Homework SoursePB34 Analyzing JournaIizing and Interpreting Business Activi
PB3-4 Analyzing, JournaIizing and Interpreting Business Activities (LO 3-3, 3-5 & then some) -
The following items present a sample of business activities involving Dry Cleaner Corporation (DCC) for the year ended December 31st. DCC provides cleaning services for individual customers and for employees of several large companies in the city.
Dec 1: DCC’s owner paid $10,000 cash to acquire 200 of DCC’s common shares.
Dec 2: DCC borrows $2,000 cash from BofA and signs a promissory note to repay the
principal and interest at 1% per annum on December 1, 2018.
Dec 3: DCC ordered cleaning supplies at a total cost of $2,000. The supplies are
expected to be received in early January.
Dec 4: DCC paid $1,500 cash to its landlord which consisted of December’s Rent of
$1,000 and a Security Deposit of $500.
Dec 7: Customers paid $200 cash to DCC to obtain DCC gift cards that they could use to
obtain future cleaning services at no additional cost.
Dec 15: Customers paid $1,000 cash to DCC for cleaning services performed during the
first two weeks of December.
Dec 21: DCC ran advertising in the local newspaper today at a total cost of $500. DCC is
not required to pay for the advertising until January 21st.
Dec 22: DCC paid $1,000 to the landlord for January rent.
Dec 23: DCC’s owner sold 20 of his own DSS common shares to a private investor, at a
selling price of $1,200.
Dec 28: DCC paid in full for the advertising run in the local newspaper on December 21st.
Dec 29: The cleaning supplies ordered on December 3rd were received today. DCC does
not have to pay for these supplies until January 29th.
Dec 31: Today, DCC completed cleaning services for several large companies at a total price of $2,000. The companies are expected to pay for the services by January 31st.
1) Prepare a Trial Balance at 12/31/2017.
2) What was the source of the company’s financing – Debt or Equity
3) Prepare the Current Ratio and the Quick Ratio (aka Acid Test). Are the ratios good or bad? What standard did you use? New – Net Profit Ratio – compute.
4) Why could the financial statements be inaccurate? Hint - See Chapter 4 Topics for some ideas. Give a couple reasons.
Solution
working Date Accounts Title Dr Cr 1-Dec Cash $10,000 Common stock $10,000 2-Dec Cash $2,000 Notes payable $2,000 3-Dec no entry required 4-Dec Rent expenses $1,000 Security deposit $500 Cash $1,500 7-Dec Cash $200 Gift card Liabilities $200 15-Dec Cash $1,000 Cleaning services revenue $1,000 21-Dec Advertising expenses $500 Accounts Payable $500 22-Dec Prepaid rent $1,000 Cash $1,000 23-Dec no entry required 28-Dec Accounts Payable $500 Cash $500 29-Dec Cleaning supplies $2,000 Accounts payable $2,000 31-Dec Accounts Receivable $2,000 Cleaning services revenue $2,000 Ans 1 Trial Balance As on 12/31/2017 Dr Cr Cash $10,200 Accounts Receivable 2000 Cleaning supples 2000 Prepaid rent 1000 Securities deposit 500 Accounts Payable 2000 Gift card Liabilities 200 Notes payable 2000 Common stock 10000 Cleaning services revenue 3000 Advertising expenses 500 Rent expenses 1000 Total $17,200 $17,200 ans 2 Company used both equity and debt for financing. But majorily the company used Equity for financing its operations. ans 3 Current ratio 3.74 Current assets/Current liabilities 15700/4200 Cash $10,200 Accounts Receivable 2000 Cleaning supples 2000 Prepaid rent 1000 Securities deposit 500 Total current assets $15,700 Accounts Payable 2000 Gift card Liabilities 200 Notes payable 2000 Total current liabilities 4200 Quick ratio 2.90 Quick assets/CL (10200+2000)/4200 The current and quick ratio are good as the current assets is able to meet the short term obligations. Net Profit ratio Net profit/revenue*100 (3000-500-1000)/3000*100 50 % 0r .5 ans 4 Financial statements can be inaccurate as the adjusting entries have not been passed so as to show correct balances of the accounts. For example cleaning supplies must have been used in December but no entry passed. 2) Interest expense for the month of December not accured.
