Concept explainers
Complete the accounting cycle using long-term asset transactions (LO 7–2, 7–4, 7–7)
On January 1, 2018, the general ledger of TNT Fireworks includes the following account balances:
Accounts | Debit | Credit |
Cash | $ 58.700 | |
25.000 | ||
Allowance for Uncollectible Accounts Inventory | 36.300 | $ 2.200 |
Notes Receivable (5%. due in 2 years) | 12.000 | |
Land | 155.000 | |
Accounts Payable | 14.800 | |
Common Stock | 220.000 | |
50.000 | ||
Totals | $287,000 | $287,000 |
During January 2018, the following transactions occur.
January 1 Purchase equipment for $19,500. The company estimates a residual value of $1,500 and a five-war service life.
January 4 Pay cash on accounts payable, $9,500.
January 8 Purchase additional inventory on account, $82,900
January 15 Receive cash on accounts receivable, $22,000
January 19 Pay cash for salaries, $29,800.
January 28 Pay cash for January utilities, $16,500.
January 30 Firework sales for January total $220,000. All of these sales are on account. The cost of the units sold is $115,000.
Required:
1. Record each of the transactions listed above.
2. Record
a.
b. At the end of January, $3,000 of accounts receivable are past due, and the company estimates that 50% of these accounts will not be collected. Of the remaining accounts receivable, the company estimates that 3% will not be collected. The note receivable of $20,000 is considered fully collectible and therefore is not included in the estimate of uncollectible accounts.
c. Accrued interest revenue on notes receivable for January.
d. Unpaid salaries at the end of January are $32,600.
e. Accrued income taxes at the end of January are $9,000.
3. Prepare an adjusted
4. Prepare a multiple-step income statement for the period ended January 31, 2018.
5. Prepare a classified
6. Record closing entries.
7. Analyze how well TNT Fireworks manages its assets:
a. Calculate the return on assets ratio for the month of January. If the average return on assets for the industry in January is 2%, is the company more or less profitable than other companies in the same industry?
b. Calculate the profit margin for the month of January. If the industry average profit margin is 4%, is the company more or less efficient at converting sales to profit than other companies in the same industry?
c. Calculate the asset turnover ratio for the month of January. If the industry average asset turnover is 0.5 times per month, is the company more or less efficient at producing revenues with its assets than other companies in the same industry?
1.
To record: Each transaction of Company TNT.
Explanation of Solution
Journal: Journal is the book of original entry. Journal consists of the day-to-day financial transactions in a chronological order. The journal has two aspects; they are debit aspect and the credit aspect.
Record the journal entries of Company TNT:
Date | Account Title and Explanation |
Post Ref. |
Debit ($) |
Credit ($) |
January 1 | Equipment | 19,500 | ||
Cash | 19,500 | |||
(To record the purchase of equipment for cash) | ||||
January 4 | Accounts Payable | 9,500 | ||
Cash | 9,500 | |||
(To record the payment made for accounts payable) | ||||
January 8 | Inventory | 82,900 | ||
Accounts Payable | 82,900 | |||
(To record the purchase of additional inventories on account) | ||||
January 15 | Cash | 22,000 | ||
Accounts receivable | 22,000 | |||
(To record the cash receipt on accounts receivable) | ||||
January 19 | Salary expenses | 29,800 | ||
Cash | 29,800 | |||
(To record the cash payment made on salaries) | ||||
January 28 | Utilities expenses | 16,500 | ||
Cash | 16,500 | |||
(To record the cash payment made on utilities) | ||||
January 30 | Accounts receivable | 220,000 | ||
Sales revenue | 220,000 | |||
(To record the sale of inventory on account) | ||||
January 30 | Cost of goods sold | 115,000 | ||
Inventory | 115,000 | |||
(To record the cost of inventory sold) |
Table (1)
2.
To record: The adjusting entries on January 31.
Explanation of Solution
Adjusting entries:
Adjusting entries refers to the entries that are made at the end of an accounting period in accordance with revenue recognition principle, and expenses recognition principle. The purpose of adjusting entries is to adjust the revenue, and the expenses during the period in which they actually occurs.
Record the adjusting entries on January 31, 2018.
Date | Account Title and Explanation |
Post Ref. |
Debit ($) |
Credit ($) |
(a) | Depreciation expense (1) | 300 | ||
January 31 | Accumulated depreciation | 300 | ||
(To record the depreciation expenses incurred on the equipment) | ||||
(b) | Bad debts expenses (2) | 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:
Determine the amount of uncollectible accounts:
Determine the amount of remaining uncollectible accounts:
Determine the amount of interest revenue:
3.
To prepare: An adjusted trial balance as of January 31, 2018.
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, 2018 is prepared as follows:
Company TNT | ||
Adjusted Trial Balance | ||
January 31, 2018 | ||
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:
Determine the amount of accounts receivable:
Determine the amount of inventory:
Determine the amount of accounts Payable:
Determine the amount of uncollectible accounts:
Determine the amount of salaries expense:
The debit column and credit column of the adjusted trial balance are agreed, both having balance of $628,250.
4.
To prepare: A multiple-step income statement for the period ended January 31, 2018.
Explanation of Solution
A multiple-step income statement for the period ended January 31, 2018 is prepared as follows:
Company TNT | ||
Income Statement (Multiple-Step) | ||
For the year ended January 31, 2018 | ||
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 prepare: A classified balance sheet as of January 31, 2018.
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, 2018 is prepared as follows:
Company TNT | ||||
Classified Balance Sheet | ||||
January 31, 2018 | ||||
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) | Retained earnings | 60,950 | |
Total stockholders’ equity | 280,950 | |||
Total assets | $410,750 | Total liabilities and stockholders’ equity | $410,750 |
Table (5)
6.
To record: The closing entries.
Explanation of Solution
Closing entries:
Closing entries are recorded in order to close the temporary accounts such as incomes and expenses by transferring them to the permanent accounts. It is passed at the end of the accounting period, to transfer the final balance.
Closing entry for revenue and expense accounts:
Date | Accounts title and Explanation |
Debit ($) |
Credit ($) |
January 31, 2018 | 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 calculate: The TNT company’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:
- Determine the return on assets ratio:
The return on assets ratio is determined as follows:
Determine the amount of average total assets:
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.
(b)
To calculate: The profit margin ratio for the month of January.
Explanation of Solution
The profit margin ratio is determined as follows:
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.
(b)
To calculate: The asset turnover ratio for the month of January.
Explanation of Solution
The asset turnover ratio is determined as follows:
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.
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