Comprehensive Problem for Chapters 7-9
Top Quality Appliance—Long Beach has just purchased a franchise from Top Quality Appliance
(TQA). TQA is a manufacturer of kitchen appliances. TQA markets its products via retail stores
that are operated as franchises. As a TQA franchisee, Top Quality Appliance—Long Beach will
receive many benefits, including having the exclusive right to sell TQA brand appliances in Long
Beach. TQA appliances have an excellent reputation and the TQA name and logo are readily
recognized by consumers. TQA also manages national television advertising campaigns that
benefit the franchisees. In exchange for these benefits, Top Quality Appliance—Long Beach will
pay an annual franchise fee to TQA based on a percentage of sales. The annual franchise fee is a
separate cost and in addition to the purchase of the franchise.
In addition to purchasing the franchise, Top Quality Appliance—Long Beach will also purchase
land with an existing building to use for its retail store, store fixtures, and office equipment. The
business will purchase appliances from TQA and resell them in its store, primarily to local
building contractors for installation in new homes.
Following is the chart of accounts for Top Quality Appliance—Long Beach. As a new business,
all beginning balances are $0.
Top Quality Appliance—Long Beach
Chart of Accounts
Cash Common Stock
Petty Cash Retained Earnings
Accounts Receivable Dividends
Allowance for Bad Debts Sales Revenue
Merchandise Inventory Interest Revenue
Office Supplies Cost of Goods Sold
Prepaid Insurance Franchise Fee Expense
Interest Receivable Salaries Expense
Notes Receivable Utilities Expense
Land Insurance Expense
Building Supplies Expense
Accumulated Depreciation—Building Bad Debt Expense
Store Fixtures Bank Expense
Accumulated Depreciation—Store Fixtures Credit Card Expense
Office Equipment Depreciation Expense—Building
Accumulated Depreciation—Office
Equipment
Depreciation Expense—Store Fixtures
Franchise Depreciation Expense—Office Equipment
Accounts Payable Amortization Expense—Franchise
Interest Payable Interest Expense
Notes Payable Cash Short and Over
Top Quality Appliance—Long Beach completed the following transactions during 2018, its first
year of operations:
a. Received $500,000 cash and issued common stock. Opened a new checking account at Long Beach National
Bank and deposited the cash received from the stockholders.
b. Paid $50,000 cash for a TQA franchise.
c. Paid $200,000 cash and issued a $400,000, 10-year, 5% notes payable for land with an existing building.
The assets had the following market values: Land, $100,000; Building, $500,000.
d. Paid $75,000 for store fixtures.
e. Paid $45,000 for office equipment.
f. Paid $600 for office supplies.
g. Paid $3,600 for a two-year insurance policy.
h. Purchased appliances from TQA (merchandise inventory) on account for $425,000.
i. Established a petty cash fund for $150.
j. Sold appliances on account to B&B Contractors for $215,000, terms n/30 (cost, $86,000).
k. Sold appliances to Davis Contracting for $150,000 (cost, $65,000), receiving a 6-month, 8% note.
l. Recorded credit card sales of $80,000 (cost, $35,000), net of processor fee of 2%.
m
.
Received payment in full from B&B Contractors.
n. Purchased appliances from TQA on account for $650,000.
o. Made payment on account to TQA, $300,000.
p. Sold appliances for cash to LB Home Builders for $350,000 (cost, $175,000).
q. Received payment in full on the maturity date from Davis Contracting for the note.
r. Sold appliances to Leard Contracting for $265,000 (cost, $130,000), receiving a 9-month, 8% note.
s. Made payment on account to TQA, $500,000.
t. Sold appliances on account to various businesses for $985,000, terms n/30 (cost, $395,000).
u. Collected $715,000 cash on account.
v. Paid cash for expenses: Salaries, $180,000; Utilities, $12,650
w. Replenished the petty cash fund when the fund had $62 in cash and petty cash tickets for $85 for office
supplies.
x. Paid dividends, $5,000.
y. Paid the franchise fee to TQA of 5% of total sales of $2,045,000.
Requirements
1. Record the transactions in the general journal. Omit explanations.
2. Post to the general ledger.
3. It is a common business practice to reconcile the bank accounts on a monthly basis. However,
in this problem, the reconciliation of the company’s checking account will be done at the end
of the year, based on an annual summary.
Reconcile the bank account by comparing the following annual summary statement from
Long Beach National Bank to the Cash account in the general ledger. Record journal entries
as needed and post to the general ledger. Use transaction z as the posting reference.
Beginning Balance, January 1, 2018 $ 0
Deposits and other credits:
$ 500,000
78,400
215,000
350,000
715,000
Interest Revenue 1,565 1,859,965
Checks and other debits:
EFT to Bank Checks(1) 125
Checks: 50,000
200,000
45,000
75,000
150
3,600
600
300,000
500,000
192,650
Bank service charge 2,340 (1,369,465)
Ending balance, December 31, 2018 $ 490,500
(1) Bank Checks is a company that prints business checks (considered a bank expense) for Top Quality Appliance—
Long Beach
4. In preparation for preparing the adjusting entries, complete depreciation schedules for the
first five years for the depreciable plant assets, assuming the assets were purchased on
January 2, 2018:
a. Building, straight-line, 30 years, $50,000 residual value.
b. Store Fixtures, straight-line, 15 years, no residual value.
c. Office Equipment, double-declining-balance, 5 years, $5,000 residual value.
5. Record adjusting entries for the year ended December 31, 2018:
a. One year of the prepaid insurance has expired.
b. Management estimates that 5% of Accounts Receivable will be uncollectible.
c. An inventory of office supplies indicates $475 of supplies have been used.
d. Calculate the interest earned on the outstanding Leard Contracting note receivable.
Assume the note was received on October 31. Round to the nearest dollar.
e. Record depreciation expense for the year.
f. Record amortization expense for the year on the franchise, which has a 10-year life.
g. Calculate the interest owed on the note payable. Assume the note was issued on
January 1.
6. Post adjusting entries and prepare an adjusted trial balance.
7. Prepare a multi-step income statement and statement of retained earnings for the year
ended December 31, 2018. Prepare a classified balance sheet as of December 31, 2018.
Assume Interest Receivable is a current asset and Interest Payable is a current liability.
8. Evaluate the company’s success for the first year of operations by calculating the
following ratios. Round to two decimal places. Comment on the results.
a. Liquidity:
i. Current ratio
ii. Acid-test ratio
iii. Cash ratio
b. Efficiency:
i. Accounts receivable turnover
ii. Day’s sales in receivables
iii. Asset turnover
iv. Rate of return on total assets
SOLUTION
Requirement 1
