ACCY 500: Accounting Measurement, Reporting and Control
Group Assignment 1
Group Name:
Student Names:
Part I – Recording Transactions and Preparing Financial Statements
Bluberry Ltd is a clothing wholesaler, which has been operating for only one year. At the beginning of its second year of operations, it has the following items on its balance sheet:
$
Fixed Assets 2,000
Cash 2,000
Common Stock 400
Retained Earnings 600
5 year Bank Loan 3,000
During the second year, the company undertakes the following transactions:
Purchases inventory (clothing) for $700, on credit.
Sells inventory, which originally cost $600, for $1,400. Half of the customers buy on credit and the other half pays in cash.
Pays $150 for advertising and $75 for insurance. The advertising is paid in cash, but the insurance will be paid in cash later.
Purchases a new storage facility for $600, on credit.
Pays the warehouse employees $200 in cash.
Pays interest of 5% on its loan, in cash.
Pays $400 for accounts payables.
Receives $400 from its customers.
The company’s accountant calculates that as a result of the above transactions, the company will have to pay tax of $100 at a later date.
Finally, the board of directors decides to pay a dividend of $50 (the dividend is not paid by the end of the fiscal year).
On the following page, you are given a worksheet for Bluberry’s second fiscal year. Fill in the opening balances (from the end of the first year) and record the transactions during the second year. Calculate closing balances and then, using the formats given, construct a closing balance sheet and an income statement.
TRANSACTION WORKSHEET
ASSETS
SHAREHOLDERS’ EQUITY
LIABILITIES
Fixed Assets
Inventory Acc
Receiv Cash
Comm
Stock Ret
Earning Income
State Bank Loan Acc
Payable Tax
Payable Dividends
Payable
Opening balances
Purchase inventory
Sales
Cost of sales
Insurance
Advertising
Purchase storage fac.
Salaries
Interest
Pay accounts payable
Collect accounts rec.
Tax
Dividend
Transfer retained earnings
Closing balances
Income Statement
Sales
Cost of Sales
Gross Profit
Operating Expenses
Profit before Interest and Tax
Interest
Profit Before Tax
Tax
Profit After Tax
Balance Sheet
CURRENT ASSETS
Cash
Accounts Receivable
Inventory
Total Current Assets
FIXED ASSETS
Plant and Machinery
Total Long Term Assets
TOTAL ASSETS
CURRENT LIABILITIES
Accounts Payable
Dividends Payable
Tax Payable
Total Current Liabilities
LONG TERM LIABILITIES
Bank Loan
Total Long Term Liabilities
TOTAL LIABILITIES
SHAREHOLDERS’ EQUITY
Common Stock
Retained Earnings
Total Shareholders’ Equity
Part II: Accrual Accounting
Question 1: Sawyer Ltd
Sawyer Ltd has a year-end of December 31st. On August 31st, 2020, it paid (in cash) $30,000 of rent for the six months ending on February 28th, 2021. What amount should appear in the 2020 income statement? What amount should appear on the closing balance sheet for 2020? Record these transactions in a transaction worksheet.
Now suppose that the next two semi-annual rent payments are:
February 28th, 2021 $36,000
August 31st, 2021 $42,000
What amount should appear in the 2021 income statement? What amount should appear on the closing balance sheet for 2021? Record these transactions in a transaction worksheet.
Question 2: Austen Ltd
On December 31st, 2020, Austen Ltd (which has a December 31st year-end) received and paid a telephone bill of $18,000 comprising:
Calls for the three months ended on December 31st, 2020 $14,000
Line rental for the six months ending on March 31st, 2021 $4,000
What amounts should appear in the 2020 income statement and on the closing 2020 balance sheet in respect of this bill? Record these transactions in a transaction worksheet.
Part III: General Concepts
In each of the following questions, you have transactions that were either “missed” or wrong in the annual financial statements ending on December 31st.
Indicate the amounts involved and the effects on each of the accounts listed, using the following notation:
overstated (O), understated (U) or no effect (NE)
Each transaction is independent (i.e., the first transaction does not affect the second, etc…).
For each question be sure to show by what amounts the financial statements are wrong before the corrections are made for the forgotten or mistaken transactions. Ignore any tax effects.
Example:
A firm neglected to record a payment to a supplier of $10,000.
