Chapter 8, Problem 18E

1.

To determine

Record the journal entries for given transactions.

Explanation of Solution

Journal entry: Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.

Rules of Debit and Credit:

Following rules are followed for debiting and crediting different accounts while they occur in business transactions:

• Debit, all increase in assets, expenses and dividends, all decrease in liabilities, revenues and stockholders’ equities.
• Credit, all increase in liabilities, revenues, and stockholders’ equities, all decrease in assets, and expenses.

The journal entries for given transactions of Company ACME are as follows:

Date	Account Titles and Explanation		Debit($)	Credit($)
2021	Cash		8,000
January 2	Deferred Revenue			8,000
	(To record the sale of gift cards for cash)
2021	Inventory		147,000
January, 6	Accounts payable			147,000
	(To record purchase of inventory on account)
2021	Accounts Receivable		135,000
January 15	Sales Revenue			135,000
	(To record sales of inventory on account)
	Cost of goods sold		73,800
	Inventory			73,800
	(To record the cost of inventory sold)
2021
January 23	Cash		125,400
	Accounts Receivable			125,400
	(To record cash on account)
2021	Accounts Payable		90,000
January 25	Cash			90,000
	(To record pay of  cash )
2021	Allowance for uncollectible accounts		4,800
January 28	Accounts Receivable			4,800
	(To record the written off of uncollectible accounts)
2021	Cash		11,000
January 30	Accounts Receivable		132,000
	Sales Revenue			143,000
	( To record sale of inventory for cash)
	Cost of goods sold		79,500
	Inventory			79,500
	(To record cost of inventory sold during the year)
2021	Salaries Expense		52,000
January 31	Cash			52,000
	(To record payment of salaries)

Table (1)

2.

To determine

Record the given adjusting entries of Company ACME.

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.

Adjusting entries of Company ACME are as follows:

Date	Account Titles and Explanation		Debit($)	Credit($)
2021	a. Depreciation Expense (1)		500
January 31	Accumulated Depreciation			500
	(To record the depreciation for January)
2021	b. Bad Debt Expense (4)		12,500
January 31	Allowance for Uncollectible Accounts			12,500
	(To record adjusting entry for uncollectible accounts)
2021	c. Interest Expense (5)		250
January 31	Interest Payable			250
	(To record the adjusting entry for interest expense)
2021	d. Income Tax Expense		13,000
January 31	Income Tax Payable			13,000
	(To record the adjusting entry for income taxes)
2021		e. Deferred Revenue	3,000
January 31	Sales Revenue			3,000
	(To record the deferred revenue for the gift cards redeemed)

Table (2)

Working Notes:

Calculate the depreciation on the equipment.

$\begin{array}{c}\text{Depreciation = }\frac{\left[\begin{array}{l}\text{Amount of Depreciation }\\ -\text{Estimated residential value}\end{array}\right]}{\text{Number of months}}\\ =\frac{\$15,000\text{}-\text{}\text{\$3000}}{24\text{ months}}\\ =\text{ \$500}\end{array}$ (1)

Calculate the ending balance of uncollectible accounts.

$\begin{array}{c}\begin{array}{l}\text{Ending Balance of}\\ \text{Uncollectible Accounts}\end{array}\}=\left[\begin{array}{l}\text{Written off Allowance }-\\ \text{Allowance for Uncollectible accounts}\end{array}\right]\\ \text{= \$4,800 }-\text{}\text{\$4,200}\\ \text{= }\text{\$600}\end{array}$

  (2)

Calculate the closing balance of accounts receivable account

$\begin{array}{c}\begin{array}{l}\text{Closing Balance of}\\ \text{Accounts Receivable}\end{array}\}=\left(\begin{array}{l}\text{Opening balance+ Credit sales on Jan}\text{. 15 }-\\ \text{Cash received from customer}-\text{Allowance written off }\\ \text{+ Credit sales on Jan}\text{. 30 }\\ -\text{Cash received on the end of the year}\end{array}\right)\\ =\text{}\text{}\left(\begin{array}{l}\text{\$46,200}\text{+ \$ 135,000 }-\text{\$125,400 }-\text{\$ 4,800 }\\ +\$132,000-\text{ \$11,000}\end{array}\right)\\ =\text{\$172,000}\end{array}$ (3)

