Ballard Yoga- Part V

Practice Exercise
Accounting 215: Accounting and Financial Reporting
Foster School of Business, University of Washington
Professor Peter Demerjian
After a number of years as a successful CPA at a national firm, you decide to quit the rat race and pursue
your true loveyoga. You decide that Seattles Ballard neighborhood would be perfect place to open an
Ashtanga Yoga studio. Even better, your friend Solomon, who studied in Mysore with Sri K. Pattabhi
Jois, has just moved to town and is willing to teach in your new studio. You hurriedly prepare to open the
studio, Ballard Yoga, by October 1.
Pre-Opening (September, 2014)
Prior to opening the business, you make the following transactions:
1. You contribute $10,000 of your own cash to start the business.
2. You purchase $500 worth of mats and other equipment for use during classes.
3. You purchase an additional $400 worth of mats, equipment, and clothing for sale at the studio.
4. You purchase a liability insurance policy at a total cost of $1,200. The policy covers October 1,
2014, through March 31, 2015.
5. You transfer $3,000 into a certificate of deposit on September 30. This three-month financial
instrument has an annualized interest rate 3.2%. The CD matures on January 1, 2015, at which
time you will receive back the $3,000 principal plus interest.
October, 2014
The following transactions take place in October:
1. You receive cash totaling $800 for classes.
2. Your instructor teaches classes during the month. You agree to pay $600 for the classes; $300 is
paid on October 15, and $300 will be paid on November 2.
3. You pay rent for October of $1,000 on October 1.
4. You use utilities (electricity and water) totaling $200. This amount is payable on November 15.
5. Some of the inventory purchased in September (original cost: $140) is defective. You return it to
the wholesaler, who refunds the full original purchase price in cash. They also offer you a 5%
discount on future sales (up to $500 list price).
November, 2014
The following transactions take place in November:
1. You receive $1,500 in cash for classes. Of this amount, $1,000 was for classes in November. The
remainder is for 2-month passes allowing unlimited classes in November and December.
2. Your instructor again earns $600; $300 paid on November 16 and $300 due on December 1.
3. Utilities total $150, payable on December 1.
4. You pay rent for November of $1,000 on November 1.
5. You sell inventory costing $150 for $225.
6. You are worried about money, so your Uncle Rafael agrees to give you $2,000. You will need to
repay him in the future, but he does not say when.
7. A client is extremely dissatisfied with their class, and demands their money back. Reluctantly,
you agree. The cash cost $15.
8. You purchase gear (from the same supplier referenced in (5.) above, with a list price of $620.
9. You decide to withdraw some of your investment in the studio to pursue other opportunities,
giving yourself $1,000 in cash.

Additionally, you pay any outstanding bills due in November from activities in prior months.

Notes

The mats and equipment acquired in September (trans. 2) have an expected useful life of 25
months.
Assume simple interest for the CD (September, trans. 5).

Required:
a. Record journal entries for any necessary adjustments based on the transactions in September,
October, and November.
b. Prepare the Income Statement, Statement of Changes in Shareholders Equity, and Balance Sheet
for September, October, and November (a separate set of statements for each month).
Adjustments
October
a) Recognized depreciation on studio equipment (original transaction: September (3))
Depreciation expense
Accumulated depreciation: equipment

20
20

b) Recognize insurance expense (original transaction: September (4))

Insurance expense
Prepaid insurance

200
200

c) Recognized interest income on CD (original transaction: September (5))

Note: $3,000 * 0.032 * (1/12) = 8
Interest receivable
Interest income

8
8

November

Record the same journal entries as October; no new adjustments beyond these.

