COMPREHENSIVE PROBLEM 2
2 to 3 hours
Strong
Music-Is-Us, Inc.
A mini-practice set illustrating numerous aspects of the accounting cycle for a
merchandising business organized as a corporation. Students are expected to:
2 to 3 hours, Strong
46,975$
16,500
$ 63,475
$ 5,500
a. 25
2,500
Cash 2,525
b. 2,500
Marketable Securities
Unrealized Holding Gain on Investments
securities from $25,000 to $27,500. (Note: the
To increase reported value of marketable
portfolio was previously increased from $19,000
to $25,000.)
c. 3,500
3,500
d. 1,350
e. 300
To record office supplies used in December.
To record inventory shrinkage of missing guitars.
Office Supplies Expense
Cost of Goods Sold
Balance per bank statement, December 31, 2018
Add: Deposits in transit not recorded by bank
Deduct: Outstanding checks
No. 508
a.
December 31, 2018
MUSIC-IS-US
Bank Reconciliation
the NSF check received from Iggy Bates.
Bank Service Charges
December.
General Journal
Accounts Receivable
To record bank service charges for December and
To record uncollectible accounts expense for
Allowance for Doubtful Accounts
Uncollectible Accounts Expense
7,500
8,000 21,000
$ 25
2,500 2,525
No. 511
No. 521
Adjusted cash balance
Deduct:
Bank service charge
NSF check from Iggy Smarts
f. 600
Prepaid Insurance 600
COMPREHENSIVE PROBLEM 2
December. (Note: One month of the twelve-month
To record insurance policies expired during
General Journal
Insurance Expense
policy had already been accounted for in
November).
g. 5,000
h. 3,200
i. 6,000
Income Tax Payable 6,000
orders.
Income Tax Expense
December.
To record depreciation expense for December.
Unearned Customer Deposits
To record revenue earned from advance special
To account for accrued income taxes in
Depreciation Expense
Cash $ 42,475
27,500
127,500
8,500$
70,000
4,800
81,000
1,000,000
240,200
8,500
1,603,200
959,350
225
12,500
395,000
700
7,000
3,600
53,000
81,000
$ 3,821,200 $ 3,821,200
Office supplies expense
Insurance expense
Utilities expense
Income tax expense
Uncollectible accounts expense
Depreciation expense
Cost of goods sold
Bank service charges
Salary and wages expense
j.
Unrealized holding gain on investments
Unearned customer deposits
Retained earnings
COMPREHENSIVE PROBLEM 2
Adjusted Trial Balance
As of December 31, 2018
Allowance for doubtful accounts
MUSIC-IS-US
Marketable securities
Accounts receivable
Income taxes payable
Capital stock
Sales
Accounts payable
248,650
900
6,000
1,791,000
805,000
64,800
Office supplies
Prepaid insurance
Building and fixtures
Merchandise inventory
Accumulated depreciation
Land
k.
1,603,200$
959,350
240,200$
Add: Net income (from income statement)
Ending Retained earnings, December 31, 2018
COMPREHENSIVE PROBLEM 2
MUSIC-IS-US (continued)
MUSIC-IS-US
Statement of Retained Earnings
Retained earnings, January 1, 2018
For the Year Ending December 31, 2018
MUSIC-IS-US
Income Statement
For the Year Ended December 31, 2018
Sales
Cost of goods sold
Income before income tax
Net income
Insurance expense
Utilities expense
Depreciation expense
Income taxes expense
Bank service charges
Uncollectible accounts expense
Salary and wages expense
Office supplies expense
Gross profit
k. (continued)
42,475$
27,500
444,525$
1,791,000$
Total assets
Total plant and equipment
Less: Accumulated depreciation
Land
70,000$
4,800
Long-term liabilities:
Income taxes payable
Total current liabilities
1,000,000$
331,025
Total Liabilities and Stockholders’ Equity
Total stockholders’ equity
Unrealized holding gain on investments
COMPREHENSIVE PROBLEM 2
Building and fixtures
MUSIC-IS-US
Balance Sheet
As of December 31, 2018
Current assets:
Marketable securities
Cash
Total current assets
Plant and equipment:
Stockholders’ Equity
Capital stock
Liabilities
Current liabilities:
Accounts payable
Unearned customer deposits
Total liabilities
Retained earnings (from statement of retained earnings)
$ 127,500
6,000
Office supplies
Prepaid insurance
Merchandise inventory
Accounts receivable
Less: Allowance for doubtful accounts
l. Step 1:
m. Step 1:
$959,350 ÷ $248,650* = 3.9 times
365 ÷ 3.9 = 94 days
Compute inventory days (365 ÷ inventory turnover)
27 days
Add: inventory days (from part m above)
Operating cycle
o.
n.
Compute inventory turnover (cost of goods sold ÷ average merchandise
Compute accounts receivable turnover (sales ÷ average accounts receivable)
$1,603,200 ÷ $119,000* = 13.5 times
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
Accounts receivable days (from part l above)
Compute accounts receivable days (365 ÷ accounts receivable turnover)
365 ÷ 13.5 = 27 days