ACCT504 Case Study 1 (P2-69B and P3-77B), Case Study 2 (P4-57B) and Case Study 3 (P4-55A)

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ACCT504 Case Studies

Case Study 1 (Parts A and B, P2-69B and P3-77B)
(Learning Objectives 4, 5, 6: Analyze the impact of business transactions on accounts; record (journalize and post) transactions in the books; construct and use a trial balance)
During the first month of operations, Johnson Plumbing, Inc., completed the following transactions:
2-Mar Johnson received $35,000 cash and issued common stock to the stockholders.
3 Purchased supplies, $200, and equipment, $3,200, on account.
4 Performed services for a client and received cash, $1,400.
7 Paid cash to acquire land, $24,000.
11 Performed services for a customer and billed the customer, $800. Johnson expects to collect within one month.
16 Paid for the equipment purchased March 3 on account.
17 Paid the telephone bill, $150.
18 Received partial payment from customer on account, $400.
22 Paid the water and electricity bills, $170.
29 Received $1,500 cash for repairing the pipes of a customer.
31 Paid employee salary, $1,800.
31 Declared and paid dividends of $2,100.

Requirements: (60 Points)
1. Record each transaction in the journal. Key each transaction by date. Explanations are not required.
2. Post the transactions to the T-accounts, using transaction dates as posting references.
3. Prepare the trial balance of Johnson Plumbing, Inc., at March 31 of the current year.

4. The manager asks you how much in total resources the business has to work with, how
much it owes, and whether March was profitable (and by how much).

(Learning Objectives 3, 4: Adjust the accounts; construct the financial statements)
Consider the unadjusted trial balance of Princess, Inc., at August 31, 2012, and the related month-end adjustment data.
Princess, Inc.
Trial Balance Work Sheet
August 31, 2012
Trial Balance Adjustments Adjusted Trial Balance
Account Debit Credit Debit Credit Debit Credit
Cash 8,300
Accunts Receivable 1,900
Prepaid Rent 2,100
Supplies 2,400
Furniture 63,000
Accumulated Depreciation 3,700
Accounts Payable 4,000
Salary Payable
Common Stock 13,000
Retained Earnings 53,430
Dividends 4,300
Service Revenue 11,000
Salary Expense 2,600
Rent Expense
Utilities Expense 530
Depreciation Expense
Supplies Expense
Total $85,130 $85,130 $- $- $- $-

Adjustment data at August 31, 2012, include the following:
a. Accrued advertising revenue at August 31, $2,100.
b. Prepaid rent expired during the month. The unadjusted prepaid balance of $2,100 relates to the period August 2012 through October 2012.
c. Supplies used during August, $2,090.
d. Depreciation on furniture for the month. The furniture’s expected useful life is three years
e. Accrued salary expense at August 31 for Monday, Tuesday, and Wednesday. The five-day weekly payroll is $5,100 and will be paid on Friday.

Requirements (40 points)
1. Using Exhibit 3-9 as an example, prepare the adjusted trial balance of Princess, Inc., at August 31, 2012. Key each adjusting entry by letter.
2. Prepare the monthly income statement, the statement of retained earnings, and the classified balance sheet. Draw arrows linking the three statements.

Case Study 2
(Learning Objectives 2, 4: Explain the components of internal control; evaluate internal controls)
Each of the following situations reveals an internal control weakness:

Situation a. In evaluating the internal control over cash payments of Yankee Manufacturing, an auditor learns that the purchasing agent is responsible for purchasing diamonds for use in the company’s manufacturing process, approving the invoices for payment, and signing the checks. No supervisor reviews the purchasing agent’s work.

Situation b. Rachel Williams owns an architectural firm. Williams’ staff consists of 19 professional architects, and Williams manages the office. Often, Williams’ work requires her to travel to meet with clients. During the past six months, Williams has observed that when she returns from a business trip, the architecture jobs in the office have not progressed satisfactorily. Williams learns that when she is away, two of her senior architects take over office management and neglect their normal duties. One employee could manage the office.

Situation c. Mike Dolan has been an employee of the City of Southport for many years. Because the city is small, Dolan performs all accounting duties, in addition to opening the mail, preparing the bank deposit, and preparing the bank reconciliation.

1. Identify the missing internal control characteristic in each situation.
2. Identify each firm’s possible problem.
3. Propose a solution to the problem.

Case Study 3
(Learning Objective 5: Construct and use a cash budget)
Nathan Farmer, chief financial officer of Bosworth Wireless, is responsible for the company’s budgeting process. Farmer’s staff is preparing the Bosworth cash budget for 2013. A key input to the budgeting process is last year’s statement of cash flows, which follows (amounts in thousands):
Bosworth Wireless
Statement of Cash Flows
In thousands
Cash Flows from Operating Activities
Collection from customers 61,000
Interest received 400
Purchase of inventory (46,000)
Operating expenses (13,200)
Net cash provided by operating activities 2,200

Cash Flows from Investing Activities
Purchase of equipment (4,500)
Purchase of investments (800)
Net cash used by investing activities (5,300)

Cash Flows from Financing Activities
Payment of dividends (500)
Payment of long-term debt (200) (500)
Cash balance, beginning 1,400
Cash balance, ending (2,200)

1. Prepare the Bosworth Wireless cash budget for 2013. Date the budget simply “2013” and denote the beginning and ending cash balances as “beginning” and “ending.” Assume the company expects 2013 to be the same as 2012, but with the following changes:
a. In 2013, the company expects a 15% increase in collections from customers and a 24% increase in purchases of inventory.
b. There will be no sales of investments in 2013.
c. Bosworth plans to issue no stock in 2013.
d. Bosworth plans to end the year with a cash balance of $3,550.
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