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Comprehensive Review Problem: Harriet's Hats, Inc. Harriet's Hats is a fictional company. The following information includes the balance sheet as of December 31, 2013, and the details of the transactions that occurred during 2014. Background: Harriet's Hats is a hat retailer (in other words, Harriet's buys hats from a hat manufacturer and then sells them in their stores). Transactions for 2014 are representative of such a company's 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. 2. Using the T-accounts provided, record the transactions that occurred during 2014. Prepare the balance sheet, retained earnings statement, and income statement for Harriet's Hats, Inc. for the year ended December 31, 2014. Transactions for 2014: 1. Sales and Accounts Receivable a. b. c. d. During 2014, each hat had a sales price of $30. All sales were made on account. Cash collections on account amounted to $41,000. During 2014, Harriet's identified $350 of receivables as being uncollectible and wrote them off. Harriet's follows a percentage-of-receivables approach to estimate its accounts receivable that will become uncollectible. As of the end of 2014, Harriet's estimates that 12% of its receivables will be uncollectible. 2. Inventory a. Harriet's began 2014 with 500 hats which had a cost of $8 each. Employees physically counted 525 hats remaining in the warehouse at the end of 2014. Harriet's uses a periodic LIFO inventory system to cost their inventory. The following purchases (all on account) were made during 2014: (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 2014, Harriet's made cash payments to inventory suppliers totaling $21,000. 3. Property, Plant and Equipment a. Harriet's 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 Harriet's had in place at the end of 2013. ID # 1256 1876 4299 c. FIXTURES AND EQUIPMENT (as of December 31, 2013) Historical Cost Estimated Estimated Salvage Useful Life Value $12,000 10 years $1,200 $1,700 5 years $300 $23,000 5 years $1,000 Date acquired Jan. 1, 2008 Jan. 1, 2010 Jan. 1, 2013 On January 1, new store fixtures were purchased for $3,000 in cash. Harriet's 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, 2014, Harriet's 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, 2013, and required semiannual interest payments on February 28 and August 31. b. Also on September 1, 2014, Harriet's borrowed $3,500 on a new note payable. The new note carries a 6% interest rate with similar payment terms as the note Harriet's just paid-off. 5. Operations a. Harriet's made two rent payments of $1,650 during 2014 (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 2014 represents the rent for January and February 2015. b. Cash paid out during 2014 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 2014, Harriet's paid their 2013 income taxes. Harriet's has a 30% income tax rate for both 2013 and 2014. 7. Common Stock a. Dividends of $3,300 were declared and paid during 2014. b. New common stock was issued for $12,000 during 2014. Harriet's Hats, Inc. Balance Sheet December 31, 2013 Assets Cash Accounts Receivable Less: Allowance for Bad Debts 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 Owner's Equity Accounts Payable Wages Payable Interest Payable Income Taxes Payable Notes Payable Total Current Liabilities Common Stock Retained Earnings Total Liabilities and Owner's Equity $15,000 5,000 (500) 4,500 500 4,000 24,000 36,700 (13,600) 23,100 $47,100 $2,500 170 64 900 2,400 6,034 20,000 21,066 $47,100