COLLEGE ACCOUNTING, CHAPTERS 1-27 2T
COLLEGE ACCOUNTING, CHAPTERS 1-27 2T
22nd Edition
ISBN: 9781305930377
Author: HEINTZ
Publisher: CENGAGE L
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Chapter 15, Problem 1MP

Dominique Fouque owns and operates Dominique’s Doll House. She has a small shop in which she sells new and antique dolls. She is particularly well known for her collection of antique Ken and Barbie dolls. A completed work sheet for 20-3 is shown on page 612. Fouque made no additional investments during the year and the long-term note payable is due in 20-9. No portion of the long-term note is due within the next year. Net credit sales for 20-3 were $35,300, and receivables on January 1 were $2,500.

REQUIRED

  1. 1. Prepare a multiple-step income statement.
  2. 2. Prepare a statement of owner’s equity.
  3. 3. Prepare a balance sheet.
  4. 4. Compute the following measures of performance and financial condition for 20-3:
    1. (a) Current ratio
    2. (b) Quick ratio
    3. (c) Working capital
    4. (d) Return on owner’s equity
      1. (e) Accounts receivable turnover and average number of days required to collect receivables
    5. (f) Inventory turnover and the average number of days required to sell inventory
  5. 5. Prepare adjusting entries and indicate which should be reversed and why.
  6. 6. Prepare closing entries.
  7. 7. Prepare reversing entries for the adjustments where appropriate.

Chapter 15, Problem 1MP, Dominique Fouque owns and operates Dominiques Doll House. She has a small shop in which she sells

1.

Expert Solution
Check Mark
To determine

Prepare a multi-step income statement of DD House.

Explanation of Solution

Multi-step income statement: The income statement represented in multi-steps with several subtotals, to report the income from principal operations, and separate the other expenses and revenues which affect net income, is referred to as multi-step income statement.

Prepare a statement of multi-step income statement.

DD
Income Statement
For Year Ended December 31, 20-3
ParticularsAmountAmountAmount
Revenue from sales:   
Sales $130,500 
Less: sales returns and allowances $900 
Net sales  $129,600
Cost of goods sold:   
Merchandise inventory, Jan. 1, 20-3 $22,300 
Purchases$72,000  
Less: Purchases discounts$750  
Net purchases$71,250  
Add freight-in1,200  
Cost of goods purchased 72,450 
Goods available for sale $94,750 
Less: march. inventory, Dec. 31, 20-3 24,600 
Cost of goods sold  $70,150
Gross profit  $59,450
Operating expenses:   
Wages expense $42,200 
Rent expense $6,000 
Office supplies expense $600 
Phone expense $1,500 
Utilities expense $7,600 
Insurance expense $400 
Depreciation expense—store equipment $5,000 
Total operating expenses  $63,300
Income (loss) from operations  ($3,850)
Other revenues:   
Rent revenue $25,700 
Other expenses:   
Interest expense ($500)$25,200
Net income  $21,350

Table (1)

2.

Expert Solution
Check Mark
To determine

Prepare a statement of owners’ equity of DD house.

Explanation of Solution

Statement of Owners’ equity: This statement reports the beginning stockholder's equity and all the changes which led to ending stockholder's equity. Additional capital, net income from income statement is added to and drawings or dividends are deducted from beginning stockholder's equity to arrive at the end result, closing balance of stockholder's equity.

Prepare an owners’ equity statement.

DD
Statement of Owner’s Equity
For Year Ended December 31, 20-3
ParticularsAmountAmount
DF's, capital, January 1, 20-3 $75,800
Net income for the year$21,350 
Less: withdrawals for the year$21,000 
Add: Increase in capital $350
DF's, capital, December 31, 20-3 $76,150

Table (2)

3.

Expert Solution
Check Mark
To determine

Prepare a balance sheet of DD House.

Explanation of Solution

Balance sheet: Balance Sheet is one of the financial statements that summarize the assets, the liabilities, and the Shareholder’s equity of a company at a given date. It is also known as the statement of financial status of the business.

Prepare a balance sheet.

