Chapter 7, Problem 7.21E

Complete the accounting cycle using long-term asset transactions (LO 7–2, 7–4, 7–7)

On January 1, 2018, the general ledger of TNT Fireworks includes the following account balances:

Accounts	Debit	Credit
Cash	$ 58.700
Accounts Receivable	25.000
Allowance for Uncollectible Accounts Inventory	36.300	$ 2.200
Notes Receivable (5%. due in 2 years)	12.000
Land	155.000
Accounts Payable		14.800
Common Stock		220.000
Retained Earnings		50.000
Totals	$287,000	$287,000

  During January 2018, the following transactions occur.

    January 1    Purchase equipment for $19,500. The company estimates a residual value of $1,500 and a five-war service life.

  January 4    Pay cash on accounts payable, $9,500.

  January 8    Purchase additional inventory on account, $82,900

January 15    Receive cash on accounts receivable, $22,000

January 19    Pay cash for salaries, $29,800.

January 28    Pay cash for January utilities, $16,500.

    January 30    Firework sales for January total $220,000. All of these sales are on account. The cost of the units sold is $115,000.

Required:

1.    Record each of the transactions listed above.

2.    Record adjusting entries on January 31.

  a.    Depreciation on the equipment for the month of January is calculated using the straight-line method.

  b.    At the end of January, $3,000 of accounts receivable are past due, and the company estimates that 50% of these accounts will not be collected. Of the remaining accounts receivable, the company estimates that 3% will not be collected. The note receivable of $20,000 is considered fully collectible and therefore is not included in the estimate of uncollectible accounts.

  c.    Accrued interest revenue on notes receivable for January.

  d.    Unpaid salaries at the end of January are $32,600.

  e.    Accrued income taxes at the end of January are $9,000.

3.    Prepare an adjusted trial balance as of January 31, 2018, after updating beginning balances (above) for transactions during January (Requirement 1) and adjusting entries at the end of January (Requirement 2).

4.    Prepare a multiple-step income statement for the period ended January 31, 2018.

5.    Prepare a classified balance sheet as of January 31, 2018.

6.    Record closing entries.

7.    Analyze how well TNT Fireworks manages its assets:

  a.    Calculate the return on assets ratio for the month of January. If the average return on assets for the industry in January is 2%, is the company more or less profitable than other companies in the same industry?

  b.    Calculate the profit margin for the month of January. If the industry average profit margin is 4%, is the company more or less efficient at converting sales to profit than other companies in the same industry?

  c.    Calculate the asset turnover ratio for the month of January. If the industry average asset turnover is 0.5 times per month, is the company more or less efficient at producing revenues with its assets than other companies in the same industry?

To determine

To record: Each transaction of Company TNT.

Explanation of Solution

Journal: Journal is the book of original entry. Journal consists of the day-to-day financial transactions in a chronological order. The journal has two aspects; they are debit aspect and the credit aspect.

Record the journal entries of Company TNT:

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
January 1	Equipment		19,500
	Cash			19,500
	(To record the purchase of equipment for cash)
January 4	Accounts Payable		9,500
	Cash			9,500
	(To record the payment made for accounts payable)
January 8	Inventory		82,900
	Accounts Payable			82,900
	(To record the purchase of additional inventories on account)
January 15	Cash		22,000
	Accounts receivable			22,000
	(To record the cash receipt on accounts receivable)
January 19	Salary expenses		29,800
	Cash			29,800
	(To record the cash payment made on salaries)
January 28	Utilities expenses		16,500
	Cash			16,500
	(To record the cash payment made on utilities)
January 30	Accounts receivable		220,000
	Sales revenue			220,000
	(To record the sale of inventory on account)
January 30	Cost of goods sold		115,000
	Inventory			115,000
	(To record the cost of inventory sold)

Table (1)

To determine

To record: The adjusting entries on January 31.

Explanation of Solution

Adjusting entries:

Adjusting entries refers to the entries that are made at the end of an accounting period in accordance with revenue recognition principle, and expenses recognition principle.  The purpose of adjusting entries is to adjust the revenue, and the expenses during the period in which they actually occurs.

Record the adjusting entries on January 31, 2018.

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
(a)	Depreciation expense (1)		300
January 31	Accumulated depreciation			300
	(To record the depreciation expenses incurred on the equipment)
(b)	Bad debts expenses (2)		5,900
January 31	Allowance for uncollectible accounts			5,900
	(To record the adjustment in uncollectible accounts)
(c)	Interest receivable (4)		50
January 31	Interest revenue			50
	(To record the accrued interest revenue )
(d)	Salaries expense		32,600
January 31	Salaries Payable			32,600
	To record the unpaid salaries expense)
(e)	Income tax Expense		9,000
January 31	Income tax Payable			9,000
	(To record the accrued income taxes)

Table (2)

Working notes:

Determine the depreciation expenses:

