1CP - Horngren'S Financial And Managerial Accounting

Question

Top Quality Appliance—Long Beach has just purchased a franchise from Top Quality Appliance (TQA). TQA is a manufacturer of kitchen appliances. TQA marketsits products via retail stores that are operated as franchises. As a TQA franchisee,Top Quality Appliance—Long Beach will receive many benefits, including havingthe exclusive right to sell TQA brand appliances in Long Beach. TQA applianceshave an excellent reputation and the TQA name and logo are readily recognized byconsumers. TQA also manages national television advertising campaigns that benefit the franchisees. In exchange for these benefits, Top Quality Appliance—Long Beachwill pay an annual franchise fee to TQA based on a percentage of sales. The annualfranchise 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 alsopurchase land with an existing building to use for its retail store, store fixtures, and officeequipment. 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 newbusiness, 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 checkingaccount at Long Beach National Bank and deposited the cash received from thestockholders.

b. Paid \(50,000 cash for a TQA franchise.

c. Paid \)200,000 cash and issued a \(400,000, 10-year, 5% notes payable for land withan existing building. The assets had the following market values: Land, \)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 a6-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 a9-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 cashtickets 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 monthlybasis. However, in this problem, the reconciliation of the company’s checkingaccount will be done at the end of the year, based on an annual summary.

Reconcile the bank account by comparing the following annual summarystatement from Long Beach National Bank to the Cash account in the generalledger. Record journal entries as needed and post to the general ledger. Usetransaction 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

 

Bank Checks is a company that prints business checks (considered a bankexpense) for Top Quality Appliance—Long Beach

4. In preparation for preparing the adjusting entries, complete depreciation schedulesfor the first five years for the depreciable plant assets, assuming the assets werepurchased 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 notereceivable. Assume the note was received on October 31. Round to the nearestdollar.

e. Record depreciation expense for the year.

f. Record amortization expense for the year on the franchise, which has a10-year life.

g. Calculate the interest owed on the note payable. Assume the note was issued onJanuary 1.

6. Post adjusting entries and prepare an adjusted trial balance.

7. Prepare a multi-step income statement and statement of retained earnings forthe year ended December 31, 2018. Prepare a classified balance sheet as ofDecember 31, 2018. Assume Interest Receivable is a current asset and InterestPayable is a current liability.

8. Evaluate the company’s success for the first year of operations by calculating thefollowing 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

Step-by-Step Solution

Answer

Net Income = $715,357

Step 1: Meaning of Journal

Journal refers to recording the business's monetary transactions in the manner in which they occurred.

Step2: Journal Entries

 

Date	Particular	Debit ($)	Credit ($)
a.	Cash	500,000
	Capital		500,000
b.	Franchise	50,000
	Cash		50,000
c.	Land	100,000
	Building	500,000
	Cash		200,000
	5% Notes Payable		400,000
d.	Store fixtures	75,000
	Cash		75,000
e.	Office Equipment	45,000
	Cash		45,000
f.	Office Supplies	600
	Cash		600
g.	Prepaid Insurance	3,600
	Cash		3,600
h.	Merchandise Inventory	425,000
	Accounts Payable		425,000
i.	Petty cash	150
	Cash		150
j.	Accounts receivables	215,000
	Sales Revenue		215,000
j.	Cost of goods sold	86,000
	Merchandise Inventory		86,000
k.	8% Notes receivables	150,000
	Sales Revenue		150,000
	Cost of goods sold	65,000
	Merchandise Inventory		65,000
l.	Cash	78,400
	Credit Card Expense	1,600
	Sales Revenue		80,000
	Cost of goods sold	35,000
	Merchandise Inventory		35,000
m.	Cash	215,000
	Accounts receivables		215,000
n.	Merchandise Inventory	650,000
	Accounts Payable		650,000
o.	Accounts Payable	300,000
	Cash		300,000
p.	Cash	350,000
	Sales revenue		350,000
	Cost of goods sold	175,000
	Merchandise Inventory		175,000
q.	Cash	156,000
	8% Notes receivable		150,000
	Interest Revenue		6,000
r.	8% Notes receivable	265,000
	Sales Revenue		265,000
	Cost of goods sold	130,000
	Merchandise Inventory		130,000
s.	Accounts Payable	500,000
	Cash		500,000
t.	Accounts Receivable	985,000
	Sales revenue		985,000
	Cost of goods sold	395,000
	Merchandise Inventory		395,000
u.	Cash	715,000
	Accounts Receivables		715,000
v.	Salaries Expense	180,000
	Utilities Expense	12,650
	Cash		192,650
w.	Office Supplies	85
	Cash short and over	3
	Cash		88
x.	Dividend	5,000
	Cash		5,000
y.	Franchise Fees	102,250
	Cash		102,250

