P7-1 (Determine Proper Cash Balance) Francis Equipment Co. closes its books regularly on December 31, but at the end of 2010 it held its cash book open so that a more favorable balance sheet could be prepared for credit purposes. Cash receipts and disbursements for the first 10 days of January were recorded as December transactions. The information is given on the next page.
1. January cash receipts recorded in the December cash book totaled $45,640, of which $28,000 represents cash sales, and $17,640 represents collections on account for which cash discounts of $360 were given.
2. January cash disbursements recorded in the December check register liquidated accounts payable of $22,450 on which discounts of $250 were taken.
3. The ledger has not been closed for 2010.
4. The amount shown as inventory was determined by physical count on December 31, 2010.
The company uses the periodic method of inventory.
(a) Prepare any entries you consider necessary to correct Francis’s accounts at December 31.
(b) To what extent was Francis Equipment Co. able to show a more favorable balance sheet at December 31 by holding its cash book open? (Compute working capital and the current ratio.) Assume that the balance sheet that was prepared by the company showed the following amounts:
Accounts payable $45,000
Other current liabilities 14,200
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