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Project Part 1: The Accounting Cycle
Karen Harris starts her own scooter retail business, City Rides, on December 1,
2
0x2. The business operates as a proprietorship from a rented space near a busy downtown area. Harris hires Jim Waters as the sales associate and assistant manager of the business. The following transactions take place during December 20×2.
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Dec. 1 |
Harris deposits $45,000 into the business bank account. In exchange, she receives capital in the proprietorship. |
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1 |
Harris writes and mails check #001 for $2,400 for rent. The rent payment covers rent for the three months ended February 28, 20×2. |
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| 2 |
Harris purchases office equipment for $1,800 by check #002. |
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Harris purchases office supplies for $420 by check #003. |
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Harris purchases 20 Model X mopeds at $500 each and 15 Model L mopeds at $800 each, costing a total of $22,000, on account from a supplier, Fun Brands: · Harris elects to use the first-in-first-out (FIFO) method to account for inventory. · Fun Brands provides an invoice with the following terms: 2/10 net 30 . |
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9 |
In the first week of operation, City Rides sells 16 Model X mopeds at $750 each: 10 are sold on account, and the rest are sold for cash. |
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12 |
City Rides makes payment to Fun Brands in full settlement of accounts payable by check #004. Payment is net of the purchase discount. Hint: The terms are 2/10 net 30, and any purchase discount received reduces the cost of inventory. |
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13 |
City Rides purchases 10 Model X mopeds from Fun Brands on account at a cost of $520 each. |
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16 |
The sales for the week are as follows: 6 Model X mopeds sold on account for $750 each—inventory cost accounted using the FIFO method. |
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18 |
Cash receipts from customers on accounts receivable are $7,100. |
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30 |
Sales for the rest of December are as follows: 2 Model L mopeds sold for cash for $1,100 each. |
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Harris receives the utilities bill for December 20X2 for $650, still payable at month end. |
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Harris pays wages amounting to $1,800 by check #005. |
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Harris withdraws $2,500 in cash. |
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The Chart of Accounts
The ledger of City Rides is composed of the following accounts. Classify each account by account type. Choose from among the following items:
Asset Contra-asset Liability Owner’s equity
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Account Name |
Account Type |
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Cash |
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Accounts Receivable |
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Supplies |
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Prepaid Rent |
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Inventory |
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Office Equipment |
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Accumulated Depreciation—Office Equipment |
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Accounts Payable |
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Capital—Harris |
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Withdrawals—Harris |
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Income Summary |
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Sales Revenue |
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Cost of Goods Sold |
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Wages Expense |
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Rent Expense |
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Depreciation Expense—Office Equipment |
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Supplies Expense |
Complete the following schedule to track the purchase and sale of inventory items during December 20×2. Use the FIFO method to account for the cost of goods sold. The first inventory purchase and sale are included as an example.
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MODEL X |
MODEL L |
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Date |
Purchase (sale) |
Quantity |
Cost per unit |
Total |
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Dec. 2 |
Purchase |
20 |
$500 |
$10,000 |
purchase |
15 |
$800 |
$12,000 |
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9 |
(Sale) |
(16) |
($8,000) |
30 | ||||||
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13 |
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| 16 | ||||||||||
Task 1: Making Journal Entries
Journalize the transactions for December 20×2. The first three transactions are journalized already. Use the following template to make journal entries and check off transactions as they are entered, using the check boxes. Double-click each check box and select “checked” in the dialog box. Click the OK button to check.
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Date |
Account and Explanation |
Debit |
Credit |
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Dec 1 |
Cash |
$45,000 |
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Capital |
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To record owner contribution |
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Prepaid Rent |
$2,400 |
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Cash |
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To record prepaid expense |
AC1220 ACCOUNTING I Project Part 1
Page 1
Task 2: Using the Accounting Worksheet
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Adjustments |
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Dec. 31 |
Depreciation on office equipment, $360 |
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31 |
Supplies used, $300 |
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Recognized rent expense—prepaid rent account |
Complete the worksheet provided on the next page by making the adjustments described. Compute adjusted trial balance amounts and enter account balances into the income statement and balance sheet columns, where necessary.
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City Rides |
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Accounting Worksheet |
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For the Month Ended Dec. 31 20×2 |
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Account |
Trial Balance |
Adjusted Trial Balance |
Income Statement |
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Balance Sheet |
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$19,020 |
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12,000 |
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2,400 |
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420 |
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15,720 |
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1,800 |
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– |
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$5,850 |
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45,000 |
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2,500 |
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16,500 |
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11,040 |
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Utilities Expense |
650 |
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Total |
$67,350 |
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Net Income |
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TOTAL |
Task 3: Preparing Financial Statements and Closing the Accounts
Using the following adjusted trial balance amounts, prepare the income statement, the statement of owner’s equity, and the balance sheet of City Rides for the month ended December 31, 20×2.
