C o m p r e h e n s i v e P r o b l e m C h a p t e r s 6 8 Fray Enterprises is a small business that purchases electronic personal information managers (PIM) from manufacturers and sells them to consumers. Th ese PIMs keep track of appointments, phone numbers, to-do lists, and the like. Fray conducts business via the Internet and, at this point, carries only one model of PIM, the ZL-420. Fray provides the following trial balance as of January 1, 2011.

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,200 Accounts Receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,800 Allowance for Bad Debts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 804 Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,650 Prepaid Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1,100 Offi ce Supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 900 Accounts Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,100 Wages Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,800 Taxes Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,400 Common Stock (10,000 shares). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,000 Retained Earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,546 Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$69,650 $69,650

Fray uses the periodic FIFO inventory method in accounting for its inventory. Th e inventory of ZL-420 consists of the following inventory layers: Layer Units Price per Unit Total Price 1 (oldest purchase) 50 $120 $ 6,000 2 80 130 10,400 3 70 135 9,450 4 (most recent purchase) 40 145 5,800 Total 240 $31,650 Fray provides the following additional relevant information: Th e company uses the percentage of receivables method in estimating bad debts; 2% of the ending receivables balance is deemed to be uncollectible. Fray conducts an actual physical count of its inventory and offi ce supplies at the end of each month. Fray rents its warehouse, offi ce facilities, and computer equipment. Rent on the computer equipment is paid at the beginning of each month. Rent on the warehouse and offi ce space is paid on the 15th of each month. Payroll is paid on the 5th and the 20th (pay periods end on the 15th and the last day of the month). Taxes Payable represents payroll taxes that are due by the 5th of the following month. All sales and all inventory purchases are on account.

The following transactions occurred for Fray during January of 2011: Jan. 1 Paid rent on the computer equipment, $1,400. 5 Recorded sales for the week, 130 units at $210 per unit. (Th e company uses a periodic inventory system.) 5 Paid wages payable and taxes payable from the prior period. 5 Collected $19,000 from customers on account during the week. 8 Purchased offi ce supplies for cash, $300. 10 Received 70 ZL-420s from the manufacturer at a cost of $145 per unit. 11 Paid accounts payable, $16,900. 12 Collected $22,000 from customers on account during the week. 12 Recorded sales for the week, 120 units at $210 per unit. 15 Paid monthly rent for the offi ce and warehouse, $2,200. 15 Received 130 ZL-420s from the manufacturer at a cost of $150 per unit. 18 A customer returned a ZL-420 and requested a refund. A check was immediately mailed to the customer in the amount of $210. 19 Collected $30,000 from customers on account during the week. 19 Recorded sales for the week, 140 units at $210 per unit. 20 Paid the semimonthly payroll for the pay period ending on January 15. Salaries and wages total $4,800 and payroll taxes were as follows: FICA taxes payable, employee, $367; FICA taxes payable, employer, $367; state withholding taxes payable, $310; federal withholding taxes payable, $780; federal unemployment taxes payable, $60; state unemployment taxes payable, $180. 22 Received notice that a customer owing Fray $630 had fi led bankruptcy and would be unable to pay. 23 Paid the taxes payable from the payroll on January 20. 24 Received 180 ZL-420s from the manufacturer at a cost of $150 per unit. 25 Purchased offi ce supplies for cash, $480. 25 Paid accounts payable, $43,000. 26 Collected $30,500 from customers on account during the week. 26 Recorded sales for the week, 135 units at $220 per unit. 29 Customers returned 7 ZL-420s and requested refunds. Checks were immediately mailed to each customer in the amount of $210 each. 30 Received 140 ZL-420s from the manufacturer at a cost of $145 per unit. 31 Collected $29,900 from customers on account. 31 Recorded sales for the partial week, 70 units at $220 per unit. 31 Accrued the semimonthly payroll for the pay period ending on January 31. Salaries and wages total $5,000 and payroll taxes were as follows: FICA taxes payable, employee, $382; FICA taxes payable, employer, $382; state withholding taxes payable, $230; federal withholding taxes payable, $810; federal unemployment taxes payable, $65; state unemployment taxes payable, $190.

Required: 1. Provide the required journal entries to record each of the above events. 2. Make the adjusting entries necessary (1) to record bad debt expense for the period and (2) to adjust inventory and offi ce supplies. A count of inventory and offi ce supplies revealed 165 ZL-420s on hand and supplies valued at $1,000. 3. Prepare a trial balance as of January 31, 2011. 4. Prepare an income statement and a balance sheet for Fray Enterprises. 5. Compute Frays number of days sales in inventory, number of days sales in accounts receivable, and number of days purchases in accounts payable ratios. What can you conclude about the companys liquidity position based on this analysis