Case 1 [ ART SPECIALISTS, INC. ] Jefferson Jerome is interested in purchasing “A

Question

Case 1 [ ART SPECIALISTS, INC. ] Jefferson Jerome is interested in purchasing “Art Specialists Inc.”, an auction house. The company receives the right to sell art but not to purchase the art themselves for a 5% commission. Art Specialists rents office space and Chelsea and holds its auctions at local hotels. Art Specialist Inc. Unadjusted Trial Balance December 31, 2013 Cash $ 35,000.00 Accounts receivable $ 60,000.00 Supplies $ 8,000.00 Equipment $ 53,000.00 Accumulated Depreciation $ 14,500.00 Accounts payable $ 5,600.00 Dividends $ 50,000.00 Capital stock $ 25,000.00 Retained earnings $ 84,900.00 Commission income $ 244,000.00 Rent Expense $ 20,000.00 Wages Expense $ 70,000.00 Auction Expenses $ 56,000.00 Depreciation Expenses $ 7,000.00 Membership Expenses $ 6,000.00 Supplies Expense $ 9,000.00 TOTAL $ 374,000.00 $ 374,000.00 As Jefferson’s accountant, you have received the trial balance above as well as the general ledger. The review has found the following errors: Year end bank reconciliation showed that the balance should be $30,000. A customer should have been billed for commissions earnedbut it was recorded as a cash payment of the commission income. Membership expenses are not related to the business and should be shown as a dividend to shareholder. Depreciation expense should be $3,500 for the year. Supplies expenses failed to record $2,000 in packing supplies used during the year. Accounts receivables that have not been billed $10,000. Required: 1. Record the correcting entry. 2. Prepare financial statements 3. Current owners want $250,000 for the business. Jefferson does not want to pay more than Net Worth x 1.5. Should he buy? For how much?

Explanation / Answer

1) 1) Correcting entries accounts receivable Dr 5000        Cash Cr 5000 ( To record rectification of commission income) Dividend Dr 6000            Membership expense Cr 6000 ( To record rectification ofcmembership expense) Accumulated depriciation Dr 3500             Depriciation expense Cr 3500 ( to record rectification of excess depriciation) Supplies expense Dr 2000          Supplies Cr 2000 ( to record rectification of supplies expense) Accounts receivable Dr 10000             Commission Income Cr 10000 ( To record rectification of unbilled revenue) 2) Trial Balance           Unadjusted    Correcting entries           adjusted Dr Cr Dr Cr Dr Cr Cash 35000 5000 30000 Accounts receivable 60000 15000 75000 Supplies 8000 2000 6000 Equipment 53000 53000 Accumulated depriciation 14500 3500 11000 Accounts payable 5600 5600 Dividends 50000 6000 56000 Capital stock 25000 25000 Retained earnings 84900 84900 Commission income 244000 10000 254000 Rent expense 20000 20000 Wges expense 70000 70000 Auction expense 56000 56000 Depriciation expense 7000 3500 3500 Membership expense 6000 6000 0 Supplies expense 9000 2000 11000 374000 374000 26500 26500 380500 380500 Income statement Commission Income 254000 Less Rent expense 20000 Wges expense 70000 Auction expense 56000 Depriciation expense 3500 Supplies expense 11000 160500 Net Income 93500 Balance Sheet Current Assets Cash 30000 Accounts receivable 75000 Supplies 6000 Total Current Assets 111000 Equipment 53000 Less : Accumulated depriciation 11000 42000 Total Assets 153000 Current liabilities Accounts payable 5600 Capital stock 25000 Retained earnings 84900 Less : Dividend 56000 Add : Net Income 93500 147400 Total liabilities and stockholders equity 153000 3) Net worth is Stockholders equity 147400 Net worth * 1.5 221100 No he should not buy this business for 250000, because 1.5 times net worth is lower than 250000 He should buy the business at maximum 221100

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.