Question

Happy Harry Pets was incorporated on January 1st. The business maintains a retail pet store, providing gourmet dog food and
treats, and also provides a full range of pet care services, including grooming, dog-walking, and boarding.
The following transactions occurred during the first twelve months of operations:
January 1st	Common stock is issued in exchange for cash in the amount of ………….………….………………………								295,000
February 8th	The company purchases and pays for 160 units of gourmet dog food at a price of $25 per unit …………..								4,000
March 1st	The company pays cash for a one-year insurance policy in the amount of ……………….………………………..…..								9,300
March 31st	Rent on a retail space for 12 months is paid in the amount of …..……….………………………………………								12,480
April 1st	Grooming and boarding equipment with a useful life of 2 years is purchased for cash in the amount of ……								18,000
April 10th	Grooming supplies purchased on account in the amount of …………..……………………………………………								1,450
May 15th	The company purchases and pays for another 370 units of gourmet dog food at a price of $29 per unit …..								10,730
May 30th	Grooming services are performed on account in the amount of …………………………………………………………..…………								13,625
June 1st	The company pays for advertisements to be run for the next 12 months in the amount of ……………………….								864
June 30th	The company issues a 5-year bond with a face value of $100,000 and a stated annual rate of 6%.
	Interest is due on June 30th each year. The market rate is 8% on the date of issuance …………………………….								100,000
July 25th	Dog-walking services are performed on account in the amount of …...……………………………..…………								14,225
July 31st	95 units of gourmet dog food are sold for $70 per unit with terms 2/10, n/30. The sale is recorded using
	the gross method in the amount of (see note c for cost flow assumptions) …………………………………………………………………………………….								6,650
August 2nd	Boarding services are provided on account in the amount of ……………………………………………………………….								6,280
August 6th	The company receives full payment from the customer for the July 31st sale ………………………………………								6,517
September 15th	Pet sitting services are performed on account in the amount of ……………………..…………………………….…………..								6,245
September 29th	Customer payments are received for services previously provided in the amount of ………………………………..								1,250
October 13th	100 units of gourmet dog food are sold for $73 per unit with terms 2/10, n/30. The sale is recorded using
	the gross method in the amount of ……………………………………………………………………………………….								7,300
October 29th	The company receives payment for half of the October 13th sale ………………………………………………………								3,650
November 1st	Equipment originally purchased on April 1st for $2400 is sold for $2000 cash
November 15th	A bookkeeper is hired to help the company with daily accounting taxes and annual tax preparation
December 15th	The bookkeeper is paid $3,500 for the previous month's services								3,500
	Additional information:
a.	Grooming supplies on hand at the end of the month are as follows: …………………………………….								870
b.	The year-end balance reported at the end of the year for the Allowance for Doubtful Accounts
	is estimated as 4% of outstanding receivables at the end of the year
c.	The Company uses a perpetual inventory system and accounts for costs using the First-In-First-Out cost
	flow assumption. On December 31st, a count of ending inventory reveals that there are 335 bags of dog
	food on hand.
d.	All revenue is recorded in the "Sales Revenue" account and reported net of cash discounts on the income statement.
e.	The effective interest method is used to amortize bond premiums and discounts
f.	Adjustments are made at the end of the year for prepaid insurance, rent, advertising, depreciation, and interest expense.
g.	The bookkeeper is paid a salary of $3,500 on the 15th of every month.
h.	The company declared dividends of $650 for the year
i.	Assume selling expenses include advertising and supplies expense. All other expenses, other than depreciation
	and interest expense, are considered general & administrative.
REQUIRED:
1.	Prepare journal entries for each transaction listed above (with descriptions).
2.	Post journal entries to the general ledger accounts.
3. 4. 5. 6. 7.	Prepare an unadjusted trial balance. Prepare all necessary adjusting journal entries (with descriptions) Prepare an adjusted trial balance on December 31st Prepare closing entries, post to the general ledger, and carry forward balances to January 1st of the next year. Prepare the following financial statements on December 31st (ignore income taxes): a. Income Statement (multi-step) b. Statement of Stockholders Equity c. Balance Sheet (classified) d. Statement of Cash Flows (indirect method)

Answer 1

In the books of Happy Harry Pets:

