Great Adventures Company, Inc., specializes in supplies, gears and equipment for
sports and outdoor adventures. The products it sells range from tennis balls, gloves to
skiing gears, and off-road motorcycles. The company purchases its products from
manufactures worldwide and sells them to a large network of independent retail shops
and dealers in North America. Business is booming as the population becomes more
health-conscious and more people participate in sports and outdoor adventures. In
addition to its main business, the company is planning to diversify its business into
running ski resorts and out-door parks.
The company’s stock is actively traded on the New York Stock Exchange. At the
end of the first quarter of the year 2022, the company’s CFO is in the process of
preparing financial statements for filing with the SEC and reporting to shareholders at the
coming stockholder’s conference late April. The CFO has obtained summarized
information on the company’s business activities from the controller’s office. The CFO
asks for your assistance to analyze the information and come up with a draft of quarterly
financial statements with a brief analysis.
Summary of Business Activities in the First Quarter 2022
All dollar amounts are in thousands (000) except the per-share values.
1. To finance business expansion, the company signed an agreement with a national
bank in December 2021 to obtain a $30,000 three-year loan. The amount was
deposited into the company’s bank account on January 1, 2022. The interest on the
loan is due semiannually and carries a 12% annual interest rate.
2. On January 20, Great Adventures reached an agreement to purchase a large plot of
land in a mountainous area in Vermont as the site for the future ski resort. In this
share-based transaction, the company agreed to issue 500,000 shares of its common
stock as a way of payment. The common stock has a $1 par value per share. The
transaction was closed on March 1 when stocks were trading at $23 per share.
3. On February 1, the company issued five million shares of its common stock through
an investment banker on Wall Street and received $95,760 in cash proceeds.
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4. In January, the company received $45,000 in cash from customers who bought
merchandizes last year. The remaining $30,000 was received in February.
5. On January 28, the company paid its suppliers for a total of $29,630 in cash through
its bank for the purchases made last year.
6. On February 1, the company signed an agreement with a national TV station to run
the company’s infomercial between 11:00 am – 12:00 pm each day for three months
and paid a total cost of $1,660.
7. On February 15, the company closed a deal to purchase a new warehouse building in
a suburban area outside Boston for $8,800 in cash. The warehouse was placed in use
immediately.
8. On February 28, the company closed a deal to sell an office building for $4,580 in
cash at a significant gain of $2,115. The building was temporarily rented to another
company before it was sold. The building was purchase in 1980 for a total cost of
$5,675.
9. On February 28, the company paid its suppliers for the remaining unpaid purchases
made last year.
10. On March 1, the company paid the employer’s portion of health insurance premium
to the insurance provider. The total amount paid was $12,435 which would cover a
period of 12 months. The remainder of the premium was paid by the employees
through salaries withholding, according to the employment contract.
11. On March 1, the company purchased 300,000 shares of its own common stock at $24
per share. These shares were needed to issue to top executives for their employee
stock option plan.
12. On March 30, the company declared and paid a quarterly cash dividend of $0.20 for
shares outstanding on March 28.
13. Company’s total sales for the quarter are listed below. All sales were credit sales.
Total Net Sales
Revenue
January $ 148,000
February 168,000
March 199,000
Total $ 515,000
The amount was net of sales return and sales discount.
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14. The collection for sales was as follows: January sales were received in full by the end
of March. The total amount received for February and March sales was $138,000 and
$106,000, respectively.
15. Company’s total salary and other operating expenses each month were as follows:
Salary & Payroll Other Operating
Tax Expenses Expenses
January $ 26,410 $ 5,630
February 28,230 6,430
March (First 3 weeks) 21,620 4,460
Total $ 76,260 $ 16,520
Salaries were paid in the form of direct deposits to employees’ bank accounts
biweekly; the employees’ portion of health insurance premium was withheld from
salaries and paid to the insurance provider at the same time when salaries were paid;
the estimated personal income taxes were withheld and paid to the government
agencies before the end of each month. Employer’s payroll taxes which included the
unemployment tax and social security tax were remitted to the government agencies
immediately as they were recorded. Other operating expenses which included utility,
property taxes, freight-out, and other miscellaneous expenses were all paid in cash via
online banking.
