The Howit Department store is located in midtown Metro. During the past several years, net income has been declining because of suburban shopping centers. At the close of the year ended December 31,2007, the following accounts appeared in two of its trial balances.

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Trial Balances
	Unadjusted	Adjusted	Difference Increase/(Decrease)
Accounts Payable	$37,310	$37,310	$0
Accounts Receivable	12,770	12,770	0
Accumulated Depreciation-Delivery Equipment	15,680	19,680	4,000
Accumulated Depreciation-Store Equipment	32,300	41,800	9,500
Cash	7,000	7,000	0
Delivery Expense	8,200	8,200	0
Delivery Equipment	57,000	57,000	0
Depreciation Expense-Delivery Equipment		4,000	4,000
Depreciation Expense-Store Equipment		9,500	9,500
Freight-in	5,060	5,060	0
Common Stock	70,000	70,000	0
Retained Earnings	14,200	14,200	0
Dividends	12,000	12,000	0
Insurance Expense		9,000	9,000
Interest Expense	8,000	8,000	0
Interest Revenue	5,000	5,000	0
Merchandise Inventory	34,360	34,360	0
Notes Payable	46,000	46,000	0
Prepaid Insurance	13,500	4,500	(9,000)
Property Tax Expense		3,500	3,500
Purchases	640,000	640,000	0
Purchase Discounts	7,000	7,000	0
Purchase Returns and Allowances	3,000	3,000	0
Rent Expense	19,600	19,600	0
Salaries Expense	120,000	120,000	0
Sales	860,000	860,000	0
Sales Commissions Expense	8,000	14,000	6,000
Sales Commissions Payable		6,000	6,000
Sales Returns and Allowances	10,000	10,000	0
Store Equipment	125,000	125,000	0
Property Taxes Payable		3,500	3,500
Utilities Expense	10,000	10,000	0

Analysis reveals the following additional data:

1. Salaries expense is 70% selling and 30% administrative.

2. Insurance expense is 50% selling and 50% administrative.

3. A physical inventory was conduced for year ended December 31, 2007 and the inventory was valued at $36,200.

4. Rent expense, utilities expense, and property tax expense are administrative expenses.

5. $10,000 of the Notes payable is due for payment next year.

6. The beginning balance of accounts receivable is $10,750.

7. The amount of total assets at the beginning of the year is $198,275.

Instructions

1)Journalize the adjusting entries that were made by the company.

2)Prepare a multiple-step income statement and a retained earnings statement for the year and a classified balance sheet as of December 31, 2007.

3)Journalize the closing entries.

4)Prepare a post-closing trial balance.

5)Prepare the following ratios and show all support for your computations:

a) Current Ratio

b) Quick Ratio

c) Working Capital

d) Accounts Receivable Turnover

e) Average Collection Period

f) Inventory Turnover

g) Days in Inventory

h )Debt to Total Assets Ratio

i) Gross Profit Ratio

j) Profit Margin Ratio

k) Return on Assets Ratio

l) Asset Turnover Ratio

6) Based on the ratios computed in 5) above, answer the following questions and use the financial statement ratios to support your answers where appropriate:

Do you feel that the company is able to meet its current and long term obligations as they become due?

Comment on the profitability of the company with respect to the various profitability ratios that you computed.

Would you lend money to this company for the long term?

Comment on the ability of the company to collect its receivables and mange inventory.

	2004	2005	2006	Industry Average
Liquidity
Current	1.13	1.31	1.45	1.34
Quick	0.98	1.15	1.29	1.05
Working Capital	$ 12,500.00	$ 13,000.00	$ 13,990.00	$ 15,000.00
Leverage
Debt to Total Assets (%)	51.06%	49.89%	47.99%	46.84%
Times Interest Earned	5.12	5.99	6.31	6.89
Activity
Inventory Turnover (sales)	18.20	19.52	20.03	26.52
Fixed Asset Turnover	6.89	7.21	7.84	8.15
Total Asset Turnover	4.99	5.25	5.32	5.61
Average Collection Period (days)	5.78	5.37	5.15	4.99
Accounts Receivable Turnover	62.31	67.02	69.87	72.15
Days in Inventory	20.05	18.70	18.22	19.20
Profitability
Gross Profit Margin (%)	24.56%	25.22%	26.87%	27.81%
Net Profit (%)	1.99%	2.56%	3.58%	4.60%
Return on Total Assets (%)	7.50%	8.20%	9.23%	9.89%
Return on Equity (%)	16.79%	17.56%	18.03%	19.02%
Payout Ratio	56.00%	65.00%	71.00%	45.00%