Question

On January 1, 2021, the general ledger of ACME Fireworks includes the following account balances:

Credit Debit $ 26,100 48,200 $ 5,200 Accounts Cash Accounts Receivable Allowance for Uncollectible Accounts Inventory Land Equipment Accumulated Depreciation Accounts Payable Notes Payable (6%, due April 1, 2022) Common Stock Retained Earnings Totals 21,000 56,000 20,000 2,500 29,500 60,000 45,000 29,100 $171,300 $171,300 During January 2021, the following transactions occur: January 2 Sold gift cards totaling $10,000. The cards are redeemable for merchandise within one year of the purchase date. January 6 Purchase additional inventory on account, $157,000. January 15 Firework sales for the first half of the month total $145,000. All of these sales are on account. The cost of the units sold is $78,800. January 23 Receive $126,400 from customers on accounts receivable. January 25 Pay $100,000 to inventory suppliers on accounts payable. January 28 Write off accounts receivable as uncollectible, $5,800. January 30 Firework sales for the second half of the month total $153,000. Sales include $16,000 for cash and $137,000 on account. The cost the units sold is $84,500. January 31 Pay cash for monthly salaries, $53,000.

6. Record closing entries. (If no entry is required for a transaction/event, select "No Journal Entry Required" in the first account field.)

7. Analyze the following for ACME Fireworks
  

Requirement 1:

a-1. Calculate the current ratio at the end of January.

a-2. If the average current ratio for the industry is 1.80, is ACME Fireworks more or less liquid than the industry average?

• More liquid

• Less liquid

Requirement 2:  

b-1. Calculate the acid-test ratio at the end of January.
  

b-2. If the average acid-test ratio for the industry is 1.50, is ACME Fireworks more or less likely to have difficulty paying its currently maturing debts (compared to the industry average)?

• More likely

• Less likely

Requirement 3:

c-1. Assume the notes payable were due on April 1, 2021, rather than April 1, 2022. Calculate the revised current ratio at the end of January.
  

adjusted trial balance:

Answer 1

Ans 6 Closing entries are the entries passed for closing the temporary accounts (Revenue and Expenses Accounts) at the end of the accounting period. They are done after the financial statement for the accounting year has been prepared. This is done make the temporary accounts zero so that these temporary accounts begins with zero balance in the next accounting period. Closing credit/debit entry is passed in all temporary accounts having debit balance/credit balance before passing the closing entry. The credit/debit amount entered is equal the debit/credit balance prior passing the closing entry. The net amount of closing entries is the Net Income /(Loss) for the period which is ultimately transferred retained earnings. Closing Entries Sr. No Date Particulars Debit Credit 1 31-Jan-21 Sales $3,02,000 Income Summary $3,02,000 (To close Sales Account) 31-Jan-21 Income Summary $2,45,230 Cost of Good Sold $1,63,300 Salary Expense $53,000 Depreciation $650 Bad Debt Expense $13,980 Interest Expense $300 Income Tax $14,000 (To close all expense accounts) 3 31-Jan-21 Income Summary $56,770 Retained Earnings $56,770 (To close the Income Summary Account) N

Assets Cash Accounts Receivable Less: Allowance for Uncollectible Accoun Acme Fireworks Classified Balance Sheet January 31, 2021 Amount Amount Liabilities $25,500 Accounts Payable $1,98,000 Gift Card Liability ($13,380) Accrued Interest Expense $1,84,620 Provision for Income Tax $14,700 $2,24,820 Total Current Liabilities Notes Payable $56,000 Total Liabilities Amount $86,500 $6,000 $300 $14,000 inventory Total Current Assets $1,06,800 $60,000 $1,66,800 Non Current Assets Land Equipment Less: Accumulated Depreciation $20,000 ($3,150) Shareholders' Equity $16,850 Common Stock Retained Earnings Total Shareholders' Equity $45,000 $85,870 $1,30,870 Total Assets $2,97,670 Total Liabilities and Shareholder's Equity $2,97,670

7 a 1 Current Ratio = Current Assets/Current Liabilities Current Ratio Choose Numerator - Choose Denominator = Current Ratio Current Asset - Current Liabilities = Current Ratio $2,24,820 : $1,06,800 - 2.11 7 a 2 As compared industry average of 1.80, the Current ratio of Acme Fireworks is more liquid 7 b 1 Acid Test Ratio = (Current Asset - inventory)/Current Liabilities Acid Test Ratio Choose Numerator - Choose Denominator = Acid Test Ratio Current Asset - invel : Current Liabilities = Acid Test Ratio $2,10,120 : $1,06,800 = 1.97 7 b 2 As compared industry average of 1.50, Acme Fireworks will have less likely have difficulty in paying its currently maturing debt 7 c 1 If the notes payable were due on April 1 2021, rather that April 1, 2022 then the notes payable will be considered as current Liabilities. Now the current liability will be $166800 ($106800+$60000) Current Ratio Choose Numerator - Choose Denominator = Current Asset Current Asset Current Liabilities = Current Ratio $2,24,820 : $1,66,800 = 1.35