Bluberry Ltd is a clothing wholesaler, which has been operating for only one year.  At the beginning of its second year of operations, it has the following items on its balance sheet:

Fixed Assets2,000  
Common Stock400  
Retained Earnings600  
5 year Bank Loan3,000  

During the second year, the company undertakes the following transactions:

  1. Purchases inventory (clothing) for $700, on credit.
  2. Sells inventory, which originally cost $600, for $1,400.  Half of the customers buy on credit and the other half pays in cash.
  3. Pays $150 for advertising and $75 for insurance.  The advertising is paid in cash, but the insurance will be paid in cash later.
  4. Purchases a new storage facility for $600, on credit.
  5. Pays the warehouse employees $200 in cash.
  6. Pays interest of 5% on its loan, in cash.
  7. Pays $400 for accounts payables.
  8. Receives $400 from its customers.
  9. The company’s accountant calculates that as a result of the above transactions, the company will have to pay tax of $100 at a later date.
  10. Finally, the board of directors decides to pay a dividend of $50 (the dividend is not paid by the end of the fiscal year).

On the following page, you are given a worksheet for Bluberry’s second fiscal year.  Fill in the opening balances (from the end of the first year) and record the transactions during the second year. Calculate closing balances and then, using the formats given, construct a closing balance sheet and an income statement.


 Fixed Assets  InventoryAcc ReceivCash  Comm StockRet EarningIncome StateBank LoanAcc PayableTax PayableDividends Payable
Opening balances           
  Purchase inventory           
Cost of sales           
Purchase storage fac.           
Pay accounts payable           
Collect accounts rec.           
Transfer retained earnings           
Closing balances           

Income Statement

Cost of Sales 
Gross Profit 
Operating Expenses 
Profit before Interest and Tax 
Profit Before Tax 
Profit After Tax 


Balance Sheet

Accounts Receivable  
Total Current Assets  
Plant and Machinery  
Total Long Term Assets  
Accounts Payable  
Dividends Payable  
Tax Payable  
Total Current Liabilities  
Bank Loan  
Total Long Term Liabilities  
Common Stock  
Retained Earnings  
Total Shareholders’ Equity  

Part II: Accrual Accounting

Question 1: Sawyer Ltd

  • Now suppose that the next two semi-annual rent payments are:

February 28th, 2021                      $36,000

August 31st, 2021                          $42,000

What amount should appear in the 2021 income statement? What amount should appear on the closing balance sheet for 2021? Record these transactions in a transaction worksheet.

Question 2: Austen Ltd   

On December 31st, 2020, Austen Ltd (which has a December 31st year-end) received and paid a telephone bill of $18,000 comprising:

Calls for the three months ended on December 31st, 2020             $14,000

Line rental for the six months ending on March 31st, 2021                $4,000

What amounts should appear in the 2020 income statement and on the closing 2020 balance sheet in respect of this bill? Record these transactions in a transaction worksheet.

Part III: General Concepts

  • In each of the following questions, you have transactions that were either “missed” or wrong in the annual financial statements ending on December 31st.
  • Indicate the amounts involved and the effects on each of the accounts listed, using the following notation:

overstated (O), understated (U) or no effect (NE)

  • Each transaction is independent (i.e., the first transaction does not affect the second, etc…).    
  • For each question be sure to show by what amounts the financial statements are wrong before the corrections are made for the forgotten or mistaken transactions.  Ignore any tax effects.


A firm neglected to record a payment to a supplier of $10,000. 

Current Assets(O) 10,000Long-term assetsNE
Current Liabilities(O) 10,000Long-term liabilitiesNE
Capital StockNERetained EarningsNE
Net IncomeNE  

Explanation (not required in your solution to the assignment):

Since the transaction was not recorded, current assets are overstated; the cash account was not charged on December 31st, but the company did pay the supplier. Hence, the closing balance of the cash account should have been $10,000 lower.

The obligation to pay the supplier (current liability) is still shown in the company’s balance sheet but it should have been eliminated after the payment was made. Hence, current liabilities are overstated.


