Happy Harry Pets was incorpora
| Happy Harry Petswas incorporated on January 1st. The business maintains a retailpet store, providing gourmet dog food and | |||||||||
| treats, and also provides a full range of pet care services,including grooming, dog-walking, and boarding. | |||||||||
| Thefollowing transactions occurred during the first twelve months ofoperations: | |||||||||
| January 1st | Common stock isissued in exchange for cash in the amount of………….………….……………………… | 295,000 | |||||||
| February 8th | The companypurchases and pays for 160 units of gourmet dog food at a price of$25 per unit ………….. | 4,000 | |||||||
| March 1st | The company payscash for a one-year insurance policy in the amount of……………….………………………..….. | 9,300 | |||||||
| March 31st | Rent on a retailspace for 12 months is paid in the amount of…..……….……………………………………… | 12,480 | |||||||
| April 1st | Grooming andboarding equipment with a useful life of 2 years is purchased forcash in the amount of …… | 18,000 | |||||||
| April 10th | Grooming suppliespurchased on account in the amount of …………..…………………………………………… | 1,450 | |||||||
| May 15th | The companypurchases and pays for another 370 units of gourmet dog food at aprice of $29 per unit ….. | 10,730 | |||||||
| May 30th | Grooming servicesare performed on account in the amount of…………………………………………………………..………… | 13,625 | |||||||
| June 1st | The company paysfor advertisements to be run for the next 12 months in the amountof ………………………. | 864 | |||||||
| June 30th | The company issuesa 5-year bond with a face value of $100,000 and a stated annualrate of 6%. | ||||||||
| Interest is due onJune 30th each year. The market rate is 8% on the date of issuance……………………………. | 100,000 | ||||||||
| July 25th | Dog-walkingservices are performed on account in the amount of…………………………………..………… | 14,225 | |||||||
| July 31st | 95 units ofgourmet dog food are sold for $70 per unit with terms 2/10, n/30.The sale is recorded using | ||||||||
| the gross methodin the amount of (see note c for cost flow assumptions)……………………………………………………………………………………. | 6,650 | ||||||||
| August 2nd | Boarding servicesare provided on account in the amount of………………………………………………………………. | 6,280 | |||||||
| August 6th | The companyreceives full payment from the customer for the July 31st sale……………………………………… | 6,517 | |||||||
| September15th | Pet sittingservices are performed on account in the amount of……………………..…………………………….………….. | 6,245 | |||||||
| September29th | Customer paymentsare received for services previously provided in the amount of……………………………….. | 1,250 | |||||||
| October 13th | 100 units ofgourmet dog food are sold for $73 per unit with terms 2/10, n/30.The sale is recorded using | ||||||||
| the gross methodin the amount of ………………………………………………………………………………………. | 7,300 | ||||||||
| October 29th | The companyreceives payment for half of the October 13th sale……………………………………………………… | 3,650 | |||||||
| November 1st | Equipmentoriginally purchased on April 1st for $2400 is sold for $2000cash | ||||||||
| November 15th | A bookkeeper ishired to help the company with daily accounting taxes and annualtax preparation | ||||||||
| December 15th | The bookkeeper ispaid $3,500 for the previous month’s services | 3,500 | |||||||
| Additionalinformation: | |||||||||
| a. | Grooming supplieson hand at the end of the month are as follows:……………………………………. | 870 | |||||||
