COMPREHENSIVE PROBLEM 2 (CHAPTERS 2, 5-8)
NAME
Page 137
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)
(2)
(3)
(4)
(5)
PREPARE JOURNAL ENTRIES FOR
MERCHANDISING TRANSACTIONS
__________
PREPARE JOURNAL ENTRIES FOR
ACCOUNTS RECEIVABLE TRANSACTIONS
__________
PREPARE BANK RECONCILIATION AND
APPROPRIATE JOURNAL ENTRIES
__________
PREPARE FINANCIAL STATEMENTS:
(a)
INCOME STATEMENT
__________
(b)
RETAINED EARNINGS STATEMENT
__________
(c)
BALANCE SHEET
__________
CALCULATE LIQUIDITY, PROFITABILITY,
& SOLVENCY MEASURES
__________
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 140-141, 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 .104376 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, $9,150.
10
Paid $175 of shipping costs to UPS for the merchandise sold on July 8.
11
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/30.
16
The Hiking Place returned $2,400 of merchandise from the July 8 sale for credit on account.
Cost of merchandise returned, $1,600.
17
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 15.
25
Sold $24,700 of merchandise for cash to Outdoor Stores. Cost of merchandise, $16,470.
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)
Record the write-off of $7,200 of accounts receivable due from customers.
(b)
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.
Current Accounts
Accounts
Receivable
Estimated Percentage
Uncollectible
Estimated Uncollectible
Amount
$ 95,000
1%
$ 950
1–30 days past due
30,300
10%
3,030
31–60 days past due
24,800
15%
3,720
61–90 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.
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
Accounts Payable
Accounts Receivable
CREDIT
142,760
170,700
Accumulated Depreciation – Building
84,510
Accumulated Depreciation –Equipment
33,195
Advertising Expense
95,149
Allowance for Doubtful Accounts
Bad Debt Expense
5,625
5,213
Bonds Payable (due in 25 years)
Building
Cash
281,250
561,195
78,188
Common Stock, 100,000 shares issued
Cost of Goods Sold
284,375
1,861,275
Depreciation Expense
23,175
Dividends (Declared)
46,875
Equipment
Freight Out Expense
Goodwill
Income Tax Expense
210,990
8,145
194,550
60,795
Income Taxes Payable
42,758
Insurance Expense
50,475
Interest Expense
51,705
Interest Income
20,475
Interest Payable
19,688
Inventory
Land
Long-Term Investment in Deckers Stock
114,780
243,000
86,925
COMPREHENSIVE PROBLEM 2 (CHAPTERS 2, 5-8)
ACCOUNT TITLES
Loss on Sale of Equipment
Miscellaneous Expense*
Page 141
DEBIT
CREDIT
13,875
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)
Salaries & Wages Expense
232,323
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
Utilities Expense
Totals
3,398
35,595
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.
Page 142
COMPREHENSIVE PROBLEM 2 (CHAPTERS 2, 5-8)
GENERAL JOURNAL
DATE
ACCOUNT TITLES
DEBIT
CREDIT
2011
July 2
Inventory
75,000
Accounts Payable
July 5
Inventory
75,000
800
Cash
July 8
Accounts Receivable
800
13,700
Sales Revenue
Cost of Goods Sold
13,700
9,150
Inventory
July 10
Freight-Out Expense
9,150
175
Cash
July 11
July 15
Accounts Payable
175
75,000
Inventory ($75,000 x 2%)
1,500
Cash ($75,000 ― $1,500)
73,500
Inventory
48,000
Accounts Payable
July 16
Sales Returns
48,000
2,400
Accounts Receivable
Inventory
Cost of Goods Sold
2,400
1,600
1,600
COMPREHENSIVE PROBLEM 2 (CHAPTERS 2, 5-8)
Page 143
GENERAL JOURNAL
DATE
ACCOUNT TITLES
DEBIT
CREDIT
2011
July 17
Cash ($11,300 ― $113)
Sales Discounts ($11,300 x 1%)
11,187
113
Accounts Receivable ($13,700 ― $2,400)
July 19
Accounts Payable
11,300
4,300
Inventory
July 25
Cash
4,300
24,700
Sales Revenue
Cost of Goods Sold
24,700
16,470
Inventory
16,470
REQUIREMENT (2) JOURNAL ENTRIES:
July 31
Allowance for Doubtful Accounts
7,200
Accounts Receivable
July 31
Bad Debts Expense
Allowance for Doubtful Accounts
[$14,630 – ($10,850 – $7,200)]
7,200
10,980
10,980
Page 144
COMPREHENSIVE PROBLEM 2 (CHAPTERS 2, 5-8)
GENERAL JOURNAL
DATE
2011
July 31
July 31
ACCOUNT TITLES
DEBIT
REQUIREMENT (3) JOURNAL ENTRIES:
Cash
10,150
Notes Receivable
10,000
Interest Revenue
150
Miscellaneous Expense
25
Cash
July 31
Accounts Receivable
25
980
Cash
July 31
CREDIT
Accounts Receivable
Cash
980
360
360
COMPREHENSIVE PROBLEM 2 (CHAPTERS 2, 5-8)
Page 145
KOOL STUFF GEAR, INC.
