Chapter 13, Problem 2PB

Hog Wild is a retail firm that sells motorcycles, parts, and accessories. The adjusted trial balance data given below is from the firm’s worksheet for the year ended December 31, 2019.

INSTRUCTIONS

1. 1. Prepare a classified income statement for the year ended December 31, 2019. The expense accounts represent warehouse expenses, selling expenses, and general and administrative expenses.
2. 2. Prepare a statement of owner’s equity for the year ended December 31, 2019. No additional investments were made during the period.
3. 3. Prepare a classified balance sheet as of December 31, 2019. The mortgage payable extends for more than one year.

ACCOUNTS

Analyze: What is the inventory turnover for Hog Wild?

To determine

Show the Classified Income Statement.

Explanation of Solution

Classified Income statement: The classified income statement is a financial statement that shows the revenues, expenses with various classifications and sub-totals. The classified income statement is used for complex income statement as its more easily understandable.

Prepare the classified income statement:

Company HW
Income Statement
Year Ended December 31, 2019
Particulars	Amount ($)	Amount ($)	Amount ($)	Amount ($)
Operating Revenue
Sales				$608,417
Less: Sales Returns and Allowances				$9,400
Net Sales				$599,017
Cost of Goods Sold
Merchandise Inventory, January 1, 2019			$88,980
Purchases		$230,050
Freight In		$9,600
Delivered Cost of Purchases		$239,650
Less: Sales Returns and Allowances	$6,420
Purchases Discount	$5,760	$12,180
Net Delivered Cost of Purchases			$227,470
Total Merchandise Available for sale			$316,450
Less: Merchandise Inventory, closing			$87,915
Cost of Goods Sold				$228,535
Gross Profit on Sales				$370,482
Operating Expenses
Warehouse Expenses
Warehouse Wages Expense		$64,300
Warehouse Supplies Expense		$4,300
Depreciation Expense — Warehouse Equipment		$2,400
Total Warehouse Expense			$71,000
Selling Expenses
Salaries Expense—Sales		$78,900
Travel Expense		$21,000
Delivery Expense		$35,400
Total Selling Expense			$135,300
General and Administrative Expenses
Salaries Expense—Office		$57,500
Office Supplies Expense		$1,360
Insurance Expense		$9,500
Utilities Expense		$6,912
Telephone Expense		$4,370
Payroll Taxes Expense		$19,200
Building Repair Expense		$11,700
Property Taxes Expense		$3,100
Uncollectible Accounts Expense		$2,900
Depreciation Expense - Building		$3,200
Depreciation Expense - Office Equipment		$1,680
Total General and Admin. Expenses			$121,422
Total Operating Expenses				$327,722
Income from Operations				$42,760
Other Income
Interest Income			$720
Other Expense
Interest Expense			$3,600
Net Non-operating expenses				$2,880
Net income for the year				$39,880

Table (1)

To determine

Show the Statement of Owner's equity.

Explanation of Solution

Statement of owner's’ equity: This statement reports the beginning owner’s equity and all the changes which led to ending owner's’ equity.

Prepare the Statement of owner's’ equity:

Company HW
Statement of Owner's Equity
Year Ended December 31, 2019
Particulars	Amount ($)	Amount ($)
NH Capital, January 1, 2019		$198,710
Net income for the year	$39,880
Deduct - Withdrawals	$56,000
Decrease in Capital		($16,120)
NH Capital, December 31, 2019		$182,590

Table (2)

To determine

Show the Classified Balance Sheet and compute the inventory turnover of Company AW.

Explanation of Solution

Classified balance sheet: The main elements of balance sheet assets, liabilities, and stockholders’ equity are categorized or classified further into sections, and sub-sections in a classified balance sheet. Assets are further classified as current assets, long-term investments, property, plant, and equipment (PPE), and intangible assets. Liabilities are classified into two sections current and long-term. Stockholders’ equity comprises of common stock and retained earnings. Thus, the classified balance sheet includes all the elements under different sections.

Prepare the classified balance sheet:

Company HW
Balance Sheet
December 31, 2019
Particulars	Amount ($)	Amount ($)	Amount ($)
Assets
Current Assets
Cash			$14,350
Petty Cash Fund			$200
Notes receivable			$6,000
Accounts receivable		$54,600
Less: Allowance for Doubtful Debts		$5,000	$49,600
Merchandise Inventory			$87,915
Interest Receivable			$200
Prepaid expenses
Warehouse Supplies		$3,700
Office Supplies		$1,800
Prepaid insurance		$6,900	$12,400
Total Current Assets			$170,665
Plant and Equipment
Land		$20,400
Building	$53,100
Less: Accumulated Depreciation	$8,400	$44,700
Warehouse Equipment	$24,000
Less: Accumulated Depreciation	$4,000	$20,000
Office Equipment	$12,800
Less: Accumulated Depreciation	$1,800	$11,000
Total Plant and Equipment			$96,100
Total Assets			$266,765
Liabilities and Owner's Equity
Current Liabilities
Notes Payable		$8,000
Accounts payable		$32,500
Interest Payable		$1,800
Total Current Liabilities			$42,300
Long Term Liabilities
Mortgage payable		$35,875
Notes Payable - Long Term		$6,000
Total Long-Term Liabilities			$41,875
Total Liabilities			$84,175
Owner's Equity
CR Capital			$182,590
Total Liabilities and Owner's Equity			$266,765

Table (3)

Inventory turnover ratio: Inventory turnover ratio is used to determine the number of times inventory used or sold during the particular accounting period. Inventory turnover ratio is calculated by using the formula:

$\text{Inventory turnover ratio = }\frac{\text{Cost of Goods Sold}}{\text{Average Inventory}}$

Compute the inventory turnover ratio:

$\begin{array}{c}\text{Inventory turnover ratio = }\frac{\text{Cost of Goods Sold}}{\text{Average Inventory}}\\ =\frac{\$228,535}{\$88,448}\\ =2.58\text{ times}\end{array}$

Compute the average inventory:

$\begin{array}{c}\text{Average Inventory = }\frac{\$88,980+\$87,915}{2}\\ =\$88,448\end{array}$

The inventory turnover is 2.58 times.