amounts owing on December 31, 2012. vii. On March 2, 2013 GCML borrowed an additional $6,000 from the bank. viii. During 2013 GCML paid cash dividends of $22,500 to its shareholders. ix. GMCL paid employees salaries of $38,750. In addition, Gary was paid a salary of $28,000. All salaries paid were for work done in 2013. At the end of 2013, GMCL owed employees $750.
X. During 2013 GMCL incurred other expenses of $25,250, all paid in cash. xi. During the year, GCML paid the $2,250 in taxes payable that was owing to the federal and provincial governments on December 31, 2012. xii. In December 2013 GCML signed a number of one-year contracts to provide ongoing 24-hour service to customers' computers at their places of business. All of the contracts take effect in January 2014. The customers paid $7,500 in cash to GCML in December 2013 as deposits against future services to be provided. xiii. During 2013 GCML paid the bank $1,500 in interest. Of that amount, $1,200 pertained to 2013 and the remainder was owed to the bank from fiscal 2012. On December 31, 2013, GCML owed the bank $450 in interest, which will be paid in March 2014. xiv. On December 31, 2013 Gary counted the inventory of parts and supplies on hand. His count showed that there was $30,750 of inventory on hand. (Use this information to figure out how much inventory was used during 2013.) xv. Depreciation of equipment was $3,750. xvi. GCML will have to pay $2,400 in income taxes for the year. No payments had been made with respect to the fiscal 2013 year as of December 31, 2013.
Required
a. Enter each of the transactions onto an accounting equation spreadsheet. You can use a computer spreadsheet program or create a spreadsheet manually. Create a separate column on the spreadsheet for each account. Make sure to prepare all adjusting entries and the closing entry. Indicate whether each entry is a transactional entry, an adjusting entry, or a closing entry.
b. Provide explanations for each of your entries. You should explain why you have treated the economic events as you have (that is, why you have recorded an asset, liability, etc.).
c. Prepare a balance sheet as of December 31, 2013 and an income statement for the year ended December 31, 2013 from your spreadsheet.
d. Gary is pleased with the performance of his business and he is considering opening a second location. He would like to get another investor to purchase an equity interest in GCML and operate the new location. Based on your examination of the statements, what can you tell about GCML that would be useful to your decision to purchase an equity stake in GCML? Also, list five questions you might ask Gary that would help you use the financial statements more effectively.
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