Retail Co. reported the balance sheet for fiscal year 2015 as follows.

Retail Co. Balance Sheet December 31, 2015 Cash 18,600 Accounts Receivable 33,000 Notes Receivable 10,000 Interest Receivable 600 Merchandise Inventory 22,000 Prepaid Insurance 4,500 Total Current Assets 88,700 Computer Systems: At Cost 78,000 Less Accumulated Depreciation (26,000) Net Computer System 52,000 Total Assets 140,700 LIABILITIES AND SHAREHOLDERS' EQUITY Accounts Payable 36,000 Dividends Payable 1,800 Salaries Payable 6,500 Taxes Payable 10,000 Unearned Revenue 600 Total Liabilities 54,900 Common Stock 40,000 Retained Earnings 45,800 Total Shareholders' Equity 85,800 Total Liabilities and Shareholders' Equity 140,700 Required:

A. Prepare Journal Entries for the below transactions occurred during fiscal year 2016. Also, post each transaction to T-accounts (in supplementary materials).

1. Insurance

a. The insurance policy cost $6,000 when the company paid the two-year insurance premium on June 30, 2015. As of December 31, 2016, the company must record the adjusting entries for fiscal year 2016 (Note that company has made adjusting entries for fiscal year 2015 and thus has a debit balance of prepaid insurance in 2015 balance sheet).

2. Dividends

a. During 2016, the company declared $6,000 of dividends, of which the firm paid $3,000 in cash to shareholders during 2016 and will pay the remainder during 2017.

b. Early in 2016, the company also paid dividends of $1,800 cash that the company declared during 2015. (Note that company has a credit balance of dividend payable in 2015 balance sheet)

3. Notes and Interest income

a. On July 1, 2015, the company lent Appleton Co., $10,000 cash on a nine-month, $900 interest-bearing, note receivable. This transaction and accompanying adjusting entries were recorded at the end of 2015. On April 1, 2016, the company received $10,900 cash from Appleton Co., in full settlement of Appletons nine-month note.

4. Delivery Trucks (Property, Plant and Equipment)

a. The company purchased delivery trucks on March 1, 2016. To finance the acquisition, it gave the seller a $60,000 four-year note that bears interest of 10% per year.

b. The company must pay interest on the note each six months, beginning September 1, 2016. The company made payment on this date.

c. As of December 31, 2016, the company must record the adjusting entries for interest on the note as follows.

d. At the end of 2016, the company depreciates the delivery trucks by $10,000.

5. Computer Systems

a. The computer systems are depreciated by $13,000 per year.

6. Sales Revenue

a. The company shipped all the merchandise to customers, for which the customer had already paid in 2015 ($600).

b. In 2016, the company received $1,400 from in advance paying customers for merchandise to be shipped in 2017.

c. The company collected $208,600 on account from its customers.

7. Merchandise Suppliers

a. During 2016, the company paid $115,000 on accounts payable to merchandise suppliers.

8. Salaries

a. The company paid $85,000 in cash to employees during 2016. Of this amount, $6,500 related to services that employees performed during 2015, and $4,000 related to services that employees will perform during 2017. Employees performed the remainder of the service during 2016.

b. On December 31, 2016, the company owes employees $1,300 for services performed during the last several days of 2016.

9. Taxes

a. The company paid $27,000 in cash for income taxes in April 2016. Of this amount, $10,000 relates to income taxes applicable to 2015, and $3,000 relates to income taxes applicable to 2017. The remainder of payment is applicable to 2016.

b. On December 31, 2016, the company learned that it owes additional $4,000 in income taxes, which will be paid off in next year.

B. Answer the following questions based on the additional information below:

Additional Information

a. The company makes all sales on account. At the end of 2016, the company found that the ending balance of accounts receivable was $51,000.

b. The company makes all merchandise inventory purchases on account. At the end of 2016, the company found that the ending balance of accounts payable was $16,000.

c. Based on a physical count of inventory on Dec 31, 2016, the company still has inventory amounting to $40,000.

1. Based on (a), how much sales revenue did the company make from on account paying customers in 2016? Record the journal entries and post them to the t-accounts.

2. Based on (b), how much merchandise inventory did the company purchase in 2016 (in dollars)? Record the journal entries and post them to the t-accounts.

3. Based on (c), the company realized that the Cost of Goods Sold (COGS) in 2016 is $77,000. Record the journal entries and post it to T-Accounts.

C. Close all the t-accounts above (i.e., compute the ending balances of balance sheet items except for retained earnings, and make the ending balances of income statement items zero). Prepare closing entries and finally close the t-account of retained earnings. Provide the income statement and balance sheet as of December 31, 2016.

Closing Entries

Income Statement

Retail Co Income Statement December 31, 2016

Sales Revenue COGS Gross Margin Depreciation expense Salaries expense Insurance Expense Operating Income Interest Income Interest expense Income before taxes Taxes Net Income

Balance Sheet

Retail Co Balance Sheet December 31, 2016 Cash

Accounts Receivable

Notes Receivable

Interest Receivable

Merchandise Inventory

Prepaid Salaries

Prepaid Taxes

Prepaid Insurance

Total Current Assets Computer Systems

Less Accumulated Depreciation

Net Computer System

Delivery Truck

Less Accumulated Depreciation

Net Delivery Truck

Total Assets

LIABILITIES AND SHAREHOLDERS' EQUITY Accounts Payable

Dividends Payable

Salaries Payable

Taxes Payable

Unearned Revenue

Interest Payable

Notes Payable

Total Liabilities

Common Stock

Retained Earnings

Total Shareholders' Equity

Total Liabilities and Shareholders' Equity

D. Additional information reveals that during its fiscal year 2015 (not 2016), Retail Co. spent $10 million on maintenance and renovation of its trucks and expensed the entire amount in the fiscal year 2015).

Suppose that instead of expensing the entire $10 million, Retail Co. would have expensed only $4 million out of the $10 million and capitalized the remaining $6 million. Further, suppose that the useful life of capitalized amount is 6 years, following which the asset will have no residual value. Further, assume that Retail Co. depreciates the asset using a straight-line method.

Under this alternative treatment of the $10 million, would the following financial statement items have been higher, lower, or the same as before? If different, by how much? [Ignore the tax effect]

Net Income for fiscal year 2016

Higher / Lower / Same

If higher or lower, by .

Cash generated by Investing Activities for fiscal year 2015 (note that it is not 2016)

Higher / Lower / Same

If higher or lower, by

Retained Earnings at the end of fiscal year 2016

Higher / Lower / Same

If higher or lower, by