StarWars7

The company StarWars7- Europe. Inc. , responsible for distributing along the European
Continent all the merchandising products linked to the StarWars films, presents the
following trial balance sheet at the end of the first quarter of 2015 (31st March 2015)
Dr. Cr.
Accounts
Furniture 20.000 0
Equipment 60.000
Inventories 11.500 0
Accounts receivable 16.000
Allowance for doubtful accounts 1.600
Prepaid expenses 5.600
Cash 26.600
Contributed Capital 58.000
Accounts payable 8.000
Long-term notes payable 15.200
Unearned Revenue 2.100
Retained Earnings 3.800
Sales Revenue 65.000
Rent expense 3.600
Salaries Expense 8.600
Other Expenses 1800
153.700 153.700

In order to know how good or bad the company is doing along the year 2015, the Chief
Financial Officer of the company wants to assess the situation of the company by
the 31st of October 2015.

The following transactions have been completed for the period 1st April to 31st October
of 2015.

1. The company ordered and received merchandise for 50.000 €. (Periodic inventory
system) – The purchase transaction is financed, and StarWars7- Europe. Inc will
pay to the supplier on the 15th of December 2015. By the end of the fiscal year
end, the value of the ending inventory amounts 6.500 €.
 2. The company signed a contract in 2014 with a communication company for
developing the online selling platform for retailers and develop promoting activities
in order to increase the sales volume. The contract was signed on the 1st of july
2014 and the service is expected to last for 18 months.

3. The company sold inventory to retailed for a total amount of 55.000 €. By the 31st
October 2015, the customers had paid 30.000 € in cash, and the rest will only be
cleared in 2016.

4. The account “unearned revenues” includes a 400 € customer payment that took
place on the first quarter of the year. The inventory items have been finally
provided in September 2015.

5. Based on the uncollectible accounts from prior years, the company estimates a 12%
Bad Debt Loss Rate.

6. Salaries accrued for the period amount 6.000 €.

a) Journalize al the transactions and calculate net income at the 31st October 2015
(presuming that there is no income tax). [Note: you must prepare both the journal
and the ledger)

b) Prepare the Balance Sheet of StarWars7- Europe. Inc. by the end of October 2015
SOLUTION

1. The company ordered and received merchandise for 50.000 €. (Periodic inventory
system) – The purchase transaction is financed, and StarWars7- Europe. Inc will
pay to the supplier on the 15th of December 2015. By the end of the fiscal year
end (we should presume 31st of October) the value of the ending inventory
amounts 6.500 €.

Date Account Debit Credit

Purchases 50.000
Accounts Payable 50.000

2. The company signed a contract in 2014 with a communication company for

developing the online selling platform for retailers and develop promoting activities
in order to increase the sales volume. The contract was signed on the 1st of july
2014 and the service is expected to last for 18 months.

Prepaid expenses = 5.600 for the period 31st March 2015 up to the 31st of
December 2015 (9 months). 5.600 / 9 = 622, 22 which means that by the end of
October, we must recognize a total amount of 622,22 x 7 months = 4.355,56

Date Account Debit Credit

Service expense 4.355,56
Prepaid expenses 4.355,56

3. The company sold inventory to retailer for a total amount of 55.000 €. By the 31st
October 2015, the customers had paid 30.000 € in cash, and the rest will only be
cleared in 2016.

Date Account Debit Credit

Revenues 55.000
Accounts Receivable 25.000
Cash 30.000

4. The account “unearned revenues” includes a 400 € customer payment that took
place on the first quarter of the year. The inventory items have been finally
provided in September 2015.
Date Account Debit Credit
Unearned Revenues 400
Sales Revenues 400

Adjustments to calculate Net Income at the 31st of October 2015

Inventory adjustment:

Date Account Debit Credit

Inventory adjustment 5.000
Inventory 5.000

5. Based on the uncollectible accounts from prior years, the company estimates a 12%
Bad Debt Loss Rate.

At this point in time, we should update the balance of the accounts receivable
account:

Accounts Receivable
Debit Credit
16.000
25.000 (3)
41.000
(debit)

0,12 x 41.000 = 4.920 €

4.920 – 1.600 = 3.320

Date Account Debit Credit

Bad debt expense 3.320
Allowance for doubtful accounts 3.320

Under the IFRS framework, the journalization would be:

Date Account Debit Credit
Impairment loss 3.320
Impairment of Accounts Receivable 3.320

6. Salaries accrued for the period amount 6.000 €.

Date Account Debit Credit

Salaries expense 6.000
Salaries payable 6.000

Calculation of Net Income (ledger)

 Net Income
Debit Credit
65.000 (revenue)
3.600 – Rent Expense 400 (revenue)
14.600 – Salaries Expense 55.000 (revenue)
1.800 – Other Expenses
50.000 - Purchases
4.355,56 - Service expense
5.000 – Inventory adjustment
a)
3.320 – Bad debt expense

Total Exp. 82.675,56 Total Rev. 120.400

(Balance) – Profit 37.724,44

Journalize al the transactions and calculate net income at the 31st October 2015
(presuming that there is no income tax). [Note: you must prepare both the journal
and the ledger)

b) Prepare the Balance Sheet of StarWars7- Europe. Inc. by the end of October 2015
 BALANCE SHEET

31st december 2013

ASSETS LIABILITIES
Fixed Assets 80.000 Shareholders' Equity
Long-term investments Capital stock 58.000
Land Paid-in-Capital & Reserves
Buildings Retained earnings 3.800
(less accumulated 37.724,4
depreciation) Net Income 4
Plant and equipment 60.000 Total Shareholders' Equity
(less accumulated
depreciation)
Furniture and fixtures 20.000 Long-term Liabilities 15.200
(less accumulated
depreciation) Mortgage/Notes payable 15.200
Total Net Fixed Assets 80.000 Other long-term liabilities
Total Long-Term Liabilities
100.424,
Current Assets 4
Inventory 6.500 Current Liabilities 65.700
Accounts receivable 41.000 Accounts payable 58.000
(less doubtful accounts) (4.920) Short-term notes
Temporary investment Current portion of long-term notes
Prepaid expenses 1.244,44 Interest payable
Cash 56.600 Salaries payable 6.000
Total Current Assets Unearned revenue 1.700
Total Current Liabilities

180.424. TOTAL LIABILITIES &

TOTAL ASSETS 4 EQUITY