Accounting:
You have recently opened a new business. You buy and sell used computers and parts. For ease and convenience, you decided to organize the business as an unincorporated sole proprietorship. You have decided to approach a local bank for additional funding. You are requesting a low-interest loan of $500,000 to be repaid in 10 years. The bank has requested that you submit current financial statements in addition to the loan application form.
General Facts and Information:
The business opened for business on November 1, 2005. The company uses the perpetual method to account for inventory. All long-lived assets are depreciated over a useful life of 5 years with no salvage value. You adhere to the half-month convention for depreciation. Under this convention, items acquired on or before the fifteenth day of the month will be depreciated for the entire month. No depreciation will be recorded in the month of purchase for items acquired after the 15th.
Below is a list of events and transactions for the month of November.
DATE TRANSACTION / EVENT
1-Nov Invested $25,000 in cash and inventory parts valued at $30,000.
3-Nov Signed office lease for five years. Paid six months' rent, $3,000.
(Covers the period, November - April).
4-Nov Purchased office furniture, $5,000.
10-Nov Purchase additional inventory on account, terms n/30, $3,000.
11-Nov Hired store manager and agreed to pay salary of $2,000 per month.
Manager begins working on November 15; initial pay date = December 1.
16-Nov Sold inventory to customer, $3,000. Cost of inventory sold = $2,000.
18-Nov Sold inventory to customer on account, terms n/30, $6,000. Cost of inventory sold = $4,000.
20-Nov Received utilities bill, $1,000. Bill not due until December.
21-Nov Purchased office equipment, $8,000. Paid half down and financed remaining balance with a 3-year, 12% note.
25-Nov Customer returned merchandise previously purchased on account, $500.
Cost of inventory returned, $200.
29-Nov Withdrew cash for personal use, $1,000.
Based on the information provided, complete the following requirements using the Peachtree Accounting Software:
1. Prepare journal entries for the November transactions, including adjusting entries.
2. Prepare a single-step income statement, in good form.
3. Prepare a classified balance sheet, in good form.
4. Provide responses to the questions/statements below.
a. What was the profit margin for the month of November?
b. What is the balance in the Capital account, after closing?
c. Compute the current ratio and interpret the result.
d. Based on the information provided, should the bank loan the company the funds requested? Why or why not?