Accounting for Operating Activities in a New Business (the Accounting Cycle)

Penny’s Pool Service & Supply, Inc. (PPSS) had the following transactions related to operating the business in its first year’s busiest quarter ended September 30, 2013:

a. Placed and paid for $2,600 in advertisements with several area newspapers (including the online versions), all of which ran in the newspapers during the quarter.

b. Cleaned pools for customers for $19,200, receiving $16,000 in cash with the rest owed by customers who will pay when billed in October.

c. Paid Pool Corporation, Inc., a pool supply wholesaler, $10,600 for inventory received by PPSS in May.

d. As an incentive to maintain customer loyalty, PPSS offered customers a discount for prepaying next year’s pool cleaning service. PPSS received $10,000 from customers who took advantage of the discount.

e. Paid the office receptionist $4,500, with $1,500 owed from work in the prior quarter and the rest from work in the current quarter. Last quarter’s amount was recorded as an expense and a liability Wages Payable.

f. Had the company van repaired, paying $310 to the mechanic.

g. Paid $220 for phone, water, and electric utilities used during the quarter.

h. Received $75 cash in interest earned during the current quarter on short-term investments.

i. Received a property tax bill for $600 for use of the land and building in the quarter; the bill will be paid next quarter.

j. Paid $2,400 for the next quarter’s insurance coverage.

Required:

1. For each of the events, prepare journal entries, checking that debits equal credits.

2. Based only on these quarterly transactions, prepare a classified income statement (with income from operations determined separately from other items) for the quarter ended September 30, 2013.

3. Calculate the net profit margin ratio at September 30, 2013 (using income before taxes in place of net income). What does this ratio indicate about the ability of PPSS to control operations?