Calculate the bad debt expense

$\begin{array}{c}\text{Bad debt expense = }\left(\begin{array}{l}\text{Accounts receivable estimate }\\ +\text{Remaining accounts receivable estimate }\\ +\text{}\text{Ending balance of uncollectible accounts}\end{array}\right)\\ \text{= ( }\left[\$11,000\times 30\%\right]+\text{}\left[\$172,000\text{}\text{}\text{ (3)}\times \text{}5\%\right]+\text{600(2))}\\ \text{= \$ 12,500}\end{array}$ (4)

Calculate the Interest expense.

$\begin{array}{c}\text{Interest Expense = }\left[\begin{array}{l}\text{Notes Payable }\times \text{ Rate of interest }\times \\ \left(\frac{\text{Number of month due}}{\text{Number of months in a year}}\right)\end{array}\right]\\ \text{= \$50,000 }\times \frac{6}{100}\times \frac{1}{12}\\ =\text{\$ 250}\end{array}$ (5)

3.

To determine

Prepare the adjusted trial balance for the month January 31, 2021.

Explanation of Solution

Trial balance: Trial balance is a summary of all the ledger accounts balances presented in a tabular form with two column, debit and credit. It checks the mathematical accuracy of the ledger postings and helps preparing the final accounts.

Prepare the adjusted trial balance for the month January 31, 2021 as follows:

Company ACME
Adjusted Trial Balance
January 31, 2021
Accounts (Refer table 4)	Debit ($)	Credit ($)
Cash	27,500
Accounts Receivable	183,000
Inventory	13,700
Land	46,000
Equipment	15,000
Allowance for Uncollectible Accounts		11,900
Accumulated Depreciation		2,000
Accounts Payable		85,500
Deferred Revenue		5,000
Interest Payable		250
Income Tax Payable		13,000
Notes Payable		50,000
Common Stock		35,000
Retained Earnings		33,100
Sales Revenue		281,000
Cost of Goods Sold	153,300
Salaries Expense	52,000
Bad Debt Expense	12,500
Depreciation Expense	500
Interest Expense	250
Income Tax Expense	13,000
Totals	$516,750	$516,750

Table (3)

Calculation of adjusted trial balance of Company ACME for the month January:

Accounts	Ending Balance	=	$\text{Opening balance+necessary transaction±}\left(\text{adusting entries}\right)$
Cash	$27,500	=	$\left(\begin{array}{l}25,100+8,000+125,400-\\ 90,000+11,000-52,000\end{array}\right)$
Accounts Receivable	183,000	=	$\left(\begin{array}{l}46,200+135,000-125,400\\ -4,800+132,000\end{array}\right)$
Inventory	13,700	=	$\left(\begin{array}{l}20,000+147,000-\\ 73,800-79,500\end{array}\right)$
Land	46,000	=	46,000
Equipment	15,000	=	15,000
Allow for Uncollectible Accounts	11,900	=	$\left(4,200-4,800+12,500\right)$
Accumulated Depreciation	2,000	=	$\left(1,500+500\right)$
Accounts Payable	85,500	=	$\left(28,500+147,000-90,000\right)$
Deferred Revenue	5,000	=	$\left(8,000-3,000\right)$
Interest Payable	250	=	250
Income Tax Payable	13,000	=	13,000
Notes Payable	50,000	=	50,000
Common Stock	35,000	=	35,000
Retained Earnings	33,100	=	33,100
Sales Revenue	281,000	=	$\left(135,000+143,000+3,000\right)$
Cost of Goods Sold	153,300	=	$\left(73,800+79,500\right)$
Salaries Expense	52,000	=	52,000
Bad Debt Expense	12,500	=	12,500
Depreciation Expense	500	=	500
Interest Expense	250	=	250
Income Tax Expense	13,000	=	13,000

Table (4)

4.

To determine

Prepare the multiple 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.