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December 31, 20×2 |
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| Accounts Receivable | ||
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1,600 |
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| Supplies |
120 |
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| Inventory | ||
| Office Equipment | ||
| Accumulated Depreciation—Office Equipment |
360 |
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| Accounts Payable |
5,850 |
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| Capital—Harris | ||
| Withdrawals—Harris | ||
| Sales Revenue | ||
| Cost of Goods Sold | ||
| Wages Expense | ||
| Rent Expense |
800 |
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| Depreciation Expense—Office Equipment | ||
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Utilities Expense |
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| Supplies Expense |
300 |
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$67,710 |
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For the Year Ended December 20×2 |
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Less Expenses: |
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Preparing Financial Statements
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Statement of Owner’s Equity |
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Beginning Capital |
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Ending Capital, Harris |
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Assets |
Liabilities |
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Owner’s Equity |
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Total Assets |
Total Liabilities and Owner’s Equity |
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Closing Temporary Accounts Using the journal template given, make the following closing entries. Use the revenue, expense, and withdrawals balances given before. Closing Entries |
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| 31 |
Closed Sales Revenues to Income Summary Account |
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Closed Expense Accounts to Income Summary Account |
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Closed Income Summary Account to Capital—Harris, Account |
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Closed Withdrawals—Harris Account to Capital Account |
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Dec 31 |
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To close sales revenue to income summary |
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To close expenses to income summary |
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To close income summary |
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To close withdrawals account |
—End of Project Part 1—
Project Part 2: Using Accounting Information for Decision Making
City Rides, a proprietorship engaged in the sale of mopeds to the public, completes its second year of operations on December 31, 20×3.
Task 1:
a. Adjusted trial balance amounts from the books of City Rides are listed below, for the two years ended December 31, 20×3:
Account
At Dec. 20×3
At Dec 20×2
DEBIT
CREDIT
DEBIT
CREDIT
Cash
$21,030
$19,020
Accounts Receivable
18,500
12,000
Prepaid Rent
1,800
1,600
Allowance for Uncollectible Accounts
$100
–
Supplies
500
120
Inventory
21,250
15,720
Office Equipment
2,700
1,800
Truck
15,000
–
Accumulated Depreciation—Office Equipment
900
360
Accumulated Depreciation—Truck
1,500
–
Accounts Payable
4,150
5,850
Current portion of Long-Term Note Payable
5,000
–
Long-Term Note Payable
20,000
–
Capital—Harris
45,000
45,000
Withdraws—Harris
2,500
2,500
Sales Revenue
25,800
16,500
Sales Return and Allowances
800
Cost of Goods Sold
15,450
11,040
Wages Expense
3,600
1,800
Rent Expense
800
800
Depreciation Expense—Office Equipment
540
360
Depreciation Expense—Truck
1,500
–
Utilities Expense
550
650
Supplies Expense
250
300
Uncollectible Accounts Expense
80
–
$106,850
$106,850
$67,710
$67,710
Use the above adjusted trial balance amounts to complete the financial statements below by filling in the shaded cells:
City Rides
Income Statement
For the Two Years Ended December, 20×3
20×3
20×2
Sales Revenue
Net Sales Revenue
Gross profit
Less: operating expenses:
Net Income
City Rides
Statement of Owner’s Equity
For the Year Ended December, 20×3
20×3
20×2
Beginning Capital
Ending Capital, Harris
AC1220 ACCOUNTING I Project Part 2
Page 1
City Rides
Balance Sheet
At December 31, 20×3, 20×2
Assets
Liabilities
20×3
20×2
20×3
20×2
Current Assets
Current Liabilities
$19,020
$5,850
12,000
–
–
Total Current Liabilities
$9,150
$5,850
12,000
1,600
Long-Term Liabilities
120
–
15,720
Total Liabilities
$29,150
$5,850
Total Current Assets
$59,580
$48,460
Plant Assets
Owner’s Equity
1,800
$45,000
(360)
Total Owner’s Equity
$45,730
$45,000
Total Plant Assets
Total Assets
$49,900
Total Liabilities and Equity
$50,850
