Question 1 What did Donahoo’s balance sheet look like at the outset of the firm’s life? Question 2 What did the firm’s balance sheet look like after each transaction? Question 3 Ignoring taxes, determine how much income Donahoo earned during January. Prepare an income statement for the month. Recognize an interest expense of 1 percent for the month (12 percent annually) on the $500,000 long-term debt, which has not been paid but is owed. Question 4 What was Donahoo’s cash flow for the month of January?
The Donahoo Western Furnishings Company was formed on
December 31, 2014, with $1,000,000 in equity plus $500,000
in long-term debt. On January 1, 2015, all of the firm’s capital
was held in cash. The following transactions occurred during
January 2015:
• January 2: Donahoo purchased $1,000,000 worth of furniture
for resale. It paid $500,000 in cash and financed the balance
using trade credit that required payment in 60 days.
• January 3: Donahoo sold $250,000 worth of furniture that it
had paid $200,000 to acquire. The entire sale was on credit
terms of net 90 days.
• January 15: Donahoo purchased more furniture for $200,000.
This time, it used trade credit for the entire amount of the
purchase, with credit terms of net 60 days.
• January 31: Donahoo sold $500,000 worth of furniture,
for which it had paid $400,000. The furniture was sold
for 10 percent cash down, with the remainder payable
in 90 days. In addition, the firm paid a cash dividend of
$100,000 to its stockholders and paid off $250,000 of its
long-term debt.
Question 1 What did Donahoo’s
outset of the firm’s life?
Question 2 What did the firm’s balance sheet look like after
each transaction?
Question 3 Ignoring taxes, determine how much income
Donahoo earned during January. Prepare an income statement
for the month. Recognize an interest expense of 1 percent for the
month (12 percent annually) on the $500,000 long-term debt,
which has not been paid but is owed.
Question 4 What was Donahoo’s cash flow for the month of
January?
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