Question

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

Accounts	Debit				Credit
Cash	$	25,100
Accounts Receivable		46,200
Allowance for Uncollectible Accounts					$	4,200
Inventory		20,000
Land		46,000
Equipment		15,000
Accumulated Depreciation						1,500
Accounts Payable						28,500
Notes Payable (6%, due April 1, 2022)						50,000
Common Stock						35,000
Retained Earnings						33,100
Totals	$	152,300			$	152,300

During January 2021, the following transactions occur:

January		2		Sold gift cards totaling $8,000. The cards are redeemable for merchandise within one year of the purchase date.
January		6		Purchase additional inventory on account, $147,000.
January		15		Firework sales for the first half of the month total $135,000. All of these sales are on account. The cost of the units sold is $73,800.
January		23		Receive $125,400 from customers on accounts receivable.
January		25		Pay $90,000 to inventory suppliers on accounts payable.
January		28		Write off accounts receivable as uncollectible, $4,800.
January		30		Firework sales for the second half of the month total $143,000. Sales include $11,000 for cash and $132,000 on account. The cost of the units sold is $79,500.
January		31		Pay cash for monthly salaries, $52,000.

1. Depreciation on the equipment for the month of January is calculated using the straight-line method. At the time the equipment was purchased, the company estimated a residual value of $3,000 and a two-year service life.

2. The company estimates future uncollectible accounts. The company determines $11,000 of accounts receivable on January 31 are past due, and 30% of these accounts are estimated to be uncollectible. The remaining accounts receivable on January 31 are not past due, and 5% of these accounts are estimated to be uncollectible. (Hint: Use the January 31 accounts receivable balance calculated in the general ledger.)

3. Accrued interest expense on notes payable for January.

4. Accrued income taxes at the end of January are $13,000.

5. By the end of January, $3,000 of the gift cards sold on January 2 have been redeemed.

QUESTIONS :

(Date: January 31, 2021) Record the closing entry for expense accounts.

(Date: January 31, 2021) Record the closing entry for revenue accounts.

Calculate the current ratio at the end of January.

. If the average current ratio for the industry is 1.8, is ACME Fireworks more or less liquid than the industry average?

• a. More liquid

• b. Less liquid

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

b-2. If the average acid-test ratio for the industry is 1.5, is ACME Fireworks more or less likely to have difficulty paying its currently maturing debts (compared to the industry average)?

• a. More likely

• b. Less likely

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.
  

c-2. Indicate whether the revised ratio would increase, decrease, or remain unchanged.

• a. Decrease the current ratio

• b. Increase the current ratio

• c. Remain unchanged

Answer 1

Closing entries
31-Jan	Sales	$ 281,000
	Retained Earnings		$ 281,000
31-Jan	Retained Earnings	$ 231,550
	Cost of goods sold		$ 153,300
	Salaries expense		$    52,000
	Depreciation expense		$          500
	Bad debts expense		$    12,500
	Interest expense		$          250
	Income tax expense		$    13,000

	ACME Fireworks
Req a1	Current Ratio
	Numerator	/	Denominator	=	Current Ratio
	Current Assets	/	Current Liabilities	=	Current Ratio
	212,300	/	103,750	=	2.05	times
Req a2	If the average current ratio for the industry is 1.8,
	Option a		More liquid
Req b1	Acid-Test Ratio
	Numerator	/	Denominator	=	Acid-Test Ratio
	Quick Assets	/	Current Liabilities	=	Acid-Test Ratio
	198,600	/	103,750	=	1.91	times
	Workings
	Quick Assets
	Current Assets		212,300
	Inventory		(13,700)
	Quick Assets		198,600
Req b2	If the average acid-test ratio for the industry is 1.5,
	Option a		More likely
Req c1	Revised Current Ratio
	Numerator	/	Denominator	=	Revised Current Ratio
	Current Assets	/	Current Liabilities	=	Current Ratio
	212,300	/	153,750	=	1.38	times
	Workings
	Revised Current Liabilities
	Current Liabilities		103,750
	Notes Payable		50,000
Revised Current Liabilities			153,750
Req c2	Indicate whether the revised ratio would increase, decrease, or remain unchanged
	Option a		Decrease the current ratio

Workings

ACME Fireworks Journal entries Date Account 2-Jan Cash Gift Card Liability/Unearned Revenue Credit Calculation Debit $ 8,000 $ 8,000 $ 147,000 6-Jan Inventory Accounts Payable $147,000 $ 135,000 15-Jan Accounts Receivable Sales $ 135,000 $ 73,800 15-Jan Cost of goods sold Inventory $ 73,800 $ 125,400 23-Jan Cash Accounts Receivable $ 125,400 $ 90,000 25-Jan Accounts Payable Cash $ 90,000 $ 4,800 28-Jan Allowance for uncollectible accounts Accounts Receivable $ 4,800 30-Jan Cash Accounts Receivable Sales $ 11,000 $ 132,000 $ 143,000 $ 79,500 30-Jan Cost of goods sold Inventory $ 79,500 $ 52,000 $ 52,000 31-Jan Salaries expense Cash Adjusting entries 31-Jan Depreciation expense Accumulated Depreciation 500 =(15,000-3,000)/2*1/12 $ 500 $ 12,500 Workings below 31-Jan Bad debts expense Allowance for uncollectible accounts $ 12,500 $ 250 =50,000*6%*1/12 31-Jan Interest expense Interest Payable $ 250 $ 13,000 31-Jan Income tax expense Income tax Payable $ 13,000 $ 3,000 $ 3,000 31-Jan Gift Card Liability/Unearned Revenue Sales Closing entries 31-Jan Sales Retained Earnings $ 281,000 $ 281,000 $ 231,550 31-Jan Retained Earnings Cost of goods sold Salaries expense Depreciation expense Bad debts expense Interest expense Income tax expense $ 153,300 $ 52,000 $ 500 $ 12,500 $ 250 $ 13,000 Workings Allowance for uncollectible accounts Opening balance Write off Unadjusted Balance $ 4,200 $ (4,800) $ (600) Allowance - Adjusted Balance Past due Not Past due Totals Accts Rec $ 11,000 $172,000 $ 183,000 30% 5% Uncollectible accts $ 3,300 -11,000*30%=3,300 $ 8,600 =183,000-11,000=172,000 $ 11,900 Bad debts expense Unadjusted Balance Adjusted Balance Bad debts expense $ (600) $ 11,900 $ 12,500 =11,900+600

