Question

Guitar Universe, Inc., is a popular source of musical instruments for professional and amateur musicians. The company’s accountants make necessary adjusting entire monthly, and they make all closing entries annually. Guitar Universe is growing rapidly and prides itself on having no long-term liabilities.
The company has provided the following trial balance dated December 31, 2011:



Other information pertaining to Guitar Universe’s trial balance is shown below:
1. The company’s most recent bank statement reports a balance of $46,975. Included with the bank statement was a $2,500 check from Iggy Bates, a professional musician, charged back to Guitar Universe as NSF. The bank’s monthly service charge was $25. Three checks written by Guitar Universe to suppliers of merchandise inventory had not yet cleared the bank for payment as of the statement date. These checks included: no. 507, $4,000;no. 511, $9,000; and no. 521, $8,000. Deposits made by Guitar Universe of $16,500 had reached the bank too late for inclusion in the current statement. The company prepares a bank reconciliation at the end of each month.
2. Guitar Universe has a portfolio of marketable securities. The initial investment in the port-folio was $19,000. As of December 31, the market value of these securities was $27,500.
Management classifies all short-term investments as “available for sale.”
3. During December, $6,400 of accounts receivable were written off as uncollectible. A recent aging of the company’s accounts receivable helped management to conclude that an allowance for doubtful accounts of $8,500 was needed at December 31, 2011.
4. The company uses a perpetual inventory system. A year-end physical count revealed that several guitars reported in the inventory records were missing. The cost of the missing units amounted to $1,350. This amount is not considered significant relative to the total cost of inventory on hand.
5. At December 31, approximately $900 in office supplies remained on hand.
6. The company pays for its insurance policies 12 months in advance. Its most recent payment was made on November 1, 2011. The cost of this policy was slightly higher than the cost of coverage for the previous 12 months.
7. Depreciation expense related to the company’s building and fixtures is $5,000 for the month ending December 31, 2011.
8. Although Guitar Universe carries an extensive inventory, it is not uncommon for musicians to order custom guitars made to their exact specifications. Manufacturers do not allow any sales returns of custom-made guitars. Thus, all customers must pay in advance for these special orders. The entire sales amount is collected at the time a custom order is placed, and it is credited to an account entitled “Unearned Customer Deposits.” As of December
31, $4,800 of these deposits remained unearned. Assume that the cost of goods sold and the reduction in inventory associated with all custom orders is recorded when the custom merchandise is delivered to customers. Thus, the adjusting entry requires only a decrease to unearned customer deposits and an increase to sales.
9. Accrued income taxes payable for the entire year ending December 31, 2011, total $81,000. No income tax payments are due until early in 2012.
Instructions
a. Prepare a bank reconciliation and make the necessary journal entries to update the accounting records of Guitar Universe as of December 31, 2011.
b. Prepare the necessary adjusting entry to update the company’s marketable securities port-folio to its mark-to-market value.
c. Prepare the adjusting entry at December 31, 2011, to report the company’s accounts receivable at their net realizable value.
d. Prepare the entry to account for the guitars missing from the company’s inventory at the end of the year.
e. Prepare the adjusting entry to account for the office supplies used during December.
f. Prepare the adjusting entry to account for the expiration of the company’s insurance policies during December.
g. Prepare the adjusting entry to account for the depreciation of the company’s building and fixtures during December.
h. Prepare the adjusting entry to report the portion of unearned customer deposits that were earned during December.
i. Prepare the adjusting entry to account for income tax expense that accrued during December.
j. On the basis of the adjustments made to the accounting records in parts a through i above, prepare the company’s adjusted trial balance at December 31, 2011.
k. Using the adjusted trial balance prepared in part j above, prepare an annual income statement, statement of retained earnings, and a balance sheet dated December 31, 2011.
l. Using the financial statements prepared in part k above, determine approximately how many days an account receivable remains outstanding before it is collected. You may assume that the company’s ending accounts receivable balance on December 31 is a close approximation of its average accounts receivable balance throughout the year.
m. Using the financial statements prepared in part k, determine approximately how many days an item of merchandise remains in stock before it is sold. You may assume that the company’s ending merchandise inventory balance on December 31 is a close approximation of its average merchandise inventory balance throughout the year.
n. Using the financial statements prepared in part k, determine approximately how many
Days it takes to convert the company’s inventory into cash. Stated differently, what is the length of the company’s operating cycle?
o. Comment briefly upon the company’s financial condition from the perspective of a short-termcreditor.


$1.99
Sales1
Views377
Comments0
  • CreatedApril 17, 2014
  • Files Included
Post your question
5000