The Crazy-Loop, Inc.

is specialized in video editing and promotional services for Youtubers’

and Instagrammers’ and the commercialization of the promotional merchandise of a
relevant YouTube family. The company presents the following trial balance at March, 31 st,
2018.

Accounts Dr. Cr.

Cash 25.300
Accounts Receivables 45.200
Allowance for doubtful accounts 5.000
Inventories (250 T-shirts x 16€). 4.000
Equipment 10.000
Intangible assets - Trademarks 18.000
Accounts Payable 4.500
Lon-term Notes Payable 5.600
Interest Payable 500
Unearned Revenue 4.200
Contributed Capital 65.000
Retained Earnings 14.000
Sales Revenue 46.500
Rent expense 12.000
Salaries Expense 30.000
Interest Expense 400
Other Expenses 400
145.300 145.300

From April to December 2018, the company completes the following transactions (they are
listed in chronological order).

1. A new shareholder invests 50.000 € in cash in the business in exchange for ordinary shares.
2. The company paid the 200 € included in ‘Interest payable’ account.
3. The company provides video editing and promotional services along 2018 for a total value of
150.000 €. At the end of the fiscal year end, 20% of credit sales was still outstanding. The rest
of the sales were effectively collected along the year.
4. The company acquired new merchandise (promotional t-shirts) for a total amount of 25.500 €
(1.500 T-shirts x 17€ each). Crazy-Loops pays 80%. The rest will be paid in January 2019.
The company uses the perpetual method to account for inventories

5. Paid 2.000 € cash on a one-year insurance policy effective July 1st.

6. The account “unearned revenues” includes a 2.500 € customer payment that took place in
2017. The merchandise (50 t-shirts) was finally delivered in May 2018.
7. Total sales for the period April-December amount 75.000 € (1.500 t-shirts). 90% of the total
sales for the period have been paid online with credit cards from customers. Credit cards fees
amount 3% of total sales. The rest will be cleared in 2019.
8. The company recognizes and pays the annual 7% interest accrued along the year for the
long-term debt (long-term notes payable).
9. Salaries for employees amount 60.000 € for the period March-December 2018.
10. Based on the uncollectible accounts from prior years, the company estimates a 8% Bad Debt
Loss Rate in accounts receivable.

(a) Analyze the impact of each operation on the fundamental equation and record all
transactions both in the JOURNAL and the LEDGER. The company uses the FIFO
inventory cost method and accounts for the inventory using the PERPETUAL METHOD (8
POINTS)

(b) Prepare the BALANCE SHEET at December, 31st (1 POINT)

(d) Can you explain the differences between the PERPETUAL VS. PERIODIC inventory
system to account for inventories? You can support your explanations using the data on
this exercise (1 POINT)
 1. A new shareholder invests 50.000 € in cash in the business in exchange for ordinary
shares.

Debit Credit

Cash (+CA) 50.000

Contributed Capital (+E) 50.000

2. The company paid the 200 € included in ‘Interest payable’ account.

Debit Credit

Interest Payable (-CL) 200

Cash (-CA) 200

3. The company provides video editing and promotional services along 2018 for a total value of
150.000 €. At the end of the fiscal year end, 20% of credit sales was still outstanding. The rest
of the sales were effectively collected along the year.

Debit Credit

Accounts receivable (+CA) 30.000

Cash (+CA) 120.000
Service Revenue (+Rev, +E) 150.000

4. The company acquired new merchandise (promotional t-shirts) for a total amount of 25.500 €
(1.500 T-shirts x 17€ each). Crazy-Loops pays 80%. The rest will be paid in January 2019.
The company uses the perpetual method to account for inventories

Debit Credit

Inventory (+CA) 25.500

Cash (-CA) 20.400
Accounts Payable (+CL) 5.100
5. Paid 2.000 € cash on a one-year insurance policy effective July 1st.
Debit Credit

Prepaid expense (+CA) 2.000

Cash (-CA) 2.000

At the FYE, the company must journalize the following adjustment:

Debit Credit

Insurance expense 1.000

Prepaid expense (-CA) 1.000

6. The account “unearned revenues” includes a 2.500 € customer payment that took place
in 2017. The merchandise (50 t-shirts) was finally delivered in May 2018.
Debit Credit

