On January 1, 2021, the general ledger of Freedom Fireworks includes the following account balances:

During January 2021, the following transactions occur:

January 1 Borrow $100,000 from Captive Credit Corporation. The installment note bears interest at 7% annually and matures in 5 years. Payments of $1,980 are required at the end of each month for 60 months.

January 4 Receive $31,000 from customers on accounts receivable.

January 10 Pay cash on accounts payable, $11,000.

January 15 Pay cash for salaries, $28,900.

January 30 Firework sales for the month total $195,000. Sales include $65,000 for cash and $130,000 on account. The cost of the units sold is $112,500.

January 31 Pay the first monthly installment of $1,980 related to the $100,000 borrowed on

January 1. Round your interest calculation to the nearest dollar.

Required:

1. Record each of the transactions listed above.

2. Record adjusting entries on January 31.
a. Depreciation on the building for the month of January is calculated using the straightline method. At the time the building was purchased, the company estimated a service life of 10 years and a residual value of $24,000.

b. At the end of January, $3,000 of accounts receivable are past due, and the company estimates that 50% of these accounts will not be collected. Of the remaining accounts receivable, the company estimates that 2% will not be collected. No accounts were written off as uncollectible in January.

c. Unpaid salaries at the end of January are $26,100.
d. Accrued income taxes at the end of January are $8,000.

3. Prepare an adjusted trial balance as of January 31, 2021, after updating beginning balances (above) for transactions during January (requirement 1) and adjusting entries at the end of January (requirement 2).

4. Prepare a multiple-step income statement for the period ended January 31, 2021.

5. Prepare a classified balance sheet as of January 31, 2021. The carrying value of notes payable on January 31, 2021 is $98,603; $17,411 is reported as notes payable in the current liabilities section and $81,192 is reported as notes payable in the long-term liabilities section ($17, 411 + $81,192 = $98,603).

6. Record closing entries.

7. Analyze the following for Freedom Fireworks:

a. Calculate the debt to equity ratio. If the average debt to equity ratio for the industry is 1.0, is Freedom Fireworks more or less leveraged than other companies in the same industry?

b. Calculate the times interest earned ratio. If the average times interest earned ratio for the industry is 20 times, is the company more or less able to meet interest payments than other companies in the same industry?

c. Based on the ratios calculated in (a) and (b), would Freedom Fireworks be more likely to receive a higher or lower interest rate than the average borrowing rate in the industry?

Transcribed Image Text:

Accounts Debit Credit Cash $ 11,200 Accounts Receivable 34,000 Allowance for Uncollectible Accounts $ 1,800 Inventory 152,000 Land 67,300 Buildings Accumulated Depreciation Accounts Payable 120,000 9,600 17,700 Common Stock 200,000 Retained Earnings 155,400 $384,500 Totals $384,500