Exercise 9-13B Comprehensive single-cycle problem

The following transactions apply to Ritter Co. for Year 1:

1. Received $40,000 cash from the issue of common stock.
2. Purchased inventory on account for $128,000.
3. Sold inventory for $200,000 cash that had cost $110,000. Sales tax was collected at the rate of 5 percent on the inventory sold.
4. Borrowed $40,000 from First State Bank on October 1, Year 1. The note had a 6 percent interest rate and a one-year term to maturity.
5. Paid the accounts payable (see transaction 2).
6. Paid the sales tax due on $160,000 of sales. Sales tax on the other $40,000 is not due until after the end of the year.
7. Salaries for the year for one employee amounted to $45,000. Assume the Social Security tax rate is 6 percent and the Medicare tax rate is 1.5 percent. Federal income tax withheld was $5,600.
8. Paid $3,200 for warranty repairs during the year.
9. Paid $24,000 of other operating expenses during the year.
10. Paid a dividend of $5,000 to the shareholders.

Adjustments
11. The products sold in transaction 3 were warranted. Ritter estimated that the warranty cost would be 3 percent of sales.

12. Record the accrued interest at December 31, Year 1.

13. Record the accrued payroll tax at December 31, Year 1. Assume no payroll taxes have been paid for the year and that the unemployment tax rate is 6.0 percent (the federal unemployment tax rate is 0.6 percent and the state unemployment tax rate is 5.4 percent on the first $7,000 of earnings per employee).

Required

a. Record the preceding transactions in general journal form.

b. Post the transactions to T-accounts.

c. Prepare an income statement, statement of changes in stockholders’ equity, balance sheet, and statement of cash flows for Year 1.

Exercise 9-14B Preparing a classified balance sheet

Required

Use the following information to prepare a classified balance sheet for Latimer Co. at the end of Year 1:

Exercise 9-15B Using the current ratio to make comparisons

The following information was drawn from the balance sheets of the Augusta and Reno companies:

Required

a. Compute the current ratio for each company.

b. Which company has the greater likelihood of being able to pay its bills?

c. Assume that both companies have the same amount of total assets. Speculate as to which company would produce the higher return-on-assets ratio.