33:382:103 Lecture Notes - Lecture 5: Debits And Credits, Net Income
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Course Project Week 4
For this next part of the project you will build the Income Statement and Balance Sheet for the Bike Repair & Maintenance Shop (BRMS) for 2018. Use the information below and add another sheet to your Excel Workbook.
BRMS Information for 2018
In 2017, the repair shop was opened in October and ended the year with a ($10,500) operating loss.
Supply Inventory of parts & supplies maintained | $3,000 | |
Replacement parts are ordered as they are used. | ||
Shop hours of operation: 52 weeks a year. | ||
Monday - Friday 11am - 7pm | 8 hrs | |
Saturday 9am - 7pm | 10 hrs | |
Staff | FTEs | Salary |
Manager | 1 | $ 40,000 |
bookkeeper/purchaser | 0.8 | $ 20/hr |
Repairers | 2.5 | $ 18.50/hr |
Employee benefits: 20% of salary for the manager; 17% of salary for all others.
Supply costs | $ 65,000 |
utility costs | $ 7,200 |
marketing costs | $ 10,000 |
other costs | $ 22,000 |
Services Provided:
Budgeted: Repair Services: $100 each for 2,600 repairs
New Packages being considered
Package A: Preventative maintenance service package $ 80
Package B: Basic inspection, lube, adjust & clean shifting braking system $ 90
Package C: Annual peak performance package $100
Package D: Basic inspection, + replace shifting cables & preventative maintenance package $250
Estimated Services Provided under the new options:
Package A: 25 per week
Package B: 15 per week
Package C: 10 per week
Package D: 5 per week
Bike Repair & Maintenance Shop | |
Budgeted Income Statement | |
For the Year Ended December 31, 2018 | |
Revenue | |
Repair Fees | ? |
Other Income | ? |
Gross Revenues | ? |
Expenses | |
Salaries & Benefits | ? |
Wages & benefits | ? |
Utilities | 7,200 |
Marketing costs | 10,000 |
Supply costs | 65,000 |
Other costs | 22,000 |
Total Expenses | 104,200 |
Operating Income | ? |
Income tax | ? |
Net Income | $(43,692) |
Profit Margin | ? |
a) For the first full year of operations, BRMS was budgeted to lose over $40,000 performing repair services. These repairs have high fixed costs for the replacement parts in the repairs. If BRMS decided to expand their services to provide bicycle inspections and preventative maintenance, which use more employee time than supplies, what would the projected change in profit be?
b) If a decision is made to add more service oriented repairs is there a change in fixed and variable costs for repair services?
c) Complete a new ACTUAL Income Statement based on your decisions in a & b. Then complete the Balance sheet below.
Bike Repair & Maintenance Shop | |
Balance Sheet | |
December 31, 2018 | |
Assets | |
Cash | $ 8,500 |
Investments | - |
Accounts Receivable (net) | 6,000 |
Prepaid Expenses | 3,000 |
Inventory | ? |
Plant, Property & Equipment | 5,000 |
Less: Accumulated Depreciation | (167) |
Total Assets | $ 25,333 |
Liabilities | |
Accounts Payable | $ 4,500 |
Accrued Liabilities | 700 |
Salaries Payable | 4,000 |
Long-term liabilities | - |
Total Liabilities | $ 9,200 |
Common Stock | ? |
Retained Earnings | ? |
Total Stockholders' Equity | ? |
Total Liabilities & Stockholders' Equity | ? |
Next Steps: Financial Analysis for both BRBS & BRMS.
Using the information below for BRBS complete the financial metric analyses as indicated in Chapter 9 of the textbook for both BRMS (above) & BRBS.
The Income Statement for the Buy-Right Bike Shop is provided below for 2017 and 2018.
