Kevin has worked in a retail toy store for 8 years. Last year, Kevin’s wages were $55,000. Lately, Kevin has been unhappy with the shop’s owner. Convinced that he could run a toy store better at a lower cost, Kevin decided to go into business for himself and opened up Toys 4 U.
To get the business going, Kevin decided to invest heavily in advertising. He spent $12,000 on advertising aimed at consumers. Kevin also purchased computers, printers, and other equipment needed for his retail store for $6,000. He estimated that the equipment he purchased can be used for about five years before maintenance costs would be too high and they would need to be replaced. All equipment is estimated to be worth 10% of their original cost at the end of their life.
At the end of the first year of business, Kevin had received $150,000 in cash from customers, of which $10,000 was cash paid in advance for pre-ordered toys.
A review of Kevin’s checkbook shows he paid the following (in addition to those mentioned previously) during the first year of business:
Toys Merchandise Inventory $70,000
Supplies 8,000
Wages—part-time assistant 12,500
Rent 15,000
Insurance (two-year policy) 3,200
Utilities 2,500
Miscellaneous expenses 1,500
Kevin’s utility bill for the last month of the fiscal year was $300. He has not recorded the bill and plans to pay it in the next 30 days.
At the end of the year, about $26,000 of toys inventory purchased during the year was in his store stock. In addition, $2,000 in supplies had not been used. Kevin’s corporate income tax rate is 30%.
Requirement 1 (30 points) – Prepare an income statement for Toys 4 U for the fiscal year ended December 31, 20xx in proper form (see sample of proper form on next page).
Requirement 2 (20 points)– Write a memo to Kevin stating whether you think it was a good idea for him to open the Toy shop or if he should have stayed employed at his old job. State your reasons for your opinion. Do you have any recommendations for Kevin? Your memo should be at least 1 page, double spaced, and 12-point font.
