Description:
You have been charged with preparing year-end adjusting entries along with a multiple-step income statement and a classified balance sheet for Fat Tire, Inc., a wholesaler of bicycles and bicycle parts. The financial statements will cover the year ended December 31, 2011. A December 31 bank reconciliation, an unadjusted trial balance, and other information to help with the adjusting entries that follow.
Fat Tire, Inc.
Bank Reconciliation
December 31, 2011
Balance per Bank Statement
$293,350
Deposits in Transit
$4,500
Bank Error (See note 1 below)
1,200
Outstanding Checks
(2,000)
3,700
Adjusted Balance
$297,050
Balance per Fat Tire’s Books
$300,000
Interest Earned per bank statement
$500
NSF Check (See note 2 below)
(175)
December bank service charges
(125)
Book Error (See note 3 below)
(3,150)
(2,950)
Adjusted Balance
$297,050
note 1: The bank incorrectly charged Fat Tire’s account for a fee
that belonged to another client of the bank.
note 2: The bank returned a bad check deposited by Fat Tire
that represented a receipt of payment from one of Fat Tire’s
customers.
note 3: A check for $3,500 to pay an Accounts Payable
balance was incorrectly recorded as $350 on Fat Tire’s books.
Fat Tire, Inc.
Unadjusted Trial Balance
December 31, 2011
Debit
Credit
Accounts Payable
$50,000
Accounts Receivable
$425,700
Accumulated Depreciation (Equipment)
7,292
Accumulated Depreciation (Furniture & Fixtures)
29,500
Advertising Expense
18,000
Allowance for Doubtful Accounts
2,000
Cash
300,000
Common Stock
200,000
Cost of Goods Sold
2,622,750
Depreciation Expense
7,792
Equipment
10,000
Furniture & Fixtures
60,000
Income Tax Expense
229,034
Insurance Expense
15,000
Interest Revenue
5,200
Inventory
350,000
Miscellaneous Operating Expense
2,500
Note Payable
40,000
Payroll Tax Expense
21,160
Prepaid Insurance
21,000
Rent Expense
168,000
Rent Revenue
3,000
Retained Earnings
247,944
Salary Expense
264,500
Sales Discounts
30,000
Sales Returns
35,000
Sales Revenue
4,035,000
Supplies Expense
17,000
Unearned Rent
1,500
Utilities Expense
24,000
Totals
$4,621,436
$4,621,436
Information related to adjusting entries:
No entries have been made for the December 31 bank reconciliation.
Fat Tire pays employees and all payroll related liabilities semi-monthly. Each payment of payroll related liabilities is for the previous pay period. Thus, Fat Tire needs to accrue salaries and payroll related expenses for the December 16th-31st pay period. The following information was obtained for the last pay period of the year.
Gross Pay = $11,500
Federal Income Tax withholding rate = 20%
FICA withholding rate = 8%
FICA rate for the employer = 8%
Assume no unemployment taxes were incurred during the pay period. Fat Tire maintains a liability account Federal Income Tax withholdings and a separate liability account for all other payroll related tax liabilities.
The Allowance for Doubtful accounts is adjusted at the end of each year using the percentage of sales method. Fat Tires estimates that 1% of net sales will go uncollected.
The Prepaid Insurance balance represents a $36,000 one-year policy that began on July 1. The company adjusts any prepaid items on a monthly basis.
Fat Tire decided to sublease some of its rental space. On October 1, the company received $4,500 in advance from a neighboring business for 3 months rent. The lease period began on October 1. Fat Tire adjusts rent related accounts on a monthly basis.
Furniture and Fixtures were acquired on January 2, 2007 at a cost of $60,000. Management selected a 10 year life with no residual value. Fat Tire depreciates Furniture and Fixtures on a monthly basis using the straight-line method of depreciation.
The Equipment was purchased on January 2, 2010 at a cost of $10,000. Management selected a four year life with a $1,000 residual value. Fat Tire depreciates Equipment on a monthly basis using the double-declining balance method of depreciation. To obtain the monthly amount, management has decided to calculate the depreciation for the year and then record 1/12 of that amount each month.
The Note Payable was issued on December 1, 2011. The terms of the note state that the principal and interest is to be paid two years from the issuance date. The interest rate stated on the note is 3 percent.
Fat Tire makes quarterly payments for its income taxes. No entry has been made for the fourth quarter income taxes of 2011 which will be paid in 2012. To make this entry, you will have to determine the Income Before Tax for the year. One-fourth of that amount represents income earned in the fourth quarter. Fat Tires corporate tax rate is 40%.
Required:
Prepared the adjusting entries required on December 31, 2011.
Prepared a multiple-step income statement.
Prepare a classified balance sheet.
Note: If it helps, prepare a schedule like we completed in requirement #2 of Problem 3-54.
It may help organize your data prior to preparing the financial statements.