(Note: T-Accounts and Trial Balances not required; provided for illustration)
September

Cash
(1) 10,000 500 (2)
400 (3)
1,200 (4)
3,000 (5)
4,900

Prepaid Insurance

PP&E

(4) 1,200

(2) 500

1,200

500

Inventory

Contributed Capital

CD
(3) 400

10,000 (1)

(5) 3,000
400

10,000

3,000
Ballard Yoga
Trial Balance
September 30, 2014
Account
DEBIT CREDIT
Cash
4,900
Prepaid Insurance
1,200
CD
3,000
Inventory
400
PP&E
500
Contributed Capital
10,000
Total
10,000 10,000

Ballard Yoga
Statement of Changes in Shareholders' Equity
September 30, 2014
Total
Contributed
Retained
Shareholders'
Capital
Earnings
Equity
Balance at September 1, 2014
0
0
0
Additional stock issuance
10,000
10,000
Net income
0
Dividends
0
Balance at September 30, 2014
10,000
0
10,000

Ballard Yoga
Balance Sheet
September 30, 2014
ASSETS
Current Assets:
Cash
Inventory
Prepaid Insurance
CD
Total Current Assets
PP&E (net)
Total Assets

4,900
400
1,200
3,000
9,500
500
10,000

LIABILITIES AND EQUITY

Contributed Capital

10,000

Total Liabilities and Equity

10,000

(Note: No Income Statement for Septemberthere were no activities)

October
Cash
4,900
(1) 800 300 (2)
(5) 140 1,000 (3)
4,540

PP&E
500

Wage Payable

500

CD
3,000

Acc. Dep: PP&E

3,000
Prepaid Expense
1,200

300 (2)

800 (1)

300

800

Utility Payable

20 (adj2)

200 (4)

20

200

Interest Receivable

Service Revenue

Contributed Capital
10,000

8 (adj3)

Wage Expense

Insurance Expense
(adj1) 200

200
Depreciation Expense

(2) 600

(adj2) 20

600

20

Rent Expense
(3) 1,000

Interest Income
8 (adj3)

200 (adj1)
1,000

Inventory
400
140 (5)

260

Ballard Yoga
Trial Balance (pre-closing)
October 31, 2014
Account
DEBIT CREDIT
Cash
4,540
Prepaid Insurance
1,000
CD
3,000
Inventory
260
PP&E
500
Acc. Dep: PP&E
20
Intererest Receivable
8
Wage Payable
300
Utility Payable
200
Contributed Capital
10,000
Service Revenue
800
Wage Expense
600
Rent Expense
1,000
Utility Expense
200
Insurance Expense
200
Depreciation Expense
20
Interest Income
8
Total
11,328 11,328

10,000
Retained Earnings

1,000
Utility Expense

1,212

(4) 200

1,212

200

Ballard Yoga
Income Statement
October 31, 2014
Service Revenue
Operating Expenses
Wage Expense
Rent Expense
Utility Expense
Insurance Expense
Depreciation Expense
Total Operating Expenese
Operating Income

800

600
1,000
200
200
20
2,020
(1,220)

Other income (expense)

Interest Income
Net Income

8
(1,212)

Ballard Yoga
Trial Balance (post-closing)
October 31, 2014
Account
DEBIT CREDIT
Cash
4,540
Prepaid Insurance
1,000
CD
3,000
Inventory
260
PP&E
500
Acc. Dep: PP&E
20
Intererest Receivable
8
Wage Payable
300
Utility Payable
200
Retained Earnings
1,212
Contributed Capital
10,000
Total
10,520 10,520

Ballard Yoga
Statement of Changes in Shareholders' Equity
October 31, 2014

Balance at October 1, 2014

Additional stock issuance
Net income
Dividends
Balance at October 31, 2014

Contributed
Capital
10,000

10,000

Total
Shareholders'
Equity
0
10,000
0
(1,212)
(1,212)
0
(1,212)
8,788

Retained
Earnings

Ballard Yoga
Balance Sheet
October 31, 2014
ASSETS
Current Assets:
Cash
Inventory
Prepaid Insurance
CD
Interest Receivable
Total Current Assets
PP&E (net)
Total Assets
LIABILITIES AND EQUITY
Current Liabilities:
Wage Payable
Utility Payable
Total Current Liabilities
Total Liabilities
Shareholders' Equity
Contributed Capital
Retained Earnings
Total Shareholders' Equity
Total Liabilities and Equity

