Top Quality Appliance-Long Beach has just purchased a franchise from Top Quality Appliance (TQA). TQA is a manufacturer of kitchen appliances. TQA markets its products via retail stores that are operated as franchises. As a TQA franchisee, Top Quality Appliance-Long Beach will receive many benefits, including having the exclusive right to sell TQA brand appliances in Long Beach. TQA appliances have an excellent reputation and the TQA name and logo are readily recognized by consumers. TQA also manages national television advertising campaigns that benefit the franchisees. In exchange for these benefits, Top Quality Appliance-Long Beach will pay an annual franchise fee to TQA based on a percentage of sales. The annual franchise fee is a separate cost and in addition to the purchase of the franchise.

In addition to purchasing the franchise, Top Quality Appliance-Long Beach will also purchase land with an existing building to use for its retail store, store fixtures, and office equipment. The business will purchase appliances from TQA and resell them in its store, primarily to local building contractors for installation in new homes.

Following is the chart of accounts for Top Quality Appliance-Long Beach. As a new business, all beginning balances are $0.

Top Quality Appliance-Long Beach

Chart of Accounts

Top Quality Appliance-Long Beach completed the following transactions during 2018, its first year of operations:
a. Received $500,000 cash and issued common stock. Opened a new checking account at Long Beach National Bank and deposited the cash received from the stockholders.
b. Paid $50,000 cash for a TQA franchise.
c. Paid $200,000 cash and issued a $400,000, 10-year, 5% notes payable for land with an existing building. The assets had the following market values: Land, $100,000; Building, $500,000.
d. Paid $75,000 for store fixtures.
e. Paid $45,000 for office equipment.
f. Paid $600 for office supplies.
g. Paid $3,600 for a two-year insurance policy.
h. Purchased appliances from TQA (merchandise inventory) on account for $425,000.
i. Established a petty cash fund for $150.
j. Sold appliances on account to B&B Contractors for $215,000, terms n/30 (cost, $86,000).
k. Sold appliances to Davis Contracting for $150,000 (cost, $65,000), receiving a
6-month, 8% note.
l. Recorded credit card sales of $80,000 (cost, $35,000), net of processor fee of 2%.
m. Received payment in full from B&B Contractors.
n. Purchased appliances from TQA on account for $650,000.
o. Made payment on account to TQA, $300,000.
p. Sold appliances for cash to LB Home Builders for $350,000 (cost, $175,000).
q. Received payment in full on the maturity date from Davis Contracting for the note.
r. Sold appliances to Leard Contracting for $265,000 (cost, $130,000), receiving a 9-month, 8% note.
s. Made payment on account to TQA, $500,000.
t. Sold appliances on account to various businesses for $985,000, terms n/30 (cost, $395,000).
u. Collected $715,000 cash on account.
v. Paid cash for expenses: Salaries, $180,000; Utilities, $12,650
w. Replenished the petty cash fund when the fund had $62 in cash and petty cash tickets for $85 for office supplies.
x. Paid dividends, $5,000.
y. Paid the franchise fee to TQA of 5% of total sales of $2,045,000.
Requirements
1. Record the transactions in the general journal. Omit explanations.
2. Post to the general ledger.
3. It is a common business practice to reconcile the bank accounts on a monthly basis. However, in this problem, the reconciliation of the company's checking account will be done at the end of the year, based on an annual summary. Reconcile the bank account by comparing the following annual summary statement from Long Beach National Bank to the Cash account in the general ledger. Record journal entries as needed and post to the general ledger. Use transaction z as the posting reference.

4. In preparation for preparing the adjusting entries, complete depreciation schedules for the first five years for the depreciable plant assets, assuming the assets were purchased on January 2, 2018:
a. Building, straight-line, 30 years, $50,000 residual value.
b. Store Fixtures, straight-line, 15 years, no residual value.
c. Office Equipment, double-declining-balance, 5 years, $5,000 residual value.
5. Record adjusting entries for the year ended December 31, 2018:
a. One year of the prepaid insurance has expired.
b. Management estimates that 5% of Accounts Receivable will be uncollectible.
c. An inventory of office supplies indicates $475 of supplies have been used.
d. Calculate the interest earned on the outstanding Leard Contracting note receivable.
Assume the note was received on October 31. Round to the nearest dollar.
e. Record depreciation expense for the year.
f. Record amortization expense for the year on the franchise, which has a 10-year life.
g. Calculate the interest owed on the note payable. Assume the note was issued on January 1.
6. Post adjusting entries and prepare an adjusted trial balance.
7. Prepare a multi-step income statement and statement of retained earnings for the year ended December 31, 2018. Prepare a classified balance sheet as of December 31, 2018. Assume Interest Receivable is a current asset and Interest Payable is a current liability.
8. Evaluate the company's success for the first year of operations by calculating the following ratios. Round to two decimal places. Comment on the results.
a. Liquidity:
i. Current ratio
ii. Acid-test ratio
iii. Cash ratio
b. Efficiency:
i. Accounts receivable turnover
ii. Day's sales in receivables
iii. Asset turnover
iv. Rate of return on total assets

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Common Stock Cash Petty Cash Retained Earnings Accounts Receivable Dividends Allowance for Bad Debts Sales Revenue Merchandise Inventory Interest Revenue Office Supplies Cost of Goods Sold Prepaid Insurance Franchise Fee Expense Interest Receivable Salaries Expense Notes Receivable Utilities Expense Land Insurance Expense Building Supplies Expense Accumulated Depreciation-Building Bad Debt Expense Bank Expense Store Fixtures Credit Card Expense Accumulated Depreciation-Store Fixtures Office Equipment Accumulated Depreciation-Office Equipment Depreciation Expense-Store Fixtures Franchise Accounts Payable Interest Payable Notes Payable Depreciation Expense-Building Depreciation Expense-Office Equipment Amortization Expense-Franchise Interest Expense Cash Short and Over