C o m p r e h e n s i v e P r o b l e m C h a p t e r s 6 – 8 Fray Enterprises i
ID: 2585905 • Letter: C
Question
C o m p r e h e n s i v e P r o b l e m C h a p t e r s 6 – 8
Fray Enterprises is a small business that purchases electronic personal information managers (PIM) from manufacturers
and sells them to consumers. Th ese PIMs keep track of appointments, phone numbers, to-do lists, and the like. Fray
conducts business via the Internet and, at this point, carries only one model of PIM, the ZL-420. Fray provides the following
trial balance as of January 1, 2011.
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,200
Accounts Receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,800
Allowance for Bad Debts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 804
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,650
Prepaid Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,100
Offi ce Supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 900
Accounts Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,100
Wages Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,800
Taxes Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,400
Common Stock (10,000 shares). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,000
Retained Earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,546
Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $69,650 $69,650
Fray uses the periodic FIFO inventory method in accounting for its inventory. Th e inventory of ZL-420 consists of the
following inventory layers:
Layer Units Price per Unit Total Price
1
(oldest purchase) 50 $120 $ 6,000
2 80 130 10,400
3 70 135 9,450
4
(most recent purchase) 40 145 5,800
Total 240 $31,650
Fray provides the following additional relevant information:
• Th e company uses the percentage of receivables method in estimating bad debts; 2% of the ending receivables
balance is deemed to be uncollectible.
• Fray conducts an actual physical count of its inventory and offi ce supplies at the end of each month.
• Fray rents its warehouse, offi ce facilities, and computer equipment. Rent on the computer equipment is paid at
the beginning of each month. Rent on the warehouse and offi ce space is paid on the 15th of each month.
• Payroll is paid on the 5th and the 20th (pay periods end on the 15th and the last day of the month).
• Taxes Payable represents payroll taxes that are due by the 5th of the following month.
• All sales and all inventory purchases are on account.
The following transactions occurred for Fray during January of 2011:
Jan. 1 Paid rent on the computer equipment, $1,400.
5 Recorded sales for the week, 130 units at $210 per unit. (Th e company uses a periodic inventory system.)
5 Paid wages payable and taxes payable from the prior period.
5 Collected $19,000 from customers on account during the week.
8 Purchased offi ce supplies for cash, $300.
10 Received 70 ZL-420s from the manufacturer at a cost of $145 per unit.
11 Paid accounts payable, $16,900.
12 Collected $22,000 from customers on account during the week.
12 Recorded sales for the week, 120 units at $210 per unit.
15 Paid monthly rent for the offi ce and warehouse, $2,200.
15 Received 130 ZL-420s from the manufacturer at a cost of $150 per unit.
18 A customer returned a ZL-420 and requested a refund. A check was immediately mailed to the customer in
the amount of $210.
19 Collected $30,000 from customers on account during the week.
19 Recorded sales for the week, 140 units at $210 per unit.
20 Paid the semimonthly payroll for the pay period ending on January 15. Salaries and wages total $4,800 and
payroll taxes were as follows: FICA taxes payable, employee, $367; FICA taxes payable, employer, $367; state
withholding taxes payable, $310; federal withholding taxes payable, $780; federal unemployment taxes payable,
$60; state unemployment taxes payable, $180.
22 Received notice that a customer owing Fray $630 had fi led bankruptcy and would be unable to pay.
23 Paid the taxes payable from the payroll on January 20.
24 Received 180 ZL-420s from the manufacturer at a cost of $150 per unit.
25 Purchased offi ce supplies for cash, $480.
25 Paid accounts payable, $43,000.
26 Collected $30,500 from customers on account during the week.
26 Recorded sales for the week, 135 units at $220 per unit.
29 Customers returned 7 ZL-420s and requested refunds. Checks were immediately mailed to each customer in
the amount of $210 each.
30 Received 140 ZL-420s from the manufacturer at a cost of $145 per unit.
31 Collected $29,900 from customers on account.
31 Recorded sales for the partial week, 70 units at $220 per unit.
31 Accrued the semimonthly payroll for the pay period ending on January 31. Salaries and wages total $5,000
and payroll taxes were as follows: FICA taxes payable, employee, $382; FICA taxes payable, employer, $382;
state withholding taxes payable, $230; federal withholding taxes payable, $810; federal unemployment taxes
payable, $65; state unemployment taxes payable, $190.
Required:
1. Provide the required journal entries to record each of the above events.
2. Make the adjusting entries necessary (1) to record bad debt expense for the period and (2) to adjust inventory
and offi ce supplies. A count of inventory and offi ce supplies revealed 165 ZL-420s on hand and supplies
valued at $1,000.
3. Prepare a trial balance as of January 31, 2011.
4. Prepare an income statement and a balance sheet for Fray Enterprises.
5. Compute Fray’s number of days’ sales in inventory, number of days’ sales in accounts receivable, and number
of days’ purchases in accounts payable ratios. What can you conclude about the company’s liquidity position
based on this analysis?
Explanation / Answer
1. In the books of Fray Enterprises:
Contd.
2. Adjusting Entries:
3. Fray Enterprises
Trial Balance
January 31, 2011
4. Fray Enterprises
Income Statement
For the month ended January 31, 2011
Fray Enterprises:
Balance Sheet
January 31, 2011
5. Number of days of sales in inventory = 365 / Inventory Turnover = 365 / Cost of Goods Sold x Average Inventory = 365 / 84,550 x 27,850 = 120.23 days.
Number of days of sales in accounts receivable = 365 / Accounts Receivable Turnover = 365 / Net Credit Sales x Average Accounts Receivable = 365 / 125,320 x 24,285 = 70.73 days.
Number of days purchases in accounts payable = 365 / Accounts Payables Turnover = 365 / Cost of Goods Sold x Average Accounts Payable = 365 / 84,550 x 27,625 = 119.26 days.
Operating Cycle = 120.23 days + 70.73 days = 190.96 days.
Cash cycle = 190.96 days - 119.26 days = 71.70 days.
Going by the operating cycle alone, the liquidity position is dismal. But the situation is somewhat redeemed by a more reasonable cash cycle. Though not very healthy, one can say that the liquidity ratio is not too bad.
This is borne out by the healthy current ratio and the quick ratio. The firm is well positioned to meet its short term payment obligations.
Date Account Titles Debit Credit January $ $ 1 Computer Rent Expense 1,400 Cash 1,400 5. Accounts Receivable 27,300 Sales 27,300 5. Wages Payable 2,800 Taxes Payable 3,400 Cash 6,200 5. Cash 19,000 Accounts Receivable 19,000 8. Office Supplies 300 Cash 300 10. Purchases 10,150 Accounts Payable 10,150 11. Accounts Payable 16,900 Cash 16,900 12. Cash 22,000 Accounts Receivable 22,000 12. Accounts Receivable 25,200 Sales 25,200 15. Rent Expense 2,200 Cash 2,200 15. Purchases 19,500 Accounts Payable 19,500 18. Sales Returns and Allowances 210 Cash 210 19. Cash 30,000 Accounts Receivable 30,000 19. Accounts Receivable 29,400 Sales 29,400Related Questions
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