Chamlite

Question 1

Chemalite, Inc.

Summary of Transactions

Jan. 2, 2003 through June 30, 2003

Date Cash Patent Machinery & Equipment Inventory Owner's Equity

Jan. 2 +125,000 +125,000 : Common Stock

Jan. 2 +375,000 +375,000 : Common Stock

Jan. 15 -7,500 -7,500 : Incorporation Expenses

Jun. 15 -62,500 +62,500 : Building the Machinery

Jun. 24 -75,000 +75,000 : Purchase of Plastics and Chemicals

Total 230,000 62,500 75,000 367,500

Question 2

Chemalite, Inc.

Income Statement

Jan. 2, 2003 through June 30, 2003

Revenue

Fees earned $0

Expenses

Operating expenses:

Incorporation expenses -7500

Depreciation expense (patent) -12,500

Total operating expenses -20,000

Net income -20,000

The company did incur a loss as Mr. Larson suggested. However, the loss is not $145,000; the loss, which is due to incorporation expenses and the patent depreciation expense, is only $20,000. Mr. Larson did not recognize the building of the machinery and the purchase of the inventory as investments.

Question 3

a.

Chemalite, Inc.

Balance Sheet

Jan. 2, 2003 through June 30, 2003

Assets

Cash $230,000

Equipment & Machinery $62,500

Inventory $75,000

Patent $125,000

Less Depreciation -12,500

Net Patent $112,500

Total assets $480,000

Liabilities $0

StockholderЎ¦s equity

Common stock $500,000

Retained earnings -20,000

Total liabilities and stockholderЎ¦s equity $480,000

Question 3

b.

Chemalite, Inc.

Statement of Cash Flows

Jan. 2, 2003 through June 30, 2003

Cash flows from operating activities:

Deduct cash payment for incorporation costs -7,500

Deduct cash payment for depreciation of patent -12,500

Net cash flow from operating activities -20,000

Cash flows from investing activities:

Cash payment for net patent -112,500

Cash payment for building machinery -62,500

Cash payment for purchasing supplies/inventory -75,000

Net cash flow from investing activities -250,000

Cash flows from financing activities:

Cash received from issuing common stock $375,000

Cash provided for purchase of patent $125,000

Net cash flow from financing activities $500,000

Net increase