DD
Balance Sheet
For Year Ended December 31, 20-3
 AmountAmount
Assets  
Current assets:  
Cash$5,200 
Accounts receivable$3,200 
Merchandise inventory$24,600 
Office supplies$200 
Prepaid insurance$800 
Total current assets $34,000
Property, plant, and equipment:  
Store equipment$85,000 
Less accumulated depreciation$20,000$65,000
Total assets $99,000
   
Liabilities  
Current liabilities:  
Notes payable$6,000 
Accounts payable$5,500 
Wages payable$200 
Sales tax payable$850 
Unearned rent revenue$300 
Total current liabilities $12,850
Long-term liabilities:  
Long-term note payable $10,000
Total liabilities $22,850
   
Owner’s Equity  
DF's, capital $76,150
Total liabilities and owner’s equity $99,000

Table (3)

4.

Expert Solution
Check Mark
To determine

Compute the following measures of performance and financial condition for 20-3.

  1. (a) Current ratio
  2. (b) Quick ratio
  3. (c) Working capital
  4. (d) Return on owners’ equity
  5. (e) Accounts receivable turnover and average number of days required to collect receivables.
  6. (f) Inventory turnover and the average number of days required to sell inventory.

Explanation of Solution

(a)

Current ratio: The financial ratio which evaluates the ability of a company to pay off the debt obligations which mature within one year or within completion of operating cycle is referred to as current ratio. This ratio assesses the liquidity of a company.

Calculate current ratio.

Current ratio =Current assetsCurrent liabilites=$34,000$12,850=2.65to 1

(b)

Quick ratio: The financial ratio which evaluates the ability of a company to pay off the instant debt obligations is referred to as quick ratio. Quick assets are cash, marketable securities, and accounts receivables. This ratio assesses the short-term liquidity of a company.

Calculate quick ratio.

Quick ratio =Quick assetsCurrent liabilites=($5,200+3,200)$12,850=0.65to 1

(c)

Working capital: Working capital refers to the excess amount of current assets over its current liabilities of a business. It measures the excess funds that are required for the companies to carry out their day to day operations, excluding any new funds that have been invested during the year.

Calculate working capital.

Working capital =Current assets Current liabilites=$34,000$12,850=$21,150

(d)

Calculate return on owners’ equity.

Return on owners' equity =Net incomeAverage owner's equity=$21,350(($75,800+$76,150)2)=$21,350$75,975=28.1%

(e)

Calculate accounts receivable turnover and average collection period.

Accounts receivable turnover =Net credit salesAverage receivables=$35,300[($2,500+$3,200)2]=$35,300$2,850=12.39times

Average collection period =365Accounts receivable turnover=36512.39times=29.46times

(f)

Calculate inventory turnover and average days to sell inventory.

Inventory turnover=Cost of goods soldAverage inventory=$70,150[($22,300+$24,600)2]=$70,150$23,450=2.99times

Average number of days tosell inventory =365Inventory turnover=3652.99times=122.07days

5.

Expert Solution
Check Mark
To determine

Prepare adjusting entries and indicate which should be reversed and why.

Explanation of Solution

Adjusting entries: Adjusting entries are those entries which are recorded at the end of the year, to update the income statement accounts (revenue and expenses) and balance sheet accounts (assets, liabilities, and stockholders’ equity) to maintain the records according to accrual basis principle.

Prepare adjusting entries.

Date Account titles and ExplanationDebitCredit
December 31a.Income summary$22,300 
       Merchandise inventory $22,300
     
December 31b.Merchandise inventory$24,600 
       Income summary $24,600
     
December 31c.Office supplies expense$600 
       Office supplies $600
     
December 31d.Insurance expense$400 
       Prepaid insurance $400
     
December 31e.Depreciation expense - Store equipment$5,000 
       Accumulated depreciation - Store equipment $5,000
     
December 31f.Unearned rent revenue$700 
       Rent revenue $700
     
December 31g.Wages expense$200 
       Wages payable $200

Table (4)

Indicate the adjusting entry that should be reversed.

  1. a. Never reverse adjustments for merchandise inventory.
  2. b. Never reverse adjustments for merchandise inventory.
  3. c. No. No asset or liability with a zero balance has been increased.
  4. d. No. No asset or liability with a zero balance has been increased.
  5. e. Never reverse adjustments for depreciation.
  6. f. No. No asset or liability with a zero balance has been increased.
  7. g. Yes. A liability with a zero balance has been increased.

