Financial Accounting
Financial Accounting
5th Edition
ISBN: 9781259914898
Author: SPICELAND
Publisher: MCG
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Chapter 8, Problem 18E

1.

To determine

Record the journal entries for given transactions.

1.

Expert Solution
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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:

DateAccount Titles and ExplanationDebit($)Credit($)
2021Cash8,000 
January 2Deferred Revenue 8,000
 (To record the sale of gift cards for cash)  
 
2021Inventory147,000 
January, 6Accounts payable 147,000
 (To record purchase of inventory on account)  
 
2021Accounts Receivable135,000 
January 15Sales Revenue 135,000
 (To record sales of inventory on account)  
 
 Cost of goods sold73,800 
 Inventory 73,800
 (To record the cost of inventory sold)  
 
2021   

January

23

Cash125,400 
 Accounts Receivable 125,400
 (To record cash on account)  
 
2021Accounts Payable90,000 
January 25Cash 90,000
 (To record pay of  cash )  
 
2021Allowance for uncollectible accounts4,800 
January 28Accounts Receivable 4,800
 (To record the written off of uncollectible accounts)  
 
2021Cash11,000 
January 30Accounts Receivable132,000 
 Sales Revenue 143,000
 ( To record sale of inventory for cash)  
 
 Cost of goods sold79,500 
 Inventory 79,500
 (To record cost of inventory sold during the year)  
 
2021Salaries Expense52,000 
January 31Cash 52,000
 (To record payment of salaries)  

Table (1)

2.

To determine

Record the given adjusting entries of Company ACME.

2.

Expert Solution
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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:

DateAccount Titles and ExplanationDebit($)Credit($)
2021a. Depreciation Expense (1)500 
January 31Accumulated Depreciation 500
 (To record the depreciation for January)  
 
2021b. Bad Debt Expense (4)12,500 
January 31Allowance for Uncollectible Accounts 12,500
 (To record adjusting entry for uncollectible accounts)  
 
2021c. Interest Expense (5)250 
January 31Interest Payable 250
 (To record the adjusting entry for interest expense)  
 
2021d. Income Tax Expense13,000 
January 31Income Tax Payable 13,000
 (To record the adjusting entry for income taxes)  
 
2021e. Deferred Revenue3,000 
January 31Sales Revenue 3,000
 (To record the deferred revenue for the gift cards redeemed)  

Table (2)

Working Notes:

Calculate the depreciation on the equipment.

Depreciation = [Amount of Depreciation Estimated residential value]Number of months=$15,000 $300024 months= $500 (1)

Calculate the ending balance of uncollectible accounts.

Ending Balance ofUncollectible Accounts}=[Written off Allowance Allowance for Uncollectible accounts]= $4,800 $4,200$600

  (2)

Calculate the closing balance of accounts receivable account

Closing Balance ofAccounts Receivable}=(Opening balance+ Credit sales on Jan. 15 Cash received from customerAllowance written off + Credit sales on Jan. 30 Cash received on the end of the year)= ($46,200+ $ 135,000 $125,400 $ 4,800 +$132,000 $11,000)=$172,000 (3)

Calculate the bad debt expense

Bad debt expense = (Accounts receivable estimate +Remaining accounts receivable estimate +Ending balance of uncollectible accounts)= ( [$11,000×30%]+[$172,000 (3)×5% ]+600(2))= $ 12,500 (4)

Calculate the Interest expense.

Interest Expense = [Notes Payable × Rate of interest ×(Number of month dueNumber of months in a year) ]= $50,000 × 6100×112=$ 250 (5)

3.

To determine

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

3.

Expert Solution
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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
($)
Credit
($)
Cash27,500 
Accounts Receivable183,000 
Inventory13,700 
Land46,000 
Equipment15,000 
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 Sold153,300 
Salaries Expense52,000 
Bad Debt Expense12,500 
Depreciation Expense500 
Interest Expense250 
Income Tax Expense13,000 
Totals$516,750$516,750

Table (3)

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

AccountsEnding Balance=Opening balance+necessary transaction±(adusting entries)
Cash$27,500=(25,100+8,000+125,40090,000+11,00052,000)
Accounts Receivable183,000=(46,200+135,000125,4004,800+132,000)
Inventory13,700=(20,000+147,00073,80079,500)
Land46,000=46,000
Equipment15,000=15,000
Allow for Uncollectible Accounts11,900=(4,2004,800+12,500)
Accumulated Depreciation2,000=(1,500+500)
Accounts Payable85,500=(28,500+147,00090,000)
Deferred Revenue5,000=(8,0003,000)
Interest Payable250=250
Income Tax Payable13,000=13,000
Notes Payable50,000=50,000
Common Stock35,000=35,000
Retained Earnings33,100=33,100
Sales Revenue281,000=(135,000+143,000+3,000)
Cost of Goods Sold153,300=(73,800+79,500)
Salaries Expense52,000=52,000
Bad Debt Expense12,500=12,500
Depreciation Expense500=500
Interest Expense250=250
Income Tax Expense13,000=13,000

Table (4)

4.

