Problem - Grindstone Paving started selling products to customers in 2017 in addition to offering paving services. In 2018, the company also started to offer landscaping services. Currently, the owner (John) owns all the shares in the corporation. To raise the needed cash, John decides to offer common and preferred stock for sale to investors starting in 2018. Below is the balance sheet at the end of 2017.
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Grindstone Paving Inc. Balance Sheet As at December 31, 2017
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Assets
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Liabilities
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Cash
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$121,000
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Accounts Payable
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$21,000
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Accounts Receivable
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25,500
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Unearned Revenue
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9,000
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Prepaid Insurance
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7,200
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Bank Loan
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17,700
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Inventory
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5,000
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Total Liabilities
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47,700
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Property, Plant & Equipment
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55,000
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Stockholders' Equity
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Accumulated Depreciation
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-32,000
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Common Stock - 60,000 issued
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60,000
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Retained Earnings
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74,000
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Total Stockholders' Equity
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134,000
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Total Assets
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$181,700
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Liabilities & Stockholders' Equity
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$181,700
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John has authorized 100,000 common shares and 25,000 preferred shares. The preferred stock will be cumulative and pay $9 dividends. John wants to keep control of his business, so he will keep his 60,000 common shares and will sit on the board of directors.
John has located a few private investors that wish to purchase stock in the corporation. Some want common stock, while other are interested in preferred stock. On January 20, 2018, John issues 30,000 common shares for $75,000 cash and issues 7,000 preferred shares for $28,000 cash.
On March 1, 2018, Grindstone Paving issued and sold $200,000, 6 year bonds with an interest rate of 7%. The market rate at the time of issue was 8%. Any premium or discount on the bond is amortized using the straight line method. Interest will be paid annually on February 28. Use a 4 decimal factor for the bond calculation.
During 2018, the company has performed well, so the board of directors decided to pay dividends. On November 30, 2018, the company declared cash dividends of $90,000, which will be paid out on December 15, 2018. Use the cash dividends method and close cash dividends at the end of the year.
Prepare the journal entries for the issue of stock, issue of the bonds and the dividends. Also prepare adjustments at year end to accrue interest on the bond.
At the end of the year, Grindstone Paving has the following list of accounts and adjusted balances.
- The expansion into landscaping services did not go as planned and had to be discontinued.
- All balances are normal balances.
- Complete the list by filling in the missing values from the journal entries you created during the year.
- The cash balance includes all transactions during the year, including the ones you prepared.
- Interest expense includes interest accrued on the bond plus interest paid on the bank loan.
- Interest payable will only contain interest accrued.
Assume the tax rate is 30%. Assume income tax has already been paid. You will just have to calculate the income tax expense on the income statement.
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Account Title
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Balance
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Accounts Payable
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$122,000
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Accounts Receivable
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163,765
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Accumulated Depreciation
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67,000
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Bank Loan
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50,000
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Bonds Payable
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Cash
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132,500
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Common Stock
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Cost of Goods Sold
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292,500
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Depreciation Expense
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35,000
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Discount on Bonds
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Insurance Expense
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1,200
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Interest Expense
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2,500
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Interest Payable
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Inventory
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210,160
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Loss from Discontinued Operations
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(10,200)
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Maintenance Expense
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8,000
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Preferred Stock
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Premium on Bonds
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Prepaid Insurance
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14,000
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Professional Fees Expense
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5,400
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Property, Plant & Equipment
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200,000
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Rent Expense
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32,000
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Salaries Expense
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70,000
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Sales Discounts
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6,000
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Sales Returns and Allowances
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7,000
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Sales Revenue
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650,000
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Telephone Expense
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3,000
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Travel Expense
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15,400
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Unearned Revenue
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26,100
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Notes:
The bank loan is payable over 5 years and $10,000 will be paid by December 31, 2019.
Prepare a multistep income statement for the year ending December 31, 2018. Round answers to the nearest whole number.
Calculate the earnings per share for i) Income from Continuing Operations, ii) income from Discontinued Operations and iii) Net Income.
Prepare a statement of retained earnings at December 31, 2018. Round answers to the nearest whole number.
Prepare a Classified Balance Sheet at December 31, 2018. Round answers to the nearest whole number.