Part I:
J. Ross Company was started on January 1, 2003 with an investment of $104,600 cash to purchase 104,600 shares of J. Ross Company stock. Following are the assets and liabilities of the company on November 30, 2003 and the revenues and expenses for the eleven months ending November 30, 2003:
|
Notes Receivable
|
$80,000
|
Office Supplies
|
$14,000
|
|
Accounts Payable
|
37,400
|
Sales Returns & Allowances
|
1,200
|
|
Accounts Receivable
|
62,000
|
Sales Discounts
|
800
|
|
Cash
|
67,000
|
Purchases
|
58,800
|
|
Selling Expenses
|
38,000
|
Notes Payable
|
64,000
|
|
Equipment
|
46,000
|
Long Term Liabilities
|
79,000
|
|
Buildings
|
120,000
|
Common Stock
|
104,600
|
|
Sales
|
320,000
|
Prepaid Insurance
|
24,000
|
|
Wage Expense
|
78,300
|
Purchase Discounts
|
100
|
|
Administrative Expense
|
15,000
|
|
|
December transactions:
Dec. 5 Paid cash of $12,000 for operating expenses that were incurred and properly recorded in the previous period.
Dec. 8 Purchased 10,000 units of merchandise at $2.20 per unit, credit terms: 2/10, n/30. J. Ross Company uses a periodic inventory system (see information in the Appendix starting on page 241).
Dec. 10 Paid freight bill of $470 for merchandise purchased on December 8.
Dec. 14 Paid $10,000 for employee wages.
Dec. 15 Paid for merchandise purchased on December 8. The company takes all discounts to which it is entitled.
Dec. 16 Sold merchandise for $16,000 to Jeff Beckley on account. The cost of the merchandise sold was $10,000. Credit terms: 2/10, n/30.
Dec. 19 Issued a credit memo to Jeff Beckley for $1,000 for merchandise returned by him from the sale on December 16. The cost of the merchandise returned was $600.
Dec. 20 Purchased 15,000 units of merchandise at $2.50 per unit, credit terms: 2/10, n/30.
Dec. 26 Received full payment on account from Jeff Beckley.
Dec. 30 Paid for merchandise purchased on December 20. The company takes all discounts to which it is entitled.
Instructions:
(a) Show the effect of the December transactions on the Balance Sheet equation as illustrated.
List account name to the right of the expense amounts. Ross uses a periodic inventory system.
(b) Journalize the December transactions. For journal entries that involve the purchase of merchandise, J. Ross Company uses a periodic inventory system (see information in the Appendix starting on page 241.)
(c) Using the 11/30 balance plus the December transaction amounts, prepare an unadjusted trial balance. Use T accounts to verify balances.
PART II:
Additional information:
• The company purchased a 2-year insurance policy on January 1, 2003 for $24,000.
• On December 31, 2003, the balance in the Office Supplies account was $6,400.
• On January 1, 2003, the J. Ross Company purchased the building for $120,000. It is estimated that the annual depreciation will be $24,000.
• On February 1, 2003, equipment was purchased for $46,000. It is estimated that the annual depreciation will be $12,000.
• The interest on the Notes Payable is $3,600 per year due on January 1, 2004.
• Unpaid wages at December 31 of $6,700 will be paid in January.
Instructions:
- Prepare adjusting entries for the additional information shown above. Create new accounts as needed. Prepare an adjusted trial balance.
- Using the information from the adjusted trial balance for 12/31/03, prepare:
• Cost of Goods sold entry assuming ending inventory is $12,250.
• a multiple step income statement,
• a classified balance sheet and
• a statement of retained earnings.
- List the accounts that would be included in closing entries.
- Using the information from the income statement and balance sheet, compute the following:
• Current ratio
• Debt to total assets ratio
• Profit margin ratio
• Return on assets ratio
• Gross profit ratio
• Inventory turnover ratio
- Given the following industry averages, what conclusions can you draw from comparing the company ratios to the industry ratios?
• Current ratio 1.75:1
• Debt to total assets ratio 52%
• Profit margin ratio 20%
• Return on assets ratio 17%
• Gross profit ratio 68%
• Inventory turnover ratio 3 times
Part III:
After reviewing the preliminary financial statements prepared from the adjusted trial balance at December 31, 2003, the general ledger accountant noticed that some transactions and adjusting entries were not recorded. These are noted below.