Current Assets (O) 10,000 Long-term assets NE
Current Liabilities (O) 10,000 Long-term liabilities NE
Capital Stock NE Retained Earnings NE
Net Income NE
Explanation (not required in your solution to the assignment):
Since the transaction was not recorded, current assets are overstated; the cash account was not charged on December 31st, but the company did pay the supplier. Hence, the closing balance of the cash account should have been $10,000 lower.
The obligation to pay the supplier (current liability) is still shown in the company’s balance sheet but it should have been eliminated after the payment was made. Hence, current liabilities are overstated.
NOTE: These are questions from past exams.
On December 31st, 2020, Shuffle Corp. borrowed $60,000 from a bank. Half of the loan was to be repaid in 2021, and the other half in 2022. This entry was never recorded. The effect of this error in the financial statements for the fiscal year end 2020 was:
Current Assets Long-term assets
Current Liabilities Long-term liabilities
Capital Stock Retained Earnings
Net Income
On December 31st, Aristotle Inc. bought inventory for $2,000, which was paid in cash. This entry was never recorded.
Current Assets Long-term assets
Current Liabilities Long-term liabilities
Capital Stock Retained Earnings
Net Income
On December 31st, Vassos Watch Corp. borrowed $100,000 from a bank. This amount has to be repaid in 6 months. It used this money, along with $50,000 of its own money, to purchase a piece of machinery for its factory for $150,000. It forgot to record any entries for borrowing and machinery purchase transactions.
Current Assets Long-term assets
Current Liabilities Long-term liabilities
Capital Stock Retained Earnings
Net Income
Mitch’s Pub Inc. neglected to record any entries to recognize the issuance of common stock. The firm sold 100 shares on the open market and received $32 per share.
Current Assets Long-term assets
Liabilities Capital Stock
Income Retained Earnings
A firm neglected to record any entries related to the sale of an item to a customer on credit. The item was in inventory at a cost of $5,000 at the time of sale and was sold for $7,500.
Current Assets Long-term assets
Current Liabilities Long-term liabilities
Common Stock Retained Earnings
Income
Part IV – Cash vs. Accrual Accounting
Prime Purchase is an electronics retailer. Indicate the effect of each of the following transactions (i.e. increase, decrease or no change) on Prime Purchase’s 2021 net income under cash accounting and accrual accounting, respectively. Clarification: for cash accounting show changes in the cash account; for accrual accounting show changes in the income statement.
Examples: Prime Purchase provided services and received $4,000 in cash.
Cash basis Accrual basis
Increase $4,000 Increase $4,000
Prime Purchase received a phone bill that amounts to $500 (related to calls made during 2021). Prime Purchase will pay the bill in January 2022.
Cash basis Accrual basis
No change Decrease $500
On November 12th, Prime Purchase purchased inventory for $200,000. It paid $120,000 in cash and owed the rest on account.
Cash basis Accrual basis
Prime Purchase paid employees $12,000 in wages for work done during the year 2021. An additional $2,000 for 2021 wages will be paid in January 2022.
Cash basis Accrual basis
On December 15th, Prime Purchase paid $36,000 for a twelve-month fire insurance policy that runs from December 16th, 2021 to December 15th, 2022. Include the effect of any adjusting entry necessary on December 31st.
Cash basis Accrual basis
Prime Purchase sold merchandise for $100,000 (half in cash and half on account). This merchandise had been purchased by Prime Purchase for $75,000 on a prior accounting period.
Cash basis Accrual basis
On December 20th, Prime Purchase made $20,000 cash sales of gift certificates, which can be used to purchase merchandise at the store. None of the gift certificates was redeemed by December 31st.
Cash basis Accrual basis
Part V. Revenue Recognition – Planet Fitness
Planet Fitness is one of the largest and fastest-growing franchisors and operators of fitness centers in the United States. When a customer signs up for a fitness club membership, she/he agrees to pay membership fees and dues for the right to use the fitness club. Using their balance sheet and additional information from their footnotes included on the following two pages, please answer the following questions.
As of the end of Year 2, what is the total value of dues and fees that customers had paid but that Planet Fitness has not yet recognized as revenue?
(a) What is the ratio of current assets divided by current liabilities (known as the current ratio) for Planet Fitness as of the end of Year 2?
(b) What would the (current) ratio be if Planet Fitness recognized all of the deferred revenue immediately instead of deferring it?
