Guitar

Universe, Inc., is a popular source of musical instruments for

professional and amateur musicians The company's accountants make

necessary adjusting entries monthly, and they make all closing

entries annually. Guitar Universe is growing rapidly and prides

itself on having no long-term liabilities.

The company has provided the following

trial balance dated December 31, 2007:

Guitar Universe, Inc.

Trial Balance

December 31, 2007

Cash........................................................................$

45,000

Marketable

securities...............................................25,000

Accounts

receivable.................................................125,000

Allowance for doubtful

accounts................................................$

5,000

Merchandise

inventory.............................................250,000

Office

supplies..........................................................1,200

Prepaid

insurance....................................................6,600

Building and

fixtures...............................................

1,791,000

Accumulated

depreciation........................................................

800,000

Land...........................................................................64,800

Accounts

payable........................................................................70,000

Unearned customer

deposits......................................................8,000

Income taxes

payable............................................

....................75,000

Capital

stock........................................................

.......................1,000,000

Retained

earnings.......................................................................

240,200

Unrealized holding gain or

investments.....................................6,000

Sales............................................................................................1,600,000

Cost of goods

sold................................................ 958,000

Bank service

charges............................................ 200

Uncollectible accounts

expense............................9,000

Salary and wages

expense...................................395,000

Office supplies

expense.........................................400

Insurance

expense...............................................

..6,400

Utilities

expense...................................................

..3,600

Depreciation

expense............................................48,000

Income tax

expense................................................75,000

Dr$3,804,200 Cr.3,804,200

Other information pertaining to Guitar

Universe's trial balance is shown below:

1. The

company's most recent bank statement reports a balance of $46,975.

Included with the bank statement was a $2,500 check from Iggy

Bates, a professional musician, charged back to Guitar Universe as

NSF. The bank's monthly service charge was $25. Three checks

written by Guitar Universe to suppliers of merchandise inventory

had not yet cleared the bank for payment as of the statement date.

These checks included: no. 507, $4,000; no. 511, $9,000; and no.

521, $8,000. Deposits made by Guitar Universe of $16,500 had

reached the bank too late for inclusion in the current statement.

The company prepares a bank reconciliation at the end of each

month.

2. Guitar

Universe has a portfolio of marketable securities. The initial

investment in the portfolio was $19,000. As of December 31, the

market value of these securities was $27,500. Management classifies

all short-term investments as "available for

sale."

3. During

December, $6,400 of accounts receivable were written off as

noncollectable A recent aging of the company's accounts receivable

helped management to conclude that an allowance for doubtful

accounts of $8,500 was needed at December 31,

2007.

4. The

company uses a perpetual inventory system. A year-end physical

count revealed that several guitars reported in the inventory

records were missing. The cost of the missing units amounted to

$1,350. This amount is not considered significant relative to the

total cost of inventory on hand.

5. 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 recent payment was made on

November 1, 2007. The cost of this policy was slightly higher than

the cost of coverage for the previous 12 months.

7. Depreciation expense related to the

company's building and fixtures is $5,000 for the month ending

December 31, 2007.

8. Although Guitar Universe carries an

extensive inventory, it is not uncommon for musicians to order

custom guitars made to their exact specifications. Manufacturers do

not allow any sales returns on custom-made guitars. Thus, all

customers must pay in advance for these special orders. The entire

sales amount is collected at the time a custom order is placed, and

it is credited to an account entitled "Unearned Customer Deposits."

As of December 31, $4,800 of these deposits remained unearned.

Assume that the cost of goods sold and the reduction in inventory

associated with all custom orders is recorded when the custom

merchandise is delivered to customers. Thus, the adjusting entry

requires only a decrease to unearned customer deposits and an

increase to sales.

9. Accrued income taxes payable for the

entire year ending December 31, 2007, total $81,000. no income tax

payments are due until early in 2008.

Instructions

a. Prepare a bank reconciliation and make

the necessary journal entries to update the accounting records of

Guitar Universe as of December 31, 2007.

b. Prepare the necessary adjusting entry

to update the company's marketable securities portfolio to its

mark-to-market value.

c. Prepare the adjusting entry at

December 31, 2007, to report the company's accounts receivable at

their net realizable value.

d. Prepare the entry to account for the

guitars missing from the company's inventory at the end of the

year.

e. 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 policies during

Dec.

g. Prepare the adjusting entry to account

for the depreciation of the company's building and fixtures during

December.

h. Prepare the adjusting entry to report

the portion of unearned customer deposits that were earned during

December.

i. Prepare the adjusting entry to account

for income tax expense that accrued during December.