Additional transactions for December:
• The transaction for a patent purchased on December 1 had not been recorded. The patent, purchased at a cost of $20,000 was estimated to have a 5 year useful life.
• On December 15, an accountant for J. Ross had received notice that one of its customers, B. Smith, was having financial difficulties and will not pay his outstanding balance of $2,000. J. Ross uses the allowance method for recording uncollectible accounts.
• On December 20, a $3,000, 8%, 3 month note dated December 1 was received from R. Tower in payment of her open account.
• On December 21, accepted a $2,500, 60 day 10% note receivable from C. Door as payment for merchandise purchased on that date.
• On December 30, B. Smith paid $1,500 of the amount previously written off and said that due to a corporate reorganization and new investors, he would be able to pay the account in full in January.
• On December 30, incurred research and development costs of $55,000 on account.
• The general ledger accountant noticed that the bank reconciliation for December had not been prepared. The information needed to prepare the reconciliation is listed below.
At December 31, the cash records of J. Ross showed the following.
• Cash deposits on the books were $8,700 but the bank statement for the month of December showed deposits of $7,000.
• Also a notice was included with the bank statement stating the bank had collected a note receivable of $80,000 plus $4,000 of interest from J. Ross’ largest customer on December 12. The accountant at J. Ross had not yet recorded this transaction on the books.
• In reviewing the checks issued during the month, the accountant noticed that $15,400 of checks were issued, yet the bank statement only showed $14,100 of checks had cleared during December.
• The cash balance per the bank statement at December 31 was $66,020.
• The estimate for bad debt expense needs to be posted.
J. Ross uses the allowance method to estimate bad debt expense. The credit manager estimates that $12,500 of the sales will prove to be uncollectible.
Instructions:
1. Prepare journal entries for the additional transactions, creating any new accounts as needed.
2. Based on the additional information presented above, prepare a bank reconciliation at December 31 using the cash balance from the preliminary adjusted trial balance at December 31, 2003 adjusted for the transactions recorded in part 1 above as the cash balance per books.
3. Prepare the adjusting journal entries that are required as a result of the additional information presented above. Remember there may be an adjusting entry required as a result of the bank reconciliation process.
4. What is the balance in the Allowance for doubtful accounts after all adjustingentries have been posted?
Assume the same facts as above except that the Allowance for Doubtful Accounts account had a $6,500 debit balance before any of the entries above were posted. What would the ending balance in the Allowance for Doubtful Accounts be in this case?
5. J. Ross decided to issue bonds as a means of additional cash financing. On January 1, 2004, J. Ross issued $500,000, 10%, 5-year bonds dated January 1, 2004, at 98. The bonds pay semiannual interest on January 1 and June 30. The company uses the straight-line method of amortization. Remember J. Ross has a calendar year end.
Prepare the entries that would be required related to these bonds in 2004.
6. Discuss the internal control weaknesses in the process described below.
Also list one way an internal control policy could be circumvented.
The controller of J. Ross Company was recently hired and she is developing a policies and procedures manual for the company. She decided to begin with her department and she is interviewing employees to find out what each employee in the accounting department does and to see if the proper controls are in place. She expressed concern about internal controls during the interview because J. Ross Company was a start-up company. Here is what she found:
One of the employees in her department, John Smith, is in charge of accounts payable and purchasing. He processes invoices for payment and prepares and approves purchase orders. He has been with the company since it started on January 1, 2003 and is considered a very dedicated employee. He often works late nights and weekends. Since J. Ross was a start up, he volunteered to take on the additional duties of purchasing manager. Additionally, the controller noted that the purchase order forms were not pre-numbered.
Part IV:
J. Ross Company was started on January 1, 2003. Due to a shortage in cash, the company issued $500,000 in bonds early in January 2004. During 2004, the company purchased $200,000 of equipment, the transaction for which was previously recorded. Additionally, J. Ross Company incurred the following selected financing and investing activities:
- On March 1, 2004, the company issued 20,000 shares of common stock @ $20 per share. The par value of J. Ross Company’s stock is $1.
- On July 1, 2004, J. Ross purchased Arta Inc. 12%, 10-year, $1,000 bonds for $100,000 including brokerage fees of $1,000. J. Ross Company is classifying this investment as Available-For-Sale.