$\begin{array}{c}\text{Depreciation expenses = }\frac{\left[\text{Cost of equipment}-\text{Residual}\text{value}\right]}{\text{Estimated service life}}\\ \text{=}\frac{\text{\$19,500}-\text{\$1,500}}{\text{5years}}\\ =\$300\end{array}$ (1)

Determine the amount of uncollectible accounts:

$\begin{array}{c}\text{Uncollectible accounts =}\left[\begin{array}{l}\text{50\% on uncollectible accounts + 3\% }\\ \text{on remaining uncollectible accounts}-\\ \text{Allowance foruncollectible accounts}\end{array}\right]\\ \text{=}\left[\text{\$3000}\times \frac{50}{100}+\$220,000(3)\times \frac{3}{100}\right]-\text{\$2,200}\\ \text{=\$5,900}\end{array}$ (2)

Determine the amount of remaining uncollectible accounts:

$\begin{array}{c}\text{Uncollectible accounts Remaining =}\left[\begin{array}{l}\text{Accounts receivable}-\text{Account receivable on January}\\ \text{15+ Sale on accounts}-\text{Uncollectible accounts}\end{array}\right]\\ \text{=}\left[\text{\$25,000}-\$22,000+\$220,000-\text{\$3,000}\right]\\ \text{=\$220,000}\end{array}$ (3)

Determine the amount of interest revenue:

$\begin{array}{c}\text{Interest revenue for January=}\left[\text{5\% on Note receivable }\times \frac{1}{12}\right]\\ \text{=}\left[\text{\$12,000×}\frac{\text{5}}{\text{100}}\text{×}\frac{\text{1}}{\text{12}}\right]\\ \text{=\$50}\end{array}$ (4)

To determine

To prepare: An adjusted trial balance as of January 31, 2018.

Explanation of Solution

Adjusted trial balance:

Adjusted trial balance is a summary of all the ledger accounts, and it contains the balances of all the accounts after the adjustment entries are journalized, and posted.

An adjusted trial balance of Company TNT as of January 31, 2018 is prepared as follows:

Company TNT
Adjusted Trial Balance
January 31, 2018
Accounts	Debit	Credit
Cash (5)	$5,400
Accounts Receivable (6)	223,000
Interest Receivable  (4)	50
Inventory (7)	4,200
Notes Receivable	12,000
Land	155,000
Equipment	19,500
Allowance for Uncollectible Accounts (9)		$8,100
Accumulated Depreciation		300
Accounts Payable (8)		88,200
Salaries Payable		32,600
Income Tax Payable		9,000
Common Stock		220,000
Retained Earnings		50,000
Sales Revenue		220,000
Interest Revenue		50
Cost of Goods Sold	115,000
Salaries Expense (10)	62,400
Utilities Expense	16,500
Bad Debt Expense	5,900
Depreciation Expense	300
Income Tax Expense	9,000
Totals	$628,250	$628,250

Table (3)

Working note:

Determine the amount of cash:

$\begin{array}{c}\text{Cash = }\left[\begin{array}{l}\text{Beginning balance + Cash received}\\ \text{on 15}-\text{Cash payments made on 1st,}\\ \text{4th, 19th and 28th of january}\end{array}\right]\\ =\$58,700+\$22,000-\$19,500-\$9,500-29,800-16,500\\ =5,400\end{array}$ (5)

Determine the amount of accounts receivable:

$\begin{array}{c}\text{Accounts}\text{receivable =}\left[\begin{array}{l}\text{Beginning balance + cash on receivable}\\ \text{ on 15th + Sales on accounts}\end{array}\right]\\ =\left[\$25,000-\$22,000+\$220,000\right]\\ =\$223,000\end{array}$ (6)

Determine the amount of inventory:

$\begin{array}{c}\text{Inventory =}\left[\begin{array}{l}\text{Beginning balance +Purchase of }\\ \text{inventories on account}-\text{sale of inventories}\end{array}\right]\\ \text{=}\left[\text{\$36,300+\$82,900}-115,000\right]\\ \text{=\$4,200}\end{array}$ (7)

Determine the amount of accounts Payable:

$\begin{array}{c}\text{Accounts}\text{Payable =}\left[\text{Beginning balance +Accounts payable due}-\text{Payments made}\right]\\ \text{=}\left[\text{\$14,800 + \$82,900}-\text{\$9,500}\right]\\ \text{=\$88,200}\end{array}$ (8)

Determine the amount of uncollectible accounts:

$\begin{array}{c}\text{Uncollectible accounts =}\left[\begin{array}{l}\text{Allowance for uncollectible}\\ \text{accounts + adjsuting entry}\end{array}\right]\\ =\$2,200+\$5,900\\ =\$8,100\end{array}$ (9)

Determine the amount of salaries expense:

$\begin{array}{c}\text{Salaries expenses =}\left[\text{Beginning balance + Unpaid salaries}\right]\\ \text{=}\left[\text{\$29,800+\$32,600}\right]\\ \text{=\$62,400}\end{array}$ (10)

Conclusion

The debit column and credit column of the adjusted trial balance are agreed, both having balance of $628,250.