b. The Financial Statements of Extreme Scooter, a direct competitor of City Rides, are presented below. The two businesses have similar operations. Compare the financial statements of City Rides and Extreme Scooter and refer to these statements as you complete the tasks that follow
Extreme Scooter
Income Statement
For the Two Years Ended December, 20×3
20×3
20×2
Net Sales Revenue
30,400
22,500
Less: Cost of Goods Sold
(19,500)
(14,400)
Gross profit
10,900
8,100
Less: operating expenses:
(7,700)
(5,700)
Net Income
$3,200
$2,400
Extreme Scooter
Statement of Owner’s Equity
For the Year Ended December, 20×3
20×3
20×2
Beginning Capital
$55,000
$ –
Add: additional capital
–
57,600
Net Income (Loss)
3,200
2,400
Less: Drawing, Harris
(20,200)
(5,000)
Ending Capital, Harris
$38,000
$55,000
Extreme Scooter
Balance Sheet
At December 31, 20×3, 20×2
Assets
Liabilities
20×3
20×2
20×3
20×2
Current Assets
Current Liabilities
Cash
$4,550
$14,600
Accounts Payable
$22,800
$500
Accounts Receivable, Net
44,500
40,000
Wages Payable
1,200
2,500
Prepaid Expenses
2,200
3,500
Total Current Liabilities
$24,000
$3,000
Supplies
450
400
Inventory
24,000
5,500
Total Current Assets
$75,700
$64,000
Long-Term Liabilities
Long-Term Note Payable
20,000
12,000
Total Liabilities
$44,000
$15,000
Plant Assets
Owner’s Equity
Office Equipment
7,400
6,500
Capital, Drew
$38,000
$55,000
Less: Accumulated Depreciation-Office Equipment
(1,100)
(500)
Total Owner’s Equity
$38,000
$55,000
Total Plant Assets
$6,300
$6,000
Total Assets
$82,000
$70,000
Total Liabilities and Equity
$82,000
$70,000
Task 2
a. Compare the trend in net sales for City Rides and Extreme Scooter. Which business has the larger net sales in dollar terms?
b. Compare the ending capital account balances of City Rides and Extreme Scooter. Compute the dollar increase or decrease in ending capital balance for each business. Suggest a reason for the large change in ending capital of Extreme Scooter.
c. Compare inventory balances of City Rides and Extreme Scooter. Which business tends to have more inventories on hand at the end of any given year? Mention one advantage and one disadvantage of keeping large amounts of inventory on hand.
d. Compare the accounts receivable balances of City Rides and Extreme Scooter. Which business tends to sell more on account? Mention one disadvantage associated with sales on account.
Task 2
Compute the following accounting ratios for the year ended December 31, 20×3, for City Rides and for Extreme Scooters (a business that is comparable to City Rides). Refer to the appendix below for the necessary formulae and page references.
Accounting Ratio
City Rides
Extreme Scooter
20×3
20×2
20×3
20×2
Current Ratio
Debt Ratio
Gross Profit Percentage
Day’s Sales in Receivables
Task 3
Imagine that you are an accountant who reports to the senior commercial loan officer of a regional bank, Ms. Heather Coldwell. Coldwell is deciding which of two loan applications to approve and is having trouble doing so because the two applicants have very similar business operations and both meet the bank’s minimum lending standards. The first is an application for a $25,000 bank loan to City Rides, and the second is an application for a $25,000 bank loan to Extreme Scooters. Your job is to compare and analyze the financial health of City Rides and Extreme Scooter based on their financial statements. You will summarize your findings and final recommendation in a memorandum (“memo”) addressed to Ms. Coldwell. Based on your memorandum, Ms. Caldwell will approve one loan and deny the other.
Complete the memo on the following pages. Divide your memo into the following sections:
Introduction
Briefly outline the purpose of the memo, mentioning the names of the businesses analyzed.
Accounting Ratios
Explain each of the ratios computed in Task 2 above, and indicate whether the ratio is:
· Favorable or unfavorable for each business
· Showing an improving or deteriorating trend over time
Financial Statements
Summarize the answers you provided to the questions in Task 1 here.
Recommendation
Recommend which business you believe should receive the bank loan. Justify your recommendation by referring back to at least one key issue raised in the body of the memo.
The memo should not exceed 2 pages. Use 11 point Arial font, double-spaced. Spelling and grammar counts!
TO: Ms. H. Caldwell, Senior Loan Officer
FROM: _____________________, Staff Accountant
DATE: January 5, 20×4
SUBJECT: Financial Statement Analysis and Loan Recommendation
Appendix: Accounting Ratios
Current Ratio (pp.214)
Debt Ratio (pp.214)
Gross Profit Percentage (pp.274)
Day’s Sales in Receivables (pp. 424)
AC
1
220Lab 5.2
Introduction
On July 25, 20×1, Jake’s Computer Sales and Repair enters into an agreement with Inner-Tech, a local computer software development firm. Inner-Tech pays Jake’s Computer Sales and Repair $45,000 in advance for ongoing computer repair services. At year-end, Jake determines that $38,500 of this amount has been earned.
Requirement 1
a. Journalize the unearned revenue transaction on July 25, 20×1.
DATE
Account and Explanation
DEBIT
CREDIT
Jul 25
To record unearned revenue
b. Journalize the necessary adjustment for December 31, 20×1.
