Music is Us., 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. The company is growing rapidly and prides itself on having no long-term liabilities.

The company has provided the following trial balance dated December 31, 2015:

Music is Us, Inc.

Trial Balance

December 31, 2015

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 Music is Us' 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 Smarts, a professional musician, charged back to Music is Us as NSF. The bank's monthly service charge was $25. Three checks written 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, $5,500; no. 511, $7,500; and no. 521, $8,000. Deposits 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. Music is Us 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 uncollectable 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, 2015.

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, 2015. 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, 2015.

8. Although Music is Us 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 unfilled because the special order guitars have not been received from the manufacturer. The cost of goods sold and the reduction in inventory associated with all custom orders is recorded when the custom merchandise is delivered to the customer. At that time, the adjusting entry 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, 2015, total $81,000. no income tax payments are due until early in 2016.

Instructions

Use Excel*

a. Prepare a bank reconciliation and make the necessary journal entries to update the accounting records of Music is Us as of December 31, 2015.

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, 2015, 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.

j. On the basis of adjustments made to the accounting records in parts a through i above, prepare the companies adjusted trail balance at December 31, 2015.

k. Using the adjusted trial balance prepared in part j above, prepare an annual income statement, statement of retained earnings, and a balance sheet dated December 31, 2015.

l. Using the financial statements prepared in part k above, determine approx. how many days on average an account receivable remains outstanding before it is collected. You may assume the company's ending accounts receivable balance on December 31 is a close approximation of its average accounts receivable balance throughout the year.

m. 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.

n. 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 company's operating cycle?

o. Comment briefly upon the company's financial condition from the perspective of a short-term creditor.

** Please answer using the following Excel template

a.

MUSIC-IS-US

Bank Reconciliation

December 31, 2015

Balance per bank statement, December 31, 2015

Add: Deposits in transit not recorded by bank

Deduct: Outstanding checks

No. 508

No. 511

No. 521

Adjusted cash balance

Balance per depositor's records, December 31, 2015

Deduct:

Bank service charge

NSF check from Iggy Smarts

Adjusted cash balance (as above)

General Journal

a.

Bank Service Charges

Accounts Receivable

Cash

To record bank service charges for December and

the NSF check received from Iggy Bates.

b.

Marketable Securities

Unrealized Holding Gain on Investments

To increase reported value of marketable

securities from $25,000 to $27,500. (Note: the

portfolio was previously increased from $19,000

to $25,000.)

c.

Uncollectible Accounts Expense

Allowance for Doubtful Accounts

To record uncollectible accounts expense for

December.

d.

Cost of Goods Sold

Inventory

To record inventory shrinkage of missing guitars.

e.

Office Supplies Expense

Office Supplies

To record office supplies used in December.

General Journal
f.		Insurance Expense
			Prepaid Insurance
		To record insurance policies expired during
		December. (Note: One month of the twelve-month
		policy had already been accounted for in
		November).
g.		Depreciation Expense
			Accumulated Depreciation
		To record depreciation expense for December.
h.		Unearned Customer Deposits
			Sales
		To record revenue earned from advance special
		orders.
i.		Income Tax Expense
			Income Tax Payable
		To account for accrued income taxes in
		December.

j.

MUSIC-IS-US

Adjusted Trial Balance

As of December 31, 2015

Cash

Marketable securities

Accounts receivable

Allowance for doubtful accounts

Merchandise inventory

Office supplies

Prepaid insurance

Building and fixtures

Accumulated depreciation

Land

Accounts payable

Unearned customer deposits

Income taxes payable

Capital stock

Retained earnings

Unrealized holding gain on investments

Sales

Cost of goods sold

Bank service charges

Uncollectible accounts expense

Salary and wages expense

Office supplies expense

Insurance expense

Utilities expense

Depreciation expense

Income tax expense

k.

MUSIC-IS-US

Income Statement

For the Year Ended December 31, 2015

Sales

Cost of goods sold

Gross profit

Bank service charges

Uncollectible accounts expense

Salary and wages expense

Office supplies expense

Insurance expense

Utilities expense

Depreciation expense

Income before income tax

Income taxes expense

Net income

MUSIC-IS-US

Statement of Retained Earnings

For the Year Ending December 31, 2015

Retained earnings, January 1, 2015

Add: Net income (from income statement)

Ending Retained earnings, December 31, 2015

k. (continued)

MUSIC-IS-US

Balance Sheet

As of December 31, 2015

Current assets:

Cash

Marketable securities

Accounts receivable

Less: Allowance for doubtful accounts

Merchandise inventory

Office supplies

Prepaid insurance

Total current assets

Plant and equipment:

Building and fixtures

Less: Accumulated depreciation

Land

Total plant and equipment

Total assets

Liabilities

Current liabilities:

Accounts payable

Unearned customer deposits

Income taxes payable

Total current liabilities

Long-term liabilities:

Total liabilities

Stockholders' Equity

Capital stock

Retained earnings (from statement of retained earnings)

Unrealized holding gain on investments

Total stockholders' equity

Total Liabilities and Stockholders' Equity

l.	Step 1:	Compute accounts receivable turnover (sales average accounts receivable)
	Step 2:	Compute accounts receivable days (365 accounts receivable turnover)
m.	Step 1:	Compute inventory turnover (cost of goods sold average merchandise inventory)
	Step 2:	Compute inventory days (365 inventory turnover)
n.
	Accounts receivable days (from part l above)
	Add: inventory days (from part m above)
	Operating cycle
o.