Reference no: EM132776424

On January 1 2020, Fred started trading as a reseller of refrigerators or "fridges" from his garage. He formed his limited liability company with $380,000 cash that he invested in exchange for 380,000 shares of $1 common stock. During the first year of trading the following events occurred:

i. Purchased a warehouse for $300,000 and a delivery van for $50,000. The building and van have estimated useful lives of 40 and 5 years, respectively. The warehouse has no estimated residual (scrap value), but the delivery van can be sold for scrap of $5,000. Straight depreciation is to be charged on the warehouse. Fred is unsure on how best to depreciate the van.
ii. In January, the business purchased 400 fridges at $80 per unit, and another 600 fridges at $40 per unit in May. Of this, 900 units were sold in June for total sales of $270,000.

iii. The business paid employee salaries of $80,000 & utilities expenses of $40,000.

iv. Fred developed a process for increasing the efficiency of the compressors within the purchased fridges. He successfully completed development of the process on 12/31/2020, and believes that the enhancement will vastly increase the demand for his fridges during the next 10 years. All fridges sold during 2021 will be modified. He incurred and paid the following research and development expenses on the project:

• $5,000 hiring a scientist to teach him about compressors
• $10,000 of market research investigating whether customers pay more for energy efficient fridges
• $30,000 of materials necessary for developing the modification process

In addition, the following operating costs were incurred from legal activities:

• $7,000 of legal costs to register the patent for the modification process.
• $8,000 of legal costs to successfully defend the patent rights, although an appeal against this judgement may be made by the other party.

v. On 12/31, it was discovered that the delivery van has a crack in its engine that reduces operational efficiency. The following information is made available to you about the vehicle at this date:

• Book value: as determined by you in part (i)
• Selling price: $28,000
• Selling costs: $2,000
• Expected future cash flows from use: $42,000
• Present value of expected future cash flows: $22,000

vi. On December 31, the warehouse was found to have a current market price of $400,000.

vii. On December 31, the company paid a final dividend of $20,000.

Required

Problem a) Does Fred have to file financial statements.

Problem b) Discuss the appropriate accounting treatment for transactions i, ii, iv, v and vi.

Problem c) How much cash does the business have on December 31, 2020?

Problem d) Using your answers from part a), calculate Fred's Fridges income instatement for the year ended December 31 2020.