A.J. Smith Company started business on January 1, 2011, and the following transactions occurred in its first year:
1. On January 1, the company issued 12,000 shares at $25 per share.
2. On January 1, the company purchased land and a building from another company in exchange for $80,000 cash and 6,000 shares. The land's value is approximately one-quarter of the total value of the transaction. (Hint: You need to determine a value for the shares using the information given in transaction 1, and the land and building should be recorded in separate accounts.)
3. On March 31, the company rented out a portion of its building to Frantek Company. Frantek is required to make quarterly payments of $7,500 on March 31, June 30, September 30, and December 31 of each year. The first payment, covering the period from April 1 to June 30, was received on March 31, and the other payments were all received as scheduled.
4. Equipment worth $120,000 was purchased on July 1, in exchange for $60,000 cash and a one-year note with a principal amount of $60,000 and an interest rate of 10%. No principal or interest payments were made during the year.
5. Inventory costing $250,000 was purchased on account.
6. Sales were $300,000, of which credit sales were $250,000.
7. The inventory sold had a cost of $190,000.
8. Payments to suppliers totalled $205,000.
9. Accounts receivable totalling $200,000 were collected.
10. Operating expenses amounted to $50,000, all of which were paid in cash.
11. The building purchased in transaction 2 is depreciated using the straight-line method, with an estimated useful life of 20 years and an estimated residual value of $30,000.
12. The equipment purchased in transaction 4 is depreciated using the straight-line method, with an estimated useful life of 10 years and an estimated residual value of $5,000. Because the equipment was purchased on July 1, only a half year of deprecia¬tion is recognized in 2011.
13. The company's income tax rate is 30%. It paid $10,000 of its income tax to the Canada Revenue Agency before the end of the year; the remainder will be paid in the first quarter of 2012.
14. Dividends of $20,000 were declared during the year, of which $5,000 remained unpaid at year end.
Required:
a. Show the effects of the transactions on the basic accounting equation, by preparing a table like the one in Exhibit 2-8.
b. Prepare a statement of financial position, statement of earnings, and statement of cash flows for 2011.
c. Comment on the company's results for its first year of operations.