MICRO-CP-1 Analysing transactions and preparing fi

Sure, let's analyze the transactions and prepare the financial statements for Draper Consulting as requested. Requirements 1. Analyze the effects of Draper Consulting's transactions on the accounting equation. 2. Prepare the income statement for the month ended 18 December 2021. 3. Prepare the statement of changes in equity for the month ended 18 December 2021. 4. Prepare the balance sheet at 18 December 2021.

Solution

a

Dec 2: Received

18,000 cash and gave capital to Carl Draper. - Cash: +

18,000 - Carl Draper, capital: +$18,000

b

Dec 2: Paid monthly office rent,

550. - Cash: -

550 - Expenses: +$550

c

Dec 3: Paid cash for a Dell computer,

1,800. - Cash: -

1,800 - Equipment: +$1,800

d

Dec 4: Purchased office furniture on credit,

4,200. - Furniture: +

4,200 - Accounts payable: +$4,200

e

Dec 5: Purchased supplies on credit,

900. - Supplies: +

900 - Accounts payable: +$900

f

Dec 9: Performed consulting service for a client on credit,

1,500. - Accounts receivable: +

1,500 - Revenue: +$1,500

g

Dec 12: Paid electricity and gas expenses,

250. - Cash: -

250 - Expenses: +$250

h

Dec 18: Performed service for a client and received cash of

1,100. - Cash: +

1,100 - Revenue: +$1,100

1 Solution

a

Revenue:

1,500 (credit) +

1,100 (cash) = $2,600

b

Expenses: - Rent:

550 - Electricity and gas:

250 - Total Expenses: $800

c

Net Income:

2,600 (Revenue) -

800 (Expenses) = $1,800

2 Solution

a

Beginning Capital: $0

b

Add: Investment by Carl Draper: $18,000

c

Add: Net Income: $1,800

d

Ending Capital:

18,000 +

1,800 = $19,800

3 Solution

a

Assets: - Cash:

18,000 -

550 -

1,800 -

250 +

1,100 =

16,500 - Accounts receivable:

1,500 - Supplies:

900 - Equipment:

1,800 - Furniture:

4,200 - Total Assets: $24,900

b

Liabilities: - Accounts payable:

4,200 +

900 = $5,100

c

Equity: - Carl Draper, capital: $19,800

d

Total Liabilities and Equity:

5,100 +

19,800 = $24,900

4 Solution

Answer

The financial statements for Draper Consulting have been prepared as requested.

Key Concept

Accounting Equation

Explanation

The accounting equation (Assets = Liabilities + Equity) ensures that the balance sheet remains balanced after each transaction.

Solution

a

Present Value of Annuity: To calculate the amount borrowed, we need to find the present value of an annuity. The formula for the present value of an annuity is given by:

PV = PMT \times \left( \frac{1 - (1 + r)^{-n}}{r} \right)

where

PMT

is the monthly payment,

r

is the monthly interest rate, and

n

is the total number of payments

b

Monthly Interest Rate: The annual interest rate is 10%, so the monthly interest rate is:

r = \frac{10\%}{12} = \frac{0.10}{12} = 0.008333

c

Total Number of Payments: The loan duration is 15 years, so the total number of monthly payments is:

n = 15 \times 12 = 180

d

Calculate Present Value: Substitute the values into the present value formula:

PV = 2500 \times \left( \frac{1 - (1 + 0.008333)^{-180}}{0.008333} \right)

PV = 2500 \times \left( \frac{1 - (1.008333)^{-180}}{0.008333} \right)

PV = 2500 \times \left( \frac{1 - 0.2231}{0.008333} \right)

PV = 2500 \times 93.528

PV \approx 233,820

e

Compounded Annually: If the interest were compounded annually, the annual interest rate would be used directly, and the number of payments would be 15. The formula for the present value of an annuity with annual compounding is:

PV = PMT \times \left( \frac{1 - (1 + r)^{-n}}{r} \right)

where

r = 0.10

and

n = 15

:

PV = 2500 \times \left( \frac{1 - (1 + 0.10)^{-15}}{0.10} \right)

PV = 2500 \times \left( \frac{1 - (1.10)^{-15}}{0.10} \right)

PV = 2500 \times \left( \frac{1 - 0.2394}{0.10} \right)

PV = 2500 \times 7.606

PV \approx 19,015

Answer

The amount borrowed with monthly compounding is approximately

233,820, while with annual compounding, it is approximately

19,015.

Key Concept

Present Value of Annuity

Explanation

The present value of an annuity is used to determine the amount borrowed based on fixed monthly payments, interest rate, and loan duration. The compounding frequency affects the interest rate applied and thus the present value calculation.

Solution

a

Present Value Calculation: The present value (PV) is calculated using the formula

PV = \frac{FV}{(1 + r)^n}

, where

FV

is the future value,

r

is the interest rate, and

n

is the number of periods

b

10% p.a. Compounded Annually: For 10% p.a. compounded annually, the PV is calculated as

PV = \frac{9500}{(1 + 0.10)^3} = 7137.49

c

8% p.a. Compounded Annually: For 8% p.a. compounded annually, the PV is calculated as

PV = \frac{9500}{(1 + 0.08)^3} = 7561.41

d

8% p.a. Compounded Monthly: For 8% p.a. compounded monthly, the PV is calculated using the formula

PV = \frac{FV}{(1 + \frac{r}{m})^{n \cdot m}}

, where

m

is the number of compounding periods per year. Here,

PV = \frac{9500}{(1 + \frac{0.08}{12})^{3 \cdot 12}} = 7515.55

e

Explanation of Differences: The present value differs in each case due to the different interest rates and compounding frequencies. Higher interest rates and more frequent compounding periods result in a lower present value

Answer

The present value differs due to variations in interest rates and compounding frequencies.

Key Concept

Present Value Calculation

Explanation

The present value is the amount that needs to be invested today to reach a specific future value, considering the interest rate and compounding frequency. Higher interest rates and more frequent compounding reduce the present value needed.

Solution

a

Present Value Formula: The present value (PV) of a future sum of money is calculated using the formula

PV = \frac{FV}{(1 + r/n)^{nt}}

, where

FV

is the future value,

r

is the annual interest rate,

n

is the number of compounding periods per year, and

t

is the number of years

b

Calculate PV of

40,000 in 5 years: Using the formula,

PV = \frac{40,000}{(1 + 0.12/12)^{12 \times 5}} = \frac{40,000}{(1 + 0.01)^{60}} = \frac{40,000}{1.8167} \approx 22,015.82$

c

Calculate PV of

60,000 in 10 years: Similarly,

PV = \frac{60,000}{(1 + 0.12/12)^{12 \times 10}} = \frac{60,000}{(1 + 0.01)^{120}} = \frac{60,000}{3.1058} \approx 19,312.20$

d

Sum of Present Values: The total present value of the investment is the sum of the present values of the two future payments,

22,015.82 + 19,312.20 \approx 41,328.02

Answer

41,328.02

Key Concept

Present Value Calculation

Explanation

The present value of an investment is the sum of the present values of all future cash flows, discounted at the given interest rate.

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