DATE
Account and Explanation
DEBIT
CREDIT
Dec 31
To adjust unearned revenue
Requirement 2
Analysis shows that around 2 percent of A-line sales require after-sale repairs. Beginning July 1, 20×1, Jake’s Computer Sales and Repair provides customers with a limited product warranty on each A-line computer sold. Sales of A-line computers total to $74,500 in July 20×1.
a. Compute the estimated warranty expense payable amount.
b. Journalize the estimated warrantee expense.
DATE
Account and Explanation
DEBIT
CREDIT
Jul 31
To accrue warranty payable
c. Actual repairs made during August 20×1 to products under warranty results in cash expenditures of $800. Journalize the warranty repair cost.
DATE
Account and Explanation
DEBIT
CREDIT
Aug 30
To accrue warranty payable
d. At what amount is warranty expense reported on the income statement for the month ended August 20×1?
Requirement 3
Jake’s Computer Sales and Repair has one employee, Dave, who earns a monthly gross salary of $3,415 for the month of August 20×1. So far, in 20×1, Dave has earned a gross salary amounting to $23,905.
Jake’s Computer Sales and Repair withholds the following amounts from Dave’s gross salary:
· Social Security taxes and Medicare taxes—Federal Insurance Contributions Act (FICA)—at 7.65 percent of gross salary up to $106,800
· Income tax withheld: 10 percent
· Other amounts withheld:
· Health insurance: $200 per month
· Retirement plan contribution: $400 per pay period
· Charitable contribution: $20 per pay period
AC1220 ACCOUNTING I Lab 5.2
1
a. Compute Dave’s net salary by completing the following table:
Gross pay:
Less withholding deductions:
Income tax
Employee FICA tax
Health insurance
Employee retirement contribution
Employee charitable contribution
Net pay
b. Journalize salaries, payroll taxes, and benefits payable. In addition, journalize the salary payment.
DATE
DEBIT
CREDIT
Aug 31
To record salaries payable
DATE
DEBIT
CREDIT
31
To record payment of salary
c. As Dave’s employer, Jake’s Computer Sales and Repair must also make a payroll tax payment. Journalize the entry to record employer payroll taxes.
DATE
DEBIT
CREDIT
Aug 31
To record employer payroll taxes
DATE
DEBIT
CREDIT
Aug 31
To record payment of payroll taxes to government
d. Journalize the payment of taxes to the federal government.
AC
1
220 Lab 5.3
Introduction
Jake’s Computer Sales and Repair acquired land, land improvements, and a building in exchange for a $180,000 note payable. The building was renovated at a cost of $15,000 before being placed into use. The cost of the renovation work was capitalized, and Jake’s Computer Sale and Repair signed a note payable for the full amount.
Notes payable are dated June 1, 20×1, totaling $195,000. The notes are payable over 10 years at an annual interest rate of 6 percent. The principal is to be repaid in equal annual installments of $19,500 each. Interest and principal payments are scheduled for June 1 each year, from 20×1 to 2×11.
Requirement 1
a.
Journalize the issuance of the long-term note payable.
Date
Account and Explanation
Debit
Credit
6/1/x1
To record long-term note payable
b. Compute the interest accrued on the long-term notes payable at December 31, 20×1.
b. Journalize the accrual of interest at December 31, 20×1.
Date
Account and Explanation
Debit
Credit
12/31/x1
To accrue interest on long-term note payable
c. Make the entry necessary at December 31, 20×1, to reclassify the first principal installment on the note payable as the current portion of the long-term notes payable.
Date
Account and Explanation
Debit
Credit
12/31/x1
To accrue interest on long-term note payable
AC1220 ACCOUNTING I Lab 5.3
1
d. Enter the correct amounts into the shaded cells of the following partial balance sheet dated December 31, 20×1:
In the Income Statement for the Year Ended
Dec. 31, 20×1
In the Balance Sheet at Dec. 31, 20×1
Expenses
Current Liabilities
Interest Expense
Current Portion of Long-Term Notes Payable
Long-Term Liabilities
Long-Term Notes Payable
Requirement 2
Jake is considering raising additional cash by issuing $100,000 in bonds with a stated interest rate of 6 percent and a maturity of 10 years.
a. Compute the annual interest payment on the bonds payable.
b. Compute the present value of the bonds if the market interest rate is 8 percent. To compute the present value of the bonds, you can use the present value tables in Appendices B-1 and B-2 of your textbook, or you can set up the following formulas using Microsoft Excel:
c. Would these bonds be issued at a discount or at a premium? Explain.
d. Compute the bond discount or premium.
e. Journalize the issue of the bonds.
Date
Account and Explanation
Debit
Credit
6/1/x1
To accrue interest on long-term note payable
f. Compute the amount by which the discount or premium would be amortized in each period, assuming straight-line amortization.