 

 

Step 3: Posting to the general ledger

Cash
a.	$   500,000	$   50,000	b.
l.	78,400	200,000	c.
m.	215,000	75,000	d.
p.	350,000	45,000	e.
q.	156,000	600	f.
u.	715,000	3,600	g.
		150	i.
		300,000	o.
		500,000	s.
		192,650	v.
		88	w.
		5,000	x.
		102,250	y.
Balance	$   540,062

 

  

capital
	$   500,000	a
Balance	$   500,000

 

 

 

 

franchise
b.	$   50,000
Balance	$   50,000

 

 

Land
c.	$   100,000
Balance	$   100,000

 

 

Building
c.	$   500,000
Balance	$   500,000

 

 

Notes payable
		$ 400,000	c.
Balance		$ 400,000

 

 

Store Fixtures
d.	$   75,000
Balance	$   75,000

 

 

Office Equipment
e.	$   45,000
Balance	$   45,000

 

 

 

Office Supplies
f.	$        600
w.	85
Balance	$   685

 

 

 

Prepaid Insurance
g.	$   3,600
Balance	$   3,600

 

 

Merchandise Inventory
h.	$   425,000	$  86,000	j.
n.	650,000	65,000	k.
		35,000	l.
		175,000	p.
		130,000	r.
		395,000	t.
Balance	$   189,000

 

 

Accounts Payable
o.	$ 300,000	$ 425,000	h.
s.	500,000	650,000	n.
Balance		$ 275,000

 

 

Petty Cash
i.	$   150
Balance	$   150

 

 

Accounts Receivables
j.	$   215,000	$ 215,000	m.
t.	985,000	715,000	u.
Balance	$   270,000

 

 

 

Sales Revenue
		$ 215,000	j.
		150,000	k.
		80,000	l.
		350,000	p.
		265,000	r.
		985,000	t.
Balance		$ 2,045,000

 

 

 

 

 

Cost of goods sold
j.	$    86,000
k.	65,000
l.	35,000
p.	175,000
r.	130,000
t.	395,000
Balance	$  886,000
Notes Receivable
k.	$   150,000	$  150,000	q.
r.	265,000
Balance	$   265,000

 

 

Credit Card Expense
l.	$   1,600
Balance	$   1,600

 

 

Interest Revenue
		$ 6,000	q.
Balance		$ 6,000

 

 

Salaries Expense
v.	$   180,000
Balance	$   180,000

 

 

Utilities Expense
v.	$   12,650
Balance	$   12,650

 

 

Cash Short & Over
w.	$   3
Balance	$   3

 

 

Dividend
x.	$   5,000
Balance	$   5,000

 

 

Franchise Fee
y.	$   102,250
Balance	$   102,250

Step 4: Bank Reconciliation Statement

 

Bank book		Cash Book
Particular	Amount	Particular	Amount
Balance as per bank book	$   490,500	Balance as per cash book	$   540,062
Add: Deposit in arrear	156,000	Add: Interest revenue	1,565
Less: Unrecorded expense		Less: Bank charges
Petty Expense	88	ETF to Bank check	125
Dividend	5,000	Bank Service Charges	2,340
Franchise Fee	102,250
Adjusted balance	$   539,162	Adjusted Balance	$   539,162

 

 

 

Journal Entries for Cash Book Adjustment
Date	Particular	Debit ($)	Credit ($)
z.	Cash	1,565
	Interest revenue		1,565
z.	ETF to Bank    Check	125
	Bank Service Charges	2,340
	Cash		2,465

 

Cash
a.	$   500,000	$   50,000	b.
l.	78,400	200,000	c.
m.	215,000	75,000	d.
p.	350,000	45,000	e.
q.	156,000	600	f.
u.	715,000	3,600	g.
		150	i.
		300,000	o.
		500,000	s.
		192,650	v.
		88	w.
		5,000	x.
		102,250	y.
Balance	$   540,062
z.	1,565	2,465	z.
Balance	$   539,162

