Question

On January 1, 2021, the general ledger of ACME Fireworks includes the following account balances:

Accounts	Debit				Credit
Cash	$	25,500
Accounts Receivable		47,000
Allowance for Uncollectible Accounts					$	4,600
Inventory		20,400
Land		50,000
Equipment		17,000
Accumulated Depreciation						1,900
Accounts Payable						28,900
Notes Payable (6%, due April 1, 2022)						54,000
Common Stock						39,000
Retained Earnings						31,500
Totals	$	159,900			$	159,900

During January 2021, the following transactions occur:

January		2		Sold gift cards totaling $8,800. The cards are redeemable for merchandise within one year of the purchase date.
January		6		Purchase additional inventory on account, $151,000.
January		15		Firework sales for the first half of the month total $139,000. All of these sales are on account. The cost of the units sold is $75,800.
January		23		Receive $125,800 from customers on accounts receivable.
January		25		Pay $94,000 to inventory suppliers on accounts payable.
January		28		Write off accounts receivable as uncollectible, $5,200.
January		30		Firework sales for the second half of the month total $147,000. Sales include $12,000 for cash and $135,000 on account. The cost of the units sold is $81,500.
January		31		Pay cash for monthly salaries, $52,400.

• Depreciation on the equipment for the month of January is calculated using the straight-line method. At the time the equipment was purchased, the company estimated a residual value of $3,800 and a two-year service life.

• The company estimates future uncollectible accounts. The company determines $15,000 of accounts receivable on January 31 are past due, and 30% of these accounts are estimated to be uncollectible. The remaining accounts receivable on January 31 are not past due, and 3% of these accounts are estimated to be uncollectible. (Hint: Use the January 31 accounts receivable balance calculated in the general ledger.)

• Accrued interest expense on notes payable for January.

• Accrued income taxes at the end of January are $13,400.

• By the end of January, $3,400 of the gift cards sold on January 2 have been redeemed.

  
2. Record the adjusting entries on January 31 for the above transactions.

3. Prepare an adjusted trial balance as of January 31, 2021.

4. Prepare a multiple-step income statement for the period ended January 31, 2021.

5. Prepare a classified balance sheet as of January 31, 2021.

6. Record closing entries

7. Analyze the following for ACME Fireworks
  

Requirement 1:

a-1. Calculate the current ratio at the end of January.

a-2. If the average current ratio for the industry is 1.80, is ACME Fireworks more or less liquid than the industry average?

• More liquid

• Less liquid

Requirement 2:  

b-1. Calculate the acid-test ratio at the end of January.
  

b-2. If the average acid-test ratio for the industry is 1.50, is ACME Fireworks more or less likely to have difficulty paying its currently maturing debts (compared to the industry average)?

• More likely

• Less likely

Requirement 3:

c-1. Assume the notes payable were due on April 1, 2021, rather than April 1, 2022. Calculate the revised current ratio at the end of January.
  

Answer 1