Prepare the multiple income statement for the period ended January 31, 2021 as follows:

Company ACME
Multiple-Step Income Statement
For the year ended January 31, 2021
Particulars	$	$
Sales revenue	$281,000
Cost of goods sold	153,300
Gross profit		$127,700
Less: Salaries expense	52,000
Bad debt expense	12,500
Depreciation expense	500
Total operating expenses		65,000
Operating income		62,700
Less: Interest expense		250
Income before taxes		62,450
Less: Income tax expense		13,000
Net income		$49,450

Table (5)

5.

To determine

Prepare the classified balance sheet as on January 31, 2021.

Explanation of Solution

Classified balance sheet: The main elements of balance sheet assets, liabilities, and stockholders’ equity are categorized or classified further into sections, and sub-sections in a classified balance sheet. Assets are further classified as current assets, long-term investments, property, plant, and equipment (PPE), and intangible assets. Liabilities are classified into two sections current and long-term. Stockholders’ equity comprises of common stock and retained earnings. Thus, the classified balance sheet includes all the elements under different sections.

Prepare the classified balance sheet as on January 31, 2021 as follows:

Table (6)

Working Notes:

Calculate the closing amount of retained earnings.

$\begin{array}{c}\text{Retained Earnings = Beginning retained earnings }+\text{Net Income }-\text{Dividends}\\ \text{= \$33,100 }+\text{\$49,450 }-\$0\\ =\text{\$82,550}\end{array}$

  (6)

6.

To determine

Record the closing entries of Company ACME.

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.

Record the closing entries of Company ACME as follows:

Date	Account Titles and Explanation		Debit($)	Credit($)
2021	Sales Revenue		281,000
January 31	Retained Earnings			281,000
	(To record the closing revenue accounts)
	Retained Earnings		231,550
	Cost of goods sold			153,300
	Salaries Expense			52,000
		Bad debt Expense		12,500
	Depreciation Expense			500
	Interest Expense			250
	Income Tax Expense			13,000
	(To  close the expense accounts)

Table (7)

Closing entry for revenue account:

In this closing entry, the sales revenue account is closed by transferring the amount of sales revenue to retained earnings in order to bring the revenue account balance to zero. Hence, debit the sales revenue account for $281,000, and credit the retained account for $281,000.

Closing entry for expenses account:

In this closing entry, all expenses accounts are closed by transferring the amount all expenses to the retained earnings in order to bring the expense account balance to zero. Hence, debit the retained earnings for $231,550 and credit all expense accounts with respective amount.

7. a

To determine

Calculate the current ratio at the end of January.

Explanation of Solution

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 the current ratio at the end of January as follows:

$\begin{array}{c}\text{Current Ratio= }\frac{\text{Current assets}}{\text{Current Liabilities}}\\ =\frac{\$212,000}{\$103,750}\\ =\text{ 2}\text{.05}\end{array}$

Company ACME has more liquidity than the average level required by the industry. Company ACME has a high portion of current assets to meet out the current liabilities, which is comparatively higher than the industry average of 1.8.

7. b.

To determine

Calculate the acid-test ratio at the end of January.

Explanation of Solution

Acid-test 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 the acid-test ratio at the end of January as follows:

$\begin{array}{c}\text{Acid-Test Ratio = }\frac{\text{Cash }+\text{Current Investments }+\text{Accounts Receivable}}{\text{Current Liablities}}\\ =\frac{\$27,500+\text{\$ 0 + \$171,000}}{\$103,750}\\ =\text{ \$1}\text{.91}\end{array}$

Company ACME has less difficulty to pay its currently matured debts. Company ACME has high portion of quick assets to meet the current liabilities, which is comparatively higher than the industry average of 1.5.

7. c.

To determine

Indicate whether the revised ratio would increase, decrease or remain unchanged compared to the requirement (a).

Explanation of Solution

Indicate whether the revised ratio would increase, decrease or remain unchanged compared to the requirement (a) as follows:

Calculate current ratio assuming notes payable as current liabilities.

$\begin{array}{c}\text{Current Ratio= }\frac{\text{Current assets}}{\text{Current Liabilities}}\\ =\frac{\$212,000}{\$153,750}\\ =\text{ 1}\text{.38}\end{array}$

The amount of notes payable increases the value of current liabilities by $153,750. This would decrease the value of the current assets and increase the value of current liabilities because ratio gets reduced when they are divided by larger number.