Question

Rose Merchandising Company buys and sells a product called Zoom. Company began the 2018 accounting year on Jan. 1st with the following balances. Debit Cash 41,000 Accounts Receivable 20,000 Merchandise Inventory 22,000 Supplies 1,440 Prepaid Insurance 2,000 Equipment 236,200

Credit: Accumulated Depreciation-equipment 40,240 Accounts Payable 7,000 Common Stock, $10 par 265,000 Retained Earnings 10,400 Total 322,640 322,640

On Jan. 1st, 2018, Merchandise Inventory consisted of 200 units of product Zoom each had cost $110. Company uses Perpetual Inventory System with LIFO method for inventory valuation. The following transactions took place in January of 2018.

1. In order to raise capital, issued and sold 5000 shares of $12 par value, 10%, preferred stocks.

2. Purchased 400 units of Zoom at a cost of $151.17 each from the Lyons Company, terms 2/10, n/30, with FOB Shipping point term plus sales taxes of 8% that were not included in the purchase price.

3. Shipping and handling cost was $158.

4. Returned 5 defective units of Zoom to the Lyons Company.

5. Paid Lyons Company the amount owed within discount period.

6. Sold 300 Zoom to Team America for a price of $510 each, terms were 2/10, n/30, FOB Shipping point. Applicable sales tax rate was 8%.

7. Borrowed $80,000 at 4%. Interest is expected to be paid monthly.

8. Paid $500 for the shipment of the merchandise to Team America.

9. Team America returned 10 units of Zooms.

10. Sold 100 units of Zoom for a price of 50,000 yen each to a Japanese company on account. Shipping term was FOB Shipping point on a Cash On Delivery basis. On the transaction date the exchange rate was $0.01 per yen. Sales taxes was not applicable.

11. Collected $1000 interest from bank on its saving account in cash

12. Team America paid the amount owed within discount period.

13. Collected from Japanese company for sales made in the above. On collection date the exchange rate was $0.008 per yen.

14. Invested $40,000 in marketable securities - $25000 for short-term purpose (also called trading securities) and $15,000 for long-term purpose (also called available-for-sale securities).

15. Collected $7,000 on accounts receivable. It was not within discount period.

16. Purchased a delivery truck (equipment) at a $30,000. Paid $5,000 in cash and signed a note for the remaining at 6% to be paid in 36 equal monthly payments.

17. Recorded $10,000 hurricane losses on equipment. The loss met extra ordinary requirements.

18. Closed its Mexico branch by selling the branch equipment that had cost $100,000 with accumulated depreciation of $20,000 for $88,000 in cash.

19. Paid $1,400 for utilities expense.

20. Paid salaries, $20,000. Applicable tax rates were as follows: FICA Taxes 7.65% Federal Income Taxes 18.00% State Income Taxes 6.00% Federal Unemployment Taxes 0.80% State Unemployment Taxes

21. Some equipment that was purchased at $5,000 was disposed for $3500 cash.

22. Declared and paid $10,000 cash dividends.

23. Made the 1st interest payment on loan to the bank.

24. Collected $500 dividends from its investment in marketable securities.

25. Detected $5,000 understatement of depreciation charges in prior period and made the necessary adjusting entry. Applicable income tax rate for last year was 30%.

26. A physical inventory count indicated that $240 supplies were let.

27. Recorded depreciation on the month, $5,000.

28. The expired insurance was $1,000.

29. Made the necessary journal entries to reflect the fair market value of investment in marketable securities. The fair value of company investment in marketable securities as of Dec.31st was as follows. Cost Fair Value Investment in Marketable Securities (short-term) $25,000 $30,000 Investment in Marketable Securities (long-term) $15,000 $17,500

30. Paid all sales taxes owed and related payroll taxes to government.

31. Paid $3,000 for income taxes.

Prepare general purpose financial statements–  Income Statement (multiple step) with proper reporting of EPS  Comprehensive Income Statement  Statement of Retained Earnings  Statement of Stockholders’ Equity  Balance Sheet (classified)  Statement of Cash Flows, and Perform closing entries.