Unearned Revenue (-CL) 2.500

Sales Revenue (+Rev, +E) 2.500

We have now to account for COGS. Using FIFO, COGS = 50 * 16 € = 800 €

Debit Credit

COGS (+Expense, -E) 800

Inventory (-CA) 800

7. Total sales for the period April-December amount 75.000 € (1.500 t-shirts). 90% of the
total sales for the period have been paid online with credit cards from customers. Credit
cards fees amount 3% of total sales. The rest will be cleared in 2019.
Credit card sales = 0,9 x 75.000 = 67.500 €
Credit card fees = 0.03 x 67.500 € = 2.025 €
Net Cash received from sales = 67.500 – 2.025 € =65.475€

Debit Credit

Cash (+CA) 65.475

Accounts Receivable (+CA) 7.500
Credit card fees (-Rev, -E) 2.025
Sales Revenue (+Rev, +E) 75.000
We have now to account for COGS. Using FIFO, COGS = 25.300
200 x 16 € = 3.200 €
1.300 x 17 € = 22.100
Debit Credit

COGS (+Expense, -E) 25.300

Inventory (-CA) 25.300

8. The company recognizes and pays the annual 7% interest accrued along the year for the
long-term debt (long-term notes payable) = 0.07x5.600 = 392 €
Debit Credit

Interest Expense (+Expense, -E) 392

Interest Payable (+CL) 392

9. Salaries for employees amount 60.000 € for the period March-December 2018.
Debit Credit

Salaries Expense (+Expense, -E) 60.000

Cash/Salaries Payable (-CA/+CL) 60.000

10. Based on the uncollectible accounts from prior years, the company estimates a 8% Bad
Debt Loss Rate in accounts receivable.
Accounts receivable final balance = 45.200 + 30.000 + 7.500 = 82.700 €
0,08 x 82.700 = 6.616 € (final balance for the Allowance for doubtful accounts)
Current balance = 5.000 ➔ The allowance must increase in 1.616 €
Debit Credit

Bad debt Expense (+Expense, -E) 1.616

Allowance for doubtful accounts (-CA/+CL) 1.616
 INVENTORY

(FIFO)

IN OUT

Beginning inventory = 4.000 Ending inventory

250 t-shirts x 16 € = 4.000 € 200 t-shirts x 17 €= 3.400 €

IN - acquisitions TOTAL COGS = 26.100

1.500 t-shirts x 17 € = 25.500 €
Total IN = 29.500 €
COGS1 = 50 t-shirts x 16 = 800 €
COGS2 = 1.500 t-shirts = 25.300 €
200 t-shirts x 16 € = 3.200 €
1.300 t-shirts x 17 € = 22.100 €
Total OUT = 29.500 €

Net Income calculation

Debit (expenses) Credit (revenues)

12.000 – rent expense 46.500 – sales revenue

30.000 – salaries expense 150.000 - service revenue
400 – interest expense 2.500 – sales revenue
400 – other expenses 75.000 – sales revenue
1.000 - insurance expense
800 – COGS1
25.300 – COGS2
2.025 - credit card fees
392 - interest expense
60.000 - salaries expense
1.616 - bad debt expense
Total expenses = 133.933 € Total revenues = 274.000 €
Net income = 140.067 €
 Balance Sheet – Crazy Loop, Inc – 31st December 2018

Assets Dec 18 Equity & Liabilities Dec 18

NON-CURRENT ASSETS 28.000 EQUITY 269.067
Equipment 10.000 I. Capital 115.000
Intangible assets 18.000 VI. Retain Earnings 14.000
VII Earnings (NI) 140.067
B) CURRENT ASSETS
II. Inventories 3.400 NON-CURRENT LIABILITIES 5.600
III. Accounts receivable 82.700
Allowance for doubtful (6.616) CURRENT LIABILITIES
accounts III. Current payables
VI. Pre-paid expense 1.000 Accounts payable 9.600
VII. Cash 178.175 Interest Payable 695
Unearned revenue 1.700
TOTAL 286.659 TOTAL 286.662