The Diva Design Group Was Organized on July 1, 2014

question 198

Essay

The Diva Design Group was organized on July 1, 2014 when the two principal owners each contributed $50,000 and received shares of stock in exchange. Their year-end is December 31. The following events occurred during Diva Design Group's first year of operations.
1. On July 1, acquired a building by paying $50,000 in cash and borrowing $250,000 from the Flores Bank.
Information regarding the building: The building has a useful life of 30 years and no salvage value. Diva Design uses straight line depreciation.
Information regarding the note payable: The note payable will be due in full in five years. Interest is payable annually. The interest rate on the note is 5%.
2. On July 1, paid cash in the amount of $1,200 for a one-year property insurance policy.
3. On August 1, purchased two computers for $4,000 cash each. The computers have a useful life of 5 years and a $100 salvage value. The computers will be depreciated using the straight line method.
4. On October 1, receives $120,000 in cash for services to be provided evenly during the next six months.
Required:
I.A Determine the effect of each of the transactions on the accounting equation.
I.B Determine the effect on the accounting equation of the necessary adjustments at
December 31 for each of the following:
1 Depreciation on the building
2 Interest on the promissory note
3 Recognition of the expired portion of the insurance
4 Depreciation on the computers
5 Cash received in advance of services provided
II. For each of the adjusting entries, indicate which of the following type of entry was recorded:
a. Accrued liability
b. Accrued asset
c. Deferred expense
d. Deferred revenue
III. Prepare an income statement at December 31, 2014. Diva Design has a tax rate of 30%.

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Definitions:

Scientific Method

A systematic process for conducting research and experimentation, involving the observation, hypothesis formation, experimentation, and the analysis of data to draw conclusions.

Economics

Economics is the social science that studies how individuals, governments, firms, and nations make choices on allocating scarce resources to satisfy their unlimited wants.

Experiments

Scientific procedures undertaken to make a discovery, test a hypothesis, or demonstrate a known fact.

Natural Experiments

Observational study setups where the variables of interest change naturally, allowing researchers to study outcomes without direct manipulation.