Question

****HOW DO I CALCULATE #15 and #16 AT THE BOTTOM?**

January

Arya and Rob have decided to open a doggy day care, Stark's Direwolf Lodge (SDL). On 1/1/2016, Arya and Rob each contribute $10,000 in exchange for 100 shares each of common stock to get things started (1). Before they can open SDL, they needed a location. After doing their due diligence, they found a centrally located building with ample space for dog lodging and play area. The building and land were listed at $30,000. Because this was more than the company could afford to pay, the company signed a $24,000 note payable (due in five years) to finance the purchase, and paid the remaining $6,000 in cash (2). The building as is wasn't functional for much of anything, but Arya immediately hired a contractor to fix up the place so that it was useable as a doggy day care business. After these improvements, the estimated life of the building is 20 years. She paid the contractor $6,000 cash, and the work was finished by the end of January (3). Meanwhile, Rob ordered and received $3,000 worth of supplies on account (4).

February

Arya and Rob's SDL is open for business on 2/1/2016! They have three customers with a total of six dogs, who each paid cash on 2/1/16 for the whole month of February (5). The monthly cost of doggy day care is $1,000 per dog. On 2/12/16, Rob paid the bill for the $3,000 of supplies he ordered in January (6). On 2/28/2016, the company made the first monthly payment on their outstanding note payable, in the amount of $400 (7). At the end of the month, Rob took inventory and realized they had used half of the supplies purchased in January (8). He also recorded an entry to recognize the revenue for the month (9).

March

Rob, fearing his imminent death, sells his shares to his sister Sansa for $30,000 (10). Towards the end of February, the business advertised a pricing promotion: 1 month of doggy daycare would still cost $1,000 per dog, but if customers are willing to purchase three months at once, the monthly cost charged will only be $900 per dog. Three customers (six dogs) took advantage of the 3-month promotion and paid for three months in advance on 3/1 (11). SDL decided to expand their service lines to include dog walking services. As of 3/31/2016, SDL had provided $2,000 worth of dog walking services for a single customer, and billed their customer for that amount (12). The customer has not yet paid. Also on 3/31/2016, SDL pays their second monthly payment on the loan (13). At the end of the month, the company recorded an entry to recognize revenue for the month (14).

Additional Questions:

15.       Arya realized that she forgot to record depreciation expense! Calculate monthly depreciation expense for the building (5-year useful life, straight line depreciation).

16.       What is net income for the first three months of 2016? Don’t forget to include depreciation expense!

Answer 1

Answer for Question 15:

Calculation of monthly depreciation Expense:

For the month of January : Depreciation = Value of building/No. of years = 30000/5= 6000.

For the month of Feb : Depreciation = 30000+6000/20 = 1800

For the month of March : Depreciation = 1800 (Same as feb month).

Answer for Question 16:

Computation of Net income for the first three months:

For the month of Jan: Net income= Revenue - Expenses = 0-3000-6000=9000 (loss)

For the month of Feb: Net Income = Revenue - Expenses= 6000-3000-1800-400= 800 (Profit)

For the month of March: Net Income = Revenue - Expenses = 18200-400-1800=16000(Profit).