Question

The following are the summary account balances from a recent statement of financial position of Modern Sportswear Inc. The accounts are followed by a list of transactions for the month of January 2018. All amounts are shown in millions of dollars:

Cash	$ 635	Accounts payable	$ 1,882
Long-term borrowings	2,229	Income tax payable	300
Accounts receivable	1,503	Prepaid expenses	16
Inventories	551	Reatained earnings	4,266
Deferred income taxes (Credit)	2,518	Other non-current assets	1,126
Property and equipment, net	10,759	Contributed capital	3,455

The accounts have normal debit or credit balances, but they are not necessarily listed in good order. The following additional information is also available:

a. Purchase new equipment costing $150 by issuing long-term debt.

b. Recieved $900 on accounts receivable.

c. Recievedand paid the telephone bills for $1.

d. Earned $500 in sales to customers on account; the cost of sales was $300.

e. Paid employees $100 for wages earned in January.

f. Paid half of the income taxes payable.

g. Purchased inventory for $223 on account.

h. Prepaid rent for february for a warehouse for $12.

i. Paid $10 of long-term borrowings and $1 in interest on the debt.

j. Purchased a patent (an intangible asset) for $8 cash.

Required:

1. Set up T-accounts for the preceding list and enter the respective balances. (you will need additional T-accounts for statement of earnings accounts).

2. For each transaction, record the effects in the T-accounts. label each by using the letter of the transaction. Compute ending balances.

3. Show the effects (dirction and amount) of each transaction on net earnings and cash.

4. Prepare in good form a multiple-step statement of earnings for the month of January 2018 and a classified statement of financial position as at January 31, 2018.

5. Compute the company's total asset turnover ratio. What does this ratio suggest to you about Modern SortswearInc. ?

Answer 1