The submission is to be one Excel file including 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

Friend’s 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 8,350

Accounts payable 900

Accounts receivable 3,500

Accumulation depreciation 2,700

Additional paid-in capital 6,000

Common stock 1,200

Depreciation expense 900

Income tax expense 700

Income tax payable 250

Insurance expense 1,800

Interest expense 600

Interest payable 700

Inventory 12,000

Land 17,000

Note payable – current portion 3,000

Note payable – long-term 8,000

Office equipment 4,500

Rent expense 6,000

Retained earnings 7,875

Salary expense 12,000

Salaries payable 800

Service revenue 35,000

Travel expense 1,275

Unearned revenue 2,200

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 Friend’s 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 doesn’t want to change any amounts on

the trial balance because “eventually it will all wash out.” $500 of the $1,275 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 $5,000 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.

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