Question

On January 1, 2021, the general ledger of Freedom Fireworks includes the following account balances: Debit 12,400 Credit Accounts Cash Accounts Receivable 36,400 Inventory 153,200 Land 79,300 Buildings 132,000 $ 3,000 10,800 Allowance for Uncollectible Accounts Accumulated Depreciation Accounts Payable Common Stock 30,900 212,000 Retained Earnings 156,600 $413,300 $413,300 Totals During January 2021, the following transactions occur: Borrow $112,000 from Captive Credit Corporation. The installment note bears interest at matures in 5 years. Payments of $2,165 are required at the end of each month for 60 months Receive $32 ,200 from customers on accounts receivable January 1 68 annually and January 4 January 10 Pay cash on accounts payable, $23,000. January 15 Pay cash for salaries, $30,100 January 30 Firework sales for the month total $201,000. Sales include $66,200 for cash and $134,800 on account. The cost of the units sold is $118,500 January 31 Pay the first monthly installment of $2,165 related to the $112,000 borrowed on January 1. Round your interest calculation to the nearest dollar. The following information is available on January 31, 2021. a. Depreciation on the building for the month of January is calculated using the straight-line method. At the time the building was purchased, the company estimated a service life of 10 years and a residual value of $25,200. b. The company estimates future uncollectible accounts. The company determines $4,200 of accounts receivable on January 31 are past due, and 50% of these accounts are estimated to be uncollectible. The remaining accounts receivable on January 31 are not past due, and 3% of these accounts are estimated to be uncollectible. (Hint: Use the January 31 accounts receivable balance calculated in the general ledger.) c. Unpaid salaries at the end of January are $27,300. d. Accrued income taxes at the end of January are $9,200. e. $19,901 of the long-term note payable balance will be paid over the next year.

Answer 1

Freedom Fireworks Journal Enteries Date Particulars 1.1.2021 Cash a/c Dr. To Note Payable (Note Payable issued) Debit in $ Credit in $ 112000 112000 32200 4.1.2021 Cash a/c Dr. To Accounts Receivable (Cash received from debtors) 32200 Dr. 23000 10.1.2021 Accounts Payable a/c To Cash (Creditors paid off) 23000 Dr. 30100 15.1.2021 Salaries Expense a/c To Cash (Salaries paid in cash) 30100 66200 134800 Dr. 30.1.2021 Cash a/c Dr. Accounts Receivable a/c To Sales (Sales made) 201000 118500 Cost of goods sold a/c To Inventory (To record cost of goods sold) 118500 1605 560 31.1.2021 Note Payable a/c Dr. Interest Expense a/c Dr. To Cash (First installment paid) 112000 x 6% x 1/12 = 560 2165

Adjusting Enteries Date Particulars 31.1.2021 Depreciation Expense - Build a/c Dr. To Accum. Depre - Build (Depreciation charged to building) |(132000 - 25200)/10 = 10680/12 = 890 Debit in $ Credit in $ 890 890 31.1.2021 Bad Debts a/c Dr. 3144 To Allowance for Uncollectible accounts 3144 (Bad debts estimated) 4200 / 2 = 2100 + 4044 = 6144 - 3000 = 3144 (139000 - 4200) = 134800 x 3% = 4044 27300 31.1.2021 Salaries Expense a/c Dr. To Salaries Payable (Salary expense accrued) 27300 Dr. 9200 31.1.2021 Income Tax Expense a/c To Income Tax Payable (Income tax accrued) 9200 Closing Enteries Date Particulars 31.1.2021 Income Summary a/c Dr. To Cost of goods sold To Salaries Expense To Interest Expense To Depreciation Expense - Build To Bad Debts To Income Tax Expense (Expense accounts closed) Debit in $Credit in $ 189694 118500 57400 560 890 3144 9200 Dr. 201000 31.1.2021 Sales a/c To Income Summary (Revenue accounts closed) 201000 Dr. 11306 31.1.2021 Income Summary a/c To Retained Earnings (Profits Transferred) 11306

Worksheet For the month ending 31.1.2021 Particulars Cash Accounts Receivable Allowance for Uncollectible accounts Inventory Land Buildings Accum. Depre - Build Accounts Payable Salaries Payable Income Tax Payable Note Payable Common Stock Retained Earnings Sales Cost of goods sold Salaries Expense Interest Expense Depreciation Expense - Build Bad Debts Income Tax Expense Totals Debit in $ Credit in $ Debit in $ Credit in $ Debit in $ Credit in $ 167535 167535 139000 139000 3000 3144 6144 34700 34700 79300 79300 132000 132000 10800 890 11690 7900 7900 27300 27300 9200 9200 110395 110395 212000 212000 156600 156600 201000 201000 118500 118500 30100 27300 57400 560 560 890 890 3144 3144 9200 9200 701695 70169540534 40534742229 742229

201000 118500 82500 Statement of Income For the month ending 31.1.2021 Sales Cost of goods sold Gross Profit Less: Salaries Expense Interest Expense Depreciation Expense - Build Bad Debts Income Tax Expense Net Income 57400 560 890 3144 9200 71194 11306 Statement of Retained Earnings For the month ending 31.1.2021 Beginning 156600 Net Income 11306 167906

Amounts in $ Amounts in $ Balance sheet As at 31.1.2021 Assets Amounts in $ Amounts in $ Liabilities Current Assets Current Liabilities Cash 167535 Accounts Payable Accounts Receivable 139000 Salaries Payable Allowance for Uncollect -6144 Income Tax Payable Inventory 34700 335091 Note Payable 7900 27300 9200 19901 64301 90494 Non Current Assets Land Buildings Accum. Depre - Build 132000 -11690 Non Current Liabilities Note Payable 79300 Shareholders Equity 120310 Common Stock Retained Earnings 534701 Total Liabilities & Equity 212000 167906 379906 534701 Total Assets Debt to Equity Ratio = Total Liabilities/Total Equity = (64301 +90494) / 379906 = 0.407 The company is less leveraged compared to Industry Times interest earned = Operating Income / Interest expense = ( 82500 - 57400 - 890 - 3144) / 560 = 21066/560 = 37.62 times The company is comforably able to meet interest payments compared to industry Freedom Fireworks is more likely to receive a higher interest rate than the average borrowing rate in the industry.