Jay Marsh established an insurance agency on May 1, 2004, and completed the following transactions during May:

a. Opened a business bank account in the name of Frontier Insurance Inc. with a deposit of $30,000 in exchange for capital stock.

b. Borrowed $10,000 by issuing a note payable.

c. Received cash from fees earned, $8,100.

d. Paid rent on office and equipment for the month, $1,000.

e. Paid automobile expenses for month, $800, and miscellaneous expenses, $250.

f. Paid office salaries, $1,500.

g. Paid interest on the note payable, $75.

h. Purchased land as a future building site, $15,000.

i. Paid dividends, $2,000.

Instructions

1. Indicate the effect of each transaction and the balances after each transaction, using the following tabular headings:

Assets = Liabilities + Stockholders’ Equity

Cash + Land = Notes Payable + Capital Stock + Retained Earnings

Explain the nature of each increase and decrease in stockholders’ equity by an appropriate notation at the right of the amount.

2. Briefly explain why the stockholders’ investments and revenues increased stockholders’ equity, while dividends and expenses decreased stockholders’ equity.

3. Prepare an income statement and retained earnings statement for May.

4. Prepare a balance sheet as of May 31, 2004.

5. Prepare a statement of cash flows for May.