One Trick Pony (OTP) incorporated and began operations near the end of the year, resulting in the following post-closing balances at December 31:   Cash$18,620 Accounts Receivable 9,650 Allowance for Doubtful Accounts 900*Inventories 2,800 Deferred Revenue (30 units) 4,350 Accounts Payable 1,300 Note Payable (long-term) 15,000 Common Stock 5,000 Retained Earnings 4,520  * credit balance.The following information is relevant to the first month of operations in the following year: OTP will sell inventory at $145 per unit. OTP’s January 1 inventory balance consists of 35 units at a total cost of $2,800. OTP’s policy is to use the FIFO method, recorded using a perpetual inventory system.In December, OTP received a $4,350 payment for 30 units OTP is to deliver in January; this obligation was recorded in Deferred Revenue. Rent of $1,300 was unpaid and recorded in Accounts Payable at December 31.OTP’s note payable matures in three years, and accrues interest at a 10% annual rate.  January TransactionsIncluded in OTP’s January 1 Accounts Receivable balance is a $1,500 balance due from Jeff Letrotski. Jeff is having cash flow problems and cannot pay the $1,500 balance at this time. On 01/01, OTP arranges with Jeff to convert the $1,500 balance to a six-month note, at 12% annual interest. Jeff signs the promissory note, which indicates the principal and all interest will be due and payable to OTP on July 1 of this year.OTP paid a $500 insurance premium on 01/02, covering the month of January; the payment is recorded directly as an expense.OTP purchased an additional 150 units of inventory from a supplier on account on 01/05 at a total cost of $9,000, with terms n/30.OTP paid a courier $300 cash on 01/05 for same-day delivery of the 150 units of inventory.The 30 units that OTP’s customer paid for in advance in December are delivered to the customer on 01/06.On 01/07, OTP received a purchase allowance of $1,350 on account, and then paid the amount necessary to settle the balance owed to the supplier for the 1/05 purchase of inventory (in c).Sales of 40 units of inventory occurring during the period of 01/07–01/10 are recorded on 01/10. The sales terms are n/30.Collected payments on 01/14 from sales to customers recorded on 01/10. OTP paid the first 2 weeks’ wages to the employees on 01/16. The total paid is $2,200.Wrote off a $1,000 customer’s account balance on 01/18. OTP uses the allowance method, not the direct write-off method.Paid $2,600 on 01/19 for December and January rent. See the earlier bullets regarding the December portion. The January portion will expire soon, so it is charged directly to expense.OTP recovered $400 cash on 01/26 from the customer whose account had previously been written off on 01/18.An unrecorded $400 utility bill for January arrived on 01/27. It is due on 02/15 and will be paid then.Sales of 65 units of inventory during the period of 01/10–01/28, with terms n/30, are recorded on 01/28.Of the sales recorded on 01/28, 15 units are returned to OTP on 01/30. The inventory is not damaged and can be resold. OTP charges sales returns directly against Sales Revenue.On 01/31, OTP records the $2,200 employee salary that is owed but will be paid February 1.OTP uses the aging method to estimate and adjust for uncollectible accounts on 01/31. All of OTP’s accounts receivable fall into a single aging category, for which 8% is estimated to be uncollectible. (Update the balances of both relevant accounts prior to determining the appropriate adjustment.)Accrue interest for January on the note payable on 01/31.Accrue interest for January on Jeff Letrotski’s note on 01/31 (see a).

Question
Asked Oct 17, 2019

One Trick Pony (OTP) incorporated and began operations near the end of the year, resulting in the following post-closing balances at December 31:

 

   
Cash $ 18,620  
Accounts Receivable   9,650  
Allowance for Doubtful Accounts   900 *
Inventories   2,800  
Deferred Revenue (30 units)   4,350  
Accounts Payable   1,300  
Note Payable (long-term)   15,000  
Common Stock   5,000  
Retained Earnings   4,520  
 

* credit balance.

The following information is relevant to the first month of operations in the following year:
 

  • OTP will sell inventory at $145 per unit. OTP’s January 1 inventory balance consists of 35 units at a total cost of $2,800. OTP’s policy is to use the FIFO method, recorded using a perpetual inventory system.
  • In December, OTP received a $4,350 payment for 30 units OTP is to deliver in January; this obligation was recorded in Deferred Revenue. Rent of $1,300 was unpaid and recorded in Accounts Payable at December 31.
  • OTP’s note payable matures in three years, and accrues interest at a 10% annual rate.

  

