Question

The following information relates to Paris Cosmetics. Ltd. for the year 2017 (1/1/2018). Cash…………………………………….       € 3,500...

The following information relates to Paris Cosmetics. Ltd. for the year 2017 (1/1/2018).

Cash…………………………………….       € 3,500

Short term investments………………...          1,297

Accounts Payable……………………….        4,200

Accounts Receivable……………………      22,475

Prepaid Insurance……………………….          4,200

Inventory……………………………….       10,325

Intangible Assets……………………….         2,694                      

Notes Payable….……………………..          20,000

Wages payable………………………….              400

Non-current borrowings………………...         1,683

Property Plant and Equipment, net……..       23,316

Accumulated depreciation………………      12,423

Share Capital-Ordinary…………………       24,594

Retained Earnings………………………              ?

Earlier in the year, Paris Cosmetics obtained a bank loan of $20,000 cash for the firm (it will be paid off in one year). One of the provisions of the loan is that the year-end debt-to equity ratio (ratio of total liabilities to total equity cannot exceed 0.7. Paris Cosmetics is concerned about being in violation of the loan agreement and requests assistance from its accounting department in reviewing the situation. Management would like to pay a 20% of net income cash dividend to its shareholders at year’s end. Assume the prior year’s retained earnings was €6,000.

Management knows that final adjustments at year-end have not been made. Discussions with the accounting department reveal the following

  1. On Dec. 1, 2017 the firm paid a €4,200 insurance premium for 6 months of coverage. The amount in Prepaid insurance has not yet been adjusted.
  2. Depreciation on the equipment should be 10% of cost per year; the company inadvertently recorded 5% for 2017.
  3. Interest on the bank loan has been paid through the end of 2017.
  4. The firm sold €5,200 to a major department store in December, which included €1,200 in gift certificates which can be redeemed for make-overs within the next year. The sales have not been billed or recorded in the accounts. (Be careful, what is or is not revenue?).
  5. On December 1, 2017, the firm received an advance payment from Paris fashion week for services it will render there in February in the amount of €1,000. This payment was not credited.
  6. Ingredients (inventory) costing €9,800 were available on December 31: the company made no entry in the accounts.

     Adjust the accounts using the beginning balances.

  1. What is the debt to equity ratio before the adjustments? (5 points)

  1. Construct a post-closing trial balance sheet for Paris Cosmetics (Order is very important. Paris Cosmetics is headquartered in France.) for 12/31/2017. Make sure to show cost, accumulated depreciation and net amount of property, plant and equipment. (15 points)

Account

Assets Adjustments

Liabilities

Adjustments

Owner’s Equity Adjustments

Beginning Totals

Recognitions of insurance expense

Depreciation corrections

Interest

Unbilled sales of cosmetics and gift certificates

Advance on Paris Fashion Week

Recognition of supply expense

Revised totals

Adjusted Post-Closing Trial Balance

Accounts

Dr.

Cr.

Total

  1. Is the firm in violation of its loan agreement if it pays the proposed cash dividend? Prepare computations to support the correct total of liabilities and total equity figures. (Hint: find Net Income using Retained Earnings. Net Income determines the amount of the dividend.) (10 points)

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