Current Assets Long-term assets 
Current Liabilities Long-term liabilities 
Capital Stock Retained Earnings 
Net Income   
  • On December 31st, Aristotle Inc. bought inventory for $2,000, which was paid in cash. This entry was never recorded.
Current Assets Long-term assets 
Current Liabilities Long-term liabilities 
Capital Stock Retained Earnings 
Net Income   
Current Assets Long-term assets 
Current Liabilities Long-term liabilities 
Capital Stock Retained Earnings 
Net Income   
  • Mitch’s Pub Inc. neglected to record any entries to recognize the issuance of common stock.  The firm sold 100 shares on the open market and received $32 per share.
Current Assets Long-term assets 
Liabilities Capital Stock 
Income Retained Earnings 
  • A firm neglected to record any entries related to the sale of an item to a customer on credit.  The item was in inventory at a cost of $5,000 at the time of sale and was sold for $7,500.
Current Assets Long-term assets 
Current Liabilities Long-term liabilities 
Common Stock Retained Earnings 




Part IV – Cash vs. Accrual Accounting

Prime Purchase is an electronics retailer.  Indicate the effect of each of the following transactions (i.e. increase, decrease or no change) on Prime Purchase’s 2021 net income under cash accounting and accrual accounting, respectively. Clarification: for cash accounting show changes in the cash account; for accrual accounting show changes in the income statement.

Examples: Prime Purchase provided services and received $4,000 in cash.

                                    Cash basis                                    Accrual basis

                                    Increase $4,000             Increase $4,000

Prime Purchase received a phone bill that amounts to $500 (related to calls made during 2021). Prime Purchase will pay the bill in January 2022.

Cash basis                                    Accrual basis

                                    No change                                    Decrease $500

  1. On November 12th, Prime Purchase purchased inventory for $200,000.  It paid $120,000 in cash and owed the rest on account.

                                    Cash basis                               Accrual basis

                                    ________                                    ___________

                                    Cash basis                                    Accrual basis

                                    _________                                    ___________

  • On December 15th, Prime Purchase paid $36,000 for a twelve-month fire insurance policy that runs from December 16th, 2021 to December 15th, 2022.  Include the effect of any adjusting entry necessary on December 31st.

                                    Cash basis                                    Accrual basis

                                    _________                                    ___________

  • Prime Purchase sold merchandise for $100,000 (half in cash and half on account). This merchandise had been purchased by Prime Purchase for $75,000 on a prior accounting period.

                                    Cash basis                                    Accrual basis

                                    _________                                    ___________

  • On December 20th, Prime Purchase made $20,000 cash sales of gift certificates, which can be used to purchase merchandise at the store.  None of the gift certificates was redeemed by December 31st.

                                    Cash basis                                    Accrual basis

                                    ____________                        ____________                                    ___________

Part V.  Revenue Recognition – Planet Fitness

Planet Fitness is one of the largest and fastest-growing franchisors and operators of fitness centers in the United States. When a customer signs up for a fitness club membership, she/he agrees to pay membership fees and dues for the right to use the fitness club.  Using their balance sheet and additional information from their footnotes included on the following two pages, please answer the following questions.

  • (a) What is the ratio of current assets divided by current liabilities (known as the current ratio) for Planet Fitness as of the end of Year 2?

 (b) What would the (current) ratio be if Planet Fitness recognized all of the deferred revenue immediately instead of deferring it?

(All dollar amounts are in thousands)


   Year 2                     Year 1


Excerpts from Footnote (2) Summary of significant accounting policies

Membership dues revenue

Customers are offered multiple membership choices varying in length. Membership dues are earned and recognized over the membership term on a straight-line basis.

Enrollment fee revenue

Enrollment fees are charged to new members at the commencement of their membership. The Company recognizes enrollment fees ratably over the estimated duration of the membership life, which is generally two years.

Annual membership fee revenue

Annual membership fees are annual fees charged to members in addition to and in order to maintain low monthly membership dues. The Company recognizes annual membership fees ratably over the 12-month membership period.

Deferred revenue

Deferred revenue is recognized in our Corporate-owned stores segment for cash received from members for enrollment fees, membership dues and annual fees for the portion not yet earned based on the membership period.

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