16. Company’s merchandize purchases were as follows:
Total Merchandise
Purchase Costs
January $ 106,000
February 108,000
March 121,000
Total $ 335,000
The company’s purchase agreement specifies that the suppliers ship merchandizes
and send invoices, and the company inspects merchandizes after receiving them and
pay the invoices after inspection. The purchase amount listed included purchase
price, tax, tariff, shipping, and insurance, net of purchase returns and discounts.
17. Payment for purchases were as follows: January purchases were fully paid by the end
of March. The amount paid for February and March purchases was $99,000 and
$87,000, respectively. The remaining unpaid purchases would be paid in the future
months in April and May.
18. Company paid in cash for the interest on the 2-year commercial note for the current
quarter as well as the amount owed from last year. The note is not due until June 30,
2023.
19. The CFO also identified the following areas that need to be adjusted:
A. Employee salary for the 4th week in March totaled $6,500 and will be paid
biweekly on April 5th through direct deposit.
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B. Goods ordered by customers in the past year but not delivered were all delivered
on time in January. However, the delivery of goods to some customers in the
northeast region of the U.S. for sales made in March was delayed because of an
unexpected snowstorm. As a result, sales totaled $57,000 were not delivered and
the merchandize remained in the company’s warehouse.
C. The depreciation for equipment and buildings totaled $6,800 for the quarter.
D. The cost for the three-month informercial paid on February 1 requires a proper
adjustment.
E. Health insurance premium for January and February, totaled $2,300, was prepaid
last year. The health insurance premium paid on March 1 covers a period of 12
months. Proper adjustments are required.
F. Interest expense on the new 3-year 12% loan borrowed in January needs to be
recognized although not yet paid.
G. Company’s inventory system shows the total costs of inventory on hand at the
end of the quarter, based on LIFO, totaled $145,000. The number has been
confirmed by a companywide inventory count completed at the end of March.
H. Company’s income tax rate is 28%.
Balance Sheet for Great Adventures at 12/31/2021
Great Adventures, Inc.
Balance Sheet
(In USD 1,000)
December 31, 2021
Assets Liabilities
Current assets: Current liabilities:
Cash $138,800 Accounts payable $39,630
Accounts Receivable – Net $75,000 Interest payable $1,750
Merchandise Inventory $111,836 Unearned Revenues $38,846
Prepayments $2,300 Income tax payable $48,680
Total current assets $327,936 Total current liabilities $128,906
Notes payable (2 year, 9%) $25,000
Long-term assets: Total Long-term Liabilities $25,000
Land $34,290 Stockholders’ Equity
Buildings $85,000 Common stock ($1 Par) $20,000
Equipment $56,650 Additional Paid-in Capital $157,965
Accumulated Depreciation ($25,225) Retained earnings $146,780
Total Long-term asset $150,715 Total stockholders’ equity $324,745
Total assets $478,651 Liabilities & stockholders’ equity $478,651
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Required:
With the CFO’s help, you developed the following work plan for the project:
1. Set up T-accounts with proper account titles and beginning balances.
2. Analyze each of the summary transitions 1 – 18, determine the proper journal
entries and record the journal entries in the general journal.
3. Post journal entries to T-accounts.
4. Prepare an unadjusted trial balance. Correct mistakes before continuing to the
next step if your accounts are out of balance.
5. Analyze adjustments in item 19 and determine proper adjusting entries. Record
the adjusting entries in the general journal.
6. Post adjusting entries to T-accounts and prepare an adjusted trial balance. Correct
mistakes before continuing to the next step if your accounts are out of balance.
7. Prepare classified Income Statement and then classified Balance Sheet. Prepare
the Statement of Stockholder’s Equity. Pay attention to proper titles, dates, and
formats.
8. Prepare Statement of Cash Flows using direct and indirect methods. Significant
non-cash transactions must be disclosed in the footnote.