You have been charged with preparing year-end adjusting


Description:

 You have been charged with preparing year-end adjusting entries along with a multiple-step income statement and a classified balance sheet for Fat Tire, Inc., a wholesaler of bicycles and bicycle parts.  The financial statements will cover the year ended December 31, 2011.  A December 31 bank reconciliation, an unadjusted trial balance, and other information to help with the adjusting entries that follow.

 

Fat Tire, Inc.

Bank Reconciliation

December 31, 2011

 

Balance per Bank Statement

 

$293,350

  Deposits in Transit

$4,500

 

  Bank Error (See note 1 below)

1,200

 

  Outstanding Checks

(2,000)

3,700

Adjusted Balance

 

$297,050

 

 

 

Balance per Fat Tire's Books

 

$300,000

  Interest Earned per bank statement

$500

 

  NSF Check (See note 2 below)

(175)

 

  December bank service charges

(125)

 

  Book Error (See note 3 below)

(3,150)

(2,950)

Adjusted Balance

 

$297,050

 

 

 

note 1:  The bank incorrectly charged Fat Tire's account for a fee

              that belonged to another client of the bank.

 

note 2:  The bank returned a bad check deposited by Fat Tire

              that represented a receipt of payment from one of Fat Tire's

              customers.

 

 

note 3:  A check for $3,500 to pay an Accounts Payable

 

             balance was incorrectly recorded as $350 on Fat Tire's books.

 

 

Fat Tire, Inc.

Unadjusted Trial Balance

December 31, 2011

 

Debit

Credit

Accounts Payable

 

$50,000

Accounts Receivable

$425,700

 

Accumulated Depreciation (Equipment)

 

7,292

Accumulated Depreciation (Furniture & Fixtures)

 

29,500

Advertising Expense

18,000

 

Allowance for Doubtful Accounts

 

2,000

Cash

300,000

 

Common Stock

 

200,000

Cost of Goods Sold

2,622,750

 

Depreciation Expense

7,792

 

Equipment

10,000

 

Furniture & Fixtures

60,000

 

Income Tax Expense

229,034

 

Insurance Expense

15,000

 

Interest Revenue

 

5,200

Inventory

350,000

 

Miscellaneous Operating Expense

2,500

 

Note Payable

 

40,000

Payroll Tax Expense

21,160

 

Prepaid Insurance

21,000

 

Rent Expense

168,000

 

Rent Revenue

 

3,000

Retained Earnings

 

247,944

Salary Expense

264,500

 

Sales Discounts

30,000

 

Sales Returns

35,000

 

Sales Revenue

 

4,035,000

Supplies Expense

17,000

 

Unearned Rent

 

1,500

Utilities Expense

24,000

 

  Totals

$4,621,436

$4,621,436

Information related to adjusting entries:

  1. No entries have been made for the December 31 bank reconciliation.
  2. Fat Tire pays employees and all payroll related liabilities semi-monthly.  Each payment of payroll related liabilities is for the previous pay period.  Thus, Fat Tire needs to accrue salaries and payroll related expenses for the December 16th-31st pay period.  The following information was obtained for the last pay period of the year.

    Gross Pay = $11,500
    Federal Income Tax withholding rate = 20%
    FICA withholding rate = 8%
    FICA rate for the employer = 8%

    Assume no unemployment taxes were incurred during the pay period.  Fat Tire maintains a liability account Federal Income Tax withholdings and a separate liability account for all other payroll related tax liabilities.
  3. The Allowance for Doubtful accounts is adjusted at the end of each year using the percentage of sales method.  Fat Tires estimates that 1% of net sales will go uncollected.
  4. The Prepaid Insurance balance represents a $36,000 one-year policy that began on July 1.  The company adjusts any prepaid items on a monthly basis.
  5. Fat Tire decided to sublease some of its rental space.  On October 1, the company received $4,500 in advance from a neighboring business for 3 month's rent.  The lease period began on October 1.  Fat Tire adjusts rent related accounts on a monthly basis.
  6. Furniture and Fixtures were acquired on January 2, 2007 at a cost of $60,000.  Management selected a 10 year life with no residual value.  Fat Tire depreciates Furniture and Fixtures on a monthly basis using the straight-line method of depreciation.
  7. The Equipment was purchased on January 2, 2010 at a cost of $10,000.  Management selected a four year life with a $1,000 residual value.  Fat Tire depreciates Equipment on a monthly basis using the double-declining balance method of depreciation.  To obtain the monthly amount, management has decided to calculate the depreciation for the year and then record 1/12 of that amount each month.
  8. The Note Payable was issued on December 1, 2011.  The terms of the note state that the principal and interest is to be paid two years from the issuance date.  The interest rate stated on the note is 3 percent. 
  9. Fat Tire makes quarterly payments for its income taxes.  No entry has been made for the fourth quarter income taxes of 2011 which will be paid in 2012.  To make this entry, you will have to determine the Income Before Tax for the year.  One-fourth of that amount represents income earned in the fourth quarter.  Fat Tire's corporate tax rate is 40%.

Required:

  1. Prepared the adjusting entries required on December 31, 2011.
  2. Prepared a multiple-step income statement.
  3. Prepare a classified balance sheet.

Note:  If it helps, prepare a schedule like we completed in requirement #2 of Problem 3-54. It may help organize your data prior to preparing the financial statements.

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5/7/2016 8:15:19 AM

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