Question

C o m p r e h e n s i v e P r o b l e m C h a p t e r s 6 – 8
Fray Enterprises is a small business that purchases electronicpersonal information managers (PIM) from manufacturers
and sells them to consumers. Th ese PIMs keep track ofappointments, phone numbers, to-do lists, and the like. Fray
conducts business via the Internet and, at this point, carries onlyone model of PIM, the ZL-420. Fray provides the following
trial balance as of January 1, 2011.

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,200
Accounts Receivable . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . 26,800
Allowance for Bad Debts . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $804
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . .31,650
Prepaid Rent . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . .1,100
Offi ce Supplies . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . 900
Accounts Payable . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19,100
Wages Payable . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2,800
Taxes Payable . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 3,400
Common Stock (10,000 shares). . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . .30,000
Retained Earnings . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13,546
Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . .$69,650$69,650

Fray uses the periodic FIFO inventory method in accounting for itsinventory. Th e inventory of ZL-420 consists of the
following inventory layers:
Layer Units Price per Unit Total Price
1
(oldest purchase) 50 $120 $ 6,000
2 80 130 10,400
3 70 135 9,450
4
(most recent purchase) 40 145 5,800
Total 240 $31,650
Fray provides the following additional relevant information:
• Th e company uses the percentage of receivables method inestimating bad debts; 2% of the ending receivables
balance is deemed to be uncollectible.
• Fray conducts an actual physical count of its inventory and office supplies at the end of each month.
• Fray rents its warehouse, offi ce facilities, and computerequipment. Rent on the computer equipment is paid at
the beginning of each month. Rent on the warehouse and offi cespace is paid on the 15th of each month.
• Payroll is paid on the 5th and the 20th (pay periods end on the15th and the last day of the month).
• Taxes Payable represents payroll taxes that are due by the 5th ofthe following month.
• All sales and all inventory purchases are on account.

The following transactions occurred for Fray during January of2011:
Jan. 1 Paid rent on the computer equipment, $1,400.
5 Recorded sales for the week, 130 units at $210 per unit. (Th ecompany uses a periodic inventory system.)
5 Paid wages payable and taxes payable from the prior period.
5 Collected $19,000 from customers on account during theweek.
8 Purchased offi ce supplies for cash, $300.
10 Received 70 ZL-420s from the manufacturer at a cost of $145 perunit.
11 Paid accounts payable, $16,900.
12 Collected $22,000 from customers on account during theweek.
12 Recorded sales for the week, 120 units at $210 per unit.
15 Paid monthly rent for the offi ce and warehouse, $2,200.
15 Received 130 ZL-420s from the manufacturer at a cost of $150 perunit.
18 A customer returned a ZL-420 and requested a refund. A check wasimmediately mailed to the customer in
the amount of $210.
19 Collected $30,000 from customers on account during theweek.
19 Recorded sales for the week, 140 units at $210 per unit.
20 Paid the semimonthly payroll for the pay period ending onJanuary 15. Salaries and wages total $4,800 and
payroll taxes were as follows: FICA taxes payable, employee, $367;FICA taxes payable, employer, $367; state
withholding taxes payable, $310; federal withholding taxes payable,$780; federal unemployment taxes payable,
$60; state unemployment taxes payable, $180.
22 Received notice that a customer owing Fray $630 had fi ledbankruptcy and would be unable to pay.
23 Paid the taxes payable from the payroll on January 20.
24 Received 180 ZL-420s from the manufacturer at a cost of $150 perunit.
25 Purchased offi ce supplies for cash, $480.
25 Paid accounts payable, $43,000.
26 Collected $30,500 from customers on account during theweek.
26 Recorded sales for the week, 135 units at $220 per unit.
29 Customers returned 7 ZL-420s and requested refunds. Checks wereimmediately mailed to each customer in
the amount of $210 each.
30 Received 140 ZL-420s from the manufacturer at a cost of $145 perunit.
31 Collected $29,900 from customers on account.
31 Recorded sales for the partial week, 70 units at $220 perunit.
31 Accrued the semimonthly payroll for the pay period ending onJanuary 31. Salaries and wages total $5,000
and payroll taxes were as follows: FICA taxes payable, employee,$382; FICA taxes payable, employer, $382;
state withholding taxes payable, $230; federal withholding taxespayable, $810; federal unemployment taxes
payable, $65; state unemployment taxes payable, $190.

Required:
1. Provide the required journal entries to record each of the aboveevents.
2. Make the adjusting entries necessary (1) to record bad debtexpense for the period and (2) to adjust inventory
and offi ce supplies. A count of inventory and offi ce suppliesrevealed 165 ZL-420s on hand and supplies
valued at $1,000.
3. Prepare a trial balance as of January 31, 2011.
4. Prepare an income statement and a balance sheet for FrayEnterprises.
5. Compute Fray’s number of days’ sales in inventory, number ofdays’ sales in accounts receivable, and number
of days’ purchases in accounts payable ratios. What can youconclude about the company’s liquidity position
based on this analysis