Assignment

Case Study 1

You have been hired by a company that offers design services and sells household goods, My Best Friend's House. The company has been in business for several years but does not have a good accounting system in place. The owner of the company, Mr. Erie, has provided you with the following account balances as of January 31, 2017. Income and expense amounts are for the month of January 2017.

Cash 8,350
Accounts payable 900
Accounts receivable 3,500
Accumulation depreciation 2,700
Additional paid-in capital 6,000
Common stock 1,200
Depreciation expense 900
Income tax expense 700
Income tax payable 250
Insurance expense 1,800
Interest expense 600
Interest payable 700
Inventory 12,000
Land 17,000
Note payable - current portion 3,000
Note payable - long-term 8,000
Office equipment 4,500
Rent expense 6,000
Retained earnings 7,875
Salary expense 12,000
Salaries payable 800
Service revenue 35,000
Travel expense 1,275
Unearned revenue 2,200

The president has told you that although the accounts are shown with a positive balance, they have the normal debit or credit balance that accounts in their account type have (e.g. - assets have a debit balance, liabilities have a credit balance).

There are six shareholders and Mr. Erie reports financial information to them on a monthly basis.

Required:

(1) Prepare a trial balance, income statement and balance sheet using the account balances provided to you. Set up your financial statements so that going forward, the president can enter the account balances in the trial balance and the amounts flow to the correct financial statements.

(2) Calculate the current ratio for My Best Friend's House. What does this tell you about the company?

(3) After you have completed your financial statements, Mr. Erie tells you that he believes a couple of mistakes have been made but he is not certain and doesn't want to change any amounts on the trial balance because "eventually it will all wash out." $500 of the $1,275 travel expenses are for a sales trip that he has planned for March 2017. A utility bill in the amount of $650 was received on February 10th for January usage. Mr. Erie received a deposit of $5,000 in January 2017 for an engagement scheduled for February 2017. He recorded this amount as Service Revenue when he received the deposit.

Prepare a memo to Mr. Erie detailing what journal entries, if any, need to be recorded for these items and include the total effect of any adjustments on the income statement. Include a brief explanation of why it is important to report accurate financial amounts.