Date	Account Titles	Debit	Credit
		$	$
Jan 1	Cash	295,000
	Common Stock		295,000
Feb 8	Inventory	4,000
	Cash		4,000
Mar 1	Prepaid Insurance	9,300
	Cash		9,300
Mar 31	Prepaid Rent	12,480
	Cash		12,480
Apr 1	Equipment	18,000
	Cash		18,000
Apr 10	Grooming Supplies	1,450
	Accounts Payable		1,450
May 15	Inventory	10,730
	Cash		10,730
May 30	Accounts Receivable	13,625
	Service Revenue		13,625
June 1	Prepaid Advertising	864
	Cash		864
June 30	Cash *	92,016
	Discount on Bonds Payable	7,984
	Bonds Payable		100,000
July 25	Accounts Receivable	14,225
	Service Revenue		14,225
July 31	Accounts Receivable	6,650
	Sales Revenue		6,650
July 31	Cost of Goods Sold ( 95 units x $ 25 per unit)	2,375
	Inventory		2,375
Aug 2	Accounts Receivable	6,280
	Service Revenue		6,280

Contd.

Date	Account Titles	Debit	Credit
		$	$
Aug 6	Cash	6,517
	Sales Discount	133
	Accounts Receivable		6,650
Sep 15	Accounts Receivable	6,245
	Service Revenue		6,245
Sep 29	Cash	1,250
	Accounts Receivable		1,250
Oct 13	Accounts Receivable	7,300
	Sales Revenue		7,300
Oct 13	Cost of Goods Sold	2,640
	Inventory		2,640
Oct 29	Cash	3,650
	Accounts Receivable		3,650
Nov 1	Depreciation Expense ( $ 2,400 / 24 months ) x 7 months	700
	Accumulated Depreciation : Equipment		700
Nov 1	Cash	2,000
	Accumulated Depreciation : Equipment	700
	Equipment		2,400
	Gain on sale of equipment		300
Nov 15	No entry needed	0	0
Dec 15	Salaries and Wages Expense	3,500
	Cash		3,500

* PVIFA _{8%, n=5} = [ { 1 - ( 1 / 1.08) ⁵ } / 5 ] = 3.9927

PVIF_{8%, 5th year} = ( 1 / 1.08 ) ⁵ = 0.6806

Present value of the bonds = 100,000 x 6 % x 3.9927 + 100,000 x 0.6806 = 23,956.20 + 68,060 = $ 92,016.20 :

3. Happy Harry Pets

Unadjusted Trial Balance

December 31

Account Titles	Debit	Credit
	$	$
Cash	341,559
Accounts Receivable	42,775
Inventory	9,715
Grooming Supplies	1,450
Prepaid Insurance	9,300
Prepaid Rent	12,480
Prepaid Advertising	864
Equipment	15,600
Accounts Payable		1,450
Bonds Payable		100,000
Discount on Bonds Payable	7,984
Common Stock		295,000
Sales Revenue		13,950
Service Revenue		40,375
Gain on sale of Equipment		300
Sales Discounts	133
Cost of Goods Sold	5,015
Salaries and WAges Expense	3,500
Depreciation Expense	700
Totals	451,075	451,075

4. In the books of Harry Happy Pets:

Adjusting entries:

	Account Titles	Debit	Credit
December 31		$	$
a.	Grooming Supplies Expense	580
	Grooming Supplies		580
b.	Bad Debt Expense ( $ 42,775 x 4%)	1,711
	Allowance for Doubtful Accounts		1,711
c.	No entry required
d.
e.	Interest Expense ( $ 92,016 x 8% x 6 months / 12 months)	3,681
	Interest Payable ( $ 100,000 x 6% x 1/2)		3,000
	Discount on Bonds Payable		681
f.	Insurance Expense ( $ 9,300 / 12 x 10)	7,750
	Prepaid Insurance		7,750
	Rent Expense ( $ 12,480 / 12 x 9)	9,360
	Prepaid Rent		9,360
	Advertising Expense ( $ 864 / 12 x 7)	504
	Prepaid Advertising		504
	Depreciation Expense ( $ 15,600 / 24 months x 9 months)	5,850
	Accumulated Depreciation : Equipment		5,850
g.	Salaries and Wages Expense ( $ 3,500 x 1 / 2 )	1,750
	Salaries and Wages Payable		1,750
h.	Retained Earnings	650
	Dividends Payable		650