4,540
260
1,000
3,000
8
8,808
480
9,288

300
200
500
500

10,000
(1,212)
8,788
9,288

November
Cash
4,540
(1) 1,500 300 (2)
(5a) 225 1,000 (4)
(6) 2,000 15 (7)
595 (8)
1,000 (9)
300 (a)
200 (b)

PP&E
500

Utility Payable
200
(b) 200 150

500

1,250 (1)

150

Acc. Dep: PP&E

20

4,855

20 (adj2)

CD
3,000

40
Interest Receivable
8

Unearned Revenue

1,250
Sales Revenue

250 (1)

225 (5a)

250

225

Loan Payable
2,000 (6)

3,000

Service Revenue

Service Rev. Return

(4) 1,000

1,000
Utility Expense
(3) 150

150
Insurance Expense

(7) 15

(adj1) 200

15

200

(adj3) 8

Prepaid Expense
1,000
200 (adj1)

16

2,000

Wages Payable
300
(a) 300 300 (2)

800
Inventory
260
(8) 595 150 (5b)

Contributed Capital
10,000

Cost of Goods Sold

Depreciation Expense

(5b) 150

(adj2) 20

150

20

(9) 1,000
300

9,000
Retained Earnings
1,212

Wage Expense
(2) 600

705

Rent Expense

Interest Income
8 (adj3)

652
1,864

600

Ballard Yoga
Trial Balance (pre-closing)
November 30, 2014
Account
DEBIT CREDIT
Cash
4,855
Prepaid Insurance
800
CD
3,000
Inventory
705
PP&E
500
Acc. Dep: PP&E
40
Intererest Receivable
16
Wage Payable
300
Utility Payable
150
Unearned Revenue
250
Loan Payable
2,000
Contributed Capital
9,000
Retained Earnings
1,212
Service Revenue
1,250
Sales Revenue
225
Service Revenue Return
15
Cost of Goods Sold
150
Wage Expense
600
Rent Expense
1,000
Utility Expense
150
Insurance Expense
200
Depreciation Expense
20
Interest Income
8
Total
13,223 13,223
Ballard Yoga
Income Statement
November 30, 2014
Service Revenue
Sales Revenue
Service Revenue Return
Total Revenue

1,250
225
(15)
1,460

Operating Expenses
Cost of Goods Sold
Wage Expense
Rent Expense
Utility Expense
Insurance Expense
Depreciation Expense
Total Operating Expenese

150
600
1,000
150
200
20
2,120

Operating Income
Other income (expense)
Interest Income
Net Income

(660)

8
(652)

Ballard Yoga
Trial Balance (post-closing)
November 30, 2014
Account
DEBIT CREDIT
Cash
4,855
Prepaid Insurance
800
CD
3,000
Inventory
705
PP&E
500
Acc. Dep: PP&E
40
Intererest Receivable
16
Wage Payable
300
Utility Payable
150
Unearned Revenue
250
Loan Payable
2,000
Contributed Capital
9,000
Retained Earnings
1,864
Total
11,740 11,740

Ballard Yoga
Statement of Changes in Shareholders' Equity
November 30, 2014

Balance at September 1, 2014

Additional stock issuance
Net income
Dividends
Balance at September 30, 2014

Contributed
Capital
10,000
(1,000)

9,000

Total
Retained
Shareholders'
Earnings
Equity
(1,212)
8,788
(1,000)
(652)
(652)
0
(1,864)
7,136

Ballard Yoga
Balance Sheet
November 30, 2014
ASSETS
Current Assets:
Cash
Inventory
Prepaid Insurance
CD
Interest Receivable
Total Current Assets
PP&E (net)
Total Assets
LIABILITIES AND EQUITY
Current Liabilities:
Wage Payable
Utility Payable
Unearned Revenue
Total Current Liabilities
Loan Payable
Total Liabilities
Shareholders' Equity
Contributed Capital
Retained Earnings
Total Shareholders' Equity
Total Liabilities and Equity

4,855
705
800
3,000
16
9,376
460
9,836

300
150
250
700
2,000
2,700

9,000
(1,864)
7,136
9,836