Lse St205 Project - Financial Accounting

Student name: ______________________________________ Cohort: ____________

15.615: Financial Accounting

Problem Set 1

Due on 7/14 at 9a.m.

Instructions:

Use the worksheet provided at the end of this assignment to answer Question 1.

Questions 2 and 3 are based on real set of financial statements. However, you will not need to use the financial statements to answer the questions as all required information in available directly in the assignment. (We will use the financial statements in Homework 2 and 3 later in the semester.)

Question 1: Xtelesis Corporation

In December 2015 Scott Skeating grew frustrated with his sales position in the telecommunication industry and set out to establish his own business. Scott identified a business opportunity as a value-added retailer. He and a partner established Xtelesis Corporation on January 1, 2016.

Xtelesis is a premier network integration and management company offering a complete range of innovative voice and data networking solutions. Scott’s business model focused on training a set of engineers to help firms install and maintain networking equipment. As such, his business model focused on two revenue streams.

Xtelesis’ primary source of revenue is the fees that Xtelesis earns from providing engineering services. That is, customers hire Xtelesis’ engineers to install and maintain networking equipment. The second stream of revenue that Xtelesis’ earns comes from the fees that they earn from referring customers to Cisco and AT&T for equipment (like routers), telephone lines, data lines.

During the first year of business (2016) Xtelesis engaged in the following transactions

1. On January 1st (2016), issued 100,000 shares of common stock friends and family for $5.00 each.
2. On January 1st, borrowed $200,000 @10% from Independent Bank.

1. On January 1st paid $210,000 cash for three vans (ignore depreciation).

1. On January 1st, signed a three-year lease totalling $150,000, and paid for all three years in full.

1. On March 31st purchased equipment costing $100,000. They took advantage of vendor financing that allowed him to defer payment on the equipment (at no interest cost) for one year.

1. On the same date, he purchased office furniture costing $55,000 for cash.

1. On April 1st, earned a sales commission of $400,000 for Cisco routers delivered and installed at a customer’s building. No payment was received at the time of the sale.

1. On April 1st, purchased office supplies, for cash, costing $17,000. One half of the supplies were used during the year.

1. On April 1st, billed client for engineering services totaling $300,000.

1. On April 18th, received $140,000 from clients for engineering services performed.

1. On May 1st received $275,000 from Cisco.

1. On November 30th paid WMIT $20,000 for 10 advertising slots (5 in December 2016 and 5 in January 2017).

1. Throughout the year paid $110,000 for selling and general administrative activities.

1. Throughout the year paid salaries of $175,000.

1. Xtelesis pays dividends of $0.25 per share.

In addition to the above transactions, Scott also disclosed the following information:

O1.        The Independent Bank note requires annual interest payments at 10% (annual).

The principal is due on 1/1/2025, interest payments are due on January 1.

O2.        In December 2016, Xtelesis signed a contract with Stanford to install routers in their business school. The contract calls for engineering services of $350,000.

O3.        Scott owed his employees $40,000 in wage expenses for the month of December.

O4.        IGNORE DEPRECIATION EXPENSE

1. Record the effects of Xtelesis 2016 events on the Balance Sheet Equation (BSE) worksheet (included in this word document), filling in appropriate account headings at the top. When you have completed the event analysis, compute the ending balances for each account.

Note:

1. You may not need all of the account columns or event rows provided, you may need to add columns or row
2. Label each event in the first column, using the designations provided in the case (i.e., 1 or O1, etc.)
3. For each event that affects Retained Earnings (RE), provide a brief description in the last column (i.e., Revenue, Advertising expense).
4. If an identified event does not affect the BSE, briefly (10 words or so) explain why.

Events that do not affect the BSE:

O2: Signed contract with Stanford to install routers

No cash exchanged, and no service provided; therefore does not affect BSE.

1. Prepare year-end December 31, 2016 financial statements for Xtelesis - Balance Sheet, Income Statement.