Reference no: EM13490584

Tom & Jerry Co

Background

Two friends, Tom and Jerry, decided to start a business. They decided to start trading tools and building materials. They will buy bulk stock and sell them to people with a marginal profit.

Required

Tom and Jerry do not have an accountant and have approached you to help them prepare their annual financial statements for the year ended December 31, 2012. The financial statements should include a trial balance, balance sheet and income statement.
You are required to review the below series of transactions which occurred during the year from January 1, 2012 to December 31, 2012 and write the accounting journal entries for the each transaction.

Compile all the transactions in the year and prepare "T" accounts, a trial balance for the year then ended, Balance Sheet as at December 31, and a statement of income for the year then ended.

Transactions

1. Tom and Jerry equally contributed US$ 1,000,000 as their share of capital in the business on 1/1/2012. They decided to keep the capital in the Company's bank account.

2. On the same day, their friend Mario offered them some space to use as office and a store on rental basis. Mario, in exchange of the space, demanded an advance rent for QR. 200,000 for two years. The cash was paid by Tom and Jerry on the same day.

3. On the evening of 1/1/2012, Tom and Jerry went to the furniture store to buy furniture for their store. They bought furniture worth QR. 100,000. They intended to scrap this furniture in 5 years before they will buy the new furniture.

4. A month later, when the office was set up, they decided to buy the tools which they can further sell in the market. They placed an order and they were able to buy 1000 hammers for US$ 10 each, Cement 1000 Kgs for US$ 50 per kg and 500 drill machines for US$ 100 per machine. Since they just started the business with little money they had, they negotiated with the supplier to supply them the desired goods on credit terms to be paid back within 60 days. They intended not to buy further stock till it is completely sold.

5. They noticed that they will become famous if they spent some money on advertisement. Therefore they decided to pay the local newspaper an amount of US$ 1,000 cash in total for advertising about their new company for 3 months. They advertisement was made attractive by saying "cheap tools for sale" and the prices were marketed as follows

a. Hammer US$ 20 per hammer
b. Cement US$ 100 per Kg
c. Drill Machines US$ 150 per machine

6. After few weeks, the advertisement did spread the word and they started to receive customers for inquiries of the products. Looking at the load of work, they decided to hire an office assisting them in making deals with the customer. The helper was offered a salary of US$ 5000 per month. He joined the company on 1/6/2012 and it was agreed to pay him salary only at the end of the year in cash.

7. The helper advised them that they lack basic office supplies such as papers, pens, stationary, calculator, books etc. Tom and Jerry decided to spend US$ 2,000 for buying stationary. The stationary was bought from the market in cash.

8. Through proper advertisement and the skills of the office helper, the Company was able to make one big sales deal. A customer, Mr. X decided to buy 750 hammers, 800 Kgs of cement and 450 drill machines. Since Mr. X just started his construction business and did not have cash on him, he decided to take the goods on credit and pay back the Company within 30 days from the date of sale.

9. The yearend approached. Tom and Jerry did not get cash from Mr. X and their supplier started to chase them for their money. They followed up with Mr. X who informed them that X's construction business was not a success and he is not able to generate cash as expected and may close his business if he is not successful anymore. Therefore he asked for some more time and was only able to settle 50% of what he bought from the Company.

10. Since they received only 50%, they convinced their suppliers to pay them off by 50% only.

11. Jerry studied accounting 101 in his university while he was studying business administration. He remembered that there is a requirement to account for the following adjustments relevant for his business,

a. Amortisation of the rent he paid in advance during the year. The rent was paid for 2 years in advance
b. Depreciation of the furniture. The intended life was 5 years.
c. They have to account for the salary which has to be paid to the helper. Since they were able to collect 50%, they negotiated with the helper to pay him 50% of the salary now and the next 50% in one month time.
d. The bank informed them that they have earned interest of US$ 10,000 on their bank account.
e. The bank has also informed that they suffered bank charged amounting to US$ 5,000.
f. Considering the condition of Mr. X, Jerry decided to keep an allowance of 50% of the remainder amount as an allowance for bad debts