Irena Takla hired an attorney to help her start Takla Delivery Service Corporation. On March 1, Takla deposited $14,375 cash in a bank account in the name of the corporation in exchange for 575 shares of $25 par value common stock. When she paid the attorney’s bill of $875, the attorney advised her to hire an accountant to keep her records. Takla was so busy that it was March 31 before she hired you to straighten out her records.
After investing in her business and paying her attorney, Takla borrowed $6,250 from the bank. She later paid $325, including interest of $75, on this loan. She also purchased a used pickup truck in the company’s name, paying $3,125 down and financing $9,250. The first payment on the truck is due April 15. Takla then rented an office and paid three months’ rent, $1,125, in advance. Credit purchases of office equipment of $1,000 and material handling equipment of $625 must be paid by April 10.
In March, Takla Delivery Service completed deliveries of $1,625, of which $500 were cash transactions. Of the credit transactions, $375 was collected during March, and $750 remained to be collected at the end of March. The company paid wages of $562 to its employees. On March 31, the company received a $93 bill for the March utilities expense and a $62 check from a customer for deliveries to be made in April. A customer requested a delivery on March 31 for the following week and agreed to pay $250. Takla is considering recording this agreement as revenue in March to make the business look better.
1. Prepare journal entries for all of the transactions for March that are described in the three paragraphs above. Label each of the entries alphabetically.
2. Set up T accounts. Then post the entries to the T accounts. Identify each posting with the letter corresponding to the transaction.
3. Determine the balance of each account.
4. Prepare a trial balance for Takla Delivery Service Corporation as of March 31, 2011. (Trial Balance total is $33,030.)
5. Irena Takla is unsure how to evaluate the trial balance. The Cash account balance is $15,550, which exceeds the original investment of $14,375 by $1,175. Did the company make a profit of $1,175? Explain why the Cash account is not an indicator of business earnings. Cite specific examples to show why it is difficult to determine net income by looking solely at figures in the trial balance.
6. What are the ethical implications of recording the delivery order received on March 31 as revenue in March?