Financial Accounting (Connect NOT Included)
Financial Accounting (Connect NOT Included)
4th Edition
ISBN: 9781259930492
Author: SPICELAND
Publisher: MCG
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Chapter 9, Problem 21E

1.

To determine

Prepare journal entry to record each transactions of FF.

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.

Prepare journal entry to record each transactions of FF as follows:

DateAccount titles and ExplanationDebitCredit
January 1Cash$100,000 
      Notes payable $100,000
 (To record issuance of long-term notes payable)  
    
January 4Cash$31,000 
      Accounts receivable $31,000
 (To record cash received on account)  
    
January 11Accounts payable$11,000 
      Cash $11,000
 (To record cash paid on account)  
    
January 15Salaries expense$28,900 
      Cash $28,900
 (To record payment of salaries)  
    
January 30Cash$65,000 
 Accounts receivable$130,000 
      Sales revenue $195,000
 (To record inventory sold for cash and on account)  
    
 Cost of goods sold$112,500 
      Inventory $112,500
 (To record cost of inventory sold)  
    
January 31Interest expense$583 
      Notes payable$1,397 
      Cash $1,980
 (To record payment of monthly instalment on long-term note)  

Table (1)

2.

To determine

Prepare adjusting entry as on January 31.

2.

Expert Solution
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Explanation of Solution

Adjustment entries:

Adjusting entries are those entries which are made at the end of the year to update all the balances in the financial statements to show the true financial information and to maintain the records according to accrual basis principle.

Prepare adjusting entry as on January 31.

a.

Prepare adjusting entry to record depreciation expense.

DateAccount titles and ExplanationDebitCredit
January 31Depreciation expenses (1)$800 
      Accumulated depreciation $800
 (To record adjusting entry for depreciation expenses)  

Table (2)

Working note:

Calculate depreciation expense.

Depreciation expenseof buildings=Bookvalue of buildings Residual valueEstimated life time=$120,000$24,00010years×12months=$96,000120months=$800 (1)

  • Depreciation expense is a component of stockholders’ equity, and it is increased. Therefore, debit depreciation expense account for $800.
  • Accumulated depreciation is a contra asset, and it is increased. Therefore, credit accumulated depreciation account for $800.

b.

Prepare adjusting entry to record allowance for uncollectible accounts.

DateAccount titles and ExplanationDebitCredit
January 31Bad debt expense$2,300 
      Allowance for uncollectible accounts $2,300
 (To adjust estimated uncollectible accounts)  

Table (3)

Working note:

Calculate allowance for uncollectible accounts.

Allowance for uncollectible accounts=[(Accounts receivable×Percentage of estimation which will not be collected)+(Remaining accounts receivable(3) ×Percentage of estimation which will not be collected)(Credit balance in allowance for uncollectible accounts as on January 1, 2021)]=[($3,000×50%)+($130,000(3)×2%)$1,800]=[($1,500)+($2,600)$1,800]=$2,300 (2)

Calculate the remaining accounts receivable.

Remaining accounts receivable=[Accounts rceivable as on January 1, 2021+Services provided on accountReceived cash on accounts receivableWritting of accounts receivable as uncollectible]=[$34,000+$130,000$31,000$3,000]=$130,000 (3)

  • Bad debt expense is a component of stockholders’ equity and it is increased. So, debit bad debt expense for $2,300 and,
  • Allowance for uncollectible accounts is a contra asset account and it is increased. So, credit allowance for uncollectible accounts for $2,300.

c.

Prepare adjusting entry to record salaries payable.

DateAccount titles and ExplanationDebitCredit
January 31Salaries expense$26,100 
      Salaries payable $26,100
 (To adjust salaries payable)  

Table (4)

  • Salaries expense is a component of stockholders’ equity, and it is increased. Therefore, debit salaries expense account for $26,100.
  • Salaries payable is a current liability, and it is increased. Therefore, credit salaries payable account for $26,100.

d.

Prepare adjusting entry to record income taxes.

DateAccount titles and ExplanationDebitCredit
January 31Income tax expense$8,000 
      Income tax payable $8,000
 (To adjust income taxes)  

Table (5)

  • Income tax expense is a component of stockholders’ equity, and it is increased. Therefore, debit income tax expense account for $8,000.
  • Income tax payable is a current liability, and it is increased. Therefore, credit income tax payable account for $8,000.

3.

To determine

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

3.

Expert Solution
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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.

Prepare an adjusted trail balance as of January 31, 2021

FF
Adjusted Trial Balance
As of December 31, 2021
AccountsDebitCredit
Cash$165,320
Accounts Receivable$133,000
Allowance for Uncollectible Accounts$4,100
Inventory$39,500
Land$67,300
Buildings$120,000
Accumulated Depreciation$10,400
Accounts Payable$6,700
Salaries Payable$26,100
Income Tax Payable$8,000
Notes Payable (Current)$17,411
Notes Payable (Long-term)$81,192
Common Stock$200,000
Retained Earnings$155,400
Sales Revenue$195,000
Cost of Goods Sold$112,500
Salaries Expense$55,000
Bad Debt Expense$2,300
Depreciation Expense$800
Interest Expense$583
Income Tax Expense$8,000
Totals$704,303$704,303

Table (6)

Working notes:

Calculate adjusted ending balance amount for each accounts.

