Assignment:
Leather Luxuries, Inc. sells unique leather goods purchased from a variety of suppliers. Early in 2015, the controller for Leather Luxuries resigned. The accounting has been completed by Sally, a staff member who had an accounting principles class a few years ago. However, whenever Sally encountered a transaction she did not know how to record, she put the documentation into a file. That file has been handed to you and your job is to record any entries needed to correctly account for these transactions.
You will find the preliminary trial balance for Leather Luxuries on the last page of this assignment. Sally has done a good job recording the basic day to day transactions of the company, so you can assume the amounts on the trial balance are correct so far. For simplicity, all operating expenses are shown in one account. When you complete your entries, use specific account titles for operating expenses (such as Salaries Expense or Insurance Expense).
Required:
A. Using the additional information and or policies presented below, complete the transactions for 2015. All items should be addressed. If you don't need to prepare a journal entry, indicate that no entry was required. Record all entries (including any adjustments) for each item together. (For example, do all entries required by #1, then #2, etc.) Show any supporting computations immediately before or after each entry. Your final answers should be rounded to the nearest whole dollar.
B. Prepare a multiple-step income statement (including any required earnings per share data), an appropriate statement of owner's equity, and a classified balance sheet in good form.
Company Accounting Policies:
Adjustments are only booked at the end of the fiscal year unless otherwise noted. Reversing entries are used for deferrals which were originally recorded in income statement accounts and all accruals.
You are to follow proper GAAP when recording transactions. The company uses the cost method of accounting for treasury stock. Assume Leather Luxuries has already adopted the new rules regarding revenue recognition. Assume the company has NOT adopted the new rules related to leases.
Leased assets and lease improvements are depreciated in accordance with current lease rules. The policy for depreciation of furniture and equipment is 10% SL per year, no salvage value. A half-year's depreciation is taken in the year of acquisition and in the year of disposition. None of the assets are fully depreciated; Building- same policy except 20 years SL. Except for dispositions, all depreciation is recorded once at the end of the year. Depreciation on dispositions should be recorded at the time of the sale or disposal. All acquisitions under $200 are considered immaterial with respect to capitalization.
Transaction Information: (UNLESS OTHERWISE STATED, NONE OF THESE TRANSACTIONS ARE REFLECTED IN THE RECORDKEEPING OF THE BUSINESS.)
1.Leather Luxuries signed a five-year lease for additional office space. Rent payments are $18,000 each year. On January 1, 2015, the company paid the $18,000 for the year's lease and also paid a $2,000 security deposit. Leather Luxuries expects to be refunded this deposit when it vacates the space. In addition to the lease, Leather Luxuries also spent $7,000 to replace carpeting, move walls, and make other similar changes to the leased space during the first two weeks in January.
2. On January 3, 2015, Leather Luxuries leased a copier on a three-year contract for the new office. The estimated fair market value of this copier is $2,250, and it is considered to have an economic life of 4 years. Annual lease payments are $850 of which $50 is specifically to cover maintenance. The contract called for the first payment on January 3. The second $850 payment was made on December 30, 2015, and the third $850 payment is due December 30, 2016. This lease is noncancellable, but there are no provisions in the lease for Leather Luxuries to take title to the equipment at the end of the lease, or purchase it. If Leather Luxuries had wanted to borrow the funds to buy the copier outright, it would have had to pay 10% interest per year.
3. On February 1, 2015, the corporation acquired office equipment by issuing a non-interest-bearing note. The face value of this note was $20,000, and the term of the note is 5 years, with the first of the five annual $4,000 installments due to be paid on February 1, 2016. Each subsequent payment is due on Feb 1st. The annual interest rate for similar obligations is currently 8%. In order to locate the equipment in a usable space, new outlets had to be installed at a cost of $500. An electrician was paid in cash on February 5 for this work.
4. On May 20, 2015, the corporation disposed of some old furniture. The cost of this furniture was $3,000 with $750 in accumulated depreciation recorded as of the end of 2014. The business received $2,000 cash for the old furniture. As the old furniture was being removed, a wall was damaged. Drywall repairs and repainting cost $300.
5. A small portion of the corporation's land was confiscated by the state to widen the road in front of the general offices. Leather Luxuries owns a total of 30,000 sq. feet and the portion that was confiscated was 6,000 square feet. The cash settlement received from the state on June 12 was $33,000. This has never happened before.
6. The business is a defendant in a lawsuit because a client slipped on the sidewalk in 2015 and broke his leg. The business' lawyer feels there is an 80% probability the Leather Luxuries will lose the lawsuit since the icy walk wasn't properly cleared, and the damages will be about $5,000. This suit will most likely be settled in the spring of 2016.
7. On July 15, 2015, the corporation issued 1,000 shares' of $8, convertible, cumulative, nonparticipating preferred stock for $70 a share. Issuance costs, which were deducted from the proceeds on these shares, totaled $2,000. Conversion may take place after 7/15/20. The par value is $50 per share. The corporation is authorized to issue 10,000 shares of the preferred stock. Upon conversion, a shareholder would receive 3 shares of common stock for every share of preferred stock.
On August 27, 2015, 500 shares of the corporation's own common stock were reacquired at $22 a share. On November 2, 2015, 200 shares of this stock were reissued to employees at $37 a share cash.
8, On Sept 3, 2015, the corporation acquired 1,000 shares of Unique Imports, Inc., common stock at $19 per share plus commissions of $250. Leather Luxuries paid cash for this stock that represents 25% of Unique Imports outstanding common stock. Unique Imports' total net income for year ended 12/31/2015 was $32,000 which was earned evenly throughout the year. Unique Imports declared a cash dividend of $3 a share on Nov. 1: the dividend was paid Dec. 3. The fair value of Unique Imports' common stock was $27 per year at the end of the year.
