Question
The following information relates to Paris Cosmetics. Ltd. for the year 2017 (1/1/2018). Fiscal year ends on 1/1/2018. Cash. 3,500 Short term investments... 1,297 Accounts
The following information relates to Paris Cosmetics. Ltd. for the year 2017 (1/1/2018). Fiscal year ends on 1/1/2018.
Cash. 3,500
Short term investments... 1,297
Accounts Payable. 4,200
Accounts Receivable 22,475
Prepaid Insurance. 4,200
Inventory. 10,325
Intangible Assets. 2,694
Notes Payable... 20,000
Wages payable. 400
Non-current borrowings... 1,683
Property Plant and Equipment, net.. 23,316
Accumulated depreciation 12,423
Share Capital-Ordinary 24,594
Retained Earnings ?
Earlier in the year, Paris Cosmetics obtained a bank loan of $20,000 cash for the firm (it will be paid off in one year). One of the provisions of the loan is that the year-end debt-to equity ratio (ratio of total liabilities to total equity cannot exceed 0.7. Paris Cosmetics is concerned about being in violation of the loan agreement and requests assistance from its accounting department in reviewing the situation. Management would like to pay a 20% of net income cash dividend to its shareholders at years end. Assume the prior years retained earnings was 6,000.
Management knows that final adjustments at year-end have not been made. Discussions with the accounting department reveal the following
- On Dec. 1, 2017 the firm paid a 4,200 insurance premium for 6 months of coverage. The amount in Prepaid insurance has not yet been adjusted.
- Depreciation on the equipment should be 10% of cost per year; the company inadvertently recorded 5% for 2017.
- Interest on the bank loan has been paid through the end of 2017.
- The firm sold 5,200 to a major department store in December, which included 1,200 in gift certificates which can be redeemed for make-overs within the next year. The sales have not been billed or recorded in the accounts. (Be careful, what is or is not revenue?).
- On December 1, 2017, the firm received an advance payment from Paris fashion week for services it will render there in February in the amount of 1,000. This payment was not credited.
- Ingredients (inventory) costing 9,800 were available on December 31: the company made no entry in the accounts.
Adjust the accounts using the beginning balances.
- What is the debt to equity ratio before the adjustments?
- Construct a post-closing trial balance sheet for Paris Cosmetics (Order is very important. Paris Cosmetics is headquartered in France.) for 12/31/2017. Make sure to show cost, accumulated depreciation and net amount of property, plant and equipment. (Paris Cosmetics fiscal year ends on 1/1/2018, not 2017. The numbers you are seeing are the balanced post-closing trial balance and all I am asking you to do is make the adjusting entries (that is why you are seeing no revenues and expenses on the trial balance)
Account | Assets Adjustments | Liabilities Adjustments | Owners Equity Adjustments |
Beginning Totals |
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Recognitions of insurance expense |
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Depreciation corrections |
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Interest |
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Unbilled sales of cosmetics and gift certificates |
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Advance on Paris Fashion Week |
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Recognition of supply expense |
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Revised totals |
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Adjusted Post-Closing Trial Balance
Accounts | Dr. | Cr. |
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Total |
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- Is the firm in violation of its loan agreement if it pays the proposed cash dividend? Prepare computations to support the correct total of liabilities and total equity figures. (Hint: find Net Income using Retained Earnings. Net Income determines the amount of the dividend.) (10 points)
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