The Hughes Tools Company started business on October 1, 2011. Its fiscal year runs through to September 30 the following year. The following transactions occurred in the fiscal year that started on October 1, 2011, and ended on September 30, 2012.
1. On October 1, 2011, Jill Hughes invested $175,000 to start the business. Hughes is the only owner. She was issued 10,000 shares.
2. On October 1, Hughes Tools borrowed $225,000 from a venture capitalist (a lender who specializes in start-up companies).
3. On October 1, the company rented a building. The rental agreement was a two-year contract requiring quarterly rental payments (every three months) of $ 15,000, payable in advance. The first payment was made on October 1, 2011 (covering the period from October 1 to December 31). Thereafter, payments were due on December 31, March 31, June 30, and September 30 for each three-month period that followed. All the rental payments were made as specified in the agreement.
4. On October 1, the company purchased equipment costing $220,000 for cash.
5. Initial inventory was purchased for $90,000 cash.
6. Additional purchases of inventory during the year totalled $570,000, all on account.
7. Sales during the year totalled $800,000, of which $720,000 were on account.
8. Collections from customers on account totalled $650,000.
9. Payments to suppliers on account totalled $510,000.
10. The cost of the inventory that was sold during the year was $560,000.
11. Selling and administrative expenses totalled $86,500 for the year. Of this amount, $4,000 was unpaid at year end.
12. Interest on the loan from the venture capitalist was paid at year end (Septem¬ber 30, 2012). The interest rate on the loan is 10%. In addition, $25,000 of the loan principal was repaid at that time.
13. The equipment was depreciated based on an estimated useful life of 10 years and a residual value of $20,000.
14. The company's income tax rate was 30%. Before the end of the year, $12,000 in income taxes was paid; the remainder was still owing at year end.
15. The company declared and paid a dividend of $7,000.
Required:
a. Show the effects of the transactions on the basic accounting equation, by preparing a table like the one in Exhibit 2-8.
b. Prepare a statement of earnings, statement of financial position, and statement of cash flows for the year.
c. Comment on the results of the company's first year of operations.