PROFESSOR S NAME ACC 255 FALL 2011 COVER SHEET FOR COMPREHENSIVE PROBLEM 2 (CHAPTERS 2, 5-8)

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1 COMPREHENSIVE PROBLEM 2 (CHAPTERS 2, 5-8) Page 137 NAME ANSWER KEY PROFESSOR S NAME SECTION SCORE ACC 255 FALL 2011 COVER SHEET FOR COMPREHENSIVE PROBLEM 2 (CHAPTERS 2, 5-8) INSTRUCTIONS: COMPLETE ALL REQUIREMENTS FOR THE COMPREHENSIVE PROBLEM AND TURN IN THE ORIGINAL OF YOUR PROBLEM (STAPLED PLEASE) BY THE DUE DATE & TIME SPECIFIED BY YOUR PROFESSOR. NO LATE PROBLEMS WILL BE ACCEPTED FOR ANY REASON!!! YOU SHOULD MAKE A COPY OF YOUR SOLUTION TO CHECK YOUR ANSWERS WITH THE SOLUTIONS WHICH WILL BE PROVIDED TO YOU BY YOUR PROFESSOR. REQUIREMENTS: (1) PREPARE JOURNAL ENTRIES FOR MERCHANDISING TRANSACTIONS (2) PREPARE JOURNAL ENTRIES FOR ACCOUNTS RECEIVABLE TRANSACTIONS (3) PREPARE BANK RECONCILIATION AND APPROPRIATE JOURNAL ENTRIES (4) PREPARE FINANCIAL STATEMENTS: (a) INCOME STATEMENT (b) RETAINED EARNINGS STATEMENT (c) BALANCE SHEET (5) CALCULATE LIQUIDITY, PROFITABILITY, & SOLVENCY MEASURES

2 Page 138 COMPREHENSIVE PROBLEM 2 (CHAPTERS 2, 5-8) COMPREHENSIVE PROBLEM 2 REQUIREMENTS (1) Prepare journal entries to record the merchandising transactions below for July 2011, assuming that the perpetual inventory system is used; Check figure: Total Debits = $282,595. (2) Prepare journal entries to record additional transactions (a) and (b) on the following page for Accounts Receivable related to uncollectible accounts. (3) Based on the information on the following page, prepare in good form, at July 31, 2011: (a) the bank reconciliation; Check figure: Adjusted cash balance = $97,285. (b) the appropriate journal entries needed from the bank reconciliation (to verify with the check figure, use a separate entry for each item); Check figure: Total debits = $11,515. (4) Using the July 31, 2011 Adjusted Trial Balance on pages , prepare in good form, the fiscal year financial statements: (a) Detailed, Multistep Income Statement; Check figure: Net Income = $493,524. (b) Retained Earnings Statement; Check figure: Retained Earnings, July 31, 2011 = $678,972. (c) Classified Balance Sheet; Check figure: Total Assets = $1,748,626. (5) Calculate liquidity, profitability, & solvency measures; show all calculations and use the proper notation for each answer (%, times, $). Round your final answer to one decimal place (e.g., for a ratio stated as a percentage, show an amount calculated to be as 10.4%). TRANSACTIONS FOR REQUIREMENT (1), ABOVE: Presented below are selected transactions pertaining to Kool Stuff Gear, Inc. s merchandise inventory for the month of July 2011: July 2 Purchased $75,000 of merchandise on credit from Best Boots Corporation, terms 2/10, n/30, FOB shipping point. 5 Paid $800 of shipping costs to Best Freight Co. for the merchandise purchased on July 2. 8 Sold $13,700 of merchandise on account to The Hiking Place, terms 1/10, n/30, FOB destination. Cost of merchandise, $9, Paid $175 of shipping costs to UPS for the merchandise sold on July Paid Best Boots Corporation the balance due from the July 2 purchase (hint: payment is within the discount period). 15 Purchased $48,000 of merchandise on account from Jacket World Company, terms n/ The Hiking Place returned $2,400 of merchandise from the July 8 sale for credit on account. Cost of merchandise returned, $1, Received payment from The Hiking Place for the balance due from the July 8 sale less the July 16 return (hint: payment is within the discount period). 19 Returned for credit on account $4,300 of merchandise purchased from Jacket World Company on July Sold $24,700 of merchandise for cash to Outdoor Stores. Cost of merchandise, $16,470.