Answer 1

No.	Account Title	Debit	Credit
1	Cash	60000
	10% Preferred stock		60000
	(5000* $ 12)
2	Merchandise Inventory	60468
	Sales tax receivable	4837
	Accounts payable		65305
	(Terms 2/10,n/30-FOB shipping point)
3	Merchandise Inventory	158
	Cash		158
	(Shipping & handling on 2 .above)
4	Accounts payable	816
	Merchandise Inventory		756
	Sales tax receivable		60
	65305/400*5=816
	60468/400*5=756
5	Accounts payable	64489
	Merchandise Inventory		1290
	Cash		63199
	65305-816=64489
	64489*2%=1290
6	Accounts receivable	165240
	Sales revenue		153000
	Sales tax payable		12240
	(Terms 2/10,n/30-FOB shipping point)
a.	COGS	44490
	Merchandise Inventory		44490
	300 units *148.30=44490
	Prepetual LIFO(Refer workings below)
7	Cash	80000
	4% Bank Loan		80000
8	Accounts receivable	500
	Cash		500
	(Shipment of the above)
9	Sales Returns	5100
	Sales tax payable	408
	Accounts receivable		5508
	153000/300*10=5100
	12240/300*10=408
	Merchandise Inventory	1483
	COGS		1483
	(Refer entry 6.a.)
10	Accounts receivable	50000
	Sales revenue		50000
	100*50000*0.01=
	COGS	14830
	Merchandise Inventory		14830
	(100*148.3)
11	Cash	1000
	Interest income		1000
12	Cash	157037
	Sales discounts	3195
	Accounts receivables		160232
	159732-3195=156537+500(shipping)
	159732*2%=3195
	165240-5508+500=160232
13	Cash	40000
	Loss on exchange rate fluctuation	10000
	Accounts receivable		50000
	(0.01-0.008)*100*50000=10000
	100*50000*0.008= 40000
14	Trading securities	25000
	Available-for-sale securities	15000
	Cash		40000
15	Cash	7000
	Accounts receivables		7000
16	Delivery truck	37380
	Cash		5000
	6% Note payable		25000
	Interest payable		7380
	(Refer workings below)
17	Loss due to hurricane	10000
	Equipment		10000
	(Extraordinary item)
18	Cash	88000
	Accumulated depreciation-Equipment	20000
	Equipment		100000
	Gain on sale		8000
	(Discontinued operation)
19	Utilities expense	1400
	Cash		1400
20	Salaries expense	20000
	FICA Taxes payable(20000*7.65%)		1530
	Federal Income taxes payable(20000*18%)		3600
	State Income taxes payable(20000*6%)		1200
	Cash(Plug-in fig.)		13670
	Pay-roll tax expense	2770
	FICA Taxes payable(Employer contn.)		1530
	Federal Unemployment Taxes(20000*0.8%)		160
	State Unemployment taxes(20000*5.4%)		1080
21	Cash	3500
	Loss on sale	1500
	Equipment		5000
22	Retained Earnings	10000
	Cash		10000
23	Interest expense	267
	Cash		267
	(80000*4%/12)
24	Cash	500
	Dividend Income		500
	(on Trading securities)
25	Prior-period item-Depreciation exp.(equip.)	5000
	Income tax receivable --30%*5000	1500
	Accumulated depreciation-Equipment		5000
	Retained Earnings		1500
26	Supplies expense	1200
	Supplies		1200
	(1440-240)
27	Depreciation expense	5000
	Accumulated depreciation-Equipment		5000
28	Insurance expense	1000
	Prepaid Insurance		1000
29	Fair value adjustment -Trading securities	5000
	Unrealised gain on short-term (trading) securities		5000
	Fair value adjustment -AFS	2500
	OCI-Unrealised gain on Long-term (AFS) securities		2500
30	Sales tax payable	11832
	Cash		7055
	Sales tax Receivable		4777
	Federal Income taxes payable(20000*18%)	3600
	State Income taxes payable(20000*6%)	1200
	FICA Taxes payable	3060
	Federal Unemployment Taxes	160
	State Unemployment taxes	1080
	Cash		9100
31	Income tax expense	3000
	Cash		3000
		1051500	1051500
	Workings for JE 6.a.
		Per unit
	Cost -------60468/400=	151.17
	Shipping -----158/395=	0.4
	-Discount------1290/395=	-3.27
		148.30
	Workings for JE 16.
	25000=x*(1-1.005^-36)/0.005
	760.55
	760.55*36= 32380-25000=7380 (int.)

