The Classic Theater Ltd.

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The Classic Theater Ltd. opened on April 1. All facilities were completed on March 31. At this time, the ledger showed No. 101 Cash 6,000, No. 140 Land 10,000, No. 145 Buildings (concession stand, projection room, ticket booth, and screen) 8,000, No. 157 Equipment 6,000, No. 201 Accounts Payable 2,000, No. 275 Mortgage Payable 8,000, and No. 311 Share CapitalOrdinary 20,000. During April, the following events and transactions occurred.

2nd Apr Paid film rental of 800 on first movie.

3rd Apr Ordered two additional films at 1,000 each.

9th Apr Received 1,800 cash from admissions.

10th Apr Made 2,000 payment on mortgage and 1,000 for accounts payable due.

11th Apr Classic Theater contracted with D. Zarle Company to operate the concession stand. Zarle is to pay 18% of gross concession receipts (payable monthly) for the rental of the concession stand.

12th Apr Paid advertising expenses 300.

20th Apr Received one of the films ordered on April 3 and was billed 1,000. The film will be shown in April.

25th Apr Received 5,500 cash from admissions.

29th Apr Paid salaries 1,600.

30th Apr Received statement from D. Zarle showing gross concession receipts of 1,200 and the balance due to The Classic Theater of 216 (1,200 18%) for April.

Zarle paid one-half of the balance due and will remit the remainder on May 5.

30th Apr Prepaid 1,300 rental on special film to be run in May.

In addition to the accounts identified above, the chart of accounts shows No. 112 Accounts Receivable, No. 136 Prepaid Rent, No. 400 Service Revenue, No. 429 Rent Revenue, No. 610 Advertising Expense, No. 726 Salaries and Wages Expense, and No. 729 Rent Expense.

Instructions

Preparation of the Financial Statements Use accounting cycle to complete this project. The completed Excel spreadsheet should be submitted

(a) Enter the beginning balances in the ledger as of April 1. Insert a check mark () in the reference column of the ledger for the beginning balance.

(b) Journalize the April transactions.

(c) Post the April journal entries to the ledger. Assume that all entries are posted from page 1 of the journal.

(d) Prepare a trial balance, income statement, owners equity and balance sheet on April 30, 2017

(e) Analysis of the income statement and balance sheet.

 

Sample Solution

Creating the Financial Statements for The Classic Theater

Step 1: Set Up the General Ledger

Chart of Accounts:

  • 101 Cash
  • 112 Accounts Receivable
  • 136 Prepaid Rent
  • 140 Land
  • 145 Buildings
  • 157 Equipment
  • 201 Accounts Payable
  • 275 Mortgage Payable
  • 311 Share Capital-Ordinary
  • 400 Service Revenue
  • 429 Rent Revenue
  • 610 Advertising Expense
  • 726 Salaries and Wages Expense
  • 729 Rent Expense

Step 2: Journal Entries

April 2:

  • Debit: Film Rental Expense 800
  • Credit: Cash 800

April 3:

  • Debit: Film Inventory 2,000
  • Credit: Accounts Payable 2,000

April 9:

  • Debit: Cash 1,800
  • Credit: Service Revenue 1,800

April 10:

  • Debit: Mortgage Payable 2,000 Debit: Accounts Payable 1,000
  • Credit: Cash 3,000

April 11:

  • No journal entry required, as this is a contract agreement.

April 12:

  • Debit: Advertising Expense 300
  • Credit: Cash 300

April 20:

  • Debit: Film Inventory 1,000
  • Credit: Accounts Payable 1,000

April 25:

  • Debit: Cash 5,500
  • Credit: Service Revenue 5,500

April 29:

  • Debit: Salaries and Wages Expense 1,600
  • Credit: Cash 1,600

April 30:

  • Debit: Rent Revenue 216
  • Credit: Accounts Receivable 216

April 30:

  • Debit: Prepaid Rent 1,300
  • Credit: Cash 1,300

Step 3: Post to the Ledger

Post the journal entries to the respective ledger accounts.

Step 4: Prepare a Trial Balance

Create a trial balance to ensure the ledger is balanced.

Step 5: Prepare Financial Statements

Income Statement:

  • Revenue:
    • Service Revenue
  • Expenses:
    • Film Rental Expense
    • Advertising Expense
    • Salaries and Wages Expense
    • Rent Expense

Statement of Owner’s Equity:

  • Beginning Balance
  • Add: Net Income
  • Less: Dividends (if any)
  • Ending Balance

Balance Sheet:

  • Assets:
    • Cash
    • Accounts Receivable
    • Prepaid Rent
    • Land
    • Buildings
    • Equipment
    • Film Inventory
  • Liabilities:
    • Accounts Payable
    • Mortgage Payable
  • Owner’s Equity:
    • Share Capital-Ordinary
    • Retained Earnings

Step 6: Analysis of Financial Statements

  • Profitability: Analyze the income statement to assess the profitability of the business.
  • Liquidity: Evaluate the balance sheet to assess the company’s ability to meet short-term obligations.
  • Solvency: Assess the company’s long-term financial health by analyzing its capital structure and debt levels.

By following these steps and using accounting software or spreadsheets, you can effectively prepare the financial statements for The Classic Theater.

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