Chapter 7, Problem 21E

1.

To determine

Record each transaction of Company TNT.

Explanation of Solution

Journal: Journal is the book of original entry. Journal consists of the day-to-day financial transactions in a chronological order. The journal has two aspects; they are debit aspect and the credit aspect.

Record the journal entries of Company TNT:

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
January 1	Equipment		19,500
	Cash			19,500
	(To record the purchase of equipment for cash)
January 4	Accounts Payable		9,500
	Cash			9,500
	(To record the payment made for accounts payable)
January 8	Inventory		82,900
	Accounts Payable			82,900
	(To record the purchase of additional inventories on account)
January 15	Cash		22,000
	Accounts receivable			22,000
	(To record the cash receipt on accounts receivable)
January 19	Salary expenses		29,800
	Cash			29,800
	(To record the cash payment made on salaries)
January 28	Utilities expenses		16,500
	Cash			16,500
	(To record the cash payment made on utilities)
January 30	Accounts receivable		220,000
	Sales revenue			220,000
	(To record the sale of inventory on account)
January 30	Cost of goods sold		115,000
	Inventory			115,000
	(To record the cost of inventory sold)

Table (1)

2.

To determine

Record the adjusting entries on January 31.

Explanation of Solution

Adjusting entries: Adjusting entries refers to the entries that are made at the end of an accounting period in accordance with revenue recognition principle, and expenses recognition principle.  The purpose of adjusting entries is to adjust the revenue, and the expenses during the period in which they actually occurs.

Record the adjusting entries on January 31, 2021.

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
(a)	Depreciation expense (1)		300
January 31	Accumulated depreciation			300
	(To record the depreciation expenses incurred on the equipment)
(b)	Bad debts expenses (3)		5,900
January 31	Allowance for uncollectible accounts			5,900
	(To record the adjustment in uncollectible accounts)
(c)	Interest receivable (4)		50
January 31	Interest revenue			50
	(To record the accrued interest revenue )
(d)	Salaries expense		32,600
January 31	Salaries Payable			32,600
	(To record the unpaid salaries expense)
(e)	Income tax Expense		9,000
January 31	Income tax Payable			9,000
	(To record the accrued income taxes)

Table (2)

Working notes:

Determine the depreciation expenses:

$\begin{array}{c}\text{Depreciation expenses = }\frac{\left[\text{Cost of equipment}-\text{Residual}\text{value}\right]}{\text{Estimated service life}}\\ \text{=}\frac{\text{\$19,500}-\text{\$1,500}}{\text{5 years}}\times \frac{1}{12}\\ =\$300\end{array}$

(1)

Determine the amount of remaining uncollectible accounts:

$\begin{array}{c}\text{Uncollectible accounts Remaining =}\left[\begin{array}{l}\text{Accounts receivable}-\text{Account receivable on January}\\ \text{15+ Sale on accounts}-\text{Uncollectible accounts}\end{array}\right]\\ \text{=}\left[\text{\$25,000}-\$22,000+\$220,000-\text{\$3,000}\right]\\ \text{=\$220,000}\end{array}$

(2)

Determine the amount of uncollectible accounts:

$\begin{array}{c}\text{Uncollectible accounts =}\left[\begin{array}{l}\text{50\% on uncollectible accounts + 3\% }\\ \text{on remaining uncollectible accounts}-\\ \text{Allowance for uncollectible accounts}\end{array}\right]\\ \text{=}\left[\text{\$3000}\times \frac{50}{100}+\$220,000(2)\times \frac{3}{100}\right]-\text{\$2,200}\\ \text{=\$1,500 + \$6,600}-\text{\$2,200}\\ \text{=\$5,900}\end{array}$

(3)

Determine the amount of interest revenue:

$\begin{array}{c}\text{Interest revenue for January=}\left[\text{5\% on Note receivable }\times \frac{1}{12}\right]\\ \text{=}\left[\text{\$12,000×}\frac{\text{5}}{\text{100}}\text{×}\frac{\text{1}}{\text{12}}\right]\\ \text{=\$50}\end{array}$

(4)

3.

To determine

Prepare an adjusted trial balance as of January 31, 2021.

Explanation of Solution

Adjusted trial balance: Adjusted trial balance is a summary of all the ledger accounts, and it contains the balances of all the accounts after the adjustment entries are journalized, and posted.