ACME Fireworks T Accounts Date Debit Date Credit Cash Op bal $ 25,100 25-Jan $ 90,000 2-Jan $ 8,000 31-Jan $ 52,000 23-Jan $ 125,400 30-Jan $ 11,000 Date Debit Date Credit Accounts Receivable Op bal $ 46,200 15-Jan $135,000 23-Jan $125,400 30-Jan $132,000 28-Jan $ 4,800 Date Debit Date Credit Allowance for uncollectible accounts 28-Jan $ 4,800 Op bal $4,200 31-Jan $ 12,500 Date Debit Date Credit Inventory Op bal $ 20,000 6-Jan $147,000 15-Jan $ 73,800 30-Jan $ 79,500 Bal. Bal. $ 27,500 Land $ 46,000 $183,000 Equipment $15,000 Bal. $ 11,900 Accumulated Depreciation Op bal $1,500 31-Jan $ 500 Bal. $ 13,700 Accounts Payable Op bal 25-Jan $ 90,000 6-Jan Op bal Op bal $ 28,500 $147,000 Bal. Bal. Bal. $ 46,000 Gift Card Liability/Unearned Revenue 31-Jan $ 3,000 2-Jan $ 8,000 $ 15,000 Notes Payable Op bal $ 2,000 Interest Payable 31-Jan $ 250 Bal. $ 85,500 Income tax Payable 31-Jan $ 13,000 $50,000 $ 5,000 $ 50,000 Bal. $ 250 Bal. $ 13,000 Bal. Common Stock Op bal Bal. Retained Earnings Op bal $ 35,000 $ 33,100 $ 33,100 Bal. $ 35,000 Sales 15-Jan $135,000 30-Jan $ 143,000 31-Jan $ 3,000 Cost of goods sold 15-Jan $ 73,800 30-Jan $ 79,500 Salaries expense 31-Jan $ 52,000 Depreciation expense 31-Jan $ 500 $ 281,000 Bal. Bal. $ 500 Bal. Bad debts expense 31-Jan $ 12,500 $ 153,300 Interest expense $ 250 Bal. $ 52,000 Income tax expense 31-Jan $ 13,000 31-Jan Bal. $ 12,500 Bal. $ 250 Bal. $ 13,000

ACME Fireworks Account Names Cash Accounts Receivable Allowance for uncollectible accounts Inventory Land Equipment Accumulated Depreciation Accounts Payable Gift Card Liability/Unearned Revenue Interest Payable Income tax Payable Notes Payable (6%, due April 1, 2022) Common Stock Retained Earnings Sales Cost of goods sold Salaries expense Depreciation expense Bad debts expense Interest expense Income tax expense Totals Adjusted TB Debit Credit 27,500 183,000 11,900 13,700 46,000 15,000 2,000 85,500 5,000 250 13,000 50,000 35,000 33,100 281,000 153,300 52,000 500 12,500 250 13,000 516,750 516,750

281,000 153,300 127,700 ACME Fireworks Income Statement For period ended January 31, 2021 Sales Cost of goods sold Gross Profit Operating Expenses Salaries expense Depreciation expense Bad debts expense Total Operating Expenses Operating Income Other items Interest expense Net Income before taxes Income tax expense Net Income 52,000 500 12,500 65,000 62,700 250 62,450 13,000 49,450 Statement of Retained Earnings For period ended January 31, 2021 Retained Earnings, Jan 1, 2021 Net Income Retained Earnings, Jan 31, 2021 33,100 49,450 82,550

ACME Fireworks Balance Sheet As of Jan 31, 2021 Assets Current Assets Cash Accounts Receivable Allowance for uncollectible accounts Inventory Total Current Assets Liabilities & Stockholders Equity Current Liabilities 27,500 Accounts Payable 183,000 Gift Card Liability/Unearned Revenue (11,900) Interest Payable 13,700 Income tax Payable 212,300 Total Current Liabilities 85,500 5,000 250 13,000 103,750 50,000 Non-Current Assets Land Equipment Accumulated Depreciation Total Non-Current Assets Non-Current Liabilties 46,000 Notes Payable (6%, due April 1, 2022) 15,000 (2,000) 59,000 Total Liabilties 153,750 Stockholders Equity Common Stock Retained earnings Total Stockholders Equity 35,000 82,550 117,550 Total Assets 271,300 Total Liabilities & Stockholders Equity 271,300