 

Step 5: Depreciation Schedule

 

Depreciation Schedule for Building
Year	Depreciable value	Useful Life	Annual Depreciation	Accumulated depreciation	Book Value
1	$ 450,000	30	$ 15,000	$ 15,000	$ 435,000
2	435,000		15,000	30,000	420,000
3	420,000		15,000	45,000	405,000
4	405,000		15,000	60,000	390,000
5	390,000		15,000	75,000	375,000

 

 

 

 

Depreciation Schedule for Store Fixtures
Year	Depreciable value	Useful Life	Annual Depreciation	Accumulated depreciation	Book Value
1	$   75,000	15	$   5,000	$   5,000	$   70,000
2	70,000		5,000	10,000	65,000
3	65,000		5,000	15,000	60,000
4	60,000		5,000	20,000	55,000
5	55,000		5,000	25,000	50,000

 

 

 

 

Depreciation Schedule for Office Equipmet
Year	Depreciable value	Double Declining rate	Annual Depreciation	Accumulated depreciation	Book Value
1	$   40,000	40%	$ 16,000	$ 16,000	$   24,000
2	24,000	40%	9,600	25,600	14,400
3	14,400	40%	5,760	31,360	8,640
4	8,640	40%	3,456	34,816	5,184
5	5,184	40%	2,074	36,890	3,110

 

Step 6: Adjustment Entries

 

Journal Entries for Cash Book Adjustment
Date	Particular	Debit	Credit
Dec 2018
a.	Insurance expense	$  1,800
	Prepaid Insurance		$   1,800
b.	Bad debt expense	13,500
	Allowance for bad debt		13,500
c.	Supplies Expense	475
	Office Supplies		475
d.	Interest receivables	3,525
	Interest revenue		3,525
e.	Depreciation Expense – Building	75,000
	Depreciation Expense – Store Fixtures	25,000
	Depreciation Expense – Office Equipment	36,890
	Accumulated Depreciation – Building		75,000
	Accumulated Depreciation – Store Fixtures		25,000
	Accumulated Depreciation – Office Equipment		36,890
f.	Amortization Expense—Franchise	5,000
	Franchise		5,000
g.	Interest Expense	20,000
	Interest Payable		20,000

 

Working note:- 

Calculation of the bad debt expense

 $\begin{array}{rcl}BadDebtexpense& =& Accountsrecceivable\times Estimateduncollectible\\ & =& \$270,000\times 0.05\\ & =& \$13,500\\ & & \end{array}$

Calculation of the interest revenue

 $\begin{array}{rcl}Interestrevenue& =& Notesreceivable\times Interestrate\times \frac{No.ofmonths}{12}\\ & =& \$265,000\times 0.08\times \frac{2}{12}\\ & =& \$265,000\times 0.0133\\ & =& \$3,525\\ & & \end{array}$

Calculation of the interest expense           

 $\begin{array}{rcl}Interestexpense& =& Notespayable\times Interestrate\times \frac{No.ofmonths}{12}\\ & =& \$400,000\times 0.05\\ & =& \$20,000\\ & & \end{array}$

Calculation of amortization expense

 $\begin{array}{rcl}Amortizationexpense& =& \frac{Frenchisevalue}{EstimatedLife}\\ & =& \frac{\$50,000}{10}\\ & =& \$5,000\\ & & \end{array}$

Step 7: Adjustment Entries posting and Adjusted trail Balance

 