- On December 1, 2004, the company acquired 30% interest in Boboh Inc. for $250,000.
Instructions:
(a) Journalize the transactions listed above as they occurred during 2004.
(b) Make all adjusting entries needed on December 31, 2004 for the transactions in part (a) with the following assumptions:
- The Arta Inc. bonds pay interest of $1,200 semiannually on January 1 and July 1.
- The market value of the Arta Inc. bonds was $98,000 at 12/31/04.
- On 12/31/04, Boboh Inc. reports net income of $10,000 and declared and paid a dividend of $5,000.
Part V:
Shown below are the comparative Balance Sheets and Income Statements for J. Ross Company at 12/31/04.
J. Ross Company
Balance Sheets
December 31, 2004
|
|
2004
|
2003
|
| Assets |
|
|
|
Current assets
|
|
|
|
Cash
|
429,802
|
66,420
|
|
Notes receivable
|
0
|
5,500
|
|
Accounts receivable, net
|
39,200
|
45,000
|
|
Interest receivable
|
1,200
|
27
|
|
Inventory
|
20,840
|
12,250
|
|
Office supplies
|
7,000
|
6,400
|
|
Prepaid insurance
|
0
|
12,000
|
|
Total current assets
|
498,042
|
147,597
|
|
Property, plant and equipment
|
|
|
|
Building
|
120,000
|
120,000
|
|
Less: accumulated depreciation
|
48,000
|
24,000
|
|
Equipment
|
246,000
|
46,000
|
|
Less: accumulated depreciation
|
62,000
|
12,000
|
|
Investments
|
349,500
|
0
|
|
Patent
|
15,667
|
19,667
|
|
Total assets
|
1,119,209
|
297,264
|
|
|
|
|
|
Liabilities and Stockholders' Equity
|
|
|
|
Current liabilities
|
|
|
|
Notes payable
|
50,000
|
64,000
|
|
Accounts payable
|
60,250
|
80,400
|
|
Interest payable
|
28,600
|
6,700
|
|
Wages payable
|
7,200
|
3,600
|
|
Total current liabilities
|
146,050
|
154,700
|
|
Long term liabilities
|
79,000
|
79,000
|
|
Bonds payable
|
492,000
|
0
|
|
Total liabilities
|
717,050
|
233,700
|
|
Common Stock ($1 par)
|
124,600
|
104,600
|
|
Additional Paid-In Capital
|
380,000
|
0
|
|
Retained Earnings
|
(100,441)
|
(41,036)
|
|
Less: Unrealized loss on Available For Sale Securities
|
(2,000)
|
0
|
|
Total stockholders' equity
|
402,159
|
63,564
|
|
Total liabilities and stockholders' equity
|
1,119,209
|
297,264
|
J. Ross Company
Income Statement
For the year ended
12/31/04 12/31/03
Net sales $435,760 $335,200
Cost of goods sold 135,465 105,230
Gross profit 300,295 229,970
Research & development 50,000 55,000
Selling expenses 49,400 38,000
Administrative expenses 156,900 142,100
Depreciation expense 74,000 36,000
Patent amortization expense 4,000 333
Income (loss) from operations (34,005) (41,463)
Other revenue (expense), net* (25,400) 427
Net income (loss) $(59,405) $(41,036)
*Includes $3,000, which is 30% of reported net income in Boboh Inc. stock investment (non-cash) and $2,000 bond discount amortization (non-cash) during 2004.
Instructions:
(c) Prepare a statement of cash flows for 2004 using the indirect method.
Additional information:
- On the December 31, 2004 Income Statement, “Other revenue (expense), net” contains $3,000 revenue representing 30% of reported net income in Boboh Inc. and $2,000 bond discount amortization. These are non-cash items.
- Dividends of $1,500 that were received as a result of the investment in Bobah Inc. should be included as an adjustment in cash flow from operating activities.
(d) Prepare a horizontal analysis of the income statement data for J. Ross Company using 2003 as a base. Comment on the significance of the trend results.
(e) Prepare a vertical analysis of the income statement data for J. Ross Company using both years. Comment on the significance of the results.
(f) Compute the following ratios for J. Ross Company for 2004. Comment on the results when compared to the industry averages and the future outlook for J. Ross Company.
*Actual averages from industry of major drug manufacturers (Multex.com).