Question

Bonita Equipment Co. closes its books regularly on December 31, but at the end of 2020 it held its cash book open so that a more favorable balance sheet could be prepared for credit purposes. Cash receipts and disbursements for the first 10 days of January were recorded as December transactions. The information is given below.

1. January cash receipts recorded in the December cash book consisting of:
Cash sales $28,000
Collections on account, for which $360 of cash discounts were given 17,640
$45,640
2. January cash disbursements recorded in the December check
register liquidated accounts $22,450
Discounts taken 250
3. The ledger has not been closed for 2017.
4. The amount shown as inventory was determined by physical count on December 31, 2017.
The company uses the periodic method of inventory.
Instructions
(A) Prepare any entries you consider necessary to correct Francis’s accounts at December 31.
(B) To what extent was Francis Equipment Co. able to show a more favorable balance sheet at December 31 by holding its cash book open? Assume that the balance sheet that was prepared by the company showed the following amounts:
Debit Credit
Cash $39,000
Accounts receivable 42,000
Inventory 67,000
Accounts payable $45,000
Other current liabilities 14,200

Answer 1

Bonita Equipment Co.

A. Entries to correct Bonita's accounts at December 31:

Debit Sales revenue $28,000

Credit Cash $28,000

To reverse the cash sales of January recorded in December.

Debit Accounts Receivable $18,000

Credit Cash $17,640

Credit Cash Discounts $360

To reverse the cash receipts of January recorded in December.

Debit Cash $22,450

Debit Cash Discounts $250

Credit Accounts Payable $22,700

To reverse the cash payment of January recorded in December.

B. To some extent, Bonita was able to show a more favorable balance sheet at December 31 by holding its cash book open. This becomes more pronounced when the working capital elements of the balance sheet are analyzed with ratios.

For example, the current and quick ratios before the above adjustments shows 2.4 and 1.4 respectively. After the adjustments, the current and quick ratios reduced to 1.74 and 0.92 respectively.

Step-by-step explanation:

a) Data and Analysis:

Cash Sales $28,000

Collections on account $17,640

Total $45,640

Cash Discounts on collections = $360

Total collections on account $18,000

Cash Disbursements:

Check for payment on account = $22,450

Discounts $250

Total disbursement $22,700

Sales revenue $28,000

Cash $28,000

Accounts Receivable $18,000

Cash $17,640

Cash Discounts $360

Cash $22,450

Cash Discounts $250

Accounts Payable $22,700

Before Adjustments After Adjustments

Debit Credit Debit Credit

Cash $39,000 $15,450($39,000 - $28,000 - $18,000 + $22,450)

Accounts receivable 42,000 60,000 ($42,000 + $18,000)

Inventory 67,000 67,000

Accounts payable $45,000 $67,450 ($45,000 + $22,450)

Other current liabilities 14,200 14,200

Total $148,000 $59,200 $142,450 $81,650

Working capital ratios:

Before Adjustments After Adjustments

Current ratio = $148,000/$59,200 $142,450/$81,650

= 2.5 1.74

Quick ratio = $81,000/$59,200 $75,450/$81,650

= 1.4 0.92