CHAPTER 5

Cookie Creations

(

Note:

This is a continuation of the Cookie Creations from Chapters 1 through 4. From the in-

formation gathered in the previous chapters, follow the instructions below using the general

ledger accounts you have already prepared.)

CC5

Because Natalie has had such a successful first few months, she is considering other

opportunities to develop her business. One opportunity is the sale of fine European mixers.

The owner of Kzinski Supply Co. has approached Natalie to become the exclusive distributor

of these fine mixers in her state. The current cost of a mixer is approximately $575, and

Natalie would sell each one for $1,150. Natalie comes to you for advice on how to account

for these mixers. Each appliance has a serial number and can be easily identified.

Natalie asks you the following questions.

1.

Would you consider these mixers to be inventory? Or should they be classified as

supplies or equipment?

2.

Ive learned a little about keeping track of inventory using both the perpetual and the

periodic systems of accounting for inventory. Which system do you think is better? Which

one would you recommend for the type of inventory that I want to sell?

3.

How often do I need to count inventory if I maintain it using the perpetual system? Do I

need to count inventory at all?

In the end, Natalie decides to use the perpetual inventory system. The following

transactions happen during the month of January.

Jan.

4

Bought five deluxe mixers on account from Kzinski Supply Co. for $2,875, FOB

shipping point, terms n/30.

6

Paid $100 freight on the January 4 purchase.

7

Returned one of the mixers to Kzinski because it was damaged during shipping.

Kzinski issues Cookie Creations credit for the cost of mixer plus $20 for the cost of

freight that was paid on January 6 for one mixer.

8

Collected $375 of the accounts receivable from December 2013.

12

Three deluxe mixers are sold on account for $3,450, FOB destination, terns n/30.

(Cost of goods sold is $595 per mixer.)

14

Paid the $75 of delivery charges for the three mixers that were sold on January

12.

14

Bought four deluxe mixers on account from Kzinski Supply Co. for $2,300, FOB

shipping point, terms n/30.

17

Natalie is concerned that there is not enough cash available to pay for all of the

mixers purchased. She invests an additional $1,000 cash in Cookie Creations.

18

Paid $80 freight on the January 14 purchase.

20

Sold two deluxe mixers for $2,300 cash. (Cost of goods sold is $595 per mixer.)

28

Natalie issued a check to her assistant for all the help the assistant has given her

during the month. Her assistant worked 20 hours in January and is also paid the

$56 owed at December 31, 2019. (Natalies assistant earns $8 an hour.)

28

Collected the amounts due from customers for the January 12 transaction.

30

Paid a $145 cellphone bill ($75 for the December 2019 account payable and $70

for the month of January). (Recall that the cellphone is used only for business

purposes.)

31

Paid Kzinski all amounts due.

31

Natalie withdrew $750 cash for personal use.

As of January 31, the following adjusting entry data is available.

1.

A count of baking supplies reveals that none were used in January.

2.

Another months worth of depreciation needs to be recorded on the $1,200 of baking

equipment bought in November. (Recall that the baking equipment has a useful life of 5

years or 60 months and no salvage value.)

3.

An additional months worth of interest on her grandmothers $2,000 loan needs to be

accrued. (The interest rate is 6%.)

4.

During the month, $110 of insurance has expired.

5.

An analysis of the unearned revenue account reveals that Natalie has not had time to

teach any of these lessons this month because she has been so busy selling mixers. As

a result, there is no change to the unearned revenue account. Natalie hopes to complete

the remaining lessons in February.

6.

An inventory count of mixers at the end of January reveals that Natalie has three mixers

remaining.

Instructions

(a)

Answer Natalies questions.

(b)

Prepare and post the January 2020 transactions.

(c)

Prepare a trial balance.

(d)

Prepare and post the adjusting journal entries required.

(e)

Prepare an adjusted trial balance.

(f)

Prepare a multiple-step income statement for the month ended January 31, 20