| b. | The year-endbalance reported at the end of the year for the Allowance forDoubtful Accounts | ||||||||
| is estimated as 4%of outstanding receivables at the end of the year | |||||||||
| c. | The Company uses aperpetual inventory system and accounts for costs using theFirst-In-First-Out cost | ||||||||
| flow assumption.On December 31st, a count of ending inventory reveals that thereare 335 bags of dog | |||||||||
| food on hand. | |||||||||
| d. | All revenue isrecorded in the “Sales Revenue” account and reported net of cashdiscounts on the income statement. | ||||||||
| e. | The effectiveinterest method is used to amortize bond premiums anddiscounts | ||||||||
| f. | Adjustments aremade at the end of the year for prepaid insurance, rent,advertising, depreciation, and interest expense. | ||||||||
| g. | The bookkeeper ispaid a salary of $3,500 on the 15th of every month. | ||||||||
| h. | The companydeclared dividends of $650 for the year | ||||||||
| i. | Assume sellingexpenses include advertising and supplies expense. All otherexpenses, other than depreciation | ||||||||
| and interestexpense, are considered general & administrative. | |||||||||
| REQUIRED: | |||||||||
| 1. | Prepare journalentries for each transaction listed above (with descriptions). | ||||||||
| 2. | Post journalentries to the general ledger accounts. | ||||||||
|
3. 4. 5. 6. 7. |
Prepare an unadjusted trial balance. Prepare all necessary adjusting journal entries (withdescriptions) Prepare an adjusted trial balance on December 31st Prepare closing entries, post to the general ledger, and carryforward balances to January 1st of the next year. Prepare the following financial statements on December 31st(ignore income taxes): a. Income Statement (multi-step) b. Statement of Stockholders Equity c. Balance Sheet (classified) d. Statement of Cash Flows (indirect method) |
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Answer:
In the books of Happy Harry Pets:
| Date | Account Titles | Debit | Credit |
| $ | $ | ||
| Jan 1 | Cash | 295,000 | |
| Common Stock | 295,000 | ||
| Feb 8 | Inventory | 4,000 | |
| Cash | 4,000 | ||
| Mar 1 | Prepaid Insurance | 9,300 | |
| Cash | 9,300 | ||
| Mar 31 | Prepaid Rent | 12,480 | |
| Cash | 12,480 | ||
| Apr 1 | Equipment | 18,000 | |
| Cash | 18,000 | ||
| Apr 10 | Grooming Supplies | 1,450 | |
| Accounts Payable | 1,450 | ||
| May 15 | Inventory | 10,730 | |
| Cash | 10,730 | ||
| May 30 | Accounts Receivable | 13,625 | |
| Service Revenue | 13,625 | ||
| June 1 | Prepaid Advertising | 864 | |
| Cash | 864 | ||
| June 30 | Cash * | 92,016 | |
| Discount on Bonds Payable | 7,984 | ||
| Bonds Payable | 100,000 | ||
| July 25 | Accounts Receivable | 14,225 | |
| Service Revenue | 14,225 | ||
| July 31 | Accounts Receivable | 6,650 | |
| Sales Revenue | 6,650 | ||
| July 31 | Cost of Goods Sold ( 95 units x $ 25 per unit) | 2,375 | |
| Inventory | 2,375 | ||
| Aug 2 | Accounts Receivable | 6,280 | |
| Service Revenue | 6,280 |
Contd.
| Date | Account Titles | Debit | Credit |
| $ | $ | ||
| Aug 6 | Cash | 6,517 | |
| Sales Discount | 133 | ||
| Accounts Receivable | 6,650 | ||
| Sep 15 | Accounts Receivable | 6,245 | |
| Service Revenue | 6,245 | ||
| Sep 29 | Cash | 1,250 | |
| Accounts Receivable | 1,250 | ||
| Oct 13 | Accounts Receivable | 7,300 | |
| Sales Revenue | 7,300 | ||
| Oct 13 | Cost of Goods Sold | 2,640 | |
| Inventory | 2,640 | ||
| Oct 29 | Cash | 3,650 | |
