Page 275 - Accounting Principles (A Business Perspective)

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540 Interest Expense 8,000
$ 3,432,400 $ 3,432,400
• Depreciation expense on the store building is USD 8,800.
• Depreciation expense on the store fixtures is USD 22,240.
• Accrued sales salaries are USD 5,600.

• Insurance expired in 2010 is USD 10,000.
• Cost of merchandise inventory on hand 2010 December 31, is USD 222,000.
Prepare the following:
a. A work sheet for the year ended 2010 December 31. Refer to the chart of accounts shown in a separate file at
the end of the text for any other account numbers you need.
b. A classified income statement. The only administrative expenses are office salaries and insurance. The
building depreciation is on the store building.

c. A statement of retained earnings.
d. A classified balance sheet.
e. The required closing entries.
Beyond the numbers—Critical thinking
Business decision case A Candy's Shirts, Inc., has an opportunity to purchase 40,000 shirts with the logo of
her favorite school in January 2009. Candy, who is not currently in business, is considering buying these shirts and

then renting a display cart from which to sell these shirts (called a kiosk) in a shopping mall. Based on the following
information and estimates, Candy needs to decide if the business would be profitable:
• Cost of the 40,000 shirts, all of which must be purchased in January 2009, is USD 440,000.
• Candy thinks it would take two years to sell all of the shirts. She estimates her sales at 25,000 shirts in
2009 and 15,000 shirts in 2010.
• Rent of the kiosk would be USD 1,500 per month in 2009 and USD 1,600 per month in 2010.
• Candy can buy some counters on which to display the merchandise for USD 4,000. She could sell the

counters for USD 500 at the end of the second year.
• Candy estimates the cost to decorate her kiosk would be USD 2,500.
• Candy would hire employees and pay them USD 1 per shirt sold.
• Candy plans to sell the shirts for USD 17 each.
• Candy and her husband purchased USD 100,000 of capital stock in the business. Therefore, she plans to
borrow USD 400,000 from their family banker. Interest expense on this loan will be USD 52,000 in 2009 and
USD 6,500 in 2010. Candy plans to repay USD 300,000 on 2010 January 2, and the remaining USD 100,000
on 2010 July 1

• Candy needs to rent some storage space because all 40,000 shirts cannot be stored at the kiosk. Storage
space costs USD 2,500 per year.
a. Prepare estimated income statements for 2009 and 2010 for Candy's business. Does it appear that the
business will be profitable?
b. Will Candy have the cash available to pay the bank loan as she planned?

Accounting Principles: A Business Perspective 276 A Global Text