(Using the accounting equation spreadsheet to record transactions and prepare financial statements, LO 1, 2, 5,6) Majestic...
Question:
(Using the accounting equation spreadsheet to record transactions and prepare financial statements, LO 1, 2, 5,6) Majestic Trucking Inc. (Majestic) is a small trucking company that carries freight between centres in central Canada and the northeastern United States. The Mozart family of Cobourg owns Majestic, but professional managers manage it. One member of the Mozart family serves as the chair of the board of directors. No other family members are actively involved with Majestic.
Majestic’s balance sheet for December 31, 2004, the company’s year end, is shown below. Majestic uses its financial statements for tax purposes, to show to the holders of the long-term notes that the company issued to finance the purchase of some of its trucks, and to provide information to the shareholders.
It is now January 2006. Majestic needs to prepare its financial statements for the year ended December 31, 2005. The following information has been obtained about the fiscal year just ended:
i. Shipping revenue for the year was $1,065,225. Majestic gives credit to all its customers and there were no cash sales during the year.
ii. Majestic purchased $275,000 worth of fuel during the year. All purchases were on credit. At the end of 2005 Majestic had not been billed for an additional $10,000 of fuel that it purchased.
iii. Majestic incurred maintenance costs of $125,000 during 2005. At the end of 2005 Majestic owed mechanics $8,000.
iv. Majestic paid salaries and bonuses of $475,000 to employees. At December 31, 2005 Majestic owed employees $27,500.
v. During the year Majestic collected $1,075,000 from customers.
vi. Majestic paid its fuel suppliers $250,000 during 2005.
vii. During the year Majestic paid the taxes it owed at the end of 2004. It also paid $11,000 in instalments on its 2005 income taxes. It is estimated that Majestic owes an additional $12,000 in income taxes for 2005.
viii. The deposits reported on the 2004 balance sheet pertained to customers who were perceived to be high risk and to whom Majestic was not prepared to offer credit. These customers were required to give deposits against shipping to be done during 2005. These customers used shipping services during 2005 in excess of the amount of the deposits. Majestic decided in 2005 to offer credit to these customers.
ix. Members of the Mozart family sometimes used Majestic employees for personal work at their homes and cottages. Usually the work was done on weekends and the employees were paid at overtime rates. Majestic pays the employees’ wages for the work done for the family members and accounts for the cost as a wage expense. The wages paid for work done on behalf of Mozart family members was $11,000.
During 2005 Majestic purchased a new truck for $98,000 in cash.
xi. Amortization expense for 2005 was $48,000.
xii. Prepaid insurance pertains to insurance on its truck fleet and premises.
During 2005 it used $15,000 of insurance that was recorded as prepaid on December 31, 2004. In late 2005 Majestic purchased and paid for insurance for 2006. The insurance cost $21,000.
xiii. During the year Majestic paid $11,900 in interest to the holders of the longterm notes. Interest is paid annually on January 2. In addition to the interest payment, Majestic paid $20,000 on January 2, 2005 to reduce the balance owed on the long-term notes. The interest rate on the notes is 8.5%.
xiv. Majestic paid $75,000 in cash for other expenses related to operating the business in fiscal 2005.
xv. Majestic paid dividends of $55,000 to shareholders.
ns Required:
a. Enter each of the transactions onto an accounting equation spreadsheet. You can use a computer spreadsheet program or create a spreadsheet manually, although the computer spreadsheet will probably be easier because you will be able to correct mistakes more easily. Create a separate column on the spreadsheet for each account. Make sure to prepare all adjusting entries and the closing entry to the spreadsheet. Indicate whether each entry to the spreadsheet is a transactional entry, an adjusting entry or a closing entry.
b. Provide explanations for each of your entries. You should explain why you have treated the economic events as you have (that is, why you have recorded an asset, liability, etc.).
c. Prepare a balance sheet as of December 31, 2005 and an income statement for the year ended December 31, 2005 from your spreadsheet.
d. The North American economy is booming and there is a lot of work for ship- ping companies like Majestic. However, the competition is fierce and success and failure are defined by how efficient a company is and how well it services its customers. Majestic’s managers would like to upgrade its fleet by adding two new trucks and making significant improvements to its existing vehicles. Based on your examination of the statements, what can you tell about Majestic that would be useful to your decision to lend it $125,000? Also, list five questions you might ask Majestic’s management that would help you use the financial statements more effectively.
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