9. On October 20, 2015, the company sold Trading Securities that cost $7,300 for $6,000 in cash less commissions of $100. These securities had a fair market value at the end of 2014 of $8,000. The fair value of the remaining trading securities on the books is $28,000. $140 in non-liquidating cash dividends had been declared on these securities as of the end of 2015, but none is due to be paid until January 2016.
10. Leather Luxuries set up a petty cash fund on November 30, 2015, to improve cash controls. The standard amount for this fund, $200, was transferred from the general checking account on that date. When it was replenished on December 31, $28.00 in coins and currency was found in the petty cash drawer along with the following receipts:
a. Coffee and tea for the office $25.00
b. Postage for overnight delivery of tickets to client 60.00
c. Charges to repair computer printer 37.00
d. IOU's from the company president
(He says he'll repay next month) 40.00
11. Leather Luxuries ordered inventory on Dec. 2, 2015 that was placed on backorder because the supplier did not have the items in stock. The company received notice that the items were shipped FOB Destination on Dec. 30. The inventory arrived Jan. 5, 2016.
12. On December 20, 2015, the board of directors declared the full annual stated cash dividend on the preferred stock and a cash dividend of $1 a share on the common stock. The date of record is January 7, 2016, and the payment date is January 15, 2016. The corporate charter has authorized 45,000 shares of common stock at a par value of $6.50 per share.
13. The note payable already on the books is a 12-year, 8% interest-bearing note that is next due to be paid on 2/1/16. Part of the principle is payable annually on February 1 in equal $5,000 installments in addition to the year's interest. The last payment of interest and principle was last paid on 2/1/2015 and it was booked on that date.
14. Leather Luxuries estimates that bad debts should be 2.5% of gross receivables. All questionable receivables have already been written off.
15. The 12/31/2015 value for Leather Luxuries' common stock is estimated to be $18 a share but since the stock doesn't trade publicly, it is difficult to value objectively. The average fair market value throughout the year is estimated to be $16 a share.
16. Sally discovered that $2,000 of office equipment acquired the previous year had not been recorded. This equipment, contributed by the owner, was placed into service on May 1, 2014. Leather Luxuries did not give any cash or stock for the equipment.
18. Equipment purchased for $10,000 4 years ago was taken out of service in November due to recurring maintenance problems. The company's attempts to find a buyer have been unsuccessful.
19. The marketing manager expressed concerns over 5,000 leather belts that remain in inventory at the end of 2015. These belts were purchased during 2015 for $10 each. The belts are engraved with political party symbols (an elephant or a donkey). The company thought these would be a big hit during election season, but sales were almost non-existent at a $25 sales price. The marketing manager feels confident that belts can be sold in 2016 at $9.95. Selling costs will average $2 per belt and normal profit on this type of leather good is 20% of the selling price. If Leather Luxuries were to purchase the belts now, the supplier would still charge $10 each due to the intricate manufacturing process.
20. In November of 2015, Leather Luxuries entered into a contract with Big City Gift Shops to make high-end wallets. Big City Gifts wants to offer a 5 year replacement warranty on the wallets if there are any problems (such as leather cracking or fading, stitching coming out, etc.) As part of the contract, Leather Luxuries will service the warranty by repairing or replacing wallets. The contract price is $150,000 for 5,000 wallets. Leather Luxuries would sell the wallets for $20 without any warranty. They cost $7 each. The wallets were delivered to Big City on Dec. 8. The due date for payment is Jan. 8, 2016. No payment has been received from Big City by the end of 2015 and no wallets have been returned for warranty replacement or repair (since Big City doesn't even plan to offer the wallets for sale until the January of 2016). Leather Luxuries doesn't believe there is any risk that Big City will not pay.
21. Sally did not record any adjustments for depreciation for 2015. Record depreciation on any assets that you have not already recorded the proper depreciation.
22. Assume for 2015 a federal income tax rate of a flat 20%. For the purpose of booking the tax accrual also assume, for simplicity sake, that 1) for 2015 there are no material timing (temporary) differences between tax and book income except for the lawsuit loss and that tax depreciation is $4,000 higher than book depreciation for 2015; the depreciation difference should reverse itself evenly in 2016 and 2017; 2) none of the four quarterly estimated payments were made, 3) the federal tax return hasn't been filed, and 4) the company is projected to have taxable income and a 25% tax rate in the foreseeable future.
|
|
Debit
|
Credit
|
|
Cash
Trading Securities
FV Adjustment - Trading Securities
Accounts Receivable
|
33,500
22,700
3,000
67,600
|
|
|
Allowance for Doubtful Accounts
|
|
800
|
|
Inventory
|
97,000
|
|
|
Furniture & Equipment
|
55,000
|
|
|
AccumDeprec-Furniture & Equip
|
|
28,250
|
|
Building
|
82,000
|
|
|
AccumDeprec - Building
|
|
18,500
|
|
Land
|
25,000
|
|
|
Accounts Payable
|
|
57,000
|
|
Note Payable
|
|
55,000
|
|
Common Stock ($6.50 par)
|
|
65,000
|
|
Paid in Capital - Common Stock
|
|
26,400
|
|
Retained Earnings
|
|
86,450
|
|
Sales
|
|
330,000
|
|
Cost of Sales
|
240,000
|
|
|
Operating Expenses
|
41,600
|
|
|
Total
|
667,400
|
667,400
|
Attachment:- Worksheet for Leather Luxuries.rar