| Accounts Receivable | 3,650 | ||
| Nov 1 | Depreciation Expense ( $ 2,400 / 24 months ) x 7 months | 700 | |
| Accumulated Depreciation : Equipment | 700 | ||
| Nov 1 | Cash | 2,000 | |
| Accumulated Depreciation : Equipment | 700 | ||
| Equipment | 2,400 | ||
| Gain on sale of equipment | 300 | ||
| Nov 15 | No entry needed | 0 | 0 |
| Dec 15 | Salaries and Wages Expense | 3,500 | |
| Cash | 3,500 |
* PVIFA 8%, n=5 = [ { 1 – ( 1 / 1.08) 5 }/ 5 ] = 3.9927
PVIF8%, 5th year = ( 1 / 1.08 ) 5 =0.6806
Present value of the bonds = 100,000 x 6 % x 3.9927 + 100,000 x0.6806 = 23,956.20 + 68,060 = $ 92,016.20 :
3. Happy Harry Pets
Unadjusted Trial Balance
December 31
| Account Titles | Debit | Credit |
| $ | $ | |
| Cash | 341,559 | |
| Accounts Receivable | 42,775 | |
| Inventory | 9,715 | |
| Grooming Supplies | 1,450 | |
| Prepaid Insurance | 9,300 | |
| Prepaid Rent | 12,480 | |
| Prepaid Advertising | 864 | |
| Equipment | 15,600 | |
| Accounts Payable | 1,450 | |
| Bonds Payable | 100,000 | |
| Discount on Bonds Payable | 7,984 | |
| Common Stock | 295,000 | |
| Sales Revenue | 13,950 | |
| Service Revenue | 40,375 | |
| Gain on sale of Equipment | 300 | |
| Sales Discounts | 133 | |
| Cost of Goods Sold | 5,015 | |
| Salaries and WAges Expense | 3,500 | |
| Depreciation Expense | 700 | |
| Totals | 451,075 | 451,075 |
4. In the books of Harry Happy Pets:
Adjusting entries:
| Account Titles | Debit | Credit | |
| December 31 | $ | $ | |
| a. | Grooming Supplies Expense | 580 | |
| Grooming Supplies | 580 | ||
| b. | Bad Debt Expense ( $ 42,775 x 4%) | 1,711 | |
| Allowance for Doubtful Accounts | 1,711 | ||
| c. | No entry required | ||
| d. | |||
| e. | Interest Expense ( $ 92,016 x 8% x 6 months / 12 months) | 3,681 | |
| Interest Payable ( $ 100,000 x 6% x 1/2) | 3,000 | ||
| Discount on Bonds Payable | 681 | ||
| f. | Insurance Expense ( $ 9,300 / 12 x 10) | 7,750 | |
| Prepaid Insurance | 7,750 | ||
| Rent Expense ( $ 12,480 / 12 x 9) | 9,360 | ||
| Prepaid Rent | 9,360 | ||
| Advertising Expense ( $ 864 / 12 x 7) | 504 | ||
| Prepaid Advertising | 504 | ||
| Depreciation Expense ( $ 15,600 / 24 months x 9 months) | 5,850 | ||
| Accumulated Depreciation : Equipment | 5,850 | ||
| g. | Salaries and Wages Expense ( $ 3,500 x 1 / 2 ) | 1,750 | |
| Salaries and Wages Payable | 1,750 | ||
| h. | Retained Earnings | 650 | |
| Dividends Payable | 650 |
5. Happy Harry Pets
Adjusted Trial Balance
December 31
| Account Titles | Debit | Credit |
| $ | $ | |
| Cash | 341,559 | |
| Accounts Receivable | 42,775 | |
| Allowance for Doubtful Accounts | 1,711 | |
| Inventory | 9,715 | |
| Grooming Supplies | 870 | |
| Prepaid Insurance | 1,550 | |
| Prepaid Rent | 3,120 | |
| Prepaid Advertising | 360 | |
| Equipment | 15,600 | |
| Accumulated Depreciation : Equipment | 5,850 | |
| Accounts Payable | 1,450 | |
| Salaries and Wages Payable | 1,750 | |
| Interest Payable | 3,000 | |
| Bonds Payable | 100,000 | |
| Discount on Bonds Payable | 7,303 | |
| Common Stock | 295,000 | |
| Sales Revenue | 54,192 | |
| Gain on sale of Equipment | 300 | |
| Cost of Goods Sold | 5,015 | |
| Salaries and Wages Expense | 5,250 | |
| Insurance Expense | 7,750 | |
| Grooming Supplies Expense | 580 | |
| Rent Expense | 9,360 | |
| Advertising Expense | 504 | |
| Depreciation Expense | 6,550 | |
| Bad Debt Expense | 1,711 | |
| Interest Expense | 3,681 | |
| Totals | $ 463,253 | $ 463,253 |
7. a. Happy Harry Pets
