HomeVideo, Inc. is a retailer of home theater and wired home products.The company was founded in early 2019 by Jesse Daniels who had significant experience in the industry and numerous contacts.As a result, the business has achieved strong sales in its first year. During 2019, HomeVideo, Inc. recorded all cash receipts and cash disbursements. However, HomeVideo, Inc.’s banker is requiring an income statement and balance sheet prepared on an accrual basis.
The following is a recap of the cash receipts for 2019:
Collections from customers
|
$375,400
|
Proceeds from bank loan
|
100,000
|
Proceeds from sale of common stock
|
75,000
|
|
$550,400
|
The cash disbursements data is available on the attached Excel sheet. However, the data needs to be analyzed, categorized, and summarized. In addition, HomeVideo, Inc.’s payroll disbursements for wages totaled $110,800. The data was obtained from a separate (not provided) payroll journal.
Daniels’, a family friend, has asked for your assistance in preparing HomeVideo, Inc.’s financial statements at December 31, 2019 on an accrual basis. The following additional information is available:
1.Customers owed the company $15,600 at year-end for credit sales. Also, HomeVideo, Inc.’s cash collections included $6,500 of amounts collected in advance from other customers for services to be performed in 2019.
2.The firm signed a 3-year lease for a retail store with rent payments starting in January 2019. The rent is due on the 15thof every month. Additionally, a security deposit of $5,000 was paid along with the first rent payment. This deposit is likely to be returned at the end of the lease term.
3.The equipment purchased during 2019 is depreciated on a straight-line basis assuming no salvage value. The firm uses a convention where one-half year of depreciation is taken in the year of acquisition (regardless of the actual purchase date).
4.The insurance payment was for a 1-year policy starting on February 1, 2019.
5.At year-end, $26,000 is owed to suppliers for merchandise purchased on credit and received.
6.At year-end, merchandise inventory costing $51,700 and supplies totaling $6,900 remained on hand.
7.Salaries earned, but not yet paid to employees at year-end totaled $6,200.
8.The bank loan requires interest at 8% per year and was issued on June 1, 2019. The principal and interest are to be repaid together on May 31, 2019.
Required:
§Prepare an analysis to categorize and summarize all2019cash disbursements by the categories shown on the attached Excel document.
§Prepare an analysis that shows how cash based income is converted to accrual-based net income for 2019.
§Prepare an accrual-based income statement for 2019 and a balance sheet as of December 31, 2019 using good form.
§Prepare a brief memo explaining the cash-to-accrual conversion and the results of your calculations. Please “cut-and-paste” your Word memo into a separate tab in Excel and submit only the Excel file.