Reference no: EM13870278

Description:

 You have been charged with preparing year-end adjusting entries along with a multiple-step income statement and a classified balance sheet for Fat Tire, Inc., a wholesaler of bicycles and bicycle parts.  The financial statements will cover the year ended December 31, 2011.  A December 31 bank reconciliation, an unadjusted trial balance, and other information to help with the adjusting entries that follow.

Information related to adjusting entries:

1. No entries have been made for the December 31 bank reconciliation.
2. Fat Tire pays employees and all payroll related liabilities semi-monthly.  Each payment of payroll related liabilities is for the previous pay period.  Thus, Fat Tire needs to accrue salaries and payroll related expenses for the December 16^th-31^st pay period.  The following information was obtained for the last pay period of the year.
   
   Gross Pay = $11,500
   Federal Income Tax withholding rate = 20%
   FICA withholding rate = 8%
   FICA rate for the employer = 8%
   
   Assume no unemployment taxes were incurred during the pay period.  Fat Tire maintains a liability account Federal Income Tax withholdings and a separate liability account for all other payroll related tax liabilities.
3. The Allowance for Doubtful accounts is adjusted at the end of each year using the percentage of sales method.  Fat Tires estimates that 1% of net sales will go uncollected.
4. The Prepaid Insurance balance represents a $36,000 one-year policy that began on July 1.  The company adjusts any prepaid items on a monthly basis.
5. Fat Tire decided to sublease some of its rental space.  On October 1, the company received $4,500 in advance from a neighboring business for 3 month's rent.  The lease period began on October 1.  Fat Tire adjusts rent related accounts on a monthly basis.
6. Furniture and Fixtures were acquired on January 2, 2007 at a cost of $60,000.  Management selected a 10 year life with no residual value.  Fat Tire depreciates Furniture and Fixtures on a monthly basis using the straight-line method of depreciation.
7. The Equipment was purchased on January 2, 2010 at a cost of $10,000.  Management selected a four year life with a $1,000 residual value.  Fat Tire depreciates Equipment on a monthly basis using the double-declining balance method of depreciation.  To obtain the monthly amount, management has decided to calculate the depreciation for the year and then record 1/12 of that amount each month.
8. The Note Payable was issued on December 1, 2011.  The terms of the note state that the principal and interest is to be paid two years from the issuance date.  The interest rate stated on the note is 3 percent. 
9. Fat Tire makes quarterly payments for its income taxes.  No entry has been made for the fourth quarter income taxes of 2011 which will be paid in 2012.  To make this entry, you will have to determine the Income Before Tax for the year.  One-fourth of that amount represents income earned in the fourth quarter.  Fat Tire's corporate tax rate is 40%.

Required:

1. Prepared the adjusting entries required on December 31, 2011.
2. Prepared a multiple-step income statement.
3. Prepare a classified balance sheet.

Note:  If it helps, prepare a schedule like we completed in requirement #2 of Problem 3-54. It may help organize your data prior to preparing the financial statements.