3 COMPREHENSIVE PROBLEM 2 (CHAPTERS 2, 5-8) Page 139 TRANSACTIONS FOR REQUIREMENT (2): Assume that Kool Stuff Gear, Inc. has a beginning of the year balance in Allowance for Doubtful Accounts of $10,850. On July 31, 2011, the following events occurred related to accounts receivable: (a) (b) Record the write-off of $7,200 of accounts receivable due from customers. After recording (a) above, the management of Kool Stuff Gear, Inc. provides the following aging schedule of accounts receivable. Prepare the year-end adjusting journal entry for bad debts using the allowance method, with the uncollectible amount estimated using the percentage of receivables basis in the aging schedule. Accounts Receivable Estimated Percentage Uncollectible Estimated Uncollectible Amount Current Accounts $ 95,000 1% $ days past due 30,300 10% 3, days past due 24,800 15% 3, days past due 15,600 30% 4,680 Over 90 days past due 5,000 45% 2,250 Totals $ 170,700 $ 14,630 INFORMATION FOR REQUIREMENT (3): On July 31, 2011 (prior to recording entries needed from the bank reconciliation), Kool Stuff Gear, Inc. had a cash balance per books of $88,500. The statement from Mountain State Bank on that date showed a balance of $92,833. A comparison of the bank statement with the cash account revealed the following facts. The following checks written by Kool Stuff Gear had not yet been paid by the bank: No. 403 for $675; No. 407 for $845; and No. 408 for $900 A deposit made on July 31 for cash receipts of that day of $6,872 had not yet been recorded by the bank. The bank statement showed a bank service charge for July of $25. The bank collected a note receivable of $10,000 for Kool Stuff Gear during July, plus interest earned of $150. Kool Stuff Gear has not accrued any interest on the note. The bank statement returned an NSF check for $980 that had been received as payment on account from customer Harrington s General Store. Receipt of a customer payment on account in the amount of $592 was mistakenly recorded in the cash receipts journal as $952.

4 Page 140 COMPREHENSIVE PROBLEM 2 (CHAPTERS 2, 5-8) INFORMATION FOR REQUIREMENTS (4) and (5): After the transactions from requirements (1), (2), and (3) above and other transactions for the year were posted to the accounts, the accounts in alphabetical order from the July 31, 2011 year-end adjusted trial balance of Kool Stuff Gear, Inc. are as follows: KOOL STUFF GEAR, INC. ADJUSTED TRIAL BALANCE JULY 31, 2011 ACCOUNT TITLES DEBIT CREDIT Accounts Payable 142,760 Accounts Receivable 170,700 Accumulated Depreciation Building 84,510 Accumulated Depreciation Equipment 33,195 Advertising Expense 95,149 Allowance for Doubtful Accounts 5,625 Bad Debt Expense 5,213 Bonds Payable (due in 25 years) 281,250 Building 561,195 Cash 78,188 Common Stock, 100,000 shares issued 284,375 Cost of Goods Sold 1,861,275 Depreciation Expense 23,175 Dividends (Declared) 46,875 Equipment 210,990 Freight Out Expense 8,145 Goodwill 194,550 Income Tax Expense 60,795 Income Taxes Payable 42,758 Insurance Expense 50,475 Interest Expense 51,705 Interest Income 20,475 Interest Payable 19,688 Inventory 114,780 Land 243,000 Long-Term Investment in Deckers Stock 86,925