BUY-RIGHT BIKE STORE | ||
Income Statement | ||
2018 | 2017 | |
Sales - Online | $ 11,080,000 | $ 6,240,000 |
Sales - In store | 580,400 | 312,000 |
Sales returns | 221,600 | |
Gross Revenues | 11,438,800 | 6,552,000 |
Cost of Goods sold | 5,540,000 | 3,276,000 |
Contribution Margin | $ 5,898,800 | $ 3,276,000 |
Expenses | ||
Salaries & Benefits | $ 144,000 | $ 139,206 |
Wages & benefits | 391,880 | 274,997 |
Utilities | 13,200 | 13,000 |
Marketing costs | 200,000 | 200,000 |
Contributions & Community Involvement | 58,040 | 31,200 |
Other costs | 1,375,000 | 1,200,000 |
Operating Income | 3,716,680 | 1,417,597 |
Income tax | 1,077,837 | 411,103 |
Net Income | $ 2,638,843 | $ 1,006,494 |
Profit Margin | 23% | 15% |
Sales volume | ||
Bike C - online | 95,000 | 60,000 |
Bike A - online | 4,800 | - |
Bike C - in store | 5,100 | 3,000 |
Bike A - in store | 200 | - |
total Sales volume | 100,000 | 63,000 |
The Balance Sheet for Buy-Right Bike Store is provided below:
Buy-Right Bike Store | ||
Balance Sheet | ||
December 31, 2018 | ||
Assets | ||
Cash | $ 1,500,000 | |
Investments | 225,000 | |
Accounts Receivable (net) | 1,250,000 | |
Prepaid Expenses | 30,000 | |
Inventory | 58,280 | |
Plant, Property & Equipment | 1,800,000 | |
Less: Accumulated Depreciation | 60,000 | |
Total Assets | $ 4,923,280 | |
Liabilities | ||
Accounts Payable | 83,250 | |
Accrued Liabilities | 4,414 | |
Salaries Payable | 7,913 | |
Long-term liabilities | 30,000 | |
Total Liabilities | $ 125,577 | |
Common Stock | 1,152,366 | |
Retained Earnings | 3,645,337 | |
Total Stockholders' Equity | $ 4,797,703 | |
Total Liabilities & Stockholders' Equity | $ 4,923,280 |
FNEC 1600
Comprehensive Problem â Due Date: December 1, 2017
Fall 2017
Your score on the following problem will carry a weight of 13% in determining your overall course grade. A hard copy of your solution must be submitted by December 1st. Any submission after the beginning of class on that date is subject to a 10 point per day late point reduction.
Description:
You have been charged with preparing year-end adjusting entries along with a multiple-step income statement and a classified balance sheet for Fat Tire, Inc., a wholesaler of bicycles and bicycle parts. The financial statements will cover the year ended December 31, 2016. A December 31 bank reconciliation, an unadjusted trial balance, and other information to help with the adjusting entries follow.
Fat Tire, Inc. | ||||||
Bank Reconciliation | ||||||
31-Dec-16 | ||||||
Balance per Bank Statement | $297,000 | |||||
Deposits in Transit | $4,500 | |||||
Bank Error (See note 1 below) | 1,200 | |||||
Outstanding Checks | (2,000) | 3,700 | ||||
Adjusted Balance | $300,700 | |||||
Balance per Fat Tire's Books | $300,000 | |||||
Interest Earned per bank statement | $450 | |||||
Book Error (See note 2 below) | 1,170 | |||||
NSF Check (See note 3 below) | (500) | |||||
December bank service charges | (420) | 700 | ||||
Adjusted Balance | $300,700 | |||||
note 1: The bank incorrectly charged Fat Tire's account for a fee | ||||||
that belonged to another client of the bank. | ||||||
note 2: A check for $130 to pay a cash miscellaneous operating | ||||||
expense was incorrectly recorded as $1,300 on Fat Tire's | ||||||
note 3: The bank returned a bad check deposited by Fat Tire | ||||||
that represented a receipt of payment from one of Fat Tire's | ||||||
customers. | ||||||
Fat Tire, Inc. | ||||||
Unadjusted Trial Balance | ||||||
December 31, 2016 | ||||||
Debit | Credit | |||||
Accounts Payable | 50,000 | |||||
Accounts Receivable | 425,700 | |||||
Accumulated Depreciation (Equip) | 4,305 | |||||
Accumulated Depreciation (F & F) | 23,600 | |||||
Advertising Expense | 18,000 | |||||
Allowance for Doubtful Accounts | $1,500 | |||||
Cash | $300,000 | |||||
Common Stock | 180,000 | |||||
Cost of Goods Sold | 2,613,000 | |||||
Depreciation Expense | 6,455 | |||||
Equipment | 10,000 | |||||
Furniture & Fixtures | 50,000 | |||||
Income Tax Expense | 228,323 | |||||
Insurance Expense | 7,500 | |||||
Interest Revenue | 5,200 | |||||
Inventory | 325,000 | |||||
Miscellaneous Operating Expense | 2,500 | |||||
Note Payable | 35,000 | |||||
Payroll Tax Expense | 23,680 | |||||
Prepaid Insurance | 10,500 | |||||
Rent Expense | 168,000 | |||||
Rent Revenue | 4,000 | |||||
Retained Earnings | 242,553 | |||||
Salary Expense | 264,500 | |||||
Sales Discounts | 42,000 | |||||
Sales Returns | 30,000 | |||||
Sales Revenue | 4,020,000 | |||||
Supplies | 2,000 | |||||
Supplies Expense | 17,000 | |||||
Unearned Rent | 2,000 | |||||
Utilities Expense | 24,000 | |||||
Totals | 4,568,158 | 4,568,158 | ||||
Information related to adjusting entries:
No entries have been made for the December 31 bank reconciliation. Use the bank reconciliation provided to prepare the necessary entries.
