COMPREHENSIVE PROBLEM #2

GUITAR UNIVERSE, INC.

a. Prepare a bank reconciliation and make the necessary journal entries to update the
accounting records of Guitar Universe as of December 31, 2011.

Bank statement balance as of Dec 31, 2011

Add: Deposits not recorded by bank
Total
Less: Outstanding checks
Check No. 507
Check No. 511
Check No. 521
Adjusted cash balance
Depositors record balance as of Dec 31, 2011
Less: Bank service charge
NSF check from Iggy Bates
Adjusted cash balance

$46,975
$16,500
$63,475
$4000
$9000
$8000

$45000
$25
$2500

Bank service charges

Account Receivable (NSF check from Iggy
Bates)
Cash

25
2500

b. Marketable Securities
Unrealized holding gain on investment
To increase reported value of marketable
securities to $27,500 from $25000

2500

c. Uncollectible accounts expense (for

December)
Allowance for doubtful accounts

$21000
$42,475

$2525
$42,475

2525
2500

3500
3500

d. Cost of goods sold

Inventory

1350

e. Office supplies expense

Office supplies

300

f. Insurance expense
Prepaid insurance

600

g. Depreciation expense
Accumulated depreciation

5000

h. Unearned customer deposits

Sales
i. Income Tax Expense accrued during
December

3200

1350
300
600
5000
3200
6000

Income tax payable

6000

j. Guitar Universe, Incs Adjusted Trial Balance at Dec 31, 2011

Cash
Marketable Securities
Account Receivable
Allowance for doubtful accounts
Merchandise inventory
Office supplies
Prepaid insurance
Building and fixtures
Accumulated depreciation
Land
Account payable
Unearned customer deposits
Income taxes payable
Capital stock
Retained earnings
Unrealized holding gain on investments
Sales
Cost of goods sold
Bank service charges
Uncollectible account expense
Salary and wages expense
Office supplies expense
Insurance expense
Utilities expense
Depreciation expense
Income tax expense

42,475
27,500
127,500
8500
248,650
900
6000
1,791,000
805,000
64,800
70,000
4800
81,000
1,000,000
240,200
8500
1,603,200
959,350
225
12,500
395,000
700
7000
3600
53,000
81,000
$3,821,200

$3,821,200

k. Guitar Universes year end income

statement
Sales
Cost of goods sold
Gross profit
Bank service charges
Uncollectible accounts expense
Salary and wages expense
Office supplies expense
Insurance expense
Utilities expense
Depreciation expense

1,603,200
959,350
643,850
225
12500
395000
700
7000
3600
53000

472,025

Income before tax

Income taxes expense
Net income

$171825
81000
$90,825

Statement of Retained Earnings Dec 31, 2011

Retained earnings Jan 1, 2011
Add: Net income
Ending retained earnings Dec, 2011

240,200
90,825
$331,025

Current assets as of Dec 31, 2011

Cash
Marketable securities
Account receivable
Less: Allowance for doubtful accounts

42475
27500
127,500
8500

Marchandise inventory
Office supplies
Prepaid insurance
Total current assets
Plant and equipment
Building and fixtures
Less: accumulated depreciation
Land
Total plant and equipment
Total assets

119000
248650
900
6000
$444,525

1,791,000
(805,000)

986,000
64800
$1,050,800
$1,495,325

Liabilities
Current liabilities:
Acct Payable
Unearned customer deposits
Income tax payable
Total current liabilities
Long term liabilities
Total liabilities

70000
4800
81000
$155,800
0
$155,800

Stockholders Equity
Capital stock
Retained earnings
Unrealized holding gain on investments

1,000,000
331,025
8500

Total stockholders equity

Total liabilities and stockholders equity

$1,339,525
$1,495,325

l. Account receivable turnover:

$1,603,200 / $119,000 = 13.5 times
Account receivable days:
365 days / 13.5 = 27 days
m. Inventory turnover:
$959,350 / $248,650 = 3.9 times
Inventory days:
365 days / 3.9 = 94 days
n. Operating cycle: 27 days + 94 days = 121 days
o. From a short term creditors perspective, the company appears to be
solvent. The company collects its account receivable in less than 30
days. The company seems to stock too much inventory because its
inventory days are 94 day.