5 COMPREHENSIVE PROBLEM 2 (CHAPTERS 2, 5-8) Page 141 ACCOUNT TITLES DEBIT CREDIT Loss on Sale of Equipment 13,875 Miscellaneous Expense* 615 Mortgage Payable ($15,800 due within one year; remainder due later) 202,500 Notes Payable (due in 11 months) 67,500 Notes Receivable (due in 3 years) 84,000 Prepaid Expenses 15,855 Retained Earnings (beginning) 232,323 Salaries & Wages Expense 407,355 Salaries & Wages Payable 25,425 Sales Revenue 3,218,100 Sales Discounts 14,348 Sales Returns and Allowances 43,028 Short-term Investments 60,023 Supplies 4,725 Supplies Expense 74,303 Trademarks 47,025 Unearned Revenue 3,398 Utilities Expense 35,595 Totals 4,663,882 4,663,882 * this account is used for bank service charges and miscellaneous administrative expenses (hint: classify this account as an operating expense ). ADDITIONAL INFORMATION FOR THE RATIOS: (A) There were 100,000 shares of common stock outstanding throughout the year (hint: use this information to calculate earnings per share). (B) Beginning Net Accounts Receivable (net of Allowance for Doubtful Accounts) = $140,925. Beginning Inventory = $161,220.

6 Page 142 COMPREHENSIVE PROBLEM 2 (CHAPTERS 2, 5-8) GENERAL JOURNAL DATE ACCOUNT TITLES DEBIT CREDIT 2011 July 2 Inventory 75,000 Accounts Payable 75,000 July 5 Inventory 800 Cash 800 July 8 Accounts Receivable 13,700 Sales Revenue 13,700 Cost of Goods Sold 9,150 Inventory 9,150 July 10 Freight-Out Expense 175 Cash 175 July 11 Accounts Payable 75,000 Inventory ($75,000 x 2%) 1,500 Cash ($75,000 $1,500) 73,500 July 15 Inventory 48,000 Accounts Payable 48,000 July 16 Sales Returns 2,400 Accounts Receivable 2,400 Inventory 1,600 Cost of Goods Sold 1,600

7 COMPREHENSIVE PROBLEM 2 (CHAPTERS 2, 5-8) Page 143 GENERAL JOURNAL DATE ACCOUNT TITLES DEBIT CREDIT 2011 July 17 Cash ($11,300 $113) 11,187 Sales Discounts ($11,300 x 1%) 113 Accounts Receivable ($13,700 $2,400) 11,300 July 19 Accounts Payable 4,300 Inventory 4,300 July 25 Cash 24,700 Sales Revenue 24,700 Cost of Goods Sold 16,470 Inventory 16,470 REQUIREMENT (2) JOURNAL ENTRIES: July 31 Allowance for Doubtful Accounts 7,200 Accounts Receivable 7,200 July 31 Bad Debts Expense 10,980 Allowance for Doubtful Accounts 10,980 [$14,630 ($10,850 $7,200)]

8 Page 144 COMPREHENSIVE PROBLEM 2 (CHAPTERS 2, 5-8) GENERAL JOURNAL DATE ACCOUNT TITLES DEBIT CREDIT 2011 REQUIREMENT (3) JOURNAL ENTRIES: July 31 Cash 10,150 Notes Receivable 10,000 Interest Revenue 150 July 31 Miscellaneous Expense 25 Cash 25 July 31 Accounts Receivable 980 Cash 980 July 31 Accounts Receivable 360 Cash 360

9 COMPREHENSIVE PROBLEM 2 (CHAPTERS 2, 5-8) Page 145 KOOL STUFF GEAR, INC. BANK RECONCILIATION JULY 31, 2011 Cash balance per bank statement $92,833 Add: Deposits in transit 6,872 Less: Outstanding checks No. 403 $ 675 No No (2,420) Adjusted cash balance $97,285 Cash balance per books $88,500 Add: Collection of note receivable for $10,000 plus interest earned of $150 $ 10,150 Less: Bank service charge $ 25 NSF check 980 Error in recording receipt of customer payment 360 (1,365) Adjusted cash balance $97,285

10 Page 146 COMPREHENSIVE PROBLEM 2 (CHAPTERS 2, 5-8) KOOL STUFF GEAR, INC. INCOME STATEMENT Complete the date line FOR THE YEAR ENDED JULY 31, 2011 Sales Revenues Sales Revenue $ 3,218,100 Less: Sales Discounts $ (14,348 ) Sales Returns and Allowances (43,028 ) (57,376 ) Net Sales $ 3,160,724 Cost of Goods Sold 1,861,275 Gross Profit $ 1,299,449 Operating Expenses Advertising Expense $ 95,149 Bad Debt Expense 5,213 Depreciation Expense 23,175 Freight Out Expense 8,145 Insurance Expense 50,475 Miscellaneous Expense 615 Salaries & Wages Expense 407,355 Supplies Expense 74,303 Utilities Expense 35,595 Total Operating Expenses 700,025 Income from Operations $ 599,424 Other Revenues and Expenses: Interest Expense $ ( 51,705) Interest Income 20,475 Loss on Sale of Equipment (13,875) Total Other Revenues and Expenses (45,105 )

