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PB3-4   Analyzing, JournaIizing and Interpreting Business Activities (LO 3-3, 3-5 & then some) - The following...

PB3-4   Analyzing, JournaIizing and Interpreting Business Activities (LO 3-3, 3-5 & then some) -

The following items present a sample of business activities involving Dry Cleaner Corporation (DCC) for the year ended December 31st. DCC provides cleaning services for individual customers and for employees of several large companies in the city.

Dec 1:       DCC’s owner paid $10,000 cash to acquire 200 of DCC’s common shares.

Dec 2:       DCC borrows $2,000 cash from BofA and signs a promissory note to repay the

principal and interest at 1% per annum on December 1, 2018.

Dec 3:       DCC ordered cleaning supplies at a total cost of $2,000. The supplies are

expected to be received in early January.

   Dec 4:       DCC paid $1,500 cash to its landlord which consisted of December’s Rent of

           $1,000 and a Security Deposit of $500.

Dec 7:       Customers paid $200 cash to DCC to obtain DCC gift cards that they could use to

       obtain future cleaning services at no additional cost.

Dec 15:       Customers paid $1,000 cash to DCC for cleaning services performed during the

first two weeks of December.

Dec 21:       DCC ran advertising in the local newspaper today at a total cost of $500. DCC is

not required to pay for the advertising until January 21st.

   Dec 22:       DCC paid $1,000 to the landlord for January rent.

   Dec 23:       DCC’s owner sold 20 of his own DSS common shares to a private investor, at a

selling price of $1,200.

   Dec 28:       DCC paid in full for the advertising run in the local newspaper on December 21st.

   Dec 29:       The cleaning supplies ordered on December 3rd were received today. DCC does

not have to pay for these supplies until January 29th.

Dec 31:   Today, DCC completed cleaning services for several large companies at a total price of $2,000. The companies are expected to pay for the services by January 31st.

1) Prepare a Trial Balance at 12/31/2017.

2) What was the source of the company’s financing – Debt or Equity

3) Prepare the Current Ratio and the Quick Ratio (aka Acid Test). Are the ratios good or bad? What standard did you use? New – Net Profit Ratio – compute.

4) Why could the financial statements be inaccurate? Hint - See Chapter 4 Topics for some ideas. Give a couple reasons.

Solutions

Expert Solution

working
Date Accounts Title Dr Cr
1-Dec Cash $10,000
Common stock $10,000
2-Dec Cash $2,000
Notes payable $2,000
3-Dec no entry required
4-Dec Rent expenses $1,000
Security deposit $500
Cash $1,500
7-Dec Cash $200
Gift card Liabilities $200
15-Dec Cash $1,000
Cleaning services revenue $1,000
21-Dec Advertising expenses $500
Accounts Payable $500
22-Dec Prepaid rent $1,000
Cash $1,000
23-Dec no entry required
28-Dec Accounts Payable $500
Cash $500
29-Dec Cleaning supplies $2,000
Accounts payable $2,000
31-Dec Accounts Receivable $2,000
Cleaning services revenue $2,000
Ans 1
Trial Balance
As on 12/31/2017
Dr Cr
Cash $10,200
Accounts Receivable 2000
Cleaning supples 2000
Prepaid rent 1000
Securities deposit 500
Accounts Payable 2000
Gift card Liabilities 200
Notes payable 2000
Common stock 10000
Cleaning services revenue 3000
Advertising expenses 500
Rent expenses 1000
Total $17,200 $17,200
ans 2
Company used both equity and debt for financing. But majorily
the company used Equity for financing its operations.
ans 3
Current ratio 3.74
Current assets/Current liabilities
15700/4200
Cash $10,200
Accounts Receivable 2000
Cleaning supples 2000
Prepaid rent 1000
Securities deposit 500
Total current assets $15,700
Accounts Payable 2000
Gift card Liabilities 200
Notes payable 2000
Total current liabilities 4200
Quick ratio 2.90
Quick assets/CL
(10200+2000)/4200
The current and quick ratio are good as the current assets
is able to meet the short term obligations.
Net Profit ratio
Net profit/revenue*100
(3000-500-1000)/3000*100 50 %
0r .5
ans 4
Financial statements can be inaccurate as the adjusting
entries have not been passed so as to show correct balances
of the accounts. For example cleaning supplies must have been
used in December but no entry passed. 2) Interest expense
for the month of December not accured.

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