Case Study #1)

Safe and Sound Security, Inc. is a security business with the following account balances as of 1/1/2015.

Cash $ 7,020

Petty cash 250

Accounts receivable 15,000

Allowance for doubtful accounts 3,000

Supplies inventory 500

Prepaid rent 6,000

Merchandise inventory (40 @ $400) 16,000

Equipment 4,000

Van 35,000

Accumulated depreciation 19,100

Sales tax payable 400

Federal income tax payable 750

FICA - Social Security tax payable 1,240

FICA - Medicare tax payable 270

Warranty payable 850

Unemployment tax payable 300

Interest payable 600

Note payable - State Bank 10,000

Common stock 20,000

Retained earnings 27,260

Note: although all accounts are shown with a positive balance, they have the normal debit or credit balance that

accounts in their account type have (e.g. - assets have a debit balance, liabilities have a credit balance).

During 2015, Safe and Sound Security, Inc. experienced the following transactions:

1) Paid the sales tax payable from 2014.

2) Paid the balance of all the payroll liabilities due for 2014.

3) On January 1, 2015, purchased land and a building for $100,000. The building was appraised at $75,000

and the land at $25,000. Safe and Sound paid $10,000 cash and financed the balance. The balance was

financed with a 10-year installment note. The note had an interest rate of 5% and annual payments of

$11,655 (including both principal and interest) due on the last day of the year.

4) Purchased $1,000 of Supplies inventory.

5) Purchased 50 alarm systems at a cost of $375. Cash was paid for the purchase.

6) After numerous attempts to collect from customers, wrote off $2,000 of uncollectible accounts

receivable.

7) Sold 80 alarm systems for $500 each plus sales tax of 6 percent. All sales were on account. (Be sure to

compute cost of goods sold using the FIFO cost flow method).

8) Billed $100,000 of monitoring services for the year. Credit card sales amounted to $36,000, and the credit

card company charged a 3% fee. The remaining $64,000 were sales on account. Sales tax is not charged

on this service. Net credit card sales are posted to accounts receivable until cash is received from the

credit card company.

9) Replenished the petty cash fund at June 30. The fund had $50 cash and receipts of $125 for yard mowing

and $75 for office supplies expense.

10) Collected the amount due from the credit card company.

11) Paid the sales tax collected on $20,000 of the alarm sales.

12) Collected $115,000 of accounts receivable during the year.

13) Paid installers and other employees a total of $60,000 for salaries for the year. Use the current Social

Security tax and Medicare rates of 6.2% and 1.45%, respectively. Federal income taxes withheld

amounted to $6,000. The net amount of salaries was paid in cash. (Disregard unemployment taxes in this

entry).

14) Paid $1,000 in warranty repairs during the year for systems installed in the previous year. Prior year

warranty expense was estimated at 2% of sales.

15) On September 1, paid in full the note payable owed to State Bank plus $1,100 of interest. All interest

payable at January 1 was owed to State Bank relating to this note payable.

16) Paid $9,000 of advertising expense during the year.

17) Paid payroll liabilities, both the amounts withheld from the salaries plus the employer share of Social

Security tax and Medicare tax, on $50,000 of the salaries plus $5,000 of the federal income tax that was

withheld. (Disregard unemployment taxes in this entry).

18) Payment was made on the building note payable.

Adjustments:

19) There was $500 of supplies inventory on hand at the end of the year.

20) Recognized the expired rent for the office building for the year. Twenty-four months of rent was

originally paid at 1/1/2014.

21) Recognized the uncollectible accounts expense for the year using the allowance method. Safe and Sound

now estimates that 2.0% of sales on account will not be collected.

22) Recognized depreciation expense on the equipment, van, and building. The equipment has a five-year

life, the van has a four-year life, and the building has a 40-year life. The company uses straight-line

method for all fixed assets. The equipment and van were purchased in 2013 and had a full year

depreciation in both 2013 and 2014. Assume no residual value on any of the assets.

Required:

1) Record the above transactions. Round all amounts to the nearest dollar (do not include cents). Use the

transaction/adjustment numbers above to identify each of the transactions in your general journal. Your

general journal should be set up as follows:

Event # Account Title Debit Credit

2) Post the transactions to the T-accounts. Use the transaction/adjustment numbers above to identify each

of the transaction in your T-accounts. Be sure to include all calculations (these can be shown on a

separate tab in excel) for any amounts requiring additional calculations (such as interest expense on

building purchase notes payable and cost of goods sold).

3) Prepare a trial balance.

4) Prepare an income statement, statement of stockholders equity, and balance sheet. You must format

your financial statements as demonstrated in chapter 1 exhibits of the text.

Hint: The following is a listing of all the accounts that you will use in the case study. They are listed in

alphabetical order. You must list them in the correct order (not alphabetically) for your trial balance.

Accounts payable

Accounts receivable

Accumulated depreciation

Advertising expense

Alarm sales

Allowance for doubtful accounts

Building

Cash

Common stock

Cost of goods sold

Credit card expense

Depreciation expense

Equipment

Federal income tax payable

FICA - Medicare payable

FICA - Social Security payable

Interest expense

Interest payable

Land

Maintenance expense

Merchandise inventory

Monitoring service revenue

Note payable - State Bank

Notes payable - building

Office supplies expense

Payroll tax expense

Petty cash

Prepaid rent

Rent expense

Retained earnings

Salaries expense

Sales tax payable

Supplies expense

Supplies inventory

Uncollectible accounts expense

Van

Warranty expense

Warranty payable