An adjusted trial balance of Company TNT as of January 31, 2021 is prepared as follows:

Company TNT
Adjusted Trial Balance
January 31, 2021
Accounts	Debit ($)	Credit ($)
Cash (5)	5,400
Accounts Receivable (6)	223,000
Interest Receivable  (4)	50
Inventory (7)	4,200
Notes Receivable	12,000
Land	155,000
Equipment	19,500
Allowance for Uncollectible Accounts (9)		8,100
Accumulated Depreciation		300
Accounts Payable (8)		88,200
Salaries Payable		32,600
Income Tax Payable		9,000
Common Stock		220,000
Retained Earnings		50,000
Sales Revenue		220,000
Interest Revenue		50
Cost of Goods Sold	115,000
Salaries Expense (10)	62,400
Utilities Expense	16,500
Bad Debt Expense	5,900
Depreciation Expense	300
Income Tax Expense	9,000
Totals	$628,250	$628,250

Table (3)

Working note:

Determine the amount of cash:

$\begin{array}{c}\text{Cash = }\left[\begin{array}{l}\text{Beginning balance + Cash received}\\ \text{on 15}-\text{Cash payments made on 1st,}\\ \text{4th, 19th and 28th of January}\end{array}\right]\\ =\$58,700+\$22,000-\$19,500-\$9,500-29,800-16,500\\ =5,400\end{array}$

(5)

Determine the amount of accounts receivable:

$\begin{array}{c}\text{Accounts}\text{receivable =}\left[\begin{array}{l}\text{Beginning balance + cash on receivable}\\ \text{ on 15th + Sales on accounts}\end{array}\right]\\ =\left[\$25,000-\$22,000+\$220,000\right]\\ =\$223,000\end{array}$

(6)

Determine the amount of inventory:

$\begin{array}{c}\text{Inventory =}\left[\begin{array}{l}\text{Beginning balance +Purchase of }\\ \text{inventories on account}-\text{sale of inventories}\end{array}\right]\\ \text{=}\left[\text{\$36,300+\$82,900}-115,000\right]\\ \text{=\$4,200}\end{array}$

(7)

Determine the amount of accounts Payable:

$\begin{array}{c}\text{Accounts}\text{Payable =}\left[\text{Beginning balance +Accounts payable due}-\text{Payments made}\right]\\ \text{=}\left[\text{\$14,800 + \$82,900}-\text{\$9,500}\right]\\ \text{=\$88,200}\end{array}$

(8)

Determine the amount of uncollectible accounts:

$\begin{array}{c}\text{Uncollectible accounts =}\left[\begin{array}{l}\text{Allowance for uncollectible}\\ \text{accounts + adjsuting entry}\end{array}\right]\\ =\$2,200+\$5,900\\ =\$8,100\end{array}$

(9)

Determine the amount of salaries expense:

$\begin{array}{c}\text{Salaries expenses =}\left[\text{Beginning balance + Unpaid salaries}\right]\\ \text{=}\left[\text{\$29,800+\$32,600}\right]\\ \text{=\$62,400}\end{array}$

(10)

Conclusion

The debit column and credit column of the adjusted trial balance are agreed, both having balance of $628,250.

4.

To determine

Prepare a multiple-step income statement for the period ended January 31, 2021.

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.

A multiple-step income statement for the period ended January 31, 2021 is prepared as follows:

Company TNT
Income Statement (Multiple-Step)
For the year ended January 31, 2021
Particulars	Amount	Amount
Sales revenue	$220,000
Cost of goods sold	$115,000
Gross profit		$105,000
Less: Salaries expense	$62,400
Utilities expense	$16,500
Bad debt expense	$5,900
Depreciation expenses	$300
Total operating expenses		$85,100
Operating income		$19,900
Add: Interest revenue		$50
Income before taxes		$19,950
Less: Income tax expense		$9,000
Net income		$10,950

Table (4)

Therefore, a multiple-step income statement shows a net income of $10,950.

5.

To determine

Prepare a classified balance sheet as of January 31, 2021.

Explanation of Solution

Classified balance sheet: This is the financial statement of a company which shows the grouping of similar assets and liabilities under subheadings.

A classified balance sheet as of January 31, 2021 is prepared as follows:

Company TNT
Classified Balance Sheet
January 31, 2021
Assets			Liabilities
Cash		$5,400	Accounts payable	$88,200
Accounts receivable	223,000		Salaries payable	$32,600
Less: Allowance	8,100	$214,900	Income tax payable	$9,000
Interest receivable		$50	Total liabilities	$129,800
Inventory		$4,200
Total current assets		$224,550
Notes receivable		$12,000
Land		$155,000	Stockholders’ Equity
Equipment	$19,500		Common stock	$220,000
Less: Accumulated depreciation	($300)	$19,200	Retained earnings (11)	$60,950
			Total stockholders’ equity	$280,950
Total assets		$410,750	Total liabilities and stockholders’ equity	$410,750

Table (5)

Working note:

Determine the amount of retained earnings.

