Moonlight Bay Inn is incorporated on January 2, 2010, by its three owners, each of whom contributes $20,000 in cash in exchange for shares of stock in the business. In addition to the sale of stock, the following transactions are entered into during the month of January:

January 2: A Victorian inn is purchased for $50,000 in cash. An appraisal performed on this date indicates that the land is worth $15,000, and the remaining balance of the purchase price is attributable to the house. The owners estimate that the house will have an estimated useful life of 25 years and an estimated salvage value of $5,000.

January 3: A two-year, 12%, $30,000 promissory note was signed at Second State Bank. Interest and principal will be repaid on the maturity date of January 3, 2012.

January 4: New furniture for the inn is purchased at a cost of $15,000 in cash. The furniture has an estimated useful life of ten years and no salvage value.

January 5: A 24-month property insurance policy is purchased for $6,000 in cash.

January 6: An advertisement for the inn is placed in the local newspaper. Moonlight Bay pays $450 cash for the ad, which will run in the paper throughout January.

January 7: Cleaning supplies are purchased on account for $950. The bill is payable within 30 days.

January 15: Wages of $4,230 for the first half of the month are paid in cash.

January 16: A guest mails the business $980 in cash as a deposit for a room to be rented for two weeks. The guest plans to stay at the inn during the last week of January and the first week of February.

January 31: Cash receipts from rentals of rooms for the month amount to $8,300.

January 31: Cash receipts from operation of the restaurant for the month amount to $6,600.

January 31: Each stockholder is paid $200 in cash dividends

Required

1. Identify and analyze each of the preceding transactions.

2. Prepare a list of accounts and their balances for Moonlight Bay at January 31, 2010. Reflect the recurring transactions for the month of January but not the necessary month-end adjustments.

3. Identify and analyze the necessary adjustments for each of the following:

a. Depreciation of the house

b. Depreciation of the furniture

c. Interest on the promissory note

d. Recognition of the expired portion of the insurance

e. Recognition of the earned portion of the guest’s deposit

f. Wages earned during the second half of January amount to $5,120 and will be paid on February

3. g. Cleaning supplies on hand on January 31 amount to $230.

h. A gas and electric bill that is received from the city amounts to $740 and is payable by February 5.

i. Income taxes are to be accrued at a rate of 30% of income before taxes.

4. Prepare in good form the following financial statements:

a. Income statement for the month ended January 31, 2010

b. Statement of retained earnings for the month ended January 31, 2010

c. Balance sheet at January 31, 2010

5. Assume that you are the loan officer at Second State Bank. (Refer to the transaction on January 3.) What are your reactions to Moonlight’s first month of operations? Are you comfortable with the loan you made? Explain your answer.