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compro declining balance depreciation



You have been charged with preparing year-end adjusting entries along with a multiple-step
income statement and a classified balance sheet for Fat Tire, Inc., a wholesaler of bicycles and
bicycle parts. The financial statements will cover the year ended December 31, 2011. A
December 31 bank reconciliation, an unadjusted trial balance, and other information to help with
the adjusting entries that follow.

                            Fat Tire, Inc.
                         Bank Reconciliation
                         December 31, 2011

Balance per Bank Statement                                   $293,350
 Deposits in Transit                              $4,500
 Bank Error (See note 1 below)                      1,200
 Outstanding Checks                               (2,000)       3,700
Adjusted Balance                                             $297,050

Balance per Fat Tire's Books                                 $300,000
 Interest Earned per bank statement                 $500
 NSF Check (See note 2 below)                       (175)
 December bank service charges                      (125)
 Book Error (See note 3 below)                    (3,150)      (2,950)
Adjusted Balance                                             $297,050

note 1: The bank incorrectly charged Fat Tire's account for a fee
        that belonged to another client of the bank.
note 2: The bank returned a bad check deposited by Fat Tire
        that represented a receipt of payment from one of Fat Tire's
note 3: A check for $3,500 to pay an Accounts Payable
       balance was incorrectly recorded as $350 on Fat Tire's books.

                              Fat Tire, Inc.
                         Unadjusted Trial Balance
                           December 31, 2011
                                                     Debit         Credit
Accounts Payable                                                   $50,000
Accounts Receivable                                  $425,700
Accumulated Depreciation (Equipment)                    7,292
Accumulated Depreciation (Furniture &
Fixtures)                                              29,500
Advertising Expense                        18,000
Allowance for Doubtful Accounts                         2,000
Cash                                      300,000
Common Stock                                          200,000
Cost of Goods Sold                       2,622,750
Depreciation Expense                         7,792
Equipment                                   10,000
Furniture & Fixtures                        60,000
Income Tax Expense                         229,034
Insurance Expense                           15,000
Interest Revenue                                        5,200
Inventory                                 350,000
Miscellaneous Operating Expense             2,500
Note Payable                                           40,000
Payroll Tax Expense                        21,160
Prepaid Insurance                          21,000
Rent Expense                              168,000
Rent Revenue                                            3,000
Retained Earnings                                     247,944
Salary Expense                            264,500
Sales Discounts                            30,000
Sales Returns                              35,000
Sales Revenue                                        4,035,000
Supplies Expense                           17,000
Unearned Rent                                           1,500
Utilities Expense                           24,000
 Totals                                 $4,621,436 $4,621,436
Information related to adjusting entries:
   1. No entries have been made for the December 31 bank reconciliation.
   2. Fat Tire pays employees and all payroll related liabilities semi-monthly. Each payment
      of payroll related liabilities is for the previous pay period. Thus, Fat Tire needs to accrue
      salaries and payroll related expenses for the December 16th-31st pay period. The
      following information was obtained for the last pay period of the year.

       Gross Pay = $11,500
       Federal Income Tax withholding rate = 20%
       FICA withholding rate = 8%
       FICA rate for the employer = 8%

       Assume no unemployment taxes were incurred during the pay period. Fat Tire maintains
       a liability account Federal Income Tax withholdings and a separate liability account for
       all other payroll related tax liabilities.
   3. The Allowance for Doubtful accounts is adjusted at the end of each year using the
      percentage of sales method. Fat Tires estimates that 1% of net sales will go uncollected.
   4. The Prepaid Insurance balance represents a $36,000 one-year policy that began on July 1.
      The company adjusts any prepaid items on a monthly basis.
   5. Fat Tire decided to sublease some of its rental space. On October 1, the company
      received $4,500 in advance from a neighboring business for 3 month’s rent. The lease
      period began on October 1. Fat Tire adjusts rent related accounts on a monthly basis.
   6. Furniture and Fixtures were acquired on January 2, 2007 at a cost of $60,000.
      Management selected a 10 year life with no residual value. Fat Tire depreciates Furniture
      and Fixtures on a monthly basis using the straight-line method of depreciation.
   7. The Equipment was purchased on January 2, 2010 at a cost of $10,000. Management
      selected a four year life with a $1,000 residual value. Fat Tire depreciates Equipment on
      a monthly basis using the double-declining balance method of depreciation. To obtain
      the monthly amount, management has decided to calculate the depreciation for the year
      and then record 1/12 of that amount each month.
   8. The Note Payable was issued on December 1, 2011. The terms of the note state that the
      principal and interest is to be paid two years from the issuance date. The interest rate
      stated on the note is 3 percent.
   9. Fat Tire makes quarterly payments for its income taxes. No entry has been made for the
      fourth quarter income taxes of 2011 which will be paid in 2012. To make this entry, you
      will have to determine the Income Before Tax for the year. One-fourth of that amount
      represents income earned in the fourth quarter. Fat Tire’s corporate tax rate is 40%.
   1. Prepared the adjusting entries required on December 31, 2011.
   2. Prepared a multiple-step income statement.
   3. Prepare a classified balance sheet.
   Note: If it helps, prepare a schedule like we completed in requirement #2 of Problem 3-54.
         It may help organize your data prior to preparing the financial statements.

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