Problem 1:

Record the following summary transactions for the second year (20X2) of business activities for Mechanical Engineering Group, Inc. on the worksheet provided below in the same way that transactions were recorded in textbook Exhibit 2.6. The difference between Exhibit 2.6 and the Problem 2.1 Worksheet is that the Problem 2.1 Worksheet contains opening account balances for a business that is now a going concern in its second year of operations. (Be sure to complete the last two lines of the worksheet for "Closing" and for "12/31/X2 Year end".)

Summary transactions:

1. Issued 2,000 additional shares of common stock at 35 per share.

2. Purchased additional land for $7,000 cash.

3. Collected $7,000 on accounts receivable from earlier sales.

4. Billed clients $42,000 for service performed during 20X2, collecting $31,000 at the time services were rendered with the remaining $11,000 not yet collected at yearend December 31, 20X2.

5. Paid $20,000 cash on the principal of the mortgage payable.

6. Incurred other expenses (interest on debt, taxes, salaries, utilities, etc.) during the year 20X2 of $24.000, of which $18,000 was paid in cash during 20X2, with $6,000 remaining in accounts payable at year-end December 31, 20X2.

7. Paid $4,000 on accounts payable.

8. Recorded $3.000 in depreciation expense on the budding for the year ended December Building (net) 20X2 (original cost of budding was $300,000). [Note: In the interest of space, use the building (net) account and the Expense account shown on the Problem 1 Worksheet rather than an accumulated depreciation account and depreciation expense accounts respectively.

9. Declared and paid dividends to shareholders of $1.00 per common share, (Note: At the beginning of year 20X2, there were 10,000 shares of common stock outstanding. During 20x2, recall that an additional 2.000 shares were issued (see entry #1). The $1.00 per share dividend applies to all 12,000 shares.)

Problem 2:

The following amount balances are available for The Clothing Outlet, Inc., a discount retailer, as of and for the year ended December 31, 20X9, except for the retained earnings balance which is stated below as of January 1. 20X9:

Cash .......................................................................  $11,600,003

Accounts receivable ........................................................  $9,000.000

Marketable securities ................................................  $4,000,000

Prepaid insurance....................................................... $400,000

Inventory .................................................................  $8,000,000

Equipment........................................................................ $7,000.000

Accumulated depreciation: equipment ...................... $3,000,000

Buildings ..............................................................................  $22,000,000

Accumulated depreciation: buildings........................ $5,000,000

Land..........................................................  $6,000,000

Investments (long-term) ...........................................  $4,000,000

Accounts payable .....................................................  $9,000,000

Salaries payable........................................................ $1,000,000

Dividends payable..................................................... $500,000

Interest payable.......................................................... $800,000

Notes poyabk (long enn) ........................................  $11,000,000

Bonds payabk (long term) ......................................  $14,000,000

Cannon stock ...........................................  $18,000,000

Retanined Earnings (as of Jan. 1, 20X9)......................... $7,400,000

Dividends declared ...................................................  $500,000

Sales .......................................................................  $80,000,000

Cost of goods sold.................................................. $48,000,000

Interest revenue ........................................................ $200,000

Interest expense .......................................................  $1,700,000

Income tax expense .................................................  $1,900,000

Belting expenses:

Sales salaries and commissions ...................................  $6,900,000

Insurance expense ................................................. $2,100,000

Advertising expense ............................................................ $3,000,000

Utilities expense ........................................................ $3,000,00

Depreciation expense: equipment.......................... $8300,000

Delivery expense................................................... $500,000

General and administrative expenses:

Executive and administrative salaries ...................  $5,800,000

Utilities expense ..........................................................  $3,100.000

Rental expense....................................................... $600,000

Depreciation expense: buildings ............................  $500,000

Label each of the accounts listed above as an asset (A) liability (L), permanent equity account (PE). or temporary equity account (TE).

Problem 3:

Based on the facts provided in problem and on your labeling of the accounts as assets, liabilities, permanent equity, or temporary equity, prepare the following financial statements for The Clothing Outlet, Inc.:

a) A multiple-step Income Statement for the year-ended December 31, 20X9, as shown in Exhibit 2.2. Calculate earnings per share for use in this financial statement based on the assumption that there were 500,000 shares of common stock outstanding all year.

b) A Statement of Retained Earnings for the year-ended December 31, 20X9, as shown in Exhibit 2.4.

c) A Statement of Financial Position as of December 31, 20X9, as shown in Exhibit 2.1.

Note: Recall that it is important to prepare the financial statements in this order so that net income is determined first for use in the statement of retained earnings, and then the year end (December 31, 20X9) retained earnings balance is determined for use in the statement of financial position.

Problem 4:

a) Based on your answers to problem 4, calculate working capital, the current ratio, and the quick (acid test) ratio of The Clothing Outlet, Inc. as of December 31, 20X9.

b) Based on your answers to problem 4, calculate the gross profit ratio of The Clothing Outlet, Inc. for the year ended December 31, 20X9.

c) Suppose the industry's gross profit ratio is currently, and had been in past years, approximately 45% and that The Clothing Outlet Inc.'s gross profit ratio had been at approximately industry average in past years. Based on your calculation of the Clothing Outlet Inc.'s gross profit ratio in part (b) for 20X9, what may be occurring?