Answer:
Freedom Fireworks
1. Journal Entries:
January 1 Debit Cash $100,000
Credit 7% Note Payable (Captive Credit Corporation) $100,000
To record the issuance of installment note payable with monthly payments of $1,980 for 60 months.
January 4 Debit Cash $31,000
Credit Accounts receivable $31,000
To record the receipt of cash from customers.
January 10 Debit Accounts payable, $11,000
Credit Cash $11,000
To record the payment on account to suppliers.
January 15 Debit Salaries, $28,900
Credit Cash $28,900
To record cash paid for salaries.
January 30 Debit Cash $65,000
Debit Accounts receivable $130,000
Credit Sales Revenue $195,000
To record sales for cash and on account.
Debit Cost of goods sold $112,500
Credit Inventory $112,500
To record the cost of goods sold.
January 31 Debit Interest Expense $583
Debit 7% Note Payable $1,397
Credit Cash $1,980
To record the monthly payment for the note payable.
2. Adjusting Journal Entries:
a. Debit Depreciation expense $800
Credit Accumulated Depreciation $800
b. Debit Bad Debts Expense $2,300
Credit Allowance for Uncollectible Accounts $2,300
c. Debit Salaries Expense $26,100
Credit Salaries Payable $26,100
d. Debit Income Taxes Expense $8,000
Credit Income Taxes Payable $8,000
3. Adjusted Trial Balance
As of January 31, 2021
Accounts Debit Credit
Cash $ 165,320
Accounts Receivable 133,000
Allowance for Uncollectible Accounts $ 4,100
Inventory 39,500
Land 67,300
Buildings 120,000
Accumulated Depreciation 10,400
Accounts Payable 6,700
Salaries Payable 26,100
Income Taxes Payable 8,000
7% Notes Payable 98,603
Common Stock 200,000
Retained Earnings 155,400
Sales Revenue 195,000
Cost of goods sold 112,500
Salaries Expense 55,000
Interest Expense 583
Depreciation Expense 800
Income Taxes Expense 8,000
Bad Debts Expense 2,300
Totals $704,303 $704,303
4. Income Statement
For the month ended January 31, 2021
Sales Revenue $195,000
Cost of goods sold 112,500
Gross profit $82,500
Salaries Expense 55,000
Depreciation Expense 800
Bad Debts Expense 2,300 $58,100
Operating income $24,400
Interest Expense 583
Income before taxes $23,817
Income Taxes Expense 8,000
Net income $15,817
5. Classified Balance Sheet
As of January 31, 2021
Assets
Current Assets:
Cash $ 165,320
Accounts Receivable 133,000
Allowance for Uncollectible (4,100)
Inventory 39,500 $333,720
Land 67,300
Buildings 120,000
Accumulated Depreciation (10,400) $176,900
Total assets $510,620
Liabilities and Equity
Current Liabilities:
Accounts Payable $6,700
Salaries Payable 26,100
Income Taxes Payable 8,000
7% Notes Payable 17,411 $58,211
Long-term Liabilities:
7% Notes Payable $81,192
Total liabilities $139,403
Equity:
Common Stock $200,000
Retained Earnings 171,217 $371,217
Total liabilities and equity $510,620
6. Closing Entries:
Debit Sales Revenue $195,000
Credit Income Summary $195,000
To close sales revenue to income summary.
Debit Income Summary $179,183
Credit:
Cost of goods sold $112,500
Salaries Expense 55,000
Depreciation Expense 800
Bad Debts Expense 2,300
Interest Expense 583
Income Taxes Expense 8,000
To close expenses to income summary.
Debit Net income $15,817
Credit Retained Earnings $15,817
To close net income to Retained Earnings.
7. Analysis:
a. Debt to Equity Ratio = $139,403/$371,217 * 100 = 0.38
Freedom Fireworks is less leveraged than other companies in the same industry.
b. Times Interest Earned = EBIT/Interest Expense = $24,400/$583 = 41.85x
The company is more able to meet interest payments than other companies in the same industry.
c. Freedom Fireworks is more likely to receive a lower interest rate than the average borrowing rate in the industry.
Explanation:
a) Data and Calculations:
1. Account Balances on January 1, 2021:
Accounts Debit Credit
Cash $ 11,200
Accounts Receivable 34,000
Allowance for Uncollectible Accounts $ 1,800
Inventory 152,000
Land 67,300
Buildings 120,000
Accumulated Depreciation 9,600
Accounts Payable 17,700
Common Stock 200,000
Retained Earnings 155,400
Totals $384,500 $384,500
Analysis of Transactions in January;
January 1 Cash $100,000 7% Note Payable (Captive Credit Corporation) $100,000
Monthly payments = $1,980 for 60 months.
January 4 Cash $31,000 Accounts receivable $31,000
January 10 Accounts payable, $11,000 Cash $11,000
January 15 Salaries, $28,900 Cash $28,900
January 30 Cash $65,000 Accounts receivable $130,000 Sales Revenue $195,000
Cost of goods sold $112,500 Inventory $112,500
January 31 Interest Expense $583 7% Note Payable $1,397 Cash $1,980
Accounts Receivable 34,000
January 4 Cash (31,000)
Sales Revenue 130,000
Jan. 31 Balance $133,000
Allowance for Uncollectible Accounts $ 1,800
Allowance for uncollectible accounts:
50% of $3,000 $1,500
2% of $130,000 2,600
New credit balance $4,100
Bad debts expense for January $2,300 ($4,100 - $1,800)
Analysis of Adjustments:
a. Depreciation expense $800 Accumulated Depreciation $800
b. Bad Debts Expense $2,300 Allowance for Uncollectible Accounts $2,300
c. Salaries Expense $26,100 Salaries Payable $26,100
d. Income Taxes Expense $8,000 Income Taxes Payable $8,000