6.

Expert Solution
Check Mark
To determine

Prepare closing entries.

Explanation of Solution

Closing entries: The journal entries prepared to close the temporary accounts to Retained Earnings account are referred to as closing entries. The revenue, expense, and dividends accounts are referred to as temporary accounts because the information and figures in these accounts is held temporarily and consequently transferred to permanent account at the end of accounting year.

Prepare closing entries.

DateAccount titles and ExplanationDebitCredit
December 31Sales$130,500 
 Rent revenue$25,700 
 Purchase discounts$750 
      Income summary $156,950
    
 Income summary$137,900 
      Sales returns and allowances $900
      Purchases $72,000
      Freight in $1,200
      Wages expense $42,200
      Rent expense $6,000
      Office supplies expense $600
      Phone expense $1,500
      Utilities expense $7,600
      Insurance expense $400
      Depreciation expense - store equipment $5,000
      Interest expense $500
    
 Income summary$21,350 
      DF's Capital $21,350
    
 DF's Capital$21,000 
      DF's Drawings $21,000

Table (5)

7.

Expert Solution
Check Mark
To determine

Prepare reversing entry.

Explanation of Solution

Reversing entry: Entries made on the first day of the next accounting cycle, and it abridges the recording transactions in the different period. It is an opposite of adjusting entry.

Prepare reversing entry

DateAccount titles and ExplanationDebitCredit
January 1 - 20-4Wages payable$200 
      Wages expense $200

Table (6)

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Chapter 15 Solutions

COLLEGE ACCOUNTING, CHAPTERS 1-27 2T

Ch. 15 - Prob. 1CECh. 15 - Prob. 2CECh. 15 - 1. L01 Prepare a multiple-step income statement...Ch. 15 - Prob. 4CECh. 15 - Prob. 5CECh. 15 - Prob. 6CECh. 15 - Prob. 1RQCh. 15 - Prob. 2RQCh. 15 - Describe how to calculate the following ratios (a)...Ch. 15 - Where is the information obtained that is needed...Ch. 15 - Explain the function of each of the four closing...Ch. 15 - What is the purpose of a post-closing trial...Ch. 15 - What is the primary purpose of reversing entries?Ch. 15 - What is the customary date for reversing entries?Ch. 15 - What adjusting entries should be reversed?Ch. 15 - REVENUE SECTION. MULTIPLE-STEP INCOME STATEMENT...Ch. 15 - COST OF GOODS SOLD SECTION, MULTIPLE-STEP INCOME...Ch. 15 - MULTIPLE-STEP INCOME STATEMENT Use the following...Ch. 15 - FINANCIAL RATIOS Based on the financial statements...Ch. 15 - CLOSING ENTRIES From the work sheet on page 600,...Ch. 15 - REVERSING ENTRIES From the work sheet used in...Ch. 15 - Prob. 7SEACh. 15 - INCOME STATEMENT. STATEMENT OF OWNER S EQUITY, AND...Ch. 15 - FINANCIAL RATIOS Use the work sheet and financial...Ch. 15 - WORK SHEET, ADJUSTING, CLOSING, AND REVERSING...Ch. 15 - REVENUE SECTION, MULTIPLE-STEP INCOME STATEMENT...Ch. 15 - COST OF GOODS SOLD SECTION, MULTIPLE-STEP INCOME...Ch. 15 - MULTIPLE-STEP INCOME STATEMENT Use the following...Ch. 15 - FINANCIAL RATIOS Based on the financial...Ch. 15 - CLOSING ENTRIES From the work sheet on page 607...Ch. 15 - Prob. 6SEBCh. 15 - ADJUSTING, CLOSING, AND REVERSING ENTRIES Prepare...Ch. 15 - INCOME STATEMENT, STATEMENT OF OWNERS EQUITY, AND...Ch. 15 - FINANCIAL RATIOS Use the work sheet and financial...Ch. 15 - Prob. 10SPBCh. 15 - Prob. 1MYWCh. 15 - Dominique Fouque owns and operates Dominiques Doll...Ch. 15 - Prob. 1CP
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