Fat Tire pays employees and all payroll related liabilities semi-monthly. Each payment of payroll related liabilities is for the previous pay period. Thus, Fat Tire needs to accrue salaries and payroll related expenses for the December 16th-31st pay period. The following information was obtained for the last pay period of the year.
Gross Pay = $12,000
Federal Income Tax withholding rate = 20%
FICA rate for employees and employers = 8%
State unemployment taxes for the pay period = $250
Federal unemployment taxes for the pay period = $75
Fat Tire maintains a liability account for federal income tax withheld from employees and a separate liability account for its own corporate income taxes.
Based on a count taken on December 31st, the amount of supplies that remain on hand is $500.
Unbilled sales as of December 31 totaled $5,000. The cost of those bikes sold was $2,000.
The Allowance for Doubtful accounts is adjusted at the end of each year using the percentage of sales method. Fat Tires estimates that 1% of adjusted net sales will go uncollected.
The Prepaid Insurance balance represents an $18,000 one-year policy that began on July 1. The company adjusts any prepaid items on a monthly basis.
Fat Tire decided to sublease some of its rental space. On October 1, the company received $6,000 in advance from a neighboring business for 3 monthâs rent. The lease period began on October 1. Fat Tire adjusts rent related accounts on a monthly basis.
Furniture and Fixtures were acquired on January 2, 2012 at a cost of $50,000. Management selected a 10 year life and a $2,000 residual value. Fat Tire depreciates Furniture and Fixtures on a monthly basis using the straight-line method of depreciation.
The Equipment was purchased on January 2, 2015 at a cost of $10,000. Management selected a productive life of 6,000 hours and a $1,000 residual value. Fat Tire depreciates Equipment on a monthly basis using the units-of-production method. The equipment was used 200 hours in December.
The Note Payable was issued on December 1, 2016. The terms of the note state that the principal and interest is to be paid two years from the issuance date. The interest rate stated on the note is 6 percent.
Accrued advertising expenses incurred but not yet paid totaled $1,000 on December 31.
Fat Tire makes quarterly payments for its income taxes. No entry has been made for the fourth quarter income taxes of 2016 which will be paid in 2017. To make this entry, you will have to determine the Income Before Tax for the year. One-fourth of that amount represents income earned in the fourth quarter. Fat Tireâs corporate tax rate is 40%.
Required:
Prepared the adjusting journal entries required on December 31, 2016.
Prepared a multiple-step income statement for the year ended December 31, 2016. Make sure your operating expenses are listed in descending order. Use the Income statement example that I provided as supplemental notes to chapter 6 as a guide.
Prepare a classified balance sheet as of December 31, 2016. List your current assets in order of liquidity.
Note: If it helps, prepare a supplemental schedule like we completed in problem 4.6A. It may help organize your data prior to preparing the financial statements.
Appropriate Use of Office Hours:
Office hours are held so that students can ask questions about assignments and/or concepts. For assignments that are to be submitted for a grade, it is unreasonable for you to ask âis my assignment correctâ or âcan you find my mistakesâ. That is why the assignments are graded. A reasonable request is to ask âhow toâ questions if you are stuck on a step or âcan you help me understand this data or this requirementâ. We (Iâm speaking for the TAs as well) want to help, but we are not there to complete your assignments for you.
Print Formats: Be sure to use the print preview feature in Excel and adjust your spreadsheets so that they can be easily read. Points will be deducted if I have to work just to read your printouts. Use normal size fonts and make sure that when reading left to right, you do not have sheets starting on one page and finishing on another. In other words, pretend Iâm your client.