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Rift Music Store and Water Fun Store

On December 31, 2007, The Rift Music Store reported net income of $1,200 and the following account balances.

Cash $1,425
Accounts Receivable 2,300
Prepaid insurance 1,200
Equipment and furnishings 3,200
Less: Accumulated depreciation (500)
Accounts payable 1,300
Wages payable 1,520
Owners equity (includes net income of $1,200) 4,805

After this information was prepared, the bookkeeper discovered that he had forgotten to make two necessary adjusting entries for the year and, therefore, they were not reflected in the balances shown. Information concerning the two missing adjusting entries follows:

a. The prepaid insurance involves a 3-year fire insurance policy that was purchased (and went into effect) on January 1, 2007. By the end of the year, a portion of the insurance policy has been used up.
b. The wages payable does not include the wages that were owed at year-end to two workers who had been temporarily assigned to work off the premises. This amount totaled $375.

Use the following schedule, determine the correct year-end amount of the (1) total assets (2) total liabilities, (3) owners' equity, and (4) net income.
Assets Liabilities Equity Net Income
Year-end amounts before correction
Adjusting Entry (a):
Adjusting entry (b):
Year-end corrected amounts $ $ $ $

Problem 7

Accrual Versus Cash Flow

The Water Fun Store is a retailer of water sports products for backyard swimming pools. During August, the firm had the following operating activities:

Date Event
Aug. 1 Bought $5,000 of goods for resale from Pinetree Wholesalers on credit.
5 Paid $450 to the local newspaper for advertising that ran during July.
6 Paid $975 rent for the month of August.
9 Sold goods to customers for $7,350 on credit. These goods had cost the firm 3,600.
10 Paid $3,000 to Pinetree Wholesalers in partial payment for goods purchased Aug 1.
11 Collected $5,350 from goods sold on August 9.
13 Bought $9,200 of goods for resale from Stanley Company. Paid Cash.
16 Paid employees for their work so far in August, $1,050
19 Sold goods to customer on credit for $6,350. These goods had cost the firm $2,400.
25 Collected $3,700 from the sales made on August 19.
29 Paid $975 rent for the month of September.
31 Employees had earned an additional $1,200 of wages but would not be paid until September 1.


A. Prepare a report of net cash flow from operating activities.
B. Prepare an accrual basis income statement.
C. Which statement documents a more realistic or complete picture of August's activity? Why?

Solution Summary

This solution adjusts entries and prepare income statements for the Rift Music Store and Water Fun Store as per instructions.