$\begin{array}{c}\text{Retained earnings}=\left(\begin{array}{l}\text{Beginning }\\ \text{balance}\end{array}\right)+\left(\begin{array}{l}\text{Net income earned}\\ \text{ during the year}\end{array}\right)\\ =\$50,000+\$10,950\\ =\$60,950\end{array}$

(11)

6.

To determine

Record the closing entries.

Explanation of Solution

Closing entries: Closing entries are recorded in order to close the temporary accounts such as incomes and expenses by transferring them to the permanent accounts. It is passed at the end of the accounting period, to transfer the ending balance of temporary accounts in order to make it zero.

Closing entry for revenue and expense accounts:

Date	Accounts title and Explanation	Debit ($)	Credit ($)
January 31, 2021	Service Revenue	220,000
	Interest revenue	50
	Retained earnings		220,050
	(To close the revenues  account)
	Retained earnings	209,100
	Cost of goods sold		115,000
	Salaries expenses		62,400
	Utilities expenses		16,500
	Bad debt expense		5,900
	Depreciation expense		300
	Income tax expense		9,000
	(To close the expenses account)

Table (6)

7.

(a)

To determine

Calculate Company TNT’s return on assets ratio for the month of January.

Explanation of Solution

Rate of return on total assets: Rate of return on the total assets is the ratio of the net income, and interest expense to the average total assets. The rate of return on total assets measures the efficiency of the business. It measures how efficiently the business is using its total assets in generating the income.

The rate of return on the total assets is calculated as follows:

$\text{Rate of return on assets}=\frac{\text{Net income }}{\text{Average total assets}}$

Determine the return on assets ratio:

The return on assets ratio is determined as follows:

$\begin{array}{c}\text{Rate of return on assets=}\frac{\text{Net income }}{\text{Average total assets (12)}}\\ \text{=}\frac{\text{\$10,950}}{\text{\$347,775}}\\ \text{=3}\text{.1\%}\end{array}$

Working note:

Determine the amount of average total assets:

$\begin{array}{c}\text{Average total assets =}\frac{\text{Beginning inventory}+\text{Ending inventory}}{\text{2}}\\ \text{=}\frac{\text{\$284,800}+\text{\$410,750}}{\text{2}}\\ \text{= \$347,775}\end{array}$

(12)

Conclusion

The return on asset ratio of Company TNT is 3.1%, which is more profitable than other companies in the same industries for the month of January.

7.

(b)

To determine

Calculate the profit margin ratio for the month of January.

Explanation of Solution

Profit margin ratio: This ratio gauges the operating profitability of a company by quantifying the net income earned from business operations after all expenses are paid. This ratio is also called as return on sales percentage. The following is the formula to calculate the ratio:

$\text{Profit margin ratio}=\frac{\text{Net income}}{\text{Net sales}}\times 100$

The profit margin ratio is determined as follows:

$\begin{array}{c}\text{Profit margin ratio}=\frac{\text{Net}\text{income}}{\text{Net}\text{sales}}\times 100\\ =\frac{\$10,950}{\$220,000}\times 100\\ =5\%\end{array}$

Conclusion

The profit margin ratio of Company TNT is 5%, which is more profitable in converting sales to profit than other companies in the same industries for the month of January.

7.

(c)

To determine

Calculate the asset turnover ratio for the month of January.

Explanation of Solution

Asset turnover: It is a ratio that measures the productive capacity of the fixed assets to generate the sales revenue for the company. Thus, it shows the relationship between the net sales and the average total fixed assets. The following is the formula to calculate the ratio:

$\text{Asset turnover =}\frac{\text{Net sales}}{\text{Average total assets}}$

The asset turnover ratio is determined as follows:

$\begin{array}{c}\text{Asset turnover =}\frac{\text{Net sales}}{\text{Average total assets (12)}}\\ \text{=}\frac{\text{\$220,000}}{\text{\$437,775}}\\ \text{=0}\text{.63 times}\end{array}$

Conclusion

Therefore the asset turnover ratio is 0.63 times. When compared to other companies in the same industries, the asset turnover ratio of Company TNT is more and it helps to produce more revenue.