C3-77(Learning Objectives 3, 4: Analyze basic financial statement information)

Note: This case is part of The Cheesecake Factory serial case contained in every chapter in this textbook.

The Cheesecake Factory Incorporated (NASDAQ: CAKE) is publicly held and uses U.S. Generally Accepted Accounting Principles (GAAP) to prepare its financial statements. Its fiscal year-end is the 52- or 53-week period ending on the Tuesday closest to December 31. In 2016, its fiscal year end was January 3, 2017.

At fiscal year-end, Cheesecake Factory makes several adjusting entries so that its assets, liabilities, income and expenses are recorded properly and in the correct time period. Here is a partial list of some accounts that require adjusting entries:

Prepaid Expenses: This current asset could include the cost of supplies used at the restaurants, including napkins, straws, tablecloths, dishes, flatware, and a variety of other items needed to stock its restaurants. The balance of these prepaid expense items at December 29, 2015, was $13,378. A physical count of the prepaid expense items performed on January 3, 2017, revealed that $12,580 of prepaid expense items remained on hand. Assume that purchases of napkins, straws, tablecloths, dishes, flatware, and other items during 2016 totaled $63,500.

Prepaid Rent: The Cheesecake Factory rents all of its locations. Some of its leases require payment of the lease in advance. At December 29, 2015, Cheesecake Factorys prepaid rent balance was $5,236. Assume that it paid a total of $47,700 in prepaid rent throughout 2016. An analysis of the prepaid rent lease agreements at the end of 2016 reveals that Cheesecake Factory had $16,072 in prepaid rent as of January 3, 2017.

Gift Cards: The Cheesecake Factory sells gift cards to customers. As of December 29, 2015, it had $153,629 in outstanding, unredeemed gift cards. Assume that during 2016, it sold $379,000 in gift cards. (When Cheesecake Factory sells a gift card, it increases (debit) Cash and increases (credit) Gift Cards, a current liability.) As of January 3, 2017, Cheesecake Factory had $123,619 in unredeemed gift cards.

Salaries and Wages Payable: The balance of Salaries and Wages Payable at December 29, 2015, was $31,570; this balance represented salaries and wages earned by Cheesecake Factory employees in 2015 that were then paid in January 2016. When Cheesecake Factory paid the $31,570 in January 2016, it reduced (debited) Salaries and Wages Payable and reduced (credited) Cash. As of January 3, 2017, Cheesecake Factory employees had earned salaries and wages of $39,401 that would be paid in early January 2017.

Requirements

1. Create the adjusting journal entry necessary at January 3, 2017, for:

a. Prepaid Expenses

b. Prepaid Rent

c. Gift Cards

d. Salaries and Wages Payable

2. If these adjusting journal entries had not been made for 2016, what would have been the impact on Cheesecake Factorys operating income?