To determine

To prepare: A multiple-step income statement for the period ended January 31, 2018.

Explanation of Solution

A multiple-step income statement for the period ended January 31, 2018 is prepared as follows:

Company TNT
Income Statement (Multiple-Step)
For the year ended January 31, 2018
Sales revenue	$220,000
Cost of goods sold	115,000
Gross profit		$105,000
Less: Salaries expense	62,400
Utilities expense	16,500
Bad debt expense	5,900
Depreciation expenses	300
Total operating expenses		85,100
Operating income		19,900
Add: Interest revenue		50
Income before taxes		19,950
Less: Income tax expense		9,000
Net income		$10,950

Table (4)

Therefore, a multiple-step income statement shows a net income of $10,950.

To determine

To prepare: A classified balance sheet as of January 31, 2018.

Explanation of Solution

Classified balance sheet:

This is the financial statement of a company which shows the grouping of similar assets and liabilities under subheadings.

A classified balance sheet as of January 31, 2018 is prepared as follows:

Company TNT
Classified Balance Sheet
January 31, 2018
Assets			Liabilities
Cash		$5,400	Accounts payable	$88,200
Accounts receivable	223,000		Salaries payable	32,600
Less: Allowance	8,100	214,900	Income tax payable	9,000
Interest receivable		50	Total liabilities	129,800
Inventory		4,200
Total current assets		224,550
Notes receivable		12,000
Land		155,000	Stockholders’ Equity
Equipment		19,500	Common stock	220,000
Less: Accumulated depreciation		(300)	Retained earnings	60,950
			Total stockholders’ equity	280,950
Total assets		$410,750	Total liabilities and stockholders’ equity	$410,750

Table (5)

To determine

To record: The closing entries.

Explanation of Solution

Closing entries:

Closing entries are recorded in order to close the temporary accounts such as incomes and expenses by transferring them to the permanent accounts. It is passed at the end of the accounting period, to transfer the final balance.

Closing entry for revenue and expense accounts:

Date	Accounts title and Explanation	Debit ($)	Credit ($)
January 31, 2018	Service Revenue	220,000
	Interest revenue	50
	Retained earnings		220,050
	(To close the revenues  account)
	Retained earnings	209,100
	Cost of goods sold		115,000
	Salaries expenses		62,400
	Utilities expenses		16,500
	Bad debt expense		5,900
	Depreciation expense		300
	Income tax expense		9,000
	(To close the expenses account)

Table (6)

To determine

To calculate: The TNT company’s return on assets ratio for the month of January.

Explanation of Solution

Rate of return on total assets:

Rate of return on the total assets is the ratio of the net income, and interest expense to the average total assets. The rate of return on total assets measures the efficiency of the business. It measures how efficiently the business is using its total assets in generating the income.

The rate of return on the total assets is calculated as follows:

$\text{Rate of return on assets}=\frac{\text{Net}\text{income }+\text{Interest expense}}{\text{Average total assets}}$

• Determine the return on assets ratio:

The return on assets ratio is determined as follows:

$\begin{array}{c}\text{Rate of return on assets=}\frac{\text{Net}\text{income }}{\text{Average total assets (11)}}\\ \text{=}\frac{\text{\$10,950}}{\text{\$347,775}}\\ \text{=3}\text{.1\%}\end{array}$

Determine the amount of average total assets:

$\begin{array}{c}\text{Average total assets =}\frac{\text{Beginninginventory+endinginventory}}{\text{2}}\\ \text{=}\frac{\text{\$284,800+\$410,750}}{\text{2}}\\ \text{= \$347,775}\end{array}$ (11)

Conclusion

The return on asset ratio of Company TNT is 3.1%, which is more profitable than other companies in the same industries for the month of January.

To determine

To calculate: The profit margin ratio for the month of January.

Explanation of Solution

The profit margin ratio is determined as follows:

$\begin{array}{c}\text{Profit margin ratio}=\frac{\text{Net}\text{income}}{\text{Net}\text{sales}}\times 100\\ =\frac{\$10,950}{\$220,000}\times 100\\ =5\%\end{array}$

Conclusion

The profit margin ratio of Company TNT is 5%, which is more profitable in converting sales to profit than other companies in the same industries for the month of January.

To determine

To calculate: The asset turnover ratio for the month of January.

Explanation of Solution

The asset turnover ratio is determined as follows:

$\begin{array}{c}\text{Asset turnover =}\frac{\text{Net}\text{sales}}{\text{Average total assets (11)}}\\ \text{=}\frac{\text{\$220,000}}{\text{\$437,775}}\\ \text{=0}\text{.63 times}\end{array}$

Conclusion

Therefore the asset turnover ratio is 0.63 times. When compared to other companies in the same industries, the asset turnover ratio of Company TNT is more and it helps to produce more revenue.