Reference no: EM131560987
Problem 1:
Record the following summary transactions for the second year (20X2) of business activities for Mechanical Engineering Group, Inc. on the worksheet provided below in the same way that transactions were recorded in textbook Exhibit 2.6. The difference between Exhibit 2.6 and the Problem 2.1 Worksheet is that the Problem 2.1 Worksheet contains opening account balances for a business that is now a going concern in its second year of operations. (Be sure to complete the last two lines of the worksheet for "Closing" and for "12/31/X2 Year end".)
Summary transactions:
1. Issued 2,000 additional shares of common stock at 35 per share.
2. Purchased additional land for $7,000 cash.
3. Collected $7,000 on accounts receivable from earlier sales.
4. Billed clients $42,000 for service performed during 20X2, collecting $31,000 at the time services were rendered with the remaining $11,000 not yet collected at yearend December 31, 20X2.
5. Paid $20,000 cash on the principal of the mortgage payable.
6. Incurred other expenses (interest on debt, taxes, salaries, utilities, etc.) during the year 20X2 of $24.000, of which $18,000 was paid in cash during 20X2, with $6,000 remaining in accounts payable at year-end December 31, 20X2.
7. Paid $4,000 on accounts payable.
8. Recorded $3.000 in depreciation expense on the budding for the year ended December Building (net) 20X2 (original cost of budding was $300,000). [Note: In the interest of space, use the building (net) account and the Expense account shown on the Problem 1 Worksheet rather than an accumulated depreciation account and depreciation expense accounts respectively.
9. Declared and paid dividends to shareholders of $1.00 per common share, (Note: At the beginning of year 20X2, there were 10,000 shares of common stock outstanding. During 20x2, recall that an additional 2.000 shares were issued (see entry #1). The $1.00 per share dividend applies to all 12,000 shares.)
Problem 2:
The following amount balances are available for The Clothing Outlet, Inc., a discount retailer, as of and for the year ended December 31, 20X9, except for the retained earnings balance which is stated below as of January 1. 20X9:
Cash ....................................................................... $11,600,003
Accounts receivable ........................................................ $9,000.000
Marketable securities ................................................ $4,000,000
Prepaid insurance....................................................... $400,000
Inventory ................................................................. $8,000,000
Equipment........................................................................ $7,000.000
Accumulated depreciation: equipment ...................... $3,000,000
Buildings .............................................................................. $22,000,000
Accumulated depreciation: buildings........................ $5,000,000
Land.......................................................... $6,000,000
Investments (long-term) ........................................... $4,000,000
Accounts payable ..................................................... $9,000,000
Salaries payable........................................................ $1,000,000
Dividends payable..................................................... $500,000
Interest payable.......................................................... $800,000
Notes poyabk (long enn) ........................................ $11,000,000
Bonds payabk (long term) ...................................... $14,000,000
Cannon stock ........................................... $18,000,000
Retanined Earnings (as of Jan. 1, 20X9)......................... $7,400,000
Dividends declared ................................................... $500,000
Sales ....................................................................... $80,000,000
Cost of goods sold.................................................. $48,000,000
Interest revenue ........................................................ $200,000
Interest expense ....................................................... $1,700,000
Income tax expense ................................................. $1,900,000
Belting expenses:
Sales salaries and commissions ................................... $6,900,000
Insurance expense ................................................. $2,100,000
Advertising expense ............................................................ $3,000,000
Utilities expense ........................................................ $3,000,00
Depreciation expense: equipment.......................... $8300,000
Delivery expense................................................... $500,000
General and administrative expenses:
Executive and administrative salaries ................... $5,800,000
Utilities expense .......................................................... $3,100.000
Rental expense....................................................... $600,000
Depreciation expense: buildings ............................ $500,000
Label each of the accounts listed above as an asset (A) liability (L), permanent equity account (PE). or temporary equity account (TE).
Problem 3:
Based on the facts provided in problem and on your labeling of the accounts as assets, liabilities, permanent equity, or temporary equity, prepare the following financial statements for The Clothing Outlet, Inc.:
a) A multiple-step Income Statement for the year-ended December 31, 20X9, as shown in Exhibit 2.2. Calculate earnings per share for use in this financial statement based on the assumption that there were 500,000 shares of common stock outstanding all year.
b) A Statement of Retained Earnings for the year-ended December 31, 20X9, as shown in Exhibit 2.4.
c) A Statement of Financial Position as of December 31, 20X9, as shown in Exhibit 2.1.
Note: Recall that it is important to prepare the financial statements in this order so that net income is determined first for use in the statement of retained earnings, and then the year end (December 31, 20X9) retained earnings balance is determined for use in the statement of financial position.
Problem 4:
a) Based on your answers to problem 4, calculate working capital, the current ratio, and the quick (acid test) ratio of The Clothing Outlet, Inc. as of December 31, 20X9.
b) Based on your answers to problem 4, calculate the gross profit ratio of The Clothing Outlet, Inc. for the year ended December 31, 20X9.
c) Suppose the industry's gross profit ratio is currently, and had been in past years, approximately 45% and that The Clothing Outlet Inc.'s gross profit ratio had been at approximately industry average in past years. Based on your calculation of the Clothing Outlet Inc.'s gross profit ratio in part (b) for 20X9, what may be occurring?