	LEDGER ACCOUNTS			Net Ledger Balances
No.	Account Title	Debit	Credit	Debit	Credit
1	10% Preferred stock		60000		60000
7	4% Bank Loan		80000		80000
16	6% Note payable		25000		25000
	Beginning balance		7000
2	Accounts payable		65305
4	Accounts payable	816
5	Accounts payable	64489			7000
	Beginning balance	20000
6	Accounts receivable	165240
8	Accounts receivable	500
9	Accounts receivable		5508
10	Accounts receivable	50000
13	Accounts receivable		50000
12	Accounts receivables		160232
15	Accounts receivables		7000	13000
	Beginning balance		40240
18	Accumulated depreciation-Equipment	20000
27	Accumulated depreciation-Equipment		5000
25	Accumulated depreciation-Equipment		5000		30240
14	Available-for-sale securities	15000		15000
	Beginning balance	41000
1	Cash	60000
3	Cash		158
5	Cash		63199
7	Cash	80000
8	Cash		500
11	Cash	1000
12	Cash	157037
13	Cash	40000
14	Cash		40000
16	Cash		5000
18	Cash	88000
19	Cash		1400
20	Cash		13670
21	Cash	3500
22	Cash		10000
23	Cash		267
24	Cash	500
30	Cash		7055
30	Cash		9100
31	Cash		3000
15	Cash	7000		324689
10.a	COGS	14830
6.a.	COGS	44490
9.a.	COGS		1483	57837
	Common stock		265000		265000
16	Delivery truck	37380		37380
27	Depreciation expense	5000		5000
24	Dividend Income		500		500
	Beginning balance	236200
17	Equipment		10000
18	Equipment		100000
21	Equipment		5000
				121200
29	Fair value adjustment -AFS	2500		2500
29	Fair value adjustment -Trading securities	5000		5000
20	Federal Income taxes payable(20000*18%)		3600
	Federal Income taxes payable(20000*18%)	3600			0
30	Federal Unemployment Taxes	160
	Federal Unemployment Taxes(20000*0.8%)		160		0
30	FICA Taxes payable	3060
20	FICA Taxes payable(20000*7.65%)		1530
	FICA Taxes payable(Employer contn.)		1530		0
18	Gain on sale of equipment		8000		8000
31	Income tax expense	3000		3000
25	Income tax receivable --30%*5000	1500		1500
28	Insurance expense	1000		1000
23	Interest expense	267		267
11	Interest income		1000		1000
	Interest payable		7380		7380
17	Loss due to hurricane	10000		10000
13	Loss on exchange rate fluctuation	10000		10000
21	Loss on sale	1500		1500
	Beginning balance	22000
2	Merchandise Inventory	60468
3	Merchandise Inventory	158
4	Merchandise Inventory		756
5	Merchandise Inventory		1290
6.a.	Merchandise Inventory		44490
9.a.	Merchandise Inventory	1483
10.a	Merchandise Inventory		14830	22743
29	OCI-Unrealised gain on Long-term (AFS) securities		2500		2500
	Pay-roll tax expense	2770		2770
	Beginning balance	2000
28	Prepaid Insurance		1000	1000
25	Prior-period item-Depreciation exp.(equip.)	5000		5000
	Beginning balance		10400
22	Retained Earnings	10000
25	Retained Earnings		1500		1900
20	Salaries expense	20000		20000
12	Sales discounts	3195		3195
9	Sales Returns	5100		5100
6	Sales revenue		153000
10	Sales revenue		50000		203000
6	Sales tax payable		12240
9	Sales tax payable	408
30	Sales tax payable	11832			0
2	Sales tax receivable	4837
4	Sales tax receivable		60
30	Sales tax receivable		4777	0
20	State Income taxes payable(20000*6%)		1200
	State Income taxes payable(20000*6%)	1200			0
30	State Unemployment taxes	1080
	State Unemployment taxes(20000*5.4%)		1080		0
	Beginning balance	1440
26	Supplies		1200	240
26	Supplies expense	1200		1200
14	Trading securities	25000		25000
29	Unrealised gain on short-term (trading) securities		5000		5000
19	Utilities expense	1400		1400
		1374140	1374140	696520	696520