BANK RECONCILIATION
JULY 31, 2011
$92,833
Cash balance per bank statement
Add: Deposits in transit
6,872
Less: Outstanding checks
No. 403
$ 675
No. 407
845
No. 408
900
(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
Less: Bank service charge
$ 10,150
$ 25
NSF check
980
Error in recording receipt of customer payment
360
Adjusted cash balance
(1,365)
$97,285
Page 146
COMPREHENSIVE PROBLEM 2 (CHAPTERS 2, 5-8)
Complete the
date line
KOOL STUFF GEAR, INC.
INCOME STATEMENT
FOR THE YEAR ENDED JULY 31, 2011
Sales Revenues
$ 3,218,100
Sales Revenue
Less: Sales Discounts
Sales Returns and Allowances
$ (14,348 )
(43,028 )
Net Sales
(57,376 )
$ 3,160,724
1,861,275
Cost of Goods Sold
Gross Profit
$ 1,299,449
Operating Expenses
Advertising Expense
Bad Debt Expense
Depreciation Expense
Freight Out Expense
Insurance Expense
Miscellaneous Expense
Salaries & Wages Expense
$ 95,149
5,213
23,175
8,145
50,475
615
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
Interest Income
Loss on Sale of Equipment
Total Other Revenues and Expenses
$ ( 51,705)
20,475
(13,875)
(45,105 )
COMPREHENSIVE PROBLEM 2 (CHAPTERS 2, 5-8)
Page 147
INCOME STATEMENT (CONTINUED)
Income Before Income Taxes
$ 554,319
60,795
Income Tax Expense
Net Income
$ 493,524
Earnings Per Share ($493,524 / 100,000 shares)
Complete the
date line
$ 4.94
KOOL STUFF GEAR, INC.
RETAINED EARNINGS STATEMENT
FOR THE YEAR ENDED JULY 31, 2011
Beginning Retained Earnings, August 1, 2010
Net Income
Less: Dividends (Declared)
Ending Retained Earnings, July 31, 2011
$ 232,323
493,524
( 46,875)
$ 678,972
Page 148
COMPREHENSIVE PROBLEM 2 (CHAPTERS 2, 5-8)
KOOL STUFF GEAR, INC.
BALANCE SHEET
Complete the
date line
JULY 31, 2011
ASSETS
Current Assets
Cash
$ 78,188
Short-Term Investments
Accounts Receivable
Less: Allowance for Doubtful Accounts
60,023
$ 170,700
(5,625 )
Inventory
165,075
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
Building
Less: Accumulated Depreciation, Building
Equipment
Less: Accumulated Depreciation, Equipment
$ 243,000
$ 561,195
(84,510 )
476,685
$ 210,990
(33,195 )
177,795
Total Property, Plant and Equipment
897,480
Intangible Assets
Goodwill
Trademarks
Total Intangible Assets
Total Assets
$ 194,550
47,025
241,575
$ 1,748,626
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
Mortgage Payable
$ 281,250
186,700
Total Long-Term Liabilities
467,950
Total Liabilities
$ 785,279
Stockholders’ Equity
Common Stock, 100,000 shares issued
Retained Earnings
Total Stockholders’ Equity
Total Liabilities and Stockholders’ Equity
$ 284,375
678,972
963,347
$ 1,748,626
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
Current Ratio
$ 438,646
$ 121,317
1.4 : 1
$ 317,329
Receivables Turnover Ratio
$ 3,160,724
(use net sales)
$ 153,000 avg
20.7 times
($140,925 + $165,075) / 2 = $153,000
Average Collection Period
365 / 20.7
17.6 days
Inventory Turnover Ratio
$ 1,861,275
13.5 times
$ 138,000 avg
($161,220 + $114,780) / 2 = $138,000
Days in Inventory
365 / 13.5
27.0 days
PROFITABILITY
Gross Profit Rate
$ 1,299,449
41.1%
$ 3,160,724
Profit Margin
$ 493,524
15.6%
$ 3,160,724
SOLVENCY
Debt to Total Assets
$ 785,279
$ 1,748,626
44.9%