(Using the accounting equation spreadsheet to record transactions and prepare financial statements, LO 1, 2, 5, 6)...
Question:
(Using the accounting equation spreadsheet to record transactions and prepare financial statements, LO 1, 2, 5, 6) Harry Neighbourly is the owner and operator of Harry’s Appliance Emporium Ltd. (HAEL), Yarksis’ largest independent household appliance store. Harry supplies appliances to retail customers as well as to builders of the many new homes and apartments that are going up in the community. Sales to builders have grown substantially in the last year. HAEL has been in business for five years and Harry has been happy with its performance.
HAEL’s balance sheet for August 31, 2004, the company’s year end, is shown below.
Harry uses the financial statements mainly for tax purposes and to show the holders of the long-term notes.
It is now mid-September 2005. HAEL needs to prepare its financial statements for the year ended August 31, 2005. The following information has been obtained about the fiscal year just ended:
i. HAEL purchased appliances from suppliers for $850,000. All purchases were made on credit.
ii. Sales during the year were $1,350,000. Cash sales were $775,000. The remainder was on credit, mainly to builders.
ili. The cost of the appliances sold during fiscal 2005 was $745,000.
iv. HAEL paid salaries and commissions to employees of $200,000. On August 31, 2005, employees were owed $7,500 by HAEL.
v., HAEL collected $375,000 during the year from customers who purchased on credit.
vi. HAEL paid suppliers $600,000 for appliances it purchased on credit.
vii. During the year HAEL paid the taxes it owed at the end of fiscal 2004.
During fiscal 2005 HAEL paid $15,000 in instalments on its taxes. At year end the accountant estimates that HAEL owes an additional $12,000 in taxes.
viii. HAEL accepted $10,000 in deposits from customers who wanted a guarantee that their appliances would be delivered when they needed them. The deposits pertained to a particularly hard-to-get appliance. HAEL expects that the appliances will be delivered in early November 2005.
ix. Beginning July 1, 2005 HAEL pays $4,000 a month for the rent of its store.
The terms of the lease require that rent be paid six months in advance on January 1 and July 1 of each year. Before July 1, 2005 HAEL paid $3,500 a month in rent. In addition, HAEL must pay 2% of annual sales to the property owner 60 days after the year end.
x. Harry recently redecorated his kitchen at home. He took a refrigerator, stove, and microwave that cost $4,500 from the store and installed them in his new kitchen.
xi. During 2005 HAEL purchased new capital assets (furniture and fixtures)
for $25,000 cash.
xii. Amortization expense for 2005 is $22,000.
xiii. During the year HAEL paid $8,500 in interest to the holders of the long- term notes. Interest is paid annually on September 1. In addition to the interest payment, HAEL paid $20,000 on September 1, 2004 to reduce the balance owed on the long-term notes. The interest rate on the notes is 8.5%. xiv. HAEL paid $225,000 in cash for other expenses related to operating the business in fiscal 2005.
Required:
a. Enter each transaction onto an accounting equation spreadsheet. Create a separate column on the spreadsheet for each account. Make sure to prepare all adjusting entries and the closing entry to the spreadsheet. Indicate whether each entry to the spreadsheet is a transactional entry, an adjusting entry ora 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, an income statement, and a statement of retained earnings from your spreadsheet.
d. Harry is considering expanding HAEL to include a wider range of products.
Harry has approached you about purchasing common shares of HAEL to help finance the expansion. Based on your examination of the statements, what can you tell about HAEL that would be useful to your decision to invest? Also, list five questions you might ask Harry that would help you use the financial statements more effectively.
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