Question

Problem 1.

Emily Elizabeth opened Clifford’s Pet Toy Warehouse on July 1, 2020. Clifford’s Pet ToyWarehouse extends credit terms of 2/10, n/30 to all of its customers. During July the following transactions occurred.

July

1 Issued 100,000 shares of common stock for $100,000 cash.

2 Paid $1,800 cash on 1-year insurance policy effective July 1.

3 Purchased pet toys on account for $1,900 from Cleo Toy Company, terms 2/10, n/30.

4 Purchased supplies for $900 on account from Norman Supply.

5 Sold pet toys on account to the Jetta’s Pet Shop for $1,200. The cost of the pet toys sold was $720.

6 Purchased a used delivery truck from Howard Motors for $9,000, paying $2,000 cash and the balance via loan from Howard Motors.

7 Received $100 credit for pet toys returned to Cleo Toy Company.

9 Paid Cleo Toy Company in Full.

15 Received payment in full from Jetta’s Pet Shop.

17 Sold pet toys on account to Charley’s Pet Store for $1,400. The cost of the pet toys sold was $840.

18 Repaid Howard Motors $1,000 cash toward the amount owed on truck and paid $500 toward the amount owed on supplies.

20 Purchased toys on account for $700 from Mac Toy Maker, terms 1/15, n/30.

21 Paid $2000 cash for employee salaries.

24 Received payment in full from Charley’s Pet Store.

26 Sold pet toys on account to T-Bone for $1300. The cost of the pet toys sold was $780.

27 Granted T-Bone $130 credit for pet toys costing $80 that were returned.

29 Paid $260 for delivery truck repairs.

30 Declared and paid $600 cash dividend.

31 Paid Mac Toy Maker in full.

Problem 1: Instructions

(a) Journalize the July transactions for Clifford’s Pet Toy Warehouse.

(b) Prepare a trial balance at July 31. (Hint: you might want to post your journal entries to ledger – i.e., “T” – accounts.)

(c) Consider the following and prepare adjusting journal entries if necessary

(note: if no entry is needed, explicitly say so).

1. On July 31st, FedEx picked up from Clifford’s Pet Toy Warehouse pet toys that Jetta’s Pet Shop agreed to purchase from Clifford’s for $1100 (the cost of the pet toys was $660). Payment terms for the sale were the usual 2/10, n/30 and the contract specified FOB shipping point. (Clifford’s did not make any entries in its records for this sale.)

2. On July 31st, FedEx picked up from Cleo Toy Company pet toys that Clifford’s Pet Toy Warehouse agreed to purchase for $2200. Payment terms of the purchase were 2/10, n/30 and the contract specified FOB shipping point. (Clifford’s did not make any entries in its records for this purchase.)

3. Depreciation on the truck for the month of July was $200 and interest owed to Howard Motors was $50.

4. One-twelfth of the insurance expired.

5. An inventory count shows $360 of supplies on hand at July 31.

5. Income taxes owed to the government at July 31 were $400.

(d) Prepare an adjusted trial balance. (Hint: you might want to post your adjusting entries to ledger – i.e., “T” – accounts.)

(e) Prepare a multi-step income statement for Clifford’s Pet Toy Warehouse for July. (Hint: start with Net Sales.)

(f) Prepare a single-step income statement for Clifford’s Pet Toy Warehouse for July.

(g) Explain which income statement (multi-step or single-step) will Emily Elizabeth and other

users would prefer for Clifford’s Pet Toy Warehouse and why.

(h) Calculate the Gross Profit Ratio (also known as the Gross Margin Ratio) as well as the Profit Margin Ratio. Given the ratios you calculated, explain why you believe Clifford’s
decision to pay shareholders a $600 dividend was a good or bad idea.

Answer 1