Income Statement
For the year ended December 31
| $ | $ | |
| Income from Operations | ||
| Net Sales Revenue | 54,192 | |
| Cost of Goods Sold | 5,015 | |
| Gross Profit | 49,177 | |
| Selling, General and Administrative Expenses | ||
| Selling Expenses | ||
| Supplies Expense | 580 | |
| Advertising Expense | 504 | |
| Total Selling Expenses | 1,084 | |
| General and Administrative Expenses | ||
| Salaries and Wages Expense | 5,250 | |
| Insurance Expense | 7,750 | |
| Rent Expense | 9,360 | |
| Bad Debt Expense | 1,711 | |
| Total General and Administrative Expense | 24,071 | |
| Total Selling, General and Administrative Expenses | 25,155 | |
| EBITDA | 24,022 | |
| Depreciation Expense | (6,550) | |
| Operating Income | 17,472 | |
| Other Income / (Expense) | ||
| Gain on sale of Equipment | 300 | |
| Interest Expense | (3,681) | ( 3,381) |
| Net Income | $ 14,091 |
b. Happy Harry Pets
Statement of Stockholders’ Equity
For the year ended December 31
| Balance, January 1 | $ 0 |
| Capital contributed | 295,000 |
| Net income for the period | 14,091 |
| Total Stockholders’ Equity before distributions | 309,091 |
| Less: Dividends declared | ( 650) |
| Balance, December 31 | $ 308,441 |
c. Happy Harry Pets
Balance Sheet
December 31
| Assets | $ | $ | Liabilities and Stockholders’ Equity | $ | $ |
| Current Assets | Current Liabilities | ||||
| Cash | 341,559 | Accounts Payable | 1,450 | ||
| Accounts Receivable, net | 41,064 | Salaries and Wages Payable | 1,750 | ||
| Inventory | 9,715 | Interest Payable | 3,000 | ||
| Supplies | 870 | Dividend Payable | 650 | ||
| Prepaid Insurance | 1,550 | Total Current Liabilities | 6,850 | ||
| Prepaid Rent | 3,120 | Long-Term Liabilities | |||
| Prepaid Advertising | 360 | Bonds Payable | 100,000 | ||
| Total Current Assets | 398,238 | Discount on Bonds Payable | (7,303) | 92,697 | |
| Property, Plant and Equipment | Total Liabilities | 99,547 | |||
| Equipment | 15,600 | ||||
| Accumulated Depreciation | (5,850) | 9,750 | Stockholders’ Equity | 308,441 | |
| Total Assets | $ 407,988 | Total Liabilities and Stockholder’s Equity | $ 407,988 |
Happy Harry Pets
Statement of Cash Flows
For the year ended December 31
| $ | $ | |
| Cash Flows from Operating Activities | ||
| Net Income | 14,091 | |
| Adjustments to reconcile the net income to net income fromoperations | ||
| Depreciation Expense | 6,550 | |
| Interest Expense | 3,681 | |
| Gain on Sale of Equipment | (300) | |
| Increase in Accounts Receivable | (41,064) | |
| Increase in Inventory | (9,715) | |
| Increase in Supplies | (870) | |
| Increase in Prepaid Insurance | (1,550) | |
| Increase in Prepaid Rent | (3,120) | |
| Increase in Prepaid Advertising | (360) | |
| Increase in Accounts Payable | 1,450 | |
| Increase in Salaries and Wages Payable | 1,750 | (43,548) |
| Net cash used in operating activities | (29,457) | |
| Cash Flows from Investing Activities | ||
| Cash paid for acquiring equipment | (18,000) | |
| Cash received on sale of equipment | 2,000 | |
| Net cash used in Investing Activities | (16,000) | |
| Cash Flows from Financing Activities | ||
| Cash received from issuance of common stock | 295,000 | |
| Cash received from issuance of bonds payable | 92,016 | |
| Net cash flows from Financing Activities | 387,016 | |
| Net increase in cash | 341,559 | |
| Cash, January 1 | 0 | |
| Cash, December 31 | 341,559 |
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