Question

Ferntree Clothing Inc. is a company that makes and sells clothing to upscale shops across the country. In 2005, the company decided to add the sale of fabric to the company portfolio, selling mainly to other clothing manufacturing companies. Ferntree soon realized that this market was unprofitable with low margins and with the continued increase in on-line sales ,their fabric division was suffering.

The company’s current controller vacated the position without notice four months ago and Ferntree has hired you as their new controller to make any adjustments necessary and correct any errors you may find. The fiscal year end is January 31, 2017 and you will need to correct errors, make adjustments and draft financial statements using ASPE in preparation for the annual audit. The following information has been gathered for you to work with.

The trial balance at January 31, 2017, before any adjustments is provided on the attached excel worksheet.

Your review through the company files has led you to the following information, which may require adjustments:

1. In October of 2016, the shareholders met and decided to sell the fabric division. By December 2016, it became apparent that a buyer is unlikely to be found. The only asset of this division is the inventory, and all attempts have been made to sell this by year-end. The company is expected to recover the book value of the inventory as it is being carried at its current fair value. There are no liabilities relating to this division. (Hint: Regardless of a buyer, this would be classified as a gain/loss from discontinued operations).

2. The company paid a dividend of $25,000 to its shareholders in December 2016. This amount was incorrectly recorded as a cost of goods sold for the clothing division.

3. Last years accounts payable had been paid: $25,000 for the clothing division and $15,000 for the fabric division. When they were paid, they had been debited to cost of goods sold for clothing division and operating expenses for the fabric division.

4. Upon reviewing the aged accounts receivable, it is apparent that one account in the amount $5,000 had become uncollectible and was written off to bad debt expense. In the past, 1% of accounts receivable had been used to estimate the allowance for doubtful accounts, but this year given the past history, they have decided to increase that amount to 2% of accounts receivable. All accounts receivable and the allowance account relate to the clothing division.(Hint: adjust the bad debt expense and allowance account first before you adjust for the allowance for doubtful accounts).

5. In January 2017, some old equipment was sold for proceeds of $250 cash. The original equipment cost $5,000 and had accumulated depreciation of $4,900. The entry made when depositing the cash was debit Cash, credit equipment for $250. The equipment is being amortized using the straight-line method over 10 years. Depreciation has not been recorded for the current year for the remainder of the equipment in this account.

6. FV-NI investments are long-term investments. The fair value of the portfolio investments at January 31, 2017 was $35,000.

7. Insurance is paid each November 30th and covers a 12-month period. When the company paid the insurance, it was debited to insurance expense.  

8. The note payable is due in two equal installments of $25,000 each, plus interest on January 31, 2018 and 2019. The annual interest rate is 5% and the note has been outstanding since August 1, 2016.

9. Unpaid salaries and wages amounted to $1,500 at January 31, 2017 and will be paid in the first payroll of February 2017. These have not been recorded.

10. In reviewing sales, it was determined that the balance in the unearned revenue account as at January 31, 2017 should be $30,000. The entire amount relates to the clothing division.

11. Ferntree has been making some income tax installments and debiting these payments to the Income Taxes Payable account. It has been determined that the applicable tax rate is 25%. The adjusting entry needed for taxes has not been recorded yet. (Hint: do this entry last)

Required: a) Prepare all adjusting and correcting entries based on the above information.

b) Post these entries journal entries to the trial balance and complete other columns of the work in good form

c) Prepare the January 31, 2017 Combined Income Statement/Comprehensive Income using the Multi-step income statement format, Statement of Financial Position and Statement of Retained Earnings for Ferntree Clothing Inc. for the fiscal year ended January 31, 2017

Ferntree Clothing Inc.			January 31, 2017
	Unadjusted Trial Balance		Adjustments		Adjusted Trial Balance
Account	Debit	Credit	Debit	Credit	Debit	Credit
Petty Cash	500
Cash	63,250
Accounts Receivable	252,000
Allowance for doubtful accounts		7,500
Preapaid Insurance	5,000
Inventory- Clothing	400,000
Inventory- Fabric	150,000
FV-NI Investments	30,000
Equipment	499,750
Accum. Depreciation- Equipment		200,000
Goodwill	25,000
Accounts Payable		75,000
Salaries & wages Payable		0
Interest payable		0
Notes Payable		50,000
Unearned Revenue		20,000
Income tax payable	60,000
Common shares		75,000
Retained Earnings		588,000
Dividends	0
Sales Revenue- Clothing		2,000,000
Sales Revenue- Fabric		250,000
Unrealized Gain/loss- FV-NI		0
Gain/loss on disposal of equipment		0
Cost of Goods sold- Clothing	1,200,000
Cost of Goods sold- Fabric	275,000
Operating expenses-Fabric	100,000
Operating Expenses-Clothing:
Depreciation expense	0
Office expense	12,000
Travel expense	4,800
Insurace expense	7,200
Interest expense	1,200
Utilities expense	2,600
Rent expense	41,000
Salaries & wages expense	125,000
Supplies expense	500
Bad debt expense	5,000
Telephone & internet expense	4,200
Repairs & maintenance expense	1,500
Income tax expense	0
	3,265,500	3,265,500	0	0	0	0

Answer 1

a.

