Financial and Managerial Accounting (18th edition) - Comprehensive Problem 2: Music-is-us, inc.

COMPREHENSIVE PROBLEM 2 Music-Is-Us, Inc. Masic-Is-Us, Inc, is clams. The company's accountants make adjusting eetries monthly and they make all closing Jabilities Gries annually. The company is growing rapidly and prides itself on having no long-term The company has provided the following trial balance dated December 31. 2018 supplier of masical instruments for peofessional and amateur musi- MUSIC-IS-US, INC. TRIAL BALANCE DECEMBER 31, 2018 Cash... nna. 45.000 Marketable securities 25,000 Accounts recelvebl. Alowance for doucful accounts 125.000 5,000 Merchandise inventory 250,000 Office supplies 1,200 Prepaid insurance Building and fixtures... Accumulated depreciation 6,600 1,791,000 800000 Land. - 64.800 Accounts payable Uneerned customer deposits 70,000 8.000 Income taxes payable 75.000 Cepital stock 1,000.000 Retained earnings 240,200 Unrealized holding gain on imvestments Sales.. 6,000 1,600,000 Cost of goods sold 958,000- Bank service charges 200 Uncollectible accounts expense.. 9.000 Salery and wages expense Office supplies expense. 395,000 400 Insurance expense 6,400 Utities expense 3,600 48,000 Depreciation expense 75,000 Income tax expense $3.804,200 $3.804.200 Other information pertaining to the company's trial balance is provided as follows I. The most recent bank statement reports a balance of $46,975, Included with the bank statement was a $2.500 check from Iggy Smarts, a professional musician, charged back to Music-Is-Us as NSE The hank's monthly service charge was $25. Three checks writ- ten by Music-Is-Us to suppliers of merchandise inventory had not yet cleared the bank for payment as of the statement date. These checks included: no. 508, 55,500; no. 511. 387 Using the fia average an ac she company of its average $7.500, and no 521, S8,000 Deposits of $16,500 reached the bank too lane for incwi in the curnene bank statemene. The company prepares a bank reconciliation at the end d cach month. 2 Music-Is-Us has a portfolio of marketable securities that originally cost $1900 As December 31, the market value of these securities was $27,500, All short-term ive Using the fis on average as company 's e of its averan ments are classified as "available for sale." 3. During December, S6,400 of accounts receivable were written off as uncollecthle. A recent aging of the company's accounts receivable led management to conclode tht Using the fin takes to com allowance for doubtful accounts of $8,500 is needed at December 31, 2018 4. The company uses a perpetual inventory system. A year-end physical count revealed th several guitars reported in the inventory records were missing. The cost of the miing units amounted to 51.350. This amout is not considered significant relative to te cost of inventory on hand S. At December 31, approximately $900 in office supplies remained on hand 6. The company pays for its insurance policies 12 months in advance, Its most tecent pey ment was made on November 1, 2018. The cost of this policy was slightly higher thin te cost of coverage 7. Depreciation expense related to the company's building and fixtures is $5,000 for the month ending December 31, 2018. 8. Although Music-Is-Us carries an extensive inventory, it is not uncommon for experinced musicians to order custom guitars made to their exact specifications. Manufacturendo not allow any sales returns of custom-made guitars. The entire sales amount is colleced at the time a custom order is placed, and is credited to an acpount entitled "Uncanel Customer Deposits." As of December 31, $4,800 of these deposits remained unfiled because the special-onder guitars have not been received from the manufacturer. The e of goods sold and the reduction in inventory associated with all custom onders is moeed when the custom merchandise is delivered to customers. At that time, the aditing ey requires only a decrease to unearned customer deposits and an increase in sales 9. Accrued income taxes payable for the entire year ending December 31, 2018 ed $81.000. No income tax payments are due until early in 2019 company 's o Comment br creditor the previous 12 months Instructions Prepare a bank reconciliation and make the journal entries to update the accounting rmcondsd Music-Is-Us as of December 31, 2018 b. Prepare the adjusting entry to update the company's marketable securities portiolio to i mark-to-market value. c. Prepare the adjusting entry at December 31, 2018, to report the company's accounts able at their net realizable value (i.e., total amount receivable, less estimated allowance i uncollectible accounts). d. Prepare the entry to account for the guitars missing from the company's inventory at the of the year Prepare the adjusting entry to account for the office supplies used during December f. Prepare the adjusting entry to account for the expiration of the company's insurance policie during December g Prepare the adjusting entry to account for the depreciation of the compuny's building fixtures during December h. Prepare the adjusting entry to report the portion of unearned customer deposits that wet earned during December i Prepare the adjusting entry to account for income tax expense that accrued during December jOn the basis of the adjustments made to the accounting records in parts a through & prepae the company's adjusted trial balance at December 31, 2018. k Using the adjusted trial balance prepared in part j. prepare an annual income statement, sta ment of retained earnings, and a balance sheet dated December 31, 2018. L Using the financial statements prepared in part k, determine approximately how many days on average an account receivable remains outstanding before it is collected, You may assume that the company's ending accounts receivable balance on December 31 is a close approximation of its average accounts receivable balance throughout the year. Using the financial statements prepared in part k, determine approximately how many days on average an item of merchandise remains in stock before it is sold. You may assume that the company's ending merchandise inventory balance on December 31 is a close approximation of its average merchandise inventory balance throughout the year. Using the financial statements prepared in part k, determine approximately how many days it takes to convert the company's inventory into cash. In other words, what is the length of the m. company's operating cycle? Comment briefly upon the company's financial condition from the perspective of a short-term creditor ONTE