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2 to 3 hours
Strong
COMPREHENSIVE PROBLEM 2
Music-Is-Us
A mini-practice set illustrating numerous aspects of the accounting cycle for a
merchandising business organized as a corporation. Students are expected to:
(1) prepare a bank reconciliation, (2) make adjusting entries—including
adjustments related to marketable securities, uncollectible accounts, inventory
shrinkage, and depreciation, (3) prepare an income statement, a statement of
retained earnings, and a balance sheet, and (4) assess the financial condition of
the business from a short-term creditor’s perspective.
2 to 3 hours, Strong
a.
46,975$
16
,
500
$ 63
,
475
$ 5
,
500
7
,
500
42
,
475$
a. 25
2
,
500
Cash 2
,
525
b. 2
,
500
2
,
500
e. 300
Office Su
pp
lies 300
To record bank service char
g
es for December and
Unrealized Holdin
g
Gain on Investments
To increase re
p
orted value of marketable
Balance per bank statement, December 31, 2015
Add: De
p
osits in transit not recorded b
y
bank
Deduct: Outstandin
g
checks
No. 508
To record office su
pp
lies used in December.
the NSF check received from I
ggy
Bates.
Bank Service Char
g
es
Marketable Securities
Office Su
pp
lies Ex
p
ense
General Journal
Accounts Receivable
December 31, 2015
Ad
j
usted cash balance
(
as above
)
COMPREHENSIVE PROBLEM 2
MUSIC-IS-US
MUSIC-IS-US
Bank Reconciliation
No. 511
f
.
600
Pre
p
aid Insurance 600
i
.
6
,
000
Income Tax Pa
y
able 6
,
000
To account for accrued income taxes in
COMPREHENSIVE PROBLEM 2
MUSIC-IS-US (continued)
To record insurance
p
olicies ex
p
ired durin
g
General Journal
Insurance Ex
p
ense
orders.
Income Tax Ex
p
ense
December.
j
.
Cash $ 42
,
475
27
,
500
127
,
500 8
,
500$
COMPREHENSIVE PROBLEM 2
MUSIC-IS-US (continued)
A
djusted Trial Balance
A
s of December 31, 201
5
Allowance for doubtful accounts
MUSIC-IS-US
Marketable securities
Accounts receivable
k.
1,603,200$ 959,350
$ 643,850
$ 225
12,500
395,000
700
Bank service charges
Uncollectible accounts expense
Salary and wages expense
Office supplies expense
For the Year Ending December 31, 2015
Income Statement
For the Year Ended December 31, 2015
Sales
Gross profit
Cost of goods sold
COMPREHENSIVE PROBLEM 2
MUSIC-IS-US (continued)
MUSIC-IS-US
MUSIC-IS-US
Statement of Retained Earnings
k. (continued)
42,475$
27,500
$ 127,500
(
8,500
)
119,000
248,650 900
70,000$ 4,800
81,000
155,800$
0
155,800$
1,000,000$ 331,025 8,500
Retained earnings (from statement of retained earnings)
Unrealized holding gain on investments
Total liabilities
Long-term liabilities:
Stockholders' Equity
Liabilities
Current liabilities:
Accounts payable
Unearned customer deposits
Income taxes payable
Total current liabilities
Balance Sheet
A
s of December 31, 201
5
Current assets:
Marketable securities
Cash
Accounts receivable
Less: Allowance for doubtful accounts
Office supplies
COMPREHENSIVE PROBLEM 2
MUSIC-IS-US (continued)
MUSIC-IS-US
Merchandise inventory
l. Step 1:
Step 2:
Step 2:
27 days
94 days
o.
n.
Note to instructor: You may want to point out that the company’s quick and current ratios also
appear relatively strong. This provides additional evidence of the company’s ability to meet its
current obligations (quick ratio = 1.21:1; current ratio = 2.85:1).
Accounts receivable days (from part l above)
Add: inventory days (from part m above)
From a short-term creditor’s perspective, the company appears relatively solvent. It collects
its accounts receivable in less than 30 days, and its uncollectible accounts expense represents
COMPREHENSIVE PROBLEM 2
MUSIC-IS-US (concluded)
Compute inventory days (365 ÷ inventory turnover)
average merchandise inventory for this company.
Compute accounts receivable turnover (sales ÷ average accounts receivable)
Compute accounts receivable days (365 ÷ accounts receivable turnover)