Transaction / Event	Account Titles	Debit	Credit
		$	$
1.	No entry required
2.	Dividends	25,000
	Cost of Goods Sold: Clothing		25,000
3.	Accounts Payable	40,000
	Cost of Goods Sold : Clothing		25,000
	Operating Expenses: Fabric		15,000
4.	Allowance for Doubtful Accounts	5,000
	Bad Debt Expense		5,000
4.	Bad Debt Expense	2,540
	Allowance for Doubtful Accounts		2,540
5.	Accumulated Depreciation : Equipment	4,900
	Gain on disposal of equipment		150
	Equipment		4,750
5.	Depreciation Expense	49,500
	Accumulated Depreciation : Equipment		49,500
6.	FV : NI Investments	5,000
	Unrealized Gain - FV:NI		5,000
7.	Prepaid Insurance	6,000
	Insurance Expense		6,000
8.	Interest Expense	1,300
	Interest Payable		1,300
9.	Salaries and Wages Expense	1,500
	Salaries and Wages Payable		1,500
10.	Sales Revenue: Clothing	10,000
	Unearned Revenue		10,000
11.	Income Tax Expense	119,078
	Income Tax Payable		119,078

b.

Ferntree Clothing Inc.
January 31, 2017
	Unadjusted Trial Balance		Adjustments		Adjusted Trial Balance
	Debit	Credit	Debit	Credit	Debit	Credit
Petty Cash	500		0	0	500
Cash	63,250		0	0	63,250
Accounts Receivable	252,000		0	0	252,000
Allowance for Doubtful Accounts		7,500	5,000	2,540		5,040
Prepaid Insurance	5,000		6,000	5,000	6,000
Inventory: Clothing	400,000				400,000
Inventory: Fabric	150,000		0	0	150,000
FV- NI Investments	30,000		5,000	0	35,000
Equipment	499,750			4,750	495,000
Accumulated Depreciation: Equipment		200,000	4,900	49,500		244,600
Goodwill	25,000		0	0	25,000
Accounts Payable		75,000	40,000	0		35,000
Salaries and Wages Payable	0	0	0	1,500		1,500
Interest Payable	0	0	0	1,300		1,300
Notes Payable		50,000	0	0		50,000
Unearned Revenue		20,000	0	10,000		30,000
Income Tax Payable	60,000			119,078		59,078
Common Shares		75,000				75,000
Retained Earnings		588,000				588,000
Dividends	0		25,000		25,000
Sales Revenue: Clothing		2,000,000	10,000	0		1,990,000
Sales Revenue : Fabric		250,000	0	150,000		400,000
Unrealized Gain / Loss: FV: NI		0		5,000		5,000
Gain/ Loss on Disposal of Equipment		0		150		150
Cost of Goods Sold: Clothing	1,200,000			50,000	1,150,000
Cost of Goods Sold: Fabric	275,000		150,000	0	425,000
Operating Expenses: Fabric	100,000			15,000	85,000
Operating Expenses: Clothing
Depreciation Expense	0		49,500		49,500
Office Expense	12,000				12,000
Travel Expense	4,800				4,800
Insurance Expense	7,200		5,000	6,000	6,200
Interest Expense	1,200		1,300		2,500
Utlities Expense	2,600		0		2,600
Rent Expense	41,000		0		41,000
Salaries and Wages Expense	125,000		1,500		126,500
Supplies Expense	500		0		500
Bad Debt Expense	5,000		2,540	5,000	2,540
Telephone and Internet Expense	4,200		0		4,200
Repairs and Maintenance	1,500		0		1,500
Income Tax Expense	0		119,078		119,078
Totals	3,265,500	3,265,500			3,484,668	3,484,668

c.

Ferntree Clothing Inc.
Combined Income Statement
For the year ended January 31, 2017
	$	$
Income from Continuing Operations
Sales Revenue: Clothing		1,990,000
Less: Cost of Goods Sold: Clothing		1,150,000
Gross profit		840,000
Operating Expenses: Clothing
Depreciation Expense	49,500
Office Expense	12,000
Travel Expense	4,800
Insurance Expense	6,200
Interest Expense	2,500
Utilities Expense	2,600
Rent Expense	41,000
Salaries and Wages Expense	126,500
Supplies Expense	500
Bad Debt Expense	2,540
Telephone and Internet	4,200
Repairs and Maintenance	1,500
Gain on disposal of equipment	(150)
Total Operating Expenses		253,690
Net Operating Income: Clothing			586,310
Income from Discontinued Operations: Fabric
Sales Revenue: Fabric		250,000
Cost of Goods Sold: Fabric		275,000
Gross Profit ( loss)		(25,000)
Less: Operating Expenses		(85,000)
Income (loss) from discontinued operations			(110,000)
Income before taxes			476,310
Income Tax Expense ( 25%)			119,078
Net Income			357,232

Ferntree Clothing Inc.
Statement of Retained Earnings
For the year ended January 31, 2017
Beginning balance		$ 588,000
Net income earned during the year	357,232
Other Comprehensive Income	5,000
Total Comprehensive Income		362,232
Less Dividends		(25,000)
Net accretion to Retained Earnings		337,232
Ending Balance		925,232

Ferntree Clothing Inc.
Balance Sheet
January 31, 2017
Assets	$	$
Petty Cash		500
Cash		63,250
Accounts Receivable	252,000
Allowance for Doubtful Accounts	(5,040)	246,960
Inventory : Clothing		400,000
Inventory: Fabric		150,000
Prepaid Insurance		6,000
Total Current Assets			866,710
Investments			35,000
Property, Plant and Equipment
Equipment	495,000
Accumulated Depreciation	(244,600)
Property, Plant ad Equipment, net			250,400
Goodwill			25,000
Total Assets			$ 1,177,110
Liabilities and Stockholders' Equity
Accounts Payable		35,000
Salaries and WAges Payable		1,500
Unearned Revenue		30,000
Interest Payable		1,300
Income Taxes Payable		59,078
Total Current Liabilities			126,878
Notes Payable			50,000
Total Liabilities			176,878
Common Shares	75,000
Retained Earnings	925,232
Total Stockholders' Equity			1,000,232
Total Liabilities and Stockholders' Equity			$ 1,177,110