•
Analyze
how business transactions are recorded in
the
financials records of an
organization.
•
Identify
the accounting principles used to create the Income Statement, Balance Sheet,
and Statement of Cash Flows.
Similar to the exercise used
in the course to introduce how business transactions are recorded in
the financial records of an organization and used to produce financial statements, Assignment 1
presents you with an organization’s opening financial position and a series of transactions
that
take place over a year. You should determine the appropriate manner in which to record these
transactions and then produce three financial statements for the organization at the end of the
year.
Assignment:
Danny’s Security Systems, Inc. (DSSI)
off
ers its clients security systems and alarm monitoring
services on a retail basis.
DSSI
specializes in offering the most up
–
to
–
date services with the most
technologically advanced equipment. For example, the high
–
end alarm system, called
DAS59
, is
widely re
cognized as an industry leader. All of the balance sheet items from December 31, 201
2
,
are shown below along with the events that occurred during 201
3
. Please ignore all taxes
(income and sales) in preparing your answer.
Danny’s Security Systems, Inc.
Balance Sheet Items
As of December 31, 2012
0.5 points
Accounts payable
$380,000
0.5 points
Accounts receivable
$611,000
1.0 points
Accumulated depreciation
$1,245,000
0.5 points
Cash
$267,000
0.5 points
Common shares
$1,152,000
0.5 points
Short
–
term
bank
loan
$125,000
0.5 points
Plant, property, and equipment
$2,111,000
0.5 points
Interest payable
$37,000
0.5 points
Inventory
$850,000
1.0
points
Licenses (
net
)
$180,000
0.5 points
Long
–
term
bank
loan
$525,000
0.5 points
Goodwill
$80,000
0.5 points
Retained earnings
$304,000
1.0 points
Advances from customers
$340,000
0.5 points
Salaries payable
$180,000
0.5 points
Short
–
term investments (t
rading
securities)
$180,000
0.5 points
Office supplies
$9,
a)
New credit sales for the year were $1,910,000.
(2 points)
(b)
Sales of $272,000 were earned from prior period cash advances from customers.
(3
points)
(c)
Old equipment, which had originally cost $147,000 and was fully
d
epreciated, was
scrapped
on the first day of business of the year.
(3 points)
(d)
New cash sales for the year were $333,000.
(2 points)
(e)
DSSI
acquired all of the assets and liabilities of
Smith Alarms,
LLC for $555,000 cash.
The assets included equipment valued at $425,000 (th
is equipment was carried on the
books of
Smith Alarms,
LLC at $300,000 net), accounts receivable of $230,000, accounts
payable of $250,000, and a demand loan of $52,000. There were no intangible assets.
(6
points)
(f)
DSSI
acquired office supplies on credit fo
r $32,000.
(2 points)
(g)
DSSI
paid salaries to employees of $390,000 in cash.
(2 points)
(h)
Cash collections from credit sales were $1,720,000.
(2 points)
(i)
Cash payments for items purchased on credit during the year were $344,000.
(2 points)
(j)
Paid $363,000 for
administrative expenses during the year.
(2 points)
(k)
Paid the bank $58,000 cash towards interest payments during the year.
(2 points)
(l)
At the end of the year, owed the bank $19,000 in interest.
(2 points)
(m)
At the end of the year, the
market
value of the short
–
term investments was $157,000.
(3
points)
(n)
A total of $3,000 in office supplies remained on hand at the end of the year.
(2 points)
(o)
Depreciation on plant, property, and equipment for
2013
was determined to be $123,000.
(2 points)
(p)
DSSI
collected $327,000 of
cash advances from customers.
(2 points)
(q)
DSSI
acquired $212,000 of inventory on credit.
(2 points)
(r)
DSSI
’s policy is to write off all intangible assets
over 3 years using straight
–
line
amortization. 201
3
is the second year for amortizing licenses.
(2 point
s)
(s)
DSSI
offers a “satisfaction guarantee” to its clients for security services. If clients are
unhappy with the services they purchased, they are eligible for free additional security
services (i.e., this is a form of “after sales warranty” service). The c
ompany estimates that
future expenditures of approximately $67,000 will be required to perform these “after
sales warranty” activities to keep clients satisfied for services originally rendered to
clients in 201
3
.
(3 points)
(t)
DSSI
spent $125,000 during 201
3
on research and development activities related to new
services the company could offer clients. It is expected that some of these products
would be marketable within one or two years
,
but nobody is sure which
products will be
successful.
(2 points)
(u)
At the
end of the year, the accountant estimated that $22,000 of accounts receivable
owed to the firm would not likely be collected.
(2 points)
(v)
On the last day of business
in 2013
,
DSSI
declared an $80,000 dividend, which will be
paid sometime in the next year.
(2 points)
(w)
At the end of the year,
DSSI
owed its employees a total of $66,000.
(2 points)
(x)
DSSI
paid down the long
–
term loan by $140,000.
(2 points)
(y)
At the end of the year, it was determined that $513,000 of inventory remained on
–
hand.
(2 points)
(z)
At the end
of the year, it was determined that the carrying value of goodwill had declined
by $28,000.