analyzing transactions and preparing financial statements kristin and jenny harrison 516993

Analyzing transactions and preparing financial statements. Kristin and Jenny Harrison graduated from the Aveda Institute at the end of June in 2010. They decided to withdraw $80,000 each from their trust fund to open a day spa, “A Day In Your Dreams” Inc. in exchange for 5,000 shares of common stock. The firm signed a note with Uncle Damien for an additional $65,000. Kristin and Jenny formed A Day In Your Dreams Inc. on July 1, 2010. The business used available funds to purchase some land with a newly remodeled building for $215,000 and spa equipment for $20,000. The business also bought a computer system on account from DELL Inc. for $40,000, with payment due at the beginning of the following year. (LO 3, 5)

· During the first year of business, A Day In Your Dreams earned $150,000 in service revenue, but collected only $125,000; the remaining $25,000 was due early the next year.

· Salary expenses for the year were $35,000, of which $30,000 was paid in cash during the year; the remaining $5,000 was due the first day of the next year.

· .The company paid operating expenses of $30,000 in cash during the year.

· .The company sent a check during the last month of the year for $6,500 for interest expense due on the loan from Uncle Damien.

· .The company invested $15,000 of cash in short-term investments at the end of the year.

· . A Day In Your Dreams declared and paid dividends of $3,500 during the year.

Required

a. Show how each transaction affects the accounting equation.

b. Prepare the four basic financial statements for the year ended June 30, 2011.

(The balance sheet at June 30, 201 1.)

c. Calculate the current ratio at June 30, 2011. What does this ratio measure?

Discuss the implications of A Day In Your Dreams” current ratio.