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Question 9E

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Intermediate Accounting (Kieso)
Found in: Page 243

Short Answer

E5-9 (L02,3) (Current Assets and Current Liabilities) The current assets and current liabilities sections of the balance sheet of Allessandro Scarlatti Company appear as follows.

ALLESSANDRO SCARLATTI COMPANY

BALANCE SHEET PARTIAL

December 31, 2017

Cash

$40,000

Account payable

$61,000

Accounts receivables

$89,000

Note payable

67,000

Less: Allowance for doubtful accounts

(7,000)

82,000

$128,000

Inventory

171,000

Prepaid expenses

9,000

$302,000

The following errors in the corporation’s accounting have been discovered:

1. January 2018 cash disbursements entered as of December 2017 included payments of accounts payable in the amount of $39,000, on which a cash discount of 2% was taken.

2. The inventory included $27,000 of merchandise that had been received at December 31 but for which no purchase invoices had been received or entered. Of this amount, $12,000 had been received on consignment; the remainder was purchased f.o.b. destination, terms 2/10, n/30.

3. Sales for the first four days in January 2018 in the amount of $30,000 were entered in the sales journal as of December 31, 2017. Of these, $21,500 were sales on account and the remainder were cash sales.

4. Cash, not including cash sales, collected in January 2018 and entered as of December 31, 2017, totaled $35,324. Of this amount, $23,324 was received on account after cash discounts of 2% had been deducted; the remainder represented the proceeds of a bank loan.

Instructions

(a) Restate the current assets and current liabilities sections of the balance sheet in accordance with good accounting practice. (Assume that both accounts receivable and accounts payable are recorded gross.)

(b) State the net effect of your adjustments on Allessandro Scarlatti Company’s retained earnings balance.

The correct balance of the current asset is $286,696, and the current liability is $140,000.

See the step by step solution

Step by Step Solution

Definition of Cash Discount

Cash discount can be defined as the advantages of making early cash payments. It is provided to motivate the borrower to make early payments.

Current Assets and Current Liability Section

Current Assets

Amount $

Current Liabilities

Amount $

Cash

$34,396

Account payable

$85,000

Inventory

159,000

Note payable

55,000

Accounts receivables

91,300

Less: Allowance

(7,000)

Prepaid expenses

9,000

Total

$286,696

$140,000

Working notes:

Calculation of adjusted cash balance

Particular

Amount $

Reported cash balance

$40,000

Add: Cash disbursement of 2018 after discount of 2% for $39,000

38,220

Less: Cash Sales of 2018

(8,500)

Less: Cash collected on account

(23,324)

Less: Proceed from bank loan

(12,000)

Adjusted Cash balance

$34,396

Calculation of adjusted inventory balance

Particular

Amount $

Reported inventory balance

$171,000

Less: Consignment inventory (35,324 – 23,324)

(12,000)

Adjusted Balance of inventory

$159,000

Calculation of adjusted balance of receivables

Particular

Amount $

Reported balance

$89,000

Less: Account sales of January 2018

(21,500)

Add: Collection in January 2018 (23,324/.98)

23,800

Adjusted balance

$91,300

Calculation of adjusted Balance of account payable

Particular

Amount $

Reported balance

$61,000

Add: Cash disbursement

39,000

Less: Purchase invoice omitted (27,000 – 12,000)

(15,000)

Adjusted balance of account payable

$85,000

Calculation of adjusted balance of note payable

Particular

Amount $

Reported balance

$67,000

Less: Proceed from bank loan

(12,000)

Adjusted balance of note payable

$55,000

Net Effect of Adjustment on Retained Earnings

Particular

Amount $

Sales discount of January (39,000/0.98)*0.02

$795.92

January sales

30,000

January Purchase discount (39,000*2%)

780

December Purchases (27,000 – 12,000)

15,000

Consignment inventory

12,000

Net decrease in the retained earnings

$58,575.92

Most popular questions for Business-studies Textbooks

Case 1: Uniroyal Technology Corporation

Uniroyal Technology Corporation (UTC), with corporate offices in Sarasota, Florida, is organized into three operating segments. The high-performance plastics segment is responsible for research, development, and manufacture of a wide variety of products, including orthopedic braces, graffiti-resistant seats for buses and airplanes, and a static-resistant plastic used in the central processing units of microcomputers. The coated fabrics segment manufactures products such as automobile seating, door and instrument panels, and specialty items such as waterproof seats for personal watercraft and stain-resistant, easy-cleaning upholstery fabrics. The foams and adhesives segment develops and manufactures products used in commercial roofing applications.

The following items relate to operations in a recent year.

1. Serious pressure was placed on profitability by sharply increasing raw material prices. Some raw materials increased in price 50% during the past year. Cost containment programs were instituted and product prices were increased whenever possible, which resulted in profit margins actually improving over the course of the year.

2. The company entered into a revolving credit agreement, under which UTC may borrow the lesser of $15,000,000 or 80% of eligible accounts receivable. At the end of the year, approximately $4,000,000 was outstanding under this agreement. The company plans to use this line of credit in the upcoming year to finance operations and expansion.

Instructions

(a) Should investors be informed of raw materials price increase, such as described in item 1? Does the fact that the company successfully met the challenge of higher prices affect the answer? Explain.

(b) How should the information in item 2 be presented in the financial statements of UTC?

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