The submission is to beone Excel fileincluding text submission on current ratio and a memo. You can type your text submission in Word and copy it into your Excel spreadsheet or type the text submission directly into a text box in Excel. All parts should be included on one sheet.
MBA 5850 Spring 2017 Block 2
Case Study 1
You have been hired by a company that offers design services and sells household goods My Best
Friends House. The company has been in business for several years but does not have a good
accounting system in place. The owner of the company Mr. Erie has provided you with the following
account balances as of January 31 2017. Income and expense amounts are for the month of January
2017.
Cash 8350
Accounts payable 900
Accounts receivable 3500
Accumulation depreciation 2700
Additional paid-in capital 6000
Common stock 1200
Depreciation expense 900
Income tax expense 700
Income tax payable 250
Insurance expense 1800
Interest expense 600
Interest payable 700
Inventory 12000
Land 17000
Note payable – current portion 3000
Note payable – long-term 8000
Office equipment 4500
Rent expense 6000
Retained earnings 7875
Salary expense 12000
Salaries payable 800
Service revenue 35000
Travel expense 1275
Unearned revenue 2200
The president has told you that although the accounts are shown with a positive balance they have the
normal debit or credit balance that accounts in their account type have (e.g. assets have a debit
balance liabilities have a credit balance).
There are six shareholders and Mr. Erie reports financial information to them on a monthly basis.
Required:
(1) Prepare a trial balance income statement and balance sheet using the account balances
provided to you. Set up your financial statements so that going forward the president can enter
the account balances in the trial balance and the amounts flow to the correct financial
statements.
(2) Calculate the current ratio for My Best Friends House. What does this tell you about the
company?
(3) After you have completed your financial statements Mr. Erie tells you that he believes a couple
of mistakes have been made but he is not certain and doesnt want to change any amounts on
the trial balance because eventually it will all wash out. $500 of the $1275 travel expenses
are for a sales trip that he has planned for March 2017. A utility bill in the amount of $650 was
received on February 10th for January usage. Mr. Erie received a deposit of $5000 in January
2017 for an engagement scheduled for February 2017. He recorded this amount as Service
Revenue when he received the deposit.
Prepare a memo to Mr. Erie detailing what journal entries if any need to be recorded for these
items and include the total effect of any adjustments on the income statement. Include a brief
explanation of why it is important to report accurate financial amounts.