Problem
Comprehensive Problem
The Anchor Down Company sells boat anchors. Currently they are only offering one model: the VU123. Anchor Down's trial balance at December 31, 2016, is presented below. All 2016 transactions for the year have been recorded , except for the items marked with dashes and those described below.
|
|
Debit
|
Credit
|
|
Cash
|
$ 1,200
|
|
|
Accounts Receivable
|
40,000
|
|
|
Allowance for Doubtful Accounts
|
|
$ 2,000
|
|
Inventory
|
31,350
|
|
|
Prepaid Insurance
|
9,000
|
|
|
Land
|
26,000
|
|
|
Buildings
|
137,500
|
|
|
Equipment
|
70,000
|
|
|
Patents
|
16,000
|
|
|
Accumulated Depreciation-Buildings
|
|
57,500
|
|
Accumulated Depreciation-Equipment
|
|
17,500
|
|
Accounts Payable
|
|
95,000
|
|
Income Taxes Payable
|
|
--
|
|
Salaries and Wages Payable
|
|
--
|
|
Notes Payable (due in 2017)
|
|
25,000
|
|
Interest Payable
|
|
--
|
|
Notes Payable (due after 2017)
|
|
30,000
|
|
Common Stock
|
|
100,000
|
|
Retained Earnings (1/1/2016)
|
|
39,050
|
|
Dividends
|
5,000
|
|
|
Sales Revenue
|
|
--
|
|
Loss (gain) on Disposal of Assets
|
--
|
--
|
|
Bad Debt Expense
|
--
|
|
|
Cost of Goods Sold
|
--
|
|
|
Depreciation Expense
|
--
|
|
|
Income Tax Expense
|
--
|
|
|
Insurance Expense
|
--
|
|
|
Interest Expense
|
--
|
|
|
Other Operating Expenses
|
10,000
|
|
|
Amortization Expense
|
--
|
|
|
Salaries and Wages Expense
|
20,000
|
|
|
Total
|
$ 366,050
|
$ 366,050
|
Anchor Down uses the FIFO inventory method in accounting for its inventory. All sales and all purchases of inventory are on account. The inventory of anchors consists of the following price layers at January 1, 2016:
|
Beginning Inventory
|
|
Price Layer
|
Qty
|
Per Unit
|
Total
|
|
1 (oldest purch)
|
70
|
$ 105
|
$ 7,350
|
|
2
|
80
|
105
|
8,400
|
|
3
|
100
|
110
|
11,000
|
|
4
|
40
|
115
|
4,600
|
Unrecorded transactions related to sales and inventory (use inventory worksheet as a guide): a)Recorded sales for first quarter 2016, 180 units at $210 per unit. (The company uses a FIFO inventory system.) Also you will record cost of goods sold in Transaction m. below.
b)Purchased 110 VU123s at a cost of $120 per unit in April 2016.
c)Paid accounts payable, $15,000.
d)Recorded sales for second quarter 2016, 190 units at $220 per unit.
e) Purchased 290 VU123s at a cost of $120 per unit in July 2016.
f) Recorded sales for third quarter 2016, 150 units at $240 per unit.
g)Received notice that a retail customer owing Anchor Down $3,456 had filed bankruptcy and would be unable to pay. After exhausting all collection efforts, Anchor Down decided to write this customer's account off.
h)Purchased 130 VU123s at a cost of $125 per unit in October 2016.
i)Recorded sales for fourth quarter 2016, 240 units at $250 per unit.
j)Purchased 120 VU123s at a cost of $130 per unit in December 2016.
k) Paid accounts payable, $110,000.
l) Collected $175,000 from customers on account for the year 2016.
m) Record cost of goods sold based on FIFO inventory method for the whole year.
Note: The inventory worksheet (whichever one you chose to use) should be turned in as support. No need to do both worksheets. )
All other unrecorded transactions:
1. On April 1, 2016, Anchor Down purchased equipment for $25,000 cash and will be depreciated using the straight-line method over 5 years, with a salvage value of $5,000. Record purchase and depreciation (1a and 1b).
2.The equipment owned prior to this year (excluding transaction #1 above) is being depreciated using the straight-line method over 7 years. The salvage value is 10% of cost.
3.On July 1, 201 6, Anchor Down sold for $8,500 equipment which originally cost $24,000. Accumulated depreciation on this equipment at January 1, 2016 was $7,000; 2016 depreciation (Jan - June, prior to the sale of the equipment ) was $2,500 and this depreciation expense has already been recorded in transaction #2 above.
4. The balance in prepaid insurance represents the payment of a $9,000 9-month premium paid on October 1, 2016.
5.The building is being depreciated using the straight -line method over 35 years. The salvage value is $15,000.
6.The patent was acquired on January 1, 2016, and has a useful life of 10 years from that date. 7.Unpaid salaries and wages at December 31, 2016, total $8,000.
8. Both the short-term and long-term notes payable are dated January 1, 2016, and carry a 5.875% interest rate. All interest is payable in the next 12 months.
9.The company uses the aging method (percent of receivables) in estimating its allowance for doubtful accounts and bad debts expense. Anchor Down estimates that 7.5% of the ending receivables balance is deemed to be uncollectible.
10. Income tax rate is 35% for 2016. It will be paid on March 15, 2017.
Instructions
I. Prepare journal entries for the transactions listed above (including any adjusting entries necessary) and post to T-Accounts.
II. Prepare an updated December 31, 2016, trial balance.
III. Prepare a multi-step income statement for the year ended December 31, 201 6.
IV. Prepare a retained earnings statement for the year ended ecember 31, 2016.
V. Prepare a December 31, 2016 classified balance sheet.
VI. Compute Anchor Down's various ratios per the ratio tab found on the template. Explain each ratio and in doing so assess the company's liquidity, profitability, management of its receivables and inventory and the age of its fixed assets and answer any questions found on that tab? Note you are given these ratios for 2014, 2015 and industry averages in the template.