Comprehensive Review Problem: Harriets Hats, Inc.

Harriets Hats is a fictional company. The following information includes the balance sheet as of December 31, 2014, and the details of the transactions that occurred during 2015.

Background: Harriets Hats is a hat retailer (in other words, Harriets buys hats from a hat manufacturer and then sells them in their stores). Transactions for 2015 are representative of such a companys business activities. HINT: Read through the entire assignment at least twice before beginning to do any work. This will help you familiarize yourself with all of the important facts.

Required: 1. Prepare the balance sheet, retained earnings statement, and income statement for Harriets Hats, Inc. for the year ended December 31, 2015.

Transactions for 2015:

1. Sales and Accounts Receivable a. During the year, each hat had a sales price of $30. All sales were made on account. b. Cash collections on account amounted to $41,000. c. During the year, Harriets identified $350 of receivables as being uncollectible and wrote them off. d. Harriets follows a percentage-of-receivables approach to estimate its accounts receivable that will become uncollectible. As of the end of 2015, Harriets estimates that 12% of its receivables will be uncollectible.

2. Inventory a. Harriets began 2015 with 500 hats which had a cost of $8 each. Employees physically counted 525 hats remaining in the warehouse at the end of 2015. Harriets uses a periodic LIFO inventory system to cost their inventory. The following purchases (all on account) were made during 2015: (1) January 15th 405 hats @ $10.00 each (2) March 23rd 310 hats @ 12.00 each (3) July 2nd 525 hats @ $14.00 each (4) October 31st 430 hats @ 15 each b. During 2015, Harriets made cash payments to inventory suppliers totaling $21,000.

3. Property, Plant and Equipment a. Harriets uses straight-line depreciation for all of its store fixtures and office equipment. b. Below is a schedule of the store fixtures and office equipment Harriets had in place at the end of 2014.

Fixtures and Equipment (as of December 31, 2014)

ID#	Historical Cost	Est. Useful Life	Est. Salvage Value	Date Acquired
1256	$12,000	10 Years	$1,200	1/1/2009
1876	$1,700	5 Years	$300	1/1/2011
4299	$23,000	5 Years	$1,000	1/1/2014

c. On January 1, new store fixtures were purchased for $3,000 in cash. Harriets expects the fixtures to have a 5 year useful life and a $500 salvage value. d. On July 1, office equipment (ID#1876) was sold for $520.

4. Debt a. On September 1, 2015, Harriets paid-off the note payable that was outstanding at the beginning of the period. The note had an 8% interest rate, had been issued on September 1, 2014, and required semiannual interest payments on February 28 and August 31. b. Also on September 1, 2015, Harriets borrowed $3,500 on a new note payable. The new note carries a 6% interest rate with similar payment terms as the note Harriets just paid-off.

5. Operations a. Harriets made two rent payments of $1,650 during 2015 (on March 1 and September 1). The payments were for rent on the store building and were prepaid for six months each. The balance in the prepaid account at the end of 2015 represents the rent for January and February 2016. b. Cash paid out during 2015 for wages totaled $12,200. Records indicate that salaries for the last week of December amounted to $300 and would be paid at the end of the first week in January (a two-week pay period). c. Other expenses (paid in cash) totaled $2,102.

6. Income Taxes a. In March of 2015, Harriets paid their 2014 income taxes. Harriets has a 30% income tax rate for both 2014 and 2015.

7. Common Stock a. Dividends of $3,300 were declared and paid during 2015. b. New common stock was issued for $12,000 during 2015.

Harriet's Hat's Inc. - Balance Sheet - December 31, 2014

Assets
Cash		$15,000
Accounts Recv.	$5,000
Less: Allowance for Bad Debts	($500)
Net Accounts Recv.		$4,500
Prepaid Rent		$500
Inventory		$4,000
Total Current Assets		$24,000
Property, Plant & Equipment	$36,700
Less: Accumulated Depreciation	($12,000)
Net Property, Plant & Equipment		$24,700
Total Assets		$48,700
Liabilities & Owner's Equity
Accounts Payable		$2,500
Wages Payable		$170
Interest Payable		$64
Income Taxes Payable		$900
Notes Payable		$2,400
Total Current Liabilities		$6,034
Common Stock		$20,000
Retained Earnings		$22,666
Total Liabilities & Owner's Equity		$48,700

Prepare the Income Statement, Statement of Retained Earnings, and Balance Sheet below for Harriets Hats, Inc. for the year ended December 31, 2015.

Income Statement
For the Year Ended December 31, 2015
Sales
Less: Cost of Goods Sold
Gross Profit
Operating Expenses
Rent Expense
Interest Expense
Bad Debts Expense
Depreciation Expense
Wages Expense
Other Operating Expenses
Total Operating Expenses
Other gains and losses
Gain on sale of equipment
Income before income taxes
Income taxes
Net Income

Statement of Retained Earnings
For the Year Ended December 31, 2015
Beginning Retained Earnings
Plus: Net Income
Less: Dividends
Ending Retained Earnings

Balance Sheet
As of December 31, 2015
Assets
Cash
Accounts Receivable
Less: Allowance for Doubtful Accounts
Net Accounts Receivable
Prepaid Rent
Inventory
Total Current Assets
Property, Plant, and Equipment
Less: Accumulated Depreciation
Net Property, Plant, and Equipment
Total Assets
Liabilities and Owners Equity
Accounts Payable
Wages Payable
Interest Payable
Income Taxes Payable
Notes Payable
Total Current Liabilities
Common Stock
Retained Earnings
Total Liabilities and Owners Equity