AccountsEnding BalanceBeginning balance, entries during January , and adjusting entries
Cash$165,320=[11,200+100,000+31,00011,00028,900+65,0001,980]
Accounts Receivable133,000=(34,00031,000+130,000)
Allow for Uncollectible  Accounts4,100=(1,800+2,300)
Inventory39,500=(152,000112,500)
Land67,300=67,300
Buildings120,000=120,000
Accumulated Depreciation10,400=(9,600+800)
Accounts Payable6,700=(17,70011,000)
Salaries Payable26,100=26,100
Income Tax Payable8,000=8,000
Notes Payable (Current)17,411=17,411
Notes Payable (Long-term)81,192=(100,000  1,397 17,411)
Common Stock200,000=200,000
Retained Earnings155,400=155,400
Sales Revenue195,000=195,000
Cost of Goods Sold112,500=112,500
Salaries Expense55,000=(28,900+26,100)
Bad Debt Expense2,300=2,300
Depreciation Expense800=800
Interest Expense583=583
Income Tax Expense8,000=8,000

Table (7) (4)

4.

To determine

Prepare a multi-step income statement for the period ended as on January 31, 2021.

4.

Expert Solution
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Explanation of Solution

Prepare a multi-step income statement for the period ended as on January 31, 2021 as follows:

FF
Multiple-Step Income Statement
For the year month ended January 31, 2021
ParticularsAmountAmount
Sales revenue$195,000
Cost of goods sold$112,500
Gross profit$82,500
Salaries expense$55,000
Bad debt expense$2,300
Depreciation expense$800
Total operating expenses$58,100
Operating income$24,400
Interest expense$583
Income before taxes$23,817
Income tax expense$8,000
Net income$15,817

Table (8)

Therefore, Net income of FF is $15,817.

5.

To determine

Prepare classified balance sheet as on January 31, 2021.

5.

Expert Solution
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Explanation of Solution

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

Financial Accounting (Connect NOT Included), Chapter 9, Problem 21E

Figure (1)

Working note:

Calculate retained earnings.

Ending retained earnings =Opening retained earnings + Net income Dividends= $155,400+$15,817$0=$171,217 (5)

6.

To determine

Record the closing entries of FF.

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.

Prepare revenue closing entry.

DateAccount titles and ExplanationDebitCredit
January 31Sales revenue$195,000 
      Retained earnings $195,000
 (To close revenue accounts)  

Table (9)

  • Sales revenue is a component of stockholders’ equity, and it is decreased. Therefore, debit sales revenue account for $195,000.
  • Retained earnings are a component of stockholders’ equity, and it is increased. Therefore, credit retained earnings account for $195,000.

Prepare expense closing entry.

DateAccount titles and ExplanationDebitCredit
January 31Retained earnings$179,183 
       Cost of goods sold $112,500
       Salaries expense $55,000
       Bad debt expense $2,300
       Depreciation expense $800
       Interest expense $583
       Income tax expense $8,000
 (To close expense accounts)  

Table (10)

  • Retained earnings are a component of stockholders’ equity, and it is decreased. Therefore, debit retained earnings account for $179,183.
  • Cost of goods sold is a component of stockholders’ equity, and it is increased. Therefore, credit cost of goods sold account for $112,500.
  • Salaries expense is a component of stockholders’ equity, and it is increased. Therefore, credit salaries expense account for $55,000.
  • Bad debts expense is a component of stockholders’ equity, and it is increased. Therefore, credit Bad debts expense account for $2,300.
  • Depreciation expense is a component of stockholders’ equity, and it is increased. Therefore, credit Depreciation expense account for $800.
  • Interest expense is a component of stockholders’ equity, and it is increased. Therefore, credit Interest expense account for $583.
  • Income tax expense is a component of stockholders’ equity, and it is increased. Therefore, credit Income tax expense account for $8,000.

7.a.

To determine

Calculate debt to equity ratio, and find outout whether the average debt to equity ratio of FF is more or less leveraged than other companies in the same industry, if the industries debt to equity ratio is 1.0.

7.a.

Expert Solution
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Explanation of Solution

Calculate debt to equity ratio.

Debt to equity ratio=Total liabilitesTotal stockholders' equity=$139,403$371,217=0.38

FF debt equity ratio (0.38) is less leveraged than the same industry average (1.0). Therefore, FF has lesser proportion of liabilities compares with the stockholders’ equity.

b.

To determine

Calculate the times interest earned ratio and find out whether the company has more or less ability to meet interest payments than other companies in the same industry, if the average times interest earned ratio for the same industry is 20 times.

b.

Expert Solution
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Explanation of Solution

Calculate times interest earned ratio.

Times interest earned ratio=Net income + Interest expense + Tax expenseInterest expense=$15,817+$583+$8,000$583=41.9times

FF times interest earned ratio (41.9 times) is more than industry average ratio (20 times). Therefore, FF is more able to meet interest payments than other companies in the same industry.

c.

To determine

Ascertain whether FF is likely to receive higher or lower interest rate than the average borrowing rate in the industry.

c.

Expert Solution
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Explanation of Solution

Based on the debt to equity ratio and the times interest earned ratio, ratio, Freedom Fireworks would more likely receive a lower interest rate than the average borrowing rate in the industry. Freedom Fireworks carries less debt than the industry average and is better able to meet interest payments than the average company in the industry. 

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Chapter 9 Solutions

Financial Accounting (Connect NOT Included)

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