Question: TATO AS is a company situated in Oslo, Norway. The firm started operations on 1.1.2016. The firm buys and resells decoration items. The company pays no corporate tax, and there is no VAT. The statement of financial position as of 31.12.2017 (after two complete years of operations) was as follows:

TATO AS
Statement of Financial Position
December 31, 2017
(in NOK)
Assets

Land                                                                                                       2,350,000

Building                                                                                                  12,500,000

Less: Accumulated Depreciation-Building                                                      - 2,500,000

Net Buildings                                                                                            10,000,000

Equipment                                                                                                3,525,000

Less: Accumulated Depreciation-Equipment                                                  - 1,410,000

Net Equipment                                                                                           2,115,000

Fixtures & Fittings                                                                                      2,350,000

Less: Accumulated Depreciation-Fixture & Fittings                                            - 470,000

Net Fixtures & Fittings                                                                                 1,880,000

Total Fixed Assets                                                                                     16,345,000

Inventories                                                                                                2,467,500

Accounts Receivables                                                                                    940,000

Less: Allowance for Doubtful Accounts                                                             - 94,000 

Net Accounts Receivables                                                                               846,000

Prepaid Expenses                                                                                          176,250

Cash                                                                                                            86,200

Bank Deposits                                                                                               940,000

Total Current Assets                                                                                   4,515,950

Total Assets                                                                                            20,860,950

Equity and Liabilities

Share Capital - Ordinary                                                                              7,050,000

Retained Earnings                                                                                         418,300

Total Equity                                                                                              7,468,300

Long-term Loan                                                                                         7,618,700

Total Non-current Liabilities                                                                         7,618,700

Accounts Payable                                                                                      1,457,000

Prepayments from Customers                                                                         940,000

Accrued Salaries                                                                                          705,000

Accrued Interest                                                                                         676,800

Other short-term Liabilities                                                                          1,995,150

Total Current Liabilities                                                                               5,773,950

Total Equity and Liabilities                                                                         20,860,950

Below you will find the accounting transactions that occurred during 2018. Your task is to:

1. Post the journal.

2. Post the adjustment entries.

3. Close the books.

4. Prepare the Income Statement and the Statement of Financial Position as of 31.12.2018.

5. Prepare a Statement of Cash Flows following the indirect method as of 31.12.2018.

6. Comment on the firm's financial position as of 31.12.2018.

Journal entries in 2018:

1. Paid the accrued salaries using bank deposits.

2. Sold goods on account 1,000,000 to Company A.

3. The company received 700,000 from a customer who bought the items in 2017.

4. Paid the accrued interest related to the long-term loan.

5. The firm purchased inventories on account 7,500,000

6. Company A paid for the goods.

7. Salary of 1,235,000 was paid out.

8. The firm sold goods on account to Company B for 10,500,000.

9. The company sold a machine on 30.6.2018. The machine had been purchased on 1.1.2016 for 1,500,000. Equipment is linearly depreciated with a useful life of 5 years and no residual value. The sales price was 1,250,000.

10. Paid phone bill of 34,500.

11. The firm sold goods on account for 1,500,000 to Company C.

12. Company B returned goods for 500,000.

13. Company B paid its remaining balance.

14. The firm paid for the inventory purchased in 5.

15. Company C paid its remaining balance obtaining 30,000 discount for prompt payment.

16. Goods prepaid by customers in 2017 were delivered.

17. Lighting and heating were paid in cash 3,000,000.

18. The prepaid expenses per 31.12.17 related to heating.

19. Prepayment of expenses 1,000,000.

20. Company D purchased goods on account 3,000,000.

21. TATO repaid 1,000,000 of its remaining account payables.

Adjustments as of 31.12.2018:

1. Inventories per 31.12.2018: 3,000,000.

2. Accrued interest long- term loan: Interest is paid once a year (1. April - in arrears). The company does not pay any instalments, only interest. The interest rate is 7 % p.a.

3. Bad debts are estimated to be 10% of receivables.

4. Depreciation Buildings: Original cost price is 12,500,000. Linear depreciation. Useful life 10 years. No residual value.

5. Depreciation Equipment: Original cost price 3,525,000. Linear depreciation. Useful life 5 years. No residual value.

6. Depreciation Fixture and Fittings: Original cost price 2,350,000. Linear depreciation. Useful life 10 years. No residual value.

7. Accrued salaries to be paid out next year: 600,000.

8. The firm pays no taxes.

9. The firm pays no dividends.

In addition to the Financial Statement Accounts listed above, use the following accounts for your transactions:

• Sales Revenues

• Salaries Expense

• Depreciation Expense

• Gain/Loss on Disposal of Plant Assets

• Other Operating Expenses

• Sales Returns and Allowances

• Sales Discounts

• Light and Heating Expense

• Cost of Goods Sold

• Interest Expense

• Bad Debt Expense