Magnificent Modems, Inc., makes modem cards that are used in notebook computers. The company completed the following transactions during 2006. All purchases and sales were made with cash.

1. Acquired $750,000 of cash from the owners.

2. Purchased $270,000 of manufacturing equipment. The equipment has a $30,000 salvage value and a four-year useful life. Label the purchase of the equipment as Event 2a and the recognition of depreciation as Event 2b.

Save your time - order a paper!

Get your paper written from scratch within the tight deadline. Our service is a reliable solution to all your troubles. Place an order on any task and we will take care of it. You won’t have to worry about the quality and deadlines

Order Paper Now

3. The company started and completed 5,000 modems. Direct materials purchased and used amounted to $40 per unit.

4. Direct labor costs amounted to $25 per unit.

5. The cost of manufacturing supplies used amounted to $4 per unit.

6. The company paid $50,000 to rent the manufacturing facility.

7. Magnificent sold all 5,000 units at a cash price of $120 per unit. Label the recognition of the sale as Event 7a and the cost of goods sold as Event 7b. (Hint. It will be necessary to determine the manufacturing costs in order to record the cost of goods sold.)

8. The sales staff was paid a $6 per unit sales commission.

9. Paid $39,000 to purchase equipment for administrative offices. The equipment was expected to have a $3,000 salvage value and a three-year useful life. Label the purchase of the equipment as Event 9a and the recognition of depreciation as Event 9b.

10. Administrative expenses consisting of office rental and salaries amounted to $71,950.


a. Record the transaction data for Magnificent Modems, Inc., in the financial statements like the one shown below. In the cash flow column, use parentheses to indicate cash outflows. Indicate whether each cash flow item is a financing activity (FA), investing activity (IA), or operating activity (OA). The first transaction is recorded as an example.

 Use the following forms to prepare an income statement and balance sheet.



Income Statement

For the Period Ended December 31, 2006



Cost of Goods Sold


Gross Margin


Sales Commission


Depreciation Expense


Administrative Expense


Net Income




Balance Sheet

As of December 31, 2006





Manufacturing Equipment, Net of Acc. Depreciation


Administrative Equipment, Net of Acc. Depreciation


Finished Goods Inventory


Total Assets




Common Stock


Retained Earnings


Total Stockholder’s Equity