To determine

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

4.

Expert Solution
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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 sold153,300 
Gross profit $127,700
Less: Salaries expense52,000 
         Bad debt expense12,500 
         Depreciation expense500 
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.

5.

Expert Solution
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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:

Financial Accounting, Chapter 8, Problem 18E

Table (6)

Working Notes:

Calculate the closing amount of retained earnings.

Retained Earnings = Beginning retained earnings +Net Income Dividends= $33,100 +$49,450 $0=$82,550

  (6)

6.

To determine

Record the closing entries of Company ACME.

6.

Expert Solution
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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:

DateAccount Titles and ExplanationDebit($)Credit($)
2021Sales Revenue281,000 
January 31Retained Earnings 281,000
 (To record the closing revenue accounts)  
 
 Retained Earnings231,550 
 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.

7. a

Expert Solution
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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:

Current Ratio= Current assetsCurrent Liabilities=$212,000$103,750= 2.05

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.

7. b.

Expert Solution
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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:

Acid-Test Ratio = Cash +Current Investments +Accounts ReceivableCurrent Liablities=$27,500+$ 0 + $171,000$103,750= $1.91

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).

7. c.

Expert Solution
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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.

Current Ratio= Current assetsCurrent Liabilities=$212,000$153,750= 1.38

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.

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Chapter 8 Solutions

Financial Accounting

Ch. 8 - Prob. 11SSQCh. 8 - Prob. 12SSQCh. 8 - Prob. 13SSQCh. 8 - Prob. 14SSQCh. 8 - Prob. 15SSQCh. 8 - Prob. 1AECh. 8 - Prob. 2AECh. 8 - Prob. 1RQCh. 8 - Prob. 2RQCh. 8 - Prob. 3RQCh. 8 - Prob. 4RQCh. 8 - Prob. 5RQCh. 8 - Prob. 6RQCh. 8 - Prob. 7RQCh. 8 - Prob. 8RQCh. 8 - Prob. 9RQCh. 8 - Prob. 10RQCh. 8 - Prob. 11RQCh. 8 - Prob. 12RQCh. 8 - Prob. 13RQCh. 8 - Prob. 14RQCh. 8 - Prob. 15RQCh. 8 - Prob. 16RQCh. 8 - Prob. 17RQCh. 8 - Prob. 18RQCh. 8 - Prob. 19RQCh. 8 - Prob. 20RQCh. 8 - Prob. 21RQCh. 8 - Prob. 22RQCh. 8 - Prob. 23RQCh. 8 - Prob. 1BECh. 8 - Prob. 2BECh. 8 - Prob. 3BECh. 8 - BE8-4 On April1, Online Travel issues $13 million...Ch. 8 - Prob. 5BECh. 8 - BE8-6 On December 18, Intel receives $260,000 from...Ch. 8 - Prob. 7BECh. 8 - Prob. 8BECh. 8 - Prob. 9BECh. 8 - Prob. 10BECh. 8 - Prob. 11BECh. 8 - Prob. 12BECh. 8 - Prob. 13BECh. 8 - Prob. 14BECh. 8 - Prob. 15BECh. 8 - Prob. 16BECh. 8 - Prob. 17BECh. 8 - E8-1 Match (by letter) the correct reporting...Ch. 8 - Record notes payable (LO8-2) E8-2 On November 1,...Ch. 8 - Prob. 3ECh. 8 - Prob. 4ECh. 8 - Prob. 5ECh. 8 - Prob. 6ECh. 8 - E8-7 Aspen Ski Resorts has 100 employees, each...Ch. 8 - E8-8 During January, Luxury Cruise Lines incurs...Ch. 8 - Prob. 9ECh. 8 - Prob. 10ECh. 8 - Record gift card transactions (LO8-4) E8-11 Vail...Ch. 8 - Prob. 12ECh. 8 - Prob. 13ECh. 8 - Prob. 14ECh. 8 - Prob. 15ECh. 8 - Prob. 16ECh. 8 - Prob. 17ECh. 8 - Prob. 18ECh. 8 - Prob. 1PACh. 8 - Prob. 2PACh. 8 - Prob. 3PACh. 8 - P8-4A Vacation Destinations offers its employees...Ch. 8 - Prob. 5PACh. 8 - Prob. 6PACh. 8 - Prob. 7PACh. 8 - Prob. 8PACh. 8 - Prob. 9PACh. 8 - P8-1B Listed below are several terms and phrases...Ch. 8 - Prob. 2PBCh. 8 - Prob. 3PBCh. 8 - Prob. 4PBCh. 8 - Prob. 5PBCh. 8 - P8-68 Logan’s Roadhouse opened a new restaurant in...Ch. 8 - Prob. 7PBCh. 8 - Prob. 8PBCh. 8 - Prob. 9PBCh. 8 - Prob. 1APCh. 8 - Prob. 2APCh. 8 - Prob. 3APCh. 8 - Prob. 4APCh. 8 - Ethics AP8-5 Eugene Wright is CFO of Caribbean...Ch. 8 - Prob. 7AP
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