MusicIsUs Inc is a supplier of musical instruments for profe

Music-Is-Us, Inc., is a supplier of musical instruments for professional and amateur musicians. The company’s accountants make adjusting entries monthly, and they make all closing entries annually . The company is growing rapidly and prides itself on having no long-term liabilities. The company has provided the following trial balance dated December 31, 2018.
MUSIC-IS-US, INC. TRIAL BALANCE DECEMBER 31, 2018
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 45,000

Marketable securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,000

Accounts receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125,000

Allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,000

Merchandise inventory. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 250,000

Office supplies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,200

Prepaid insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,600

Building and fixtures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,791,000

Accumulated depreciation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 800,000

Land. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64,800

Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70,000

Unearned customer deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,000

Income taxes payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75,000

Capital stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000,000

Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 240,200

Unrealized holding gain on investments. . . . . . . . . . . . . . . . . . . . . . . . 6,000

Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,600,000

Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 958,000

Bank service charges. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200

Uncollectible accounts expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,000

Salary and wages expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 395,000

Office supplies expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 400

Insurance expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,400

Utilities expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,600

Depreciation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48,000

Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75,000

$3,804,200 $3,804,200
Other information pertaining to the company’s trial balance is provided as follows. 1. The most recent bank statement reports a balance of $46,975. Included with the bank statement was a $2,500 check from Iggy Smarts, a professional musician, charged back to Music-Is-Us as NSF. The bank’s monthly service charge was $25. Three checks written by Music-Is-Us to suppliers of merchandise inventory had not yet cleared the bank for payment as of the statement date. These checks included: no. 508, $5,500; no. 511,
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$7,500; and no. 521, $8,000. Deposits of $16,500 reached the bank too late for inclusion in the current bank statement. The company prepares a bank reconciliation at the end of each month.

2. Music-Is-Us has a portfolio of marketable securities that originally cost $19,000. As of December 31, the market value of these securities was $27,500. All short-term investments are classified as “available for sale.”

3. During December, $6,400 of accounts receivable were written off as uncollectible. A recent aging of the company’s accounts receivable led management to conclude that an allowance for doubtful accounts of $8,500 is needed at December 31, 2018.

4. The company uses a perpetual inventory system. A year-end physical count revealed that several guitars reported in the inventory records were missing. The cost of the missing units amounted to $1,350. This amount is not considered significant relative to the total cost of inventory on hand.

5. At December 31, approximately $900 in office supplies remained on hand.

6. The company pays for its insurance policies 12 months in advance. Its most recent payment was made on November 1, 2018. The cost of this policy was slightly higher than the cost of coverage for the previous 12 months.

7. Depreciation expense related to the company’s building and fixtures is $5,000 for the month ending December 31, 2018.

8. Although Music-Is-Us carries an extensive inventory, it is not uncommon for experienced musicians to order custom guitars made to their exact specifications. Manufacturers do not allow any sales returns of custom-made guitars. The entire sales amount is collected at the time a custom order is placed, and is credited to an account entitled “Unearned Customer Deposits.” As of December 31, $4,800 of these deposits remained unfilled because the special-order guitars have not been received from the manufacturer. The cost of goods sold and the reduction in inventory associated with all custom orders is recorded when the custom merchandise is delivered to customers. At that time, the adjusting entry requires only a decrease to unearned customer deposits and an increase in sales.

9. Accrued income taxes payable for the entire year ending December 31, 2018, total $81,000. No income tax payments are due until early in 2019.

Instructions

a. Prepare a bank reconciliation and make the journal entries to update the accounting records of Music-Is-Us as of December 31, 2018.

b. Prepare the adjusting entry to update the company’s marketable securities portfolio to its mark-to-market value.

c. Prepare the adjusting entry at December 31, 2018, to report the company’s accounts receivable at their net realizable value (i.e., total amount receivable, less estimated allowance for uncollectible accounts).

d. Prepare the entry to account for the guitars missing from the company’s inventory at the end of the year.

e. Prepare the adjusting entry to account for the office supplies used during December.

f. Prepare the adjusting entry to account for the expiration of the company’s insurance policies during December.

g. Prepare the adjusting entry to account for the depreciation of the company’s building and fixtures during December.

h. Prepare the adjusting entry to report the portion of unearned customer deposits that were earned during December.

i. Prepare the adjusting entry to account for income tax expense that accrued during December.

j. On the basis of the adjustments made to the accounting records in parts a through i, prepare the company’s adjusted trial balance at December 31, 2018.

k. Using the adjusted trial balance prepared in part j, prepare an annual income statement, statement of retained earnings, and a balance sheet dated December 31, 2018.
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l. Using the financial statements prepared in part k, determine approximately how many days on average an account receivable remains outstanding before it is collected. You may assume that the company’s ending accounts receivable balance on December 31 is a close approximation of its average accounts receivable balance throughout the year.

m. Using the financial statements prepared in part k, determine approximately how many days on average an item of merchandise remains in stock before it is sold. You may assume that the company’s ending merchandise inventory balance on December 31 is a close approximation of its average merchandise inventory balance throughout the year.

n. Using the financial statements prepared in part k, determine approximately how many days it takes to convert the company’s inventory into cash. In other words, what is the length of the company’s operating cycle?

o. Comment briefly upon the company’s financial condition from the perspective of a short-term creditor.

Solution

Music-Is-Us, Inc., Bank reconciliation for december 31 2018 balance as per bank statement , december 31 2018 $46,975 add: deposit in transit $16,500 $63,475 deduct: outstanding cheques no. 508 $5,500 no.511 $7,500 no.521 $8,000 $21,000 adjusted cash balance $42,475 balance as per depositor\'s records, december 31 2018 $45,000 deduct: NSF from Iggy smarts $2,500 bank service charges $25 $2,525 adjusted cash balance $42,475 General Journal a) bank service charge $25 account receivable $2,500 cash $2,525 To account for service charge as well as the Nsf check b) marketable securiries $2,500 Investments $2,500 the difference between the reported $25,000 marketable securities to $27,500 c) uncollecatble account expenses $3,500 allowance for doubtful accounts $3,500 d) cost of goods sold $1,350 inventory $1,350 e) expense of office supplies $300 office supplies $300 f) insurance expense $600 prepaid insurance $600 To record the insurance expired in december g) depreciation expense $5,000 accumulated depreciation $5,000 h) unearned customer deposits $3,200 sales $3,200 To record the revenue from special order (8000-4800=3200) i) income tax expense $6,000 income tax payable $6,000 j) adjusted trial balance at december 31 2018 Music -Is-Us Inc adjusted trial balance december 31 2018 $ $ cash 42,475 marketable securities 27,500 accounts receivable 1,27,500 allowance for doubtful accounts 8,500 merchandise investment 2,84,650 office supplies 900 prepaid insurance 6,000 building & fixtures 17,91,000 accumulated depreciation 8,05,000 land 64,800 accounts payable 70,000 unearned custoer deposits 4800 income taxes payable 81,000 capital stock 1000000 retained earnings 2,40,200 unrealised holding gain on investment 8500 sales 16,03,200 cost of gods sold 959350 bank service cahrges 225 uncollectible account expense 12500 salary & wages expense 395000 office supplies expense 700 insurance expense 7000 utilities expense 3600 depreciation expense 53000 income tax expense 81000 total 3821200 3821200