Question: One Trick Pony (OTP) incorporated and began
One Trick Pony (OTP) incorporated and began operations near the end of the year, resulting in the following post-closing balances at December 31:
The following information is relevant to the first month of operations in the following year:
• OTP will sell inventory at $145 per unit. OTP’s January 1 inventory balance consists of 35 units at a total cost of $2,800. OTP’s policy is to use the FIFO method, recorded using a perpetual inventory system.
• In December, OTP received a $4,350 payment for 30 units OTP is to deliver in January; this obligation was recorded in Deferred Revenue. Rent of $1,300 was unpaid and recorded in Accounts Payable at December 31.
• OTP’s note payable matures in three years, and accrues interest at a 10% annual rate. January Transactions
a. Included in OTP’s January 1 Accounts Receivable balance is a $1,500 balance due from Jeff Letrotski. Jeff is having cash flow problems and cannot pay the $1,500 balance at this time. On 01/01, OTP arranges with Jeff to convert the $1,500 balance to a six-month note, at 12% annual interest. Jeff signs the promissory note, which indicates the principal and all interest will be due and payable to OTP on July 1 of this year.
b. OTP paid a $500 insurance premium on 01/02, covering the month of January; the payment is recorded directly as an expense.
c. OTP purchased an additional 150 units of inventory from a supplier on account on 01/05 at a total cost of $9,000, with terms n/30.
d. OTP paid a courier $300 cash on 01/05 for same-day delivery of the 150 units of inventory.
e. The 30 units that OTP’s customer paid for in advance in December are delivered to the customer on 01/06. f. On 01/07, OTP received a purchase allowance of $1,350 on account, and then paid the amount necessary to settle the balance owed to the supplier for the 1/05 purchase of inventory (in c).
g. Sales of 40 units of inventory occurring during the period of 01/07–01/10 are recorded on 01/10. The sales terms are n/30.
h. Collected payments on 01/14 from sales to customers recorded on 01/10.Â
i. OTP paid the first 2 weeks’ wages to the employees on 01/16. The total paid is $2,200.
j. Wrote off a $1,000 customer’s account balance on 01/18. OTP uses the allowance method, not the direct write-off method.
k. Paid $2,600 on 01/19 for December and January rent. See the earlier bullets regarding the December portion. The January portion will expire soon, so it is charged directly to expense.
l. OTP recovered $400 cash on 01/26 from the customer whose account had previously been written off on 01/18.
m. An unrecorded $400 utility bill for January arrived on 01/27. It is due on 02/15 and will be paid then.
n. Sales of 65 units of inventory during the period of 01/10–01/28, with terms n/30, are recorded on 01/28.
o. Of the sales recorded on 01/28, 15 units are returned to OTP on 01/30. The inventory is not damaged and can be resold. OTP charges sales returns directly against Sales Revenue.
p. On 01/31, OTP records the $2,200 employee salary that is owed but will be paid February 1.
q. OTP uses the aging method to estimate and adjust for uncollectible accounts on 01/31. All of OTP’s accounts receivable fall into a single aging category, for which 8% is estimated to be uncollectible. (Update the balances of both relevant accounts prior to determining the appropriate adjustment, and round your calculation to the nearest dollar.)
r. Accrue interest for January on the note payable on 01/31.
s. Accrue interest for January on Jeff Letrotski’s note on 01/31 (see a).
Required:
1. Prepare all January journal entries and adjusting entries for items (a)–(s).
2. If you are completing this problem manually, set up T-accounts using the December 31 balances as the beginning balances, post the journal entries from requirement 1, and prepare an adjusted trial balance at January 31. If you are completing this problem in Connect using the general ledger tool, this requirement will be completed automatically using your previous answers.
3. Prepare an income statement, statement of retained earnings, and classified balance sheet at the end of January.
4. For the month ended January 31, indicate the (i) gross profit percentage (rounded to one decimal place), (ii) number of units in ending inventory, and (iii) cost per unit of ending inventory (include dollars and cents).
5. If OTP had used the percentage of sales method (using 2% of Net Sales) rather than the aging method, what amounts would OTC’s January financial statements have reported for (i) Bad Debt Expense and (ii) Accounts Receivable, net?
6. If OTP had used LIFO rather than FIFO, what amount would OTC have reported for Cost of Goods Sold on 01/10?
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