5. Happy Harry Pets

Adjusted Trial Balance

December 31

Account Titles	Debit	Credit
	$	$
Cash	341,559
Accounts Receivable	42,775
Allowance for Doubtful Accounts		1,711
Inventory	9,715
Grooming Supplies	870
Prepaid Insurance	1,550
Prepaid Rent	3,120
Prepaid Advertising	360
Equipment	15,600
Accumulated Depreciation : Equipment		5,850
Accounts Payable		1,450
Salaries and Wages Payable		1,750
Interest Payable		3,000
Bonds Payable		100,000
Discount on Bonds Payable	7,303
Common Stock		295,000
Sales Revenue		54,192
Gain on sale of Equipment		300
Cost of Goods Sold	5,015
Salaries and Wages Expense	5,250
Insurance Expense	7,750
Grooming Supplies Expense	580
Rent Expense	9,360
Advertising Expense	504
Depreciation Expense	6,550
Bad Debt Expense	1,711
Interest Expense	3,681
Totals	$ 463,253	$ 463,253

7. a. Happy Harry Pets

Income Statement

For the year ended December 31

	$	$
Income from Operations
Net Sales Revenue		54,192
Cost of Goods Sold		5,015
Gross Profit		49,177
Selling, General and Administrative Expenses
Selling Expenses
Supplies Expense	580
Advertising Expense	504
Total Selling Expenses		1,084
General and Administrative Expenses
Salaries and Wages Expense	5,250
Insurance Expense	7,750
Rent Expense	9,360
Bad Debt Expense	1,711
Total General and Administrative Expense		24,071
Total Selling, General and Administrative Expenses		25,155
EBITDA		24,022
Depreciation Expense		(6,550)
Operating Income		17,472
Other Income / (Expense)
Gain on sale of Equipment	300
Interest Expense	(3,681)	( 3,381)
Net Income		$ 14,091

b. Happy Harry Pets

Statement of Stockholders' Equity

For the year ended December 31

Balance, January 1	$ 0
Capital contributed	295,000
Net income for the period	14,091
Total Stockholders' Equity before distributions	309,091
Less: Dividends declared	( 650)
Balance, December 31	$ 308,441

c. Happy Harry Pets

Balance Sheet

December 31

Assets	$	$	Liabilities and Stockholders' Equity	$	$
Current Assets			Current Liabilities
Cash	341,559		Accounts Payable	1,450
Accounts Receivable, net	41,064		Salaries and Wages Payable	1,750
Inventory	9,715		Interest Payable	3,000
Supplies	870		Dividend Payable	650
Prepaid Insurance	1,550		Total Current Liabilities		6,850
Prepaid Rent	3,120		Long-Term Liabilities
Prepaid Advertising	360		Bonds Payable	100,000
Total Current Assets		398,238	Discount on Bonds Payable	(7,303)	92,697
Property, Plant and Equipment			Total Liabilities		99,547
Equipment	15,600
Accumulated Depreciation	(5,850)	9,750	Stockholders' Equity		308,441
Total Assets		$ 407,988	Total Liabilities and Stockholder's Equity		$ 407,988

Happy Harry Pets

Statement of Cash Flows

For the year ended December 31

	$	$
Cash Flows from Operating Activities
Net Income		14,091
Adjustments to reconcile the net income to net income from operations
Depreciation Expense	6,550
Interest Expense	3,681
Gain on Sale of Equipment	(300)
Increase in Accounts Receivable	(41,064)
Increase in Inventory	(9,715)
Increase in Supplies	(870)
Increase in Prepaid Insurance	(1,550)
Increase in Prepaid Rent	(3,120)
Increase in Prepaid Advertising	(360)
Increase in Accounts Payable	1,450
Increase in Salaries and Wages Payable	1,750	(43,548)
Net cash used in operating activities		(29,457)
Cash Flows from Investing Activities
Cash paid for acquiring equipment	(18,000)
Cash received on sale of equipment	2,000
Net cash used in Investing Activities		(16,000)
Cash Flows from Financing Activities
Cash received from issuance of common stock	295,000
Cash received from issuance of bonds payable	92,016
Net cash flows from Financing Activities		387,016
Net increase in cash		341,559
Cash, January 1		0
Cash, December 31		341,559