Mick’s Photographic Equipment began operations on January 1, 2011. During 2011, the company…

Mick’s Photographic Equipment began operations on January 1, 2011. During 2011, the company entered into the following transactions:

1. Issued 50,000 shares of $15 par value common stock for $30 per share in exchange for cash. Also issued, for cash, 1,000 shares of 10 percent, $100 par value preferred stock for $102 per share.

2. Purchased $750,000 of fixed assets in exchange for cash.

3. Issued twenty bonds, each with a face value of $1,000, at 146 (annual coupon rate = 16 percent and annual yield rate

 10 percent). The bonds pay interest semiannually on December 31 and June 30.

4. Purchased land in exchange for 1,000 shares of $15 par value common stock. The shares were selling for $40 per share at the time.

5. Purchased $2,000,000 of inventory on account. $1,075,000 was subsequently paid during 2005.

6. Sold $2,050,000 of merchandise in exchange for cash. The related inventory had cost $875,000.

7. Purchased a two-year insurance policy for $80,000.

8. Purchased short-term marketable securities for $250,000.

9. Sold $880,000 of merchandise on account. The related inventory had a cost of $490,000. $500,000 of the sales made on account were collected during the year.

10. Paid $500,000 in miscellaneous expenses (rent, utilities, and wages).

11. Declared, but did not pay, a $100,000 dividend.

12. Made the first interest payment on the bonds on December 31.

Adjusting entries include:

a. The fixed assets were purchased on January 1 and had an estimated useful life and salvage value of five years and $50,000, respectively. The company uses the straight-line depreciation method.

b. The company used one-fourth of the insurance policy during 2011.

c. The market value of the marketable securities on December 31 was $225,000.

d. As of December 31, the company had incurred, but had not yet paid, $75,000 in miscellaneous expenses.

e. The company estimates that 8 percent of credit sales will prove uncollectible.

f. The market value of the inventory was $5,000 less than the cost.


a. Prepare journal entries for each of the original and adjusting transactions. Establish T-accounts for each account. Post the entries to the T-accounts.

b. Prepare the necessary closing entries. Post these entries.

c. Prepare the income statement and balance sheet for Mick’s Photographic Equipment for the year ended December 31, 2011.

d. Prepare the statement of cash flows for Mick’s Photographic Equipment for the year ended December 31, 2011, using both the direct and indirect methods.

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