BUAD 250 Sample Midterm - Accounting Cycle[061M1.1a 1 The...

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Accounting Cycle : [061M1.1a] 1. The Merlin Company [the firm] was formed on October 1, Year 1 when seven people each invested $9,000 in the firm. One investor lent $11,000 to the firm that is to be repaid on October 1, Year 2, along with $1,200 of interest. 2. The firm leased an office space for one year on October 1, Year 1, and moved in that same day. The monthly rate was $2,000 and rent for the 12-month lease term will be paid on January 31, Year 2. 3. On October 1, Year 1, the firm rented some office furniture and computers for three years. The firm paid $24,000 on October 1, Year 1. This amount covers all three years of the lease term. 4. On October 12, Year 1, the firm purchased some supplies for use in the business at a cost of $3,000. This amount was charged to the firm’s account. 5. On October 16, Year 1, the firm returned 15% of the supplies it had purchased because they were not what had been ordered. 6. On October 15, Year 1, the firm hired seven employees at a monthly salary of $3,500 each. These employees are to be paid at the middle of each month for the period ending on that day. Their first payday will be on November 15, Year 1. 7. On October 30, Year 1, the firm paid the amount owed for the supplies it had purchased earlier. 8. On December 15, Year 1, the firm completed its first consulting project for a client. The project was valued at $320,000 and the client paid 65% immediately and promised to pay the remainder on January 31, Year 2. Merlin will not charge interest on the unpaid amount. 9. Record the paydays for November and December. Remember that paydays occur on the 15 th day of each month. Refer to item 6 above. 10. On November 1, Year 1, the firm received $160,000 for a consulting project to be started late in Year 1. 11. During the last month of Year 1, Merlin completed 70% of the project discussed in the previous item. 12. Supplies on hand at the end of the year were $450 by actual count. The balance sheet at December 31, Year 1, and the income statement for the three months ended December 31, Year 1, have been completed for you.
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Accounting Cycle (continued) : [061M1.1a] Merlin Company Balance Sheet December 31, Year 1 Assets: Cash $366,450 Accounts Receivable 112,000 Prepaid Equipment Rent 22,000 Supplies Inventory 450 $500,900 Liabilities: Salaries Payable $12,250 Unearned Revenues 48,000 Office Rent Payable 6,000 Interest Payable 300 Note Payable 11,000 77,550 Owners' Equity: Contributed Capital $63,000 Retained Earnings 360,350 423,350 Total Liab. & Owners' Equity 500,865 Merlin Company Income Statement For Three Months Ended Dec. 31, Yr. 1 Consulting Revenues: $432,000 Expenses: Salaries $61,250 Office Rent 6,000 Supplies 2,100 Eq. Rent 2,000 Interest 300 -71,650 Income $360,350 Year 2 begins on the next page. Accounting Cycle (continued) : [061M1.1a] In Year 2, the following events occurred.
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1. On January 16, Year 2, the firm hired two more employees at a monthly salary of $3,600. The firm also increased the salaries of the continuing employees to $4,000 per month each. [Item 6 in Year 1] 2. Merlin finished the rest of the project described in items 10 and 11 from Year 1.
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