Milo, the cat, has been using various scratching posts for the last 14 years. With some thoughts
Question:
Milo, the cat, has been using various scratching posts for the last 14 years. With some thoughts and planning, he has decided to start selling his personal brand of scratching posts. He sources prefabricated, eco-friendly scratching posts from around the world. On January 2, 2020, World Best Scratching Inc. opened in Ontario, Canada for business. The following transactions took place during the fiscal year ended December 31, 2020.
1. Milo invested $175,000 into the company upon incorporation on January 2, 2020.
2. World Best Scratching Inc. is located in an industrial park. Milo signed a three-year lease to rent this space. The rent is $8,000 a month due on the first of each month. The landlord required the first and last month’s rent to be paid on January 2, 2020. The lease started on January 2, 2020, ending on December 31, 2022.
3. To ensure there is no shortage of inventory, Milo also rented a storage space for $1,200 a month, starting February 1, 2020. This rental agreement was on a month-to-month basis.
4. $120,000 of inventory was purchased on account.
5. Used furniture and equipment was purchased at the beginning of January 2020 at Facebook Marketplace. He paid $30,000 in cash. Milo decided that he would use straight-line depreciation method, the estimated residual value would be $200 with a useful life of two years.
6. During the first year of operation, World Best Scratching Inc.’s Sales were: Cash sales - $500,000; Credit Sales - $300,000.
7. Inventories were received during August 2020. They were purchased from various manufacturers on account in June 2020 for $450,000.
8. The company also borrowed money from a bank for $200,000. This was a 5-year loan, taken out on June 1, 2020, at 10% annual interest due every 6 months.
9. $300,000 Accounts Receivable were collected during the fiscal year.
10. The total cost of inventory sold during the year was $400,000.
11. On November 30, 2020, a customer ordered and paid in cash 10 custom-designed scratching posts at retail price $500 each. One was delivered in December; the remainder of the order will be delivered one per month for the next 9 months.
12. On December 31, World Best Scratching Inc. incurred a utility expense (water and electricity) of $400 when Milo checked online. He had not received the bill yet.
13. Other expense for the year were listed below:
a. Wages and Salaries $ 50,000
b. Advertising $ 10,000
c. Office Supplies $ 20,000
d. Payments of Accounts Payable $100,000
e. Insurance Policy $ 4,800
14. The insurance policy was effective from January 2, 2020 to December 31, 2021
15. Milo declared and paid a dividend of $10,000 (drawn down from retained earnings)
Required
1. Show the appropriate journal entries for all the above transactions.
2. Prepare a pre-closing trial balance
3. Prepare the closing entries
4. Prepare the Statement of Financial Position in a proper format
