Joanna Wu won a Web-designing contest and decided to start her own Web-design company. She contributed $200,000 in exchange for 1,000 shares of common stock and borrowed another $55,000 by signing a 4-year note with Quality Bank. She formed Wu Web Designs, Inc., on July 1, 2009. The business used available funds to purchase some land with an office building for $125,000 and office equipment and furniture for $25,000. The business also bought a computer system on account for $45,500; payment was due at the beginning of the following year.
• During the first year of business, Wu Web Designs earned $215,000 in service revenue, but had collected only $172,000; the remaining $43,000 was due early the next year.
• Salary expenses for the year were $95,000 of which the company paid $80,000 in cash during the year; the remaining $15,000 was due the first day of the next year.
• The company purchased an insurance policy for $24,000, of which $6,000 was for the current year and the remainder was for future years.
• The company paid operating expenses of $20,250 in cash during the year.
• Interest expense for the year was $7,175 but has not yet been paid.
• The company invested $20,000 of cash in a short-term investment at the end of the year.
• Wu Web Designs declared and paid dividends of $3,200 during the year.
1. Show how each transaction affects the accounting equation.
2. Prepare the income statement, statement of changes in shareholder’s equity, and statement of cash flows for the year ended June 30, 2010; and prepare the balance sheet at June 30, 2010. (Ignore depreciation.)
3. Calculate the current ratio at June 30, 2010.