Thumbs Up Video Case Solution HO

Thumbs Up Video - Thumbs-Up Video Inc Exhibit TN-1 Events and Transactions—November 1988 through June 1989 T—account entries shown in Exhibit

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Unformatted text preview: Thumbs-Up Video, Inc. Exhibit TN -1 Events and Transactions—November 1988 through June 1989 T—account entries shown in Exhibit TN-2 are keyed to the transaction numbers. 1. Common stock issued for $165,000. 2. Legal fees of $2,700 paid in cash. 3. Building and land purchased for $5,000 and $43,000 respectively. Mortgage obtained for $33,600; remainder of $14,400 paid in cash. 4. Renovation work of $20,000 incurred; $5,000 paid when the work began. a. The remaining $15,000 paid when the work was completed at the end of December. 5. Rental tape inventory purchased for $100,000 on account. a. Entire amount subsequently paid for in cash by 12/31 / 88. 6. Equipment purchased for $6,700 cash. 7. Software purchased for $1,000 cash. 8. Office supplies purchased for $500 cash. Assume it is treated as an expense when delivered. 9. Advertising contract covering 1/ 2 / 89 through 12 / 31 / 89 paid for in cash for $6,000. Initially recorded as prepaid advertising. 10. "New Release” tapes purchased on June 1 for $18,750 on account. Remained unpaid at 6/30/89. 11. Sales for the six-months ended 6/30/89 were $96,000. $2,200 remained in accounts receivable at 6/30/89. 12. Salaries and wages paid during this six-month period totaled $62,000. Additionally, the following accrual entries are necessary. Assumptions are noted following the transaction. 13. Depreciation recorded for the building, renovations and equipment as follows: Building ($ 5,000/25 years) @ 6 months = $ 100 Renovations ($20,000/25 years) (9? 6 months = 400 ‘ Equipment ($ 6,700/ 5 years} @ 6 months = fl $1,170 This assumes that depreciation does not begin until 1 /2/ 89, when operations began, even though the renovations were completed and the equipment was purchased by 12/31/88. Thumbs-Up Video, Inc. 14. Amortization recorded for the software as follows: ($1,000/5 years) @ 6 months = $100 Again, this asset is not depreciated until operations commence on 1/2/89. The above also assumes that the software is depreciated (rather than expensed) over the same life as the computer and the other equipment. The case does not specify a life for the software. Arguments for shorter lives (due to expected obsolescence) or longer lives (since the software is intangible and does not "wear out”) can be made. 15. Amortization recorded for the regular and "new release” video tapes as follows: Regular ($100,000/ 3 years) @ 6 months = $16,667 New releases $18,750 20% ($ 3,750/3 years) @ 1 month = 104 80% ($15,000/1 year) @ 1 month = 1,250 $18,021 The regular tapes are amortized over 3 years. The new releases were purchased in multiple copies of the same title; 10 copies of each title were purchased versus the usual 2 for regular tapes. The case states that little or no benefit will be derived from the extra 8 copies of these new release titles after one year. We have therefore amortized these extra 8 copies over a period of 1 year. The remaining 2 copies are amortized over the usual 3 year period. 16. Interest on the mortgage accrued for $2,900. 17. Advertising expense recorded as follows: ($6,000/ 12 months) x 6 months = $3,000 We are recording here advertising expense from January 1989 through June 1989. Exhibit TN -2 Numbers refer to the transactions listed in Exhibit TN-l. Closing entries made to the Income Thumbs-Up Video, Inc. Summary account and finally to Retained Earnings are denoted with letters. 00511 (1) 165.000 I 2,700 (2) (11) 93.800 14,400 (3) 5.000 (4) 15,000 (4a) 100,000 (5a) 6.700 (6) 1,000 (7) 500 (a) 6.000 (9) 2) | 62,000 (1 45.500 Prepaid Advertising (9} 6.000 3.000 [17) 3.000 Land (3i Equipment (5) 0.?00 6.700 Software {7] 100 (14) Accrued Interest 2.900 (16) 2.000 Accounts Receivable (11) 2.200 2.200 Tape Inventory 18.021 {15} 100.000 18.750 100.729 (5} Buildings and Renovations Accumulated Depreciation 1.170 (13) 1.170 Accounts Payable (421) 15.000 15.000 (4) (5a) 100.000 100.000 (5) 18.750 (10) 18.750 Mortgage Payable 33.600 {3) 33.600 Thumbs-Up Video, Inc. Common Stock 165.000 (1) 165.000 Sales Revenue 96.000 {11) (A! Depreciation Expense iC-J Salaries and Wages (12) 62.000 (E) Interest Expense (16} 2.900 [G] Office Supplies Expense (9) Retained Earnings 5.609 5,609 Tape Amortization Software Amortization Legal Fees Advertising Expense income Summary (J) Thumbs-Up Video, Inc. Exhibit TN-S Statement of Financial Position, June 30, 1989 Assets Cash $ 45.500 Accounts Receivable 2,200 Prepaid Advenising M Total Current Assets $ 50.700 Tape inventory 100.729 Land 43.000 Building & Renovations $ 25,000 Equipment 6.700 $ 31.700 Less Accumulated Depreciation (1,170) Net Building and Equipment 30.530 Software 900 Total Assets m Liabilities and Shareholders’ Equity Accounts Payable $ 18.750 Accrued Interest 2.900 Total Current Liabilities $ 21.650 Mortgage Payable 33.600 Common Stock 165.000 Fletained Earnings 5.609 Total Shareholders’ Equity $170,609 Total Liabilities and Shareholders’ Equity m Thumbs-Up Video, Inc. Exhibit TN-4 Income Statement for the Six-Months Ended June 30, 1989 Video Tape Rental Revenue $96,000 Costs and Expenses Salaries and Wages $62,000 Tape Amortization 18,021 Depreciation 1,170 Legal Fees 2,700 Advertising 3,000 Interest 2,900 Office Supplies 500 Software Amortization 100 Total Costs and Expenses 90,391 Net Income M Note: No expenses are recognized before operations began on 1/2/89. Exhibit TN—5 The Super "T" Rules for Bookkeeping Using Accounts Assets Liabilities and Owners' Equity Asset Liability Owners' Retained Earnings Expenses Revenues Increases (+) always go to the outside. Decreases (-) always go to the inside. Temporary accounts reside underthe Retained Earnings “T”. ...
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This note was uploaded on 10/12/2010 for the course MBA 11111 taught by Professor Spike during the Fall '10 term at Lewis University .

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Thumbs Up Video - Thumbs-Up Video Inc Exhibit TN-1 Events and Transactions—November 1988 through June 1989 T—account entries shown in Exhibit

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