Problem 1:
S & X Co. is a retail store owned solely by Joe Saunder. During the month of November, the equity accounts were affected by the following events:
Nov. 9 Saunder invested an additional $15,000 in the business.
Nov. 15 Saunder withdrew $1,500 for his salary for the first two weeks of the month.
Nov. 30 Saunder withdrew $1,500 for his salary for the second two weeks of the month.
Nov. 30 S & X distributed $1,000 of earnings to Saunder.
Instructions:
1. Assuming that the business is organized as a sole proprietorship:
a) Prepare the journal entries to record the above events in the accounts of S & X.
b) Prepare the closing entries for the month of November. Assume that after closing all of the revenue and expense accounts the Income Summary account has a credit balance of $5,000.
Hint: Record the investment in a separate capital account and the withdrawals (salary) in a separate drawing account. Close the drawing account into the capital account as part of the closing entries.
2. Assuming that the business is organized as a corporation:
a) Prepare the journal entries to record the above events in the accounts of S & X. Assume that the distribution of earnings on November 30 was payment of a dividend that was declared on November 20.
b) Prepare the closing entries for the month of November. Assume that after closing all of the revenue credit and expense accounts (except Income Tax Expense) the Income Summary account has a credit balance of $2,000. Before preparing the closing entries, prepare the entries to accrue income tax expense for the month and to close the Income Tax Expense account to the Income Summary account. Assume that the corporate income tax rate is 30 percent.
3. Explain the causes of the differences in net income between S & X as a sole proprietorship and S & X as a corporation.
4. Describe the effects of the business operations on Saunder's individual income tax return, assuming that the business is organized as (1) a sole proprietorship and (2) a corporation.
Problem 2:
The partnership of Avery and Kirk was formed on July 1, when George Avery and Dinah Kirk agreed to invest equal amounts and to share profits and losses equally. The investment by Avery consists of $30,000 cash and an inventory of merchandise valued at $56,000.
Kirk also is to contribute a total of $86,000. However, it is agreed that her contribution will consist of the transfer of both the assets of her business and its liabilities (listed below). A list of the agreed values of the various items as well as their carrying values on Kirk's records follows. Kirk also contributes enough cash to bring her capital account to $86,000.
Investment by Kirk
Balances on Kirk's Records Agreed Value
Accounts Receivable $81,680 $79,600
Inventory 11,400 12,800
Office Equipment (net) 14,300 9,000
Accounts Payable 24,800 24,800
Instructions:
1. Draft entries (in general journal form) to record the investments of Avery and Kirk in the new partnership.
2. Prepare the beginning balance sheet of the partnership (in report form) at the close of business July 1, reflecting the above transfers to the firm.
3. On the following June 30 after one year of operation, the Income Summary account showed a credit balance of $74,000, and the Drawing account for each partner showed a debit balance of $31,000. Prepare journal entries to close the Income Summary account and the Drawing accounts at June 30.