Use the information below to prepare financial statements for ABC Corporation.

- Income Statements for Y1 and Y2

- Balance sheets as of December 31, Y1 and Y2

- Statements of cash flows for Y1 and Y2 prepared using the indirect method

- Round to the nearest dollar.

Policies:

Furniture depreciation: Straight-line basis, using a five-year useful life and salvage value equal to 10% of the purchase cost.

Accounts Receivable: We expect to collect 90% of outstanding accounts receivable.

Gift cards: We expect 8% of all gift cards sold to go unused.

Ignore income taxes.

Transactions:

Y1

Date: October 1

ABC Corp was formed by issuing 100,000 shares of no par-value common stock for $8 per share. The company also took out a loan for $600,000. The loan is payable in 4 equal installments of $150,000 and carries an annual interest rate of 6%. The interest and principal are due each year on October 1. The company paid $180,000 to cover rent for the next 12 months, purchased furniture for $400,000, and hired four employees, each with a salary of $10,000 per month (paid at the end of the month). Utility costs are $5,000 per month and each bill is paid at the end of the month. The company paid $60,000 for a one-year insurance policy that will cover them through September 30, Y2. To get business started, ABC purchased 10,000 units of inventory on account for $60 each.

Date: December 31

Here is a summary of our activity for the year. We sold 7,000 units of inventory for $110 each on account and sold 500 gift cards. Each card cost $800 and entitled holders to obtain 10 inventory units. We distributed 2,000 units to customers using their gift cards. To encourage sales, we adopted a very flexible return policy. As a result, 900 units were returned for full cash refunds. Given this evidence, we expect an additional 200 units to be returned next year. During the year we collected $600,000 on our accounts receivable. We did not write-off any of the accounts, but we believe that we will eventually collect 90% of the outstanding accounts. We paid cash dividends of $30,000. At the end of the year, we still owed $130,000 to suppliers for our inventory.

Y2:

Date: January, Y2

ABC hired 2 more employees at a salary of $10,000 per month and found that utility costs will increase to $7,500 per month.

Date: July 1, Y2

Today ABC sold some of our furniture. Even though ABC paid $100,000 for the furniture, ABC decided to sell it for $80,000 and buy new ones for $120,000. ABC received $800,000 for a one-year service contract that ABC will perform evenly over the next twelve months.

Date: October 1, Y2

Today we paid the interest on the loan, made the first $150,000 principal payment, and paid $204,000 to cover rent for the next 12 months. We also renewed our insurance policy with broader coverage by paying a premium of $80,000 for one year starting from today.

Date: December 1, Y2

ABC declared and paid a dividend of $50,000.

Date: December 31, Y2

We sold a total of 18,000 units of inventory at a price of $110 per unit on account. Over the year we sold 320 gift cards and distributed 4,400 units from the use of gift cards. Unfortunately, a total of 1,300 units were returned for full cash refunds during the year. As of year-end we expect another 250 units to be returned during Y3. At the end of the year, customers owed us $280,000, and this is after we wrote-off $35,000 in accounts. At the end of the year, we owed suppliers $90,000 for inventory. At the last minute, we also received $150,000 from new clients for one-year service contracts, although we have yet to deliver any services under the contract.

Answer rating: 100% (QA)

Answer Furniture depreciation Straightline basis using a fiveyear useful life and salvage value equal to 10 of the purchase cost Accounts Receivable We expect to collect 90 of outstanding accounts rec... View the full answer