11 COMPREHENSIVE PROBLEM 2 (CHAPTERS 2, 5-8) Page 147 INCOME STATEMENT (CONTINUED) Income Before Income Taxes $ 554,319 Income Tax Expense 60,795 Net Income $ 493,524 Earnings Per Share ($493,524 / 100,000 shares) $ 4.94 KOOL STUFF GEAR, INC. RETAINED EARNINGS STATEMENT Complete the date line FOR THE YEAR ENDED JULY 31, 2011 Beginning Retained Earnings, August 1, 2010 $ 232,323 Net Income 493,524 Less: Dividends (Declared) ( 46,875) Ending Retained Earnings, July 31, 2011 $ 678,972

12 Page 148 COMPREHENSIVE PROBLEM 2 (CHAPTERS 2, 5-8) KOOL STUFF GEAR, INC. BALANCE SHEET Complete the date line JULY 31, 2011 Current Assets ASSETS Cash $ 78,188 Short-Term Investments 60,023 Accounts Receivable $ 170,700 Less: Allowance for Doubtful Accounts (5,625 ) 165,075 Inventory 114,780 Prepaid Expenses 15,855 Supplies 4,725 Total Current Assets $ 438,646 Long-Term Investments Long-Term Investment in Deckers Stock $86,925 Notes Receivable 84,000 Total Long-Term Investments 170,925 Property, Plant and Equipment Land $ 243,000 Building $ 561,195 Less: Accumulated Depreciation, Building (84,510 ) 476,685 Equipment $ 210,990 Less: Accumulated Depreciation, Equipment (33,195 ) 177,795 Total Property, Plant and Equipment 897,480 Intangible Assets Goodwill $ 194,550 Trademarks 47,025 Total Intangible Assets 241,575 Total Assets $ 1,748,626

13 COMPREHENSIVE PROBLEM 2 (CHAPTERS 2, 5-8) Page 149 BALANCE SHEET (CONTINUED) LIABILITIES & STOCKHOLDERS EQUITY Current Liabilities Accounts Payable $ 142,760 Income Taxes Payable 42,758 Interest Payable 19,688 Current Portion of Mortgage Payable 15,800 Notes Payable 67,500 Salaries & Wages Payable 25,425 Unearned Revenue 3,398 Total Current Liabilities $ 317,329 Long-Term Liabilities Bonds Payable $ 281,250 Mortgage Payable 186,700 Total Long-Term Liabilities 467,950 Total Liabilities $ 785,279 Stockholders Equity Common Stock, 100,000 shares issued $ 284,375 Retained Earnings 678,972 Total Stockholders Equity 963,347 Total Liabilities and Stockholders Equity $ 1,748,626

14 Page 150 COMPREHENSIVE PROBLEM 2 (CHAPTERS 2, 5-8) FINANCIAL MEASURES: Use proper notation and round your final answer to one decimal place. Place your answers in the spaces provided for each ratio. MEASURE CALCULATION: ANSWER: LIQUIDITY Working Capital $ 438,646 $ 317,329 $ 121,317 Current Ratio $ 438, : 1 $ 317,329 Receivables Turnover Ratio $ 3,160, times (use net sales) $ 153,000 avg ($140,925 + $165,075) / 2 = $153,000 Average Collection Period 365 / days Inventory Turnover Ratio $ 1,861, times $ 138,000 avg ($161,220 + $114,780) / 2 = $138,000 Days in Inventory 365 / days PROFITABILITY Gross Profit Rate $ 1,299, % $ 3,160,724 Profit Margin $ 493, % $ 3,160,724 SOLVENCY Debt to Total Assets $ 785, % $ 1,748,626

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