Adjusted Trial Balance
Particular	Unadjusted Balance		Ajustment		Adjusted Balance
	Debit	Credit	Debit	Credit	Debit	Credit
Cash	$ 540,062				$ 540,062
Capital		$ 500,000				$ 500,000
Franchise	50,000			$ 5,000	45,000
Land	100,000				100,000
Building	500,000				500,000
Notes payable		400,000				400,000
Store Fixtures	75,000				75,000
Office Equipment	45,000				45,000
Office Supplies	685			475	210
Prepaid Insurance	3,600			1,800	1,800
Merchandise Inventories	189,000				189,000
Accounts payable		275,000				275,000
Petty Cash	150				150
Accounts receivables	270,000				270,000
Sales revenue		2,045,000				2,045,000
Cost of goods sold	886,000				886,000
Notes receivables	265,000				265,000
Credit Card Expense	1,600				1,600
Interest revenue		6,000		3,525		9,525
Salaries Expense	180,000				180,000
Utilities Expense	12,650				12,650
Cash short and over	3				3
Dividend	5,000				5,000
Franchise fee	102,250				102,250
Insurance Expense			$1,800		1800
Bad debt expense			13,500		13,500
Allowance for bad debt				13,500		13,500
Supplies Expense			475		475
Interest receivables			3,525		3,525
Depreciation Expense – Building			75,000		75,000
Depreciation Expense – Store Fixtures			25,000		25,000
Depreciation Expense – Office Equipment			36,890		36,890
Accumulated Depreciation – Building				75,000		75,000
Accumulated Depreciation – Store Fixtures				25,000		25,000
Accumulated Depreciation – Office Equipment				36,890		36,890
Amortization Expense—Franchise			5,000		5,000
Interest Expense			20,000		20,000
Interest Payable				20,000		20,000
Total	$3,226,000	$3,226,000			$ 3,399,915	$ 3,399,915

Step 8: Income Statement and Balance sheet

 

Income Statement
Particular		Amount
Sales revenue		$ 2,045,000
Less: Cost of goods sold		886,000
Gross profit		1,159,000
Less: Operating Expenses
Credit card Expense	$ 1600
Utilities Expense	12650
Salaries Expense	180,000
Cash short and over	3
Franchisee Fee	102250
Insurance Expense	1800
Bad debt Expense	13500
Supplies Expense	475
Depreciation Expense – Building	75,000
Depreciation Expense – Store Fixtures	25,000
Depreciation Expense – Office Equipment	36,890
Amortization Expense	5000
Interest Expense	2000	456,168
Add: Operating revenue
Interest revenue	9,525	9,525
Net Income		$ 715,357

 

 

Retained Earnings Statement
Particular		Amount
Opening Balance		$ 0
Less: Dividend	$        5,000
Add: Net Income	715,357	710,357
Ending Balance		$ 710,357

 

  

Liabilities and capital	Amount	Assets	Amount
Liabilities:		Current Assets:
Accounts Payable	$275,000	Cash	$    540,062
Interest Payable	20,000	Accounts Receivables  270,000
Notes Payable	400,000	Less: Allowance for bad debts 13,500	256,500
Total Liabilities	$ 695,000	Merchandise Inventory	189,000
		Office Supplies	210
Capital:		Interest receivable	3525
Common Stock	500,000	Prepaid Insurance	1800
Retained earnings	710,357	Petty Cash	150
Total Capital	1,210,357	Total Current Assets	$ 991,247
		Fixed Assets:
		Franchise	$45,000
		Land	100,000
		Building       400,000
		Less: Accumulated Depreciation 75,000	325,000
		Office equipment     45,000
		Less: Accumulated Depreciation  36,890	8,110
		Store Fixtures     75,000
		Less: Accumulated Depreciation  25,000	50,000
		Notes receivable	265,000
		Total Fixed Assets	$ 793,110
Total Liabilities and capital	$ 1,905,357	Total Assets	$1,905,357

 

 

Step 9: Ratios Computationm

Calculation of current ratio

 $\begin{array}{rcl}Currentratio& =& \frac{CurrentAssets}{CurrentLiabilities}\\ & =& \frac{991247}{295000}\\ & =& 3.36\\ & & \end{array}$

Calculation of acid-test ratio

 $\begin{array}{rcl}AcidTestratio& =& \frac{QuickAssets}{CurrentLiabilities}\\ & =& \frac{991247-189000-1800}{295000}\\ & =& 2.71\\ & & \end{array}$ 

Calculation of Cash ratio

 $\begin{array}{rcl}Cashratio& =& \frac{Cash\&Cashequivanets}{CurrentLiabilities}\\ & =& \frac{540,062+150}{295000}\\ & =& 1.8\\ & & \end{array}$

Calculation of Asset turnover 

 $\begin{array}{rcl}AssetTurnover& =& \frac{NetSales}{TotalAssets}\\ & =& \frac{2,045,000}{1,905,357}\\ & =& 1.07\\ & & \end{array}$

Calculation of ROI

 $\begin{array}{rcl}ROI& =& \frac{NetIncome}{TotalAssets}\times 100\\ & =& \frac{715,357}{1,905,357}\times 100\\ & =& 37.55\%\\ & & \end{array}$