Reference no: EM132575652

THE ROYAL PALACE- YEAR TWO

Maria Javed opened the Royal Palace as planned on April 1, 2016. Business during the first year turned out to be somewhat better than expected, and in mid-April 2017, she was considering expanding her product line to include fertilizer, tools, and other Royal accessories. She thought she might need an additional loan, however, if she decided to expand. With that idea in mind, she decided to prepare income statement for the first fiscal year and a balance sheet at fiscal year end in order to get a better idea of how her business had done and to have information to show the bank if she needed to seek additional financing.

The business had been incorporated as planned, and the pickup truck, display equipment, Rototiller, and cash register had been purchased as planned. In addition, the following information was available to her from the company's checkbook, sales records, purchase records, payroll records, and notes she had written to herself throughout the first fiscal year:

1. Sales for the year were Rs. 420,000, broken down as follows:

Cash sales Rs. 200,000 Sales on account Rs. 60,000 Multibank charge card Rs. 160,000

(The bank deducted 2% from the charge-card sales, so the business had a net amount of Rs. 156,800 deposited in its bank account.)

2. The Rs. 32,000 bank loan was not received until July 1.

3. A pocket calculator was purchased for Rs. 144 cash.

4. A total of Rs. 316,000 of plants, shrubs, and trees was purchased during the year. Maria Javed took an inventory on March 31, 2017. She determined that the saleable merchandise still on hand had cost Rs. 64,000. During the year, she had to throw away items that cost her Rs. 12,000, because they wilted and died. Unexpectedly, several plants had cross- pollinated and produced new plants worth about Rs. 1,500, none of which had yet been sold.

5. Advertising expenses were Rs. 22,000, all paid in cash.

6. Ongoing expenses paid in cash turned out to be as follows:

Rent Rs. 7,200 Telephone 1,000 Utilities 6,000 Payroll (including Rs. 40,000 for Maria Javed) Rs. 108,000

7. Twelve monthly payments of Rs. 336 each had been made on the truck loan. According to information from the bank, the interest was Rs. 1,154 for the first year, Rs. 700 the second year, and Rs. 246 the third year.

8. Maria Javed figured that her equipment would have the following useful lives:

1. Rototiller, 2 years

2. Truck, 4 years

3. Display cases, 10 years

4. Cash register, 10 years

The following things were noted by Maria Javed. She was not quite sure how they should be treated.

9. She would have to make the loan principal payment of Rs. 8,000 and interest of Rs. 4,160 on June 30, 2017, rather than on March 31, 2017, as originally planned.

10. She had purchased a three-year liability insurance policy for Rs. 660 on April 2, 2016.

11. She still owed Rs. 20,000 to suppliers for inventory that had been purchased.

12. Rs. 20,000 of the sales on account had not been collected. One landscape contractor who owed her Rs. 1,600 had gone bankrupt, yet the account receivable was still on the books.

13. On September 30, 2016, she had entered into a purchase contract with one of her suppliers to purchase Rs. 60,000 of small houseplants during the next 12 months. By making this commitment, she was guaranteed one-day delivery, top-quality plants, better selection, and a reduced price.

14. On March 31, 2017, she signed a new 5-year lease agreement for the building space that she rented. The annual rent would be Rs. 7,200, but the lease contained a local price-level escalation clause for years 2 through 5.

15. On March 1, one of her major customers had paid her Rs. 3,600 in advance for plants and shrubs to be delivered in June.

16. On February 1, 2017, Maria Javed issue a note receivable which will mature on May 1. She had paid Rs. 19,700.

17. Maria Javed had established a policy of guaranteeing for one year all plants, trees, and shrubs that were sold, if they had been properly planted. To date, no items had been replaced. 18. The income tax rate was 17% on the first Rs. 50,000 of income and 46% on all income over Rs. 50,000.

Required:

Problem 1: Prepare journal entries for items.

Problem 2: Prepare the trial balance.

Problem 3: Prepare the income statement for the fiscal year ended March 31, 2017.

Problem 4: Prepare the balance sheet at March 31, 2017