Question
On January 1, 2018, the general ledger of Freedom Fireworks includes the following account balances: Accounts Debit Credit Cash $ 11,800 Accounts Receivable 35,200 Inventory
On January 1, 2018, the general ledger of Freedom Fireworks includes the following account balances:
Accounts | Debit | Credit | ||||
Cash | $ | 11,800 | ||||
Accounts Receivable | 35,200 | |||||
Inventory | 152,600 | |||||
Land | 73,300 | |||||
Buildings | 126,000 | |||||
Allowance for Uncollectible Accounts | $ | 2,400 | ||||
Accumulated Depreciation | 10,200 | |||||
Accounts Payable | 24,300 | |||||
Common Stock | 206,000 | |||||
Retained Earnings | 156,000 | |||||
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Totals | $ | 398,900 | $ | 398,900 | ||
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During January 2018, the following transactions occur: January 1 Borrow $106,000 from Captive Credit Corporation. The installment note bears interest at 6% annually and matures in 5 years. Payments of $2,040 are required at the end of each month for 60 months. January 4 Receive $31,600 from customers on accounts receivable. January 10 Pay cash on accounts payable, $17,000. January 15 Pay cash for salaries, $29,500. January 30 Firework sales for the month total $196,200. Sales include $65,600 for cash and $130,600 on account. The cost of the units sold is $115,500. January 31 Pay the first monthly installment of $2,040 related to the $106,000 borrowed on January 1. Round your interest calculation to the nearest dollar.
1. Record each of the transactions listed above. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)
a. Depreciation on the building for the month of January is calculated using the straight-line method. At the time the equipment was purchased, the company estimated a service life of 10 years and a residual value of $24,600. b. At the end of January, $3,600 of accounts receivable are past due, and the company estimates that 50% of these accounts will not be collected. Of the remaining accounts receivable, the company estimates that 2% will not be collected. No accounts were written off as uncollectible in January. c. Unpaid salaries at the end of January are $26,700. d. Accrued income taxes at the end of January are $8,600. 2. Record the adjusting entries on January 31 for the above transactions. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)
3. Prepare an adjusted trial balance as of January 31, 2018.
4. Prepare a multiple-step income statement for the period ended January 31, 2018.
5. Prepare a classified balance sheet as of January 31, 2018. (Hint: The carrying value of notes payable on January 31, 2018 is $104,490; $18,011 is reported as notes payable in the current liabilities section and $86,479 is reported as notes payable in the long-term liabilities section ($18,011 + $86,479 = $104,490). (Amounts to be deducted should be indicated with a minus sign.)
6. Record closing entries. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)
7. Analyze the following for Freedom Fireworks:
Requirement 1:
a-1. Calculate the debt to equity ratio.
a-2. If the average debt to equity ratio for the industry is 1, is Freedom Fireworks more or less leveraged than other companies in the same industry?
b-1. Calculate the times interest earned ratio.
b-1. If the average times interest earned ratio for the industry is 20 times, is the company more or less able to meet interest payments than other companies in the same industry?
c. Based on the ratios calculated in (a) and (b), would Freedom Fireworks be more likely to receive a higher or lower interest rate than the average borrowing rate in the industry?
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