Jim Tomato is a recent university graduate and budding entrepreneur. Jim thinks that hot, fresh, and pizza
available all day long on university campuses is a guaranteed way to make money. Jim had been
considering this idea for a couple of years and recently he finalized what he thinks is the pizza recipe. His
friends think the pizza is the best they ever tasted. Jim wants to test his business idea so he decides to
incorporate a company called Electric Tomato, Inc. (Electric) and arranges to set up a shop in the food
court on the university campus.
It’s now December 27, 2016 and Electric has closed for the winter break. Jim has been working almost
continuously since Electric opened its doors. He’s had no time to keep any accounting records and he’s
asked you to “pull things together” for him. After summarizing the data Jim provided, you have the
following information for 2016:
i.
July 4: Jim incorporates Electric and contributes $20,000 in cash in exchange for Electric
shares.
ii.
August 1: Signs a two-year lease with the university for a small space in the food court.
Monthly rent is $1,000. In addition, Electric must pay 2 percent of sales in additional rent at
the end of the year. No rent is required for August. Electric writes a cheque for $3,000 for rent
for September through November.
iii.
August 4: Purchases a pizza oven, refrigerator, display cases, cash register, and other required
items from a distributor for $22,000. Pays $12,000 in cash and agrees to pay the remainder
on February 15, 2017. Jim estimates that all the equipment will have a useful life of five years.
Electric begins using the equipment on September 1.
iv.
August 10: Electric arranged a $20,000 loan from Paul Pepperoni, a rich investor who likes to
invest in new small businesses. The interest rate on the loan is 9 percent, payable on
December 31 of each year. $10,000 of the loan must be repaid on August 1, 2017 and the
remainder on August 1, 2018.
v.
During August: Renovates and repairs the shop. A contractor is paid $7,000 in cash.
vi.
October 1: Electric purchases a one-year insurance policy for $1,600.
vii.
December 1: Electric writes a $3,000 cheque to the university for rent for December through
February.
viii.
December 18: Caters a holiday party for one of the faculties. Bills the faculty $300 and expects
to be paid in early January.
ix.
During 2016: Purchases ingredients for pizza, drinks, etc. for $18,000. On December 27, there
is inventory on hand that cost $800.
x.
During 2016: Sells pizza and drinks to customers for $42,000. All sales were for cash.
xi.
During 2016: Pays employees $11,200. As of the end of December, employees are owed $500.
xii.
During 2016: Pays utilities of $1,200. Utilities are paid in full to the end of December.
xiii.
During 2016: Electric incurred other expenses amounting to $9,500. All were paid in cash.
xiv.
During 2016: Jim took $5,000 to meet his personal needs.
Required
a. Prepare all necessary journal entries until December 31, 2016. Provide an explanation for each
journal entry.
b. Prepare T-accounts and post each journal entry to the appropriate T-accounts.
c. Prepare and post adjusting journal entries to their appropriate T-accounts. Adjusting entries
are needed for the equipment, insurance, rent, and interest.
d. Prepare a trial balance as of December 31, 2016.
e. Prepare a balance sheet as of December 31, 2016 and an income statement for the period
ended December 31, 2016. Prepare the closing journal entry and post the closing entry to the
appropriate T-accounts.
f. Prepare a trial balance as of December 31, 2016, after the closing entry has been prepared.
g. Compare Electric’s net income with the amount of cash that was generated by the business.
Which is a better indicator of how Electric did? Why are they different? (When looking at the
cash flow, consider the cash flows after the owners made their initial $20,000 investment.)
h. If Jim asked you to evaluate Electric’s financial situation using the financial statements, what
would you be able to tell him?
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