Trial balance for Jan
Cash	324689
Accounts receivable	13000
Merchandise Inventory	22743
Trading securities	25000
Fair value adjustment -Trading securities	5000
Supplies	240
Prepaid Insurance	1000
Income tax receivable	1500
Delivery truck	37380
Equipment	121200
Accumulated depreciation-Equipment		30240
Available-for-sale securities	15000
Fair value adjustment -AFS	2500
Accounts payable		7000
Interest payable		7380
4% Bank Loan		80000
6% Note payable		25000
Common stock $ 10 par		265000
10% Preferred stock		60000
Retained Earnings		1900
OCI-Unrealised gain on Long-term (AFS) securities		2500
Sales revenue		203000
Sales Returns	5100
Sales discounts	3195
COGS	57837
Supplies expense	1200
Utilities expense	1400
Depn.exp	5000
Salaries expense	20000
Pay-roll tax expense	2770
Insurance expense	1000
Interest expense	267
Loss on exchange rate fluctuation	10000
Loss on sale of Equipment	1500
Interest income		1000
Gain on sale of equipment(discontinued opns.)		8000
Dividend Income		500
Unrealised gain on short-term (trading) securities		5000
Income tax expense	3000
Prior-period item-Depreciation exp.(equip.)	5000
Loss due to hurricane	10000
Total	696521	696520
Rose Merchandising Company
Multi-step Income statement
Sales revenue	203000
Less:Sales Returns	-5100
Less:Sales discounts	-3195
Net sales		194705
Less: COGS		-57837
Gross Margin		136868
Less: Operating Expenses:
Supplies expense	1200
Utilities expense	1400
Depn.exp	5000
Salaries expense	20000
Pay-roll tax expense	2770
Insurance expense	1000
Loss on sale of Equipment	1500
Unrealised gain on short-term (trading) securities	-5000	-27870
Operating Income		108998
Add/(Less): Non-operating items
Interest expense	-267
Interest income	1000
Dividend Income	500
Prior-period item-Depreciation exp.(equip.)	-5000	-3767	EPS
Income from continuing operations		105232	3.97
Add:Gain on sale of equipment(discontinued opns.)		8000	0.30
Less: Non-recurring:Loss due to hurricane		-10000	-0.38
Income before tax		103232	3.90
Less:Income tax expense		-3000
Net Income		100232	3.78
Less Pref. div. (60000*10%)		-6000
Earnings for Equity		94232	3.56
Statement of Comprehensive Income
Net Income		100232
OCI--
Loss on exchange rate fluctuation	-10000
OCI-Unrealised gain on Long-term (AFS) securities	2500	-7500
Comprehensive Income		92732
Statement of Retained Earnings
Beginning balance		10400
Add:Net income		100232
Add: Income tax receivable(PP depn.)		1500
Less: Dividends paid		-10000
Ending balance		102132
Classified Balance sheet
Assets
Current assets
Cash		324689
Accounts receivable		13000
Merchandise Inventory		22743
Trading securities	25000
Add:Fair value adjustment -Trading securities	5000	30000
Supplies		240
Prepaid Insurance		1000
Income tax receivable		1500
Total Current assets			393172
Fixed assets
Delivery truck		37380
Equipment	121200
Accumulated depreciation-Equipment	-30240	90960
Available-for-sale securities	15000
Add: Fair value adjustment -AFS	2500	17500	145840
Total Assets			539012
Liabilities & Equity
Current Liabilities
Accounts payable		7000
Interest payable		7380
4% Bank Loan		80000	94380
Total current Liabilities
Long-term liabilities
6% Note payable		25000
Total long-term Liabilities			25000
Equity
Common stock $ 10 par		265000
10% Preferred stock		60000
Retained Earnings		102132
OCI (-10000+2500)		-7500
Total equity			419632
Total Liabilities & Equity			539012