Chapter 3 – Problem PB3-4 Modified

PB3-4 Analyzing, JournaIizing and Interpreting Business Activities (LO 3-3, 3-5 & then some) –

The following items present a sample of business activities involving Dry Cleaner Corporation (DCC) for the year ended December 31st. DCC provides cleaning services for individual customers and for employees of several large companies in the city.

Dec 1: DCC’s owner paid $10,000 cash to acquire 200 of DCC’s common shares.

Dec 2: DCC borrows $2,000 cash from BofA and signs a promissory note to repay the

principal and interest at 1% per annum on December 1, 2018.

Dec 3: DCC ordered cleaning supplies at a total cost of $2,000. The supplies are

expected to be received in early January.

Dec 4: DCC paid $1,500 cash to its landlord which consisted of December’s Rent of

$1,000 and a Security Deposit of $500.

Dec 7: Customers paid $200 cash to DCC to obtain DCC gift cards that they could use to

obtain future cleaning services at no additional cost.

Dec 15: Customers paid $1,000 cash to DCC for cleaning services performed during the

first two weeks of December.

Dec 21: DCC ran advertising in the local newspaper today at a total cost of $500. DCC is

not required to pay for the advertising until January 21st.

Dec 22: DCC paid $1,000 to the landlord for January rent.

Dec 23: DCC’s owner sold 20 of his own DSS common shares to a private investor, at a

selling price of $1,200.

Dec 28: DCC paid in full for the advertising run in the local newspaper on December 21st.

Dec 29: The cleaning supplies ordered on December 3rd were received today. DCC does

not have to pay for these supplies until January 29th.

Dec 31: Today, DCC completed cleaning services for several large companies at a total price of $2,000. The companies are expected to pay for the services by January 31st.

Required:

1. Analyze transactions Dec. 1st thru Dec. 31st to determine their effects on the accounting equation, if any . Once you have determined the effects on the accounting equation prepare a journal entry (Hint – debits first and credits second). Use the format shown below.

2. Post your journal entries in Part 1 above to the T-Accounts. Use the format shown below.

3. Carryforward account balances from Part 2 to the worksheet for Part 3 – show account balances, indicated account type (i.e. asset, liability, equity, revenue or expense), does the account have a debit or credit balance and which financial statement does this account appear on (i.e. Income Statement, Statement of Retained Earnings or Balance Sheet)?

4. Prepare a Trial Balance at 12/31/2017.

5. Prepare an Income Statement, Statement of Retained Earnings and a classified Balance Sheet.

6. What was the source of the company’s financing – Debt or Equity – show your work?

7. Prepare the Current Ratio and the Quick Ratio (aka Acid Test). Are the ratios good or bad? What standard did you use? New – Net Profit Ratio – compute.