Fundamentals in Accounting & Finance ACCT 501-01
Case Study Fall 2019
The Smith Case
On January 1st2018 Ricardo Smith started a small store selling computers, and other related products. The company is a sole proprietor operating under the name or Doing Business As (DBA) Smith & company. For accounting & reporting purposes, the company uses the accrual basis of accounting in accordance with Generally Accepted Accounting Principle. In December of 2018, Mr. smith terminated his accountant during an argument. The accountant left taking with him all of Smith & Co. accounting records. With the help of a bookkeeper, Mr. Smith was able to recreate and compile a list of transactions that occurred throughout the year. As the new accountant for Smith & Company, you were given the list of transactions and asked to re-create the audit trail for 2018. This includes:(1) a complete set of Journal entries to record all transactions. (2) A complete set of General Ledger “T” Accounts for 2018; (3)a spread sheet showing Trial Balance, adjustments, and Adjusted Trial Balance, (4) an Income Statement for the period Jan 1 - December 31, 2018, (5) a Statement of Equity and Balance Sheet as of December 31, 2018.
After compiling the information, what advice would you give to Mr. smith about his first year in business, briefly explain.
The following is the list of transactions and occurrences recovered by Mr. Smith:
Mr. Smith contributed $100,000 to start the business.
The company borrowed $1,500,000 on a 3-year 8% note. Interest is due on the outstanding balance at the end of each year. The first payment of $500,000 was made on December 29th, 2018.
The company purchased $240,000 dollars worth of equipment that has an estimated useful life of 5 years and a salvage value of 40,000. (hint: The company uses the straight-line method to compute and record depreciation expense.
The company signed a 5-year lease paying 2 years rent in advance. Rent is $2000 per month
The company bought supplies worth $50,000 on credit in January of 2018 and paid $30,000 against this account on July 30th, 2018. All the supplies were used up as of Dec 31, 2018.
During the year the company collected 150,000 dollars in advance for an order of highly specialized scanners and printers, but as of December 31, 2018 only $90,000 worth of the ordered had been delivered to the customer. The cost of the scanners & printers delivered was $70,000.
The company’s inventory records show the following activities:
March 1st, 2018 Purchased 200 computers at $1000 each
Sept 1st, 2018 Purchased 1000 computers at $800 each
December 1st
Sold 1100 computers as of December 31st, 2018 (hint: you may choose any of the four inventory assumptions in determining Cost of Goods sold)
Revenues from computers sold equaled $1,200,000 of which only $900,000 were collected as of December 31, 2018.
In addition, the company using historical experience of similar type businesses determined that 3% of receivables will be uncollected. (hint: the indirect or allowance method for writing off bad debt expenses is required here).
The company had the following expenses which were paid in cash during 2018:
Salaries & wages $130,000
Utilities $12,000
Shipping and postage $20,000
Advertising, $40,000
Please present your answers and analysis clearly and legibly. Answers should by typed in word or excel and submitted no later than Monday October 7th
2019….