January Transactions

  1. Included in OTP’s January 1 Accounts Receivable balance is a $1,500 balance due from Jeff Letrotski. Jeff is having cash flow problems and cannot pay the $1,500 balance at this time. On 01/01, OTP arranges with Jeff to convert the $1,500 balance to a six-month note, at 12% annual interest. Jeff signs the promissory note, which indicates the principal and all interest will be due and payable to OTP on July 1 of this year.
  2. OTP paid a $500 insurance premium on 01/02, covering the month of January; the payment is recorded directly as an expense.
  3. OTP purchased an additional 150 units of inventory from a supplier on account on 01/05 at a total cost of $9,000, with terms n/30.
  4. OTP paid a courier $300 cash on 01/05 for same-day delivery of the 150 units of inventory.
  5. The 30 units that OTP’s customer paid for in advance in December are delivered to the customer on 01/06.
  6. On 01/07, OTP received a purchase allowance of $1,350 on account, and then paid the amount necessary to settle the balance owed to the supplier for the 1/05 purchase of inventory (in c).
  7. Sales of 40 units of inventory occurring during the period of 01/07–01/10 are recorded on 01/10. The sales terms are n/30.
  8. Collected payments on 01/14 from sales to customers recorded on 01/10. 
  9. OTP paid the first 2 weeks’ wages to the employees on 01/16. The total paid is $2,200.
  10. Wrote off a $1,000 customer’s account balance on 01/18. OTP uses the allowance method, not the direct write-off method.
  11. Paid $2,600 on 01/19 for December and January rent. See the earlier bullets regarding the December portion. The January portion will expire soon, so it is charged directly to expense.
  12. OTP recovered $400 cash on 01/26 from the customer whose account had previously been written off on 01/18.
  13. An unrecorded $400 utility bill for January arrived on 01/27. It is due on 02/15 and will be paid then.
  14. Sales of 65 units of inventory during the period of 01/10–01/28, with terms n/30, are recorded on 01/28.
  15. Of the sales recorded on 01/28, 15 units are returned to OTP on 01/30. The inventory is not damaged and can be resold. OTP charges sales returns directly against Sales Revenue.
  16. On 01/31, OTP records the $2,200 employee salary that is owed but will be paid February 1.
  17. OTP uses the aging method to estimate and adjust for uncollectible accounts on 01/31. All of OTP’s accounts receivable fall into a single aging category, for which 8% is estimated to be uncollectible. (Update the balances of both relevant accounts prior to determining the appropriate adjustment.)
  18. Accrue interest for January on the note payable on 01/31.
  19. Accrue interest for January on Jeff Letrotski’s note on 01/31 (see a).
check_circleExpert Solution
Step 1

Prepare journal entry:

Debit
Credit
Account title and Explanation
Date
(S)
(S)
1-Jan Bills Receivable
1,500
$1,500
Accounts receivable
Amount due from PersonJ converted to promissory note
2-Jan Insurance expense
500
Cash
500
Insurance expense recordedfor year
5-Jan Inventory
9,000
Accounts payable
9,000
Inventory purchased on account
5-Jan Inventory
300
Cash
300
Courierexpense on unit purchased
6-Jan Unearned revenue
4,350
Sales
4,350
Sale recorded and unearned revenue transferred to income account
6-Jan Cost of goods sold
2,400
2,400
Inventory
Proportionate costfrom opening inventory on 30 units transferred to cost
FIFO method of inventory is followed
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Debit Credit Account title and Explanation Date (S) (S) 1-Jan Bills Receivable 1,500 $1,500 Accounts receivable Amount due from PersonJ converted to promissory note 2-Jan Insurance expense 500 Cash 500 Insurance expense recordedfor year 5-Jan Inventory 9,000 Accounts payable 9,000 Inventory purchased on account 5-Jan Inventory 300 Cash 300 Courierexpense on unit purchased 6-Jan Unearned revenue 4,350 Sales 4,350 Sale recorded and unearned revenue transferred to income account 6-Jan Cost of goods sold 2,400 2,400 Inventory Proportionate costfrom opening inventory on 30 units transferred to cost FIFO method of inventory is followed

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Step 2
7-Jan Accounts payable
9,000
Inventory
180
Cash
8,820
Since payment is made within 15 days, discount is availed for 2% on amount
2 % = $180
to be paid $9,000
Under perpetual accounting any discount will reduce cost of inventory
10-Jan Cost of goods sold
2,528
Inventory
Cost is calculated as follows:
5 units 80 400 (from opening stock)
Cost of 150 units purchased= $90,000+$300-$180= $9,120
2,528
Proportionate cost of 35 units sold:
(S9,120/$150) 35= $2,128
Total cost of goods sold $400+$2,128= $2,528
help_outline

Image Transcriptionclose

7-Jan Accounts payable 9,000 Inventory 180 Cash 8,820 Since payment is made within 15 days, discount is availed for 2% on amount 2 % = $180 to be paid $9,000 Under perpetual accounting any discount will reduce cost of inventory 10-Jan Cost of goods sold 2,528 Inventory Cost is calculated as follows: 5 units 80 400 (from opening stock) Cost of 150 units purchased= $90,000+$300-$180= $9,120 2,528 Proportionate cost of 35 units sold: (S9,120/$150) 35= $2,128 Total cost of goods sold $400+$2,128= $2,528

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Step 3
14-Jan Cash
5,684
Sales discount ($5,800 2 % )
116
Accounts receivable
5,800
Discount allowed on early
16-Jan Work in process
22,200
Cash
22,200
Wages expense recorded in work in process
18-Jan Allowance for doubtful account
1,000
Accounts receivable
1,000
Amount written off to allowance account
19-Jan Rent expense
1,300
Accounts payable
1,300
Cash
2,600
Rent expense recorded and outstanding rentfor December paid
26-Jan Cash
400
Accounts receivable
400
Accounts receivable instated and amount recoveredfrom customer
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14-Jan Cash 5,684 Sales discount ($5,800 2 % ) 116 Accounts receivable 5,800 Discount allowed on early 16-Jan Work in process 22,200 Cash 22,200 Wages expense recorded in work in process 18-Jan Allowance for doubtful account 1,000 Accounts receivable 1,000 Amount written off to allowance account 19-Jan Rent expense 1,300 Accounts payable 1,300 Cash 2,600 Rent expense recorded and outstanding rentfor December paid 26-Jan Cash 400 Accounts receivable 400 Accounts receivable instated and amount recoveredfrom customer

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