Case Narrative You have been called in as a consultant to help…

Case Narrative
You have been called in as a consultant to help convert Merlin Auto Supply, Inc. from a paper-based system to a computerized system (WARNING: Paper based systems have been known to contain numerous errors). The client has provided you with the current records. Merlin has entered and maintained all records manually with the assistance of his favorite cousin.
Merlin Auto Supply, Inc. is in the wholesale auto supply business. Arthur King founded it in July, 2020. The business was originally funded by Arthur with bank credit lines. Eventually, the cost of credit became too expensive, and Arthur sold stock to two investors. Arthur and each investor originally purchased 10,000 shares of no-par stock for $20,000. With the additional $60,000 Arthur was able to expand the business. Arthur subsequently purchased 5,000 shares from one shareholder for $14,000; he currently owns 15,000 shares. The other original investor re-sold 4,000 shares to a friend for $9,500.
The business purchases tires and batteries direct from manufacturers with whom Merlin has open accounts. Merlin sells to local auto supply stores, car repair shops, and auto dealers (and the occasional retail customer). It owns the land and building in which it operates. It has four employees, one of whom is also a stockholder. Merlin sells on account to its biggest customers (terms are 2/10, Net 30). All other customers are required to pay cash.
Purchases are made from several firms and are on account. A periodic inventory system is used. At the end of each month the following inventory-related events occur:
1. An inventory count is taken;
2. Purchases and Purchase Returns are closed;
3. The Inventory account is brought up to date;
4. The Cost of Goods Sold account is closed;
5. A monthly inventory count of office supplies is taken.
When payroll checks are issued, Merlin has debited Wages Expense for the gross pay, and credited Federal Payroll Taxes and Withholding Payable, and State Payroll Taxes and Withholding Payable for the amount of the deductions.
Depreciation expense is recorded to the nearest whole dollar and nearest whole month. Furniture and equipment are depreciated using straight-line depreciation over five (5) years, and building and fixtures are depreciated over 25 years using the same method (you can assume that Arthur has not purchased any new furniture or equipment since he started the business).
The data provided on the following pages is what the client has given you. The data are taken from the manual accounting system and were manually transcribed by Arthur King’s favorite cousin (who had taken a bookkeeping class in high school several years ago). So, be warned that while every effort was made to keep the records accurate, errors may (will) exist in the data. The only data you can be sure of are the cash receipts and check amounts, as those have been verified with bank statements. You can/should add whatever accounts you believe are needed and you should correct any mistakes that you find in the data. You should document the changes that you make and list these under “assumptions.” The assumptions listing should also be used to document how you recorded various items that are subject to multiple accounting treatments, e.g., inventory valuation methods.
Arthur King has stated that he will advise me of the answers for any questions that you might have regarding the data or the transactions. You can either e-mail me (..i@msu.edu) or post a message on the discussion forum (only you will be able to see the response if you email me a question, whereas if you post the question to the discussion forum, everyone in the class will see the question and answer).

ACCOUNT BALANCES AND DETAILS
Accounts Receivable, 11/30/22
Jack Hilliard Motors, Inc. $ 3,250
Inv. 31259 11/7 $ 3250
13 Ever Start @ $ 50
20 Firepower @ $ 50
20 Snow Tires @ $ 50
10 Radials @ $ 60
H. Winston 200
Inv. 31248 11/2 $ 200
4 Snow Tires @ $ 50
Josephine’s Auto Parts 2,800
Inv. 31261 11/12 $ 2,000
25 Ever Start @ $ 50
15 Firepower @ $ 50
Inv. 31277 11/28 800
10 Radials @ $ 60
4 Firepower @ $ 50
Blackwell Motors 350
Inv. 31267 11/21 $ 350
7 Ever Start @ $ 50
Total Receivable $ 6,600

Inventory, 11/30/22
Item Number Description Trans. Date Unit Cost Quantity Extended Cost
1111-XXXX Radials 11/1 50 140 7000.00
10/21 48 100 4800.00
10/6 48 30 1440.00
3333-XXXX Snow Tires 11/15 39 45 1755.00
3333-BBBB Firepower 11/4 50 50 2500.00
10/8 42 10 420.00
4444-BBBB Ever Start 11/20 30 70 2100.00
Grand Totals 445 20,015.00

Accounts Payable, 11/30/22
B.F. Goodbuy & Company
Invoice # 34523, 11/1/22 $ 6,000
120 Radials @ $ 50
Firerich, Inc.
Invoice # 12769, 11/4/22 2,000
50 Firepower @ $ 40
Michelyear, Inc.
Invoice # 41233, 11/15/22 1,950
50 Snow Tires @ $39
Sparky Sparkman Auto Products
Invoice # 77656, 11/20/22 2,100
70 Ever Start @ $ 30
Total Payables $ 12,050
Notes Receivable, 11/30/22
Ruble and Rothrock Company, due 12/31/23
with interest of 12% per year $ 8,000
Accrued Interest Receivable 880
Notes Payable, 11/30/22
Worthen National Bank, due 11/30/25
with interest of 12% per year, payable quarterly
(due dates are 3/31, 6/30, 9/30, 12/31) $10,000
Accrued Interest Payable 200
Equity Mortgage Company, due 12/31/25
with interest of 10% per year $ 36,000
Installment payments of interest and principal
are paid monthly. A payment of $1100 is
made each month which includes the interest payment.
The interest is charged as simple interest on the
outstanding balance. A balloon payment will be made at
the end of the loan for any outstanding amount.

Merlin Auto Supply, Inc.
Post-Closing Trial Balance
November 30, 2022
Debit Credit
101 Cash $ 67,347.00
103 Temporary Investments 9,670.00
104 Notes Receivable, Control 8,000.00
105 Accounts Receivable, Control 6,600.00
106 Inventory 20,015.00
107 Office Supplies 860.00
108 Interest Receivable 80.00
201 Land 12,000.00
202 Buildings & Fixtures 87,000.00
203 Accumulated Depreciation, Buildings & Fixtures 9,000.00
204 Furniture & Equipment 15,000.00
205 Accumulated Depreciation, Furniture & Equipment 7,250.00
301 Accounts Payable, Control 12,050.00
302 Federal Payroll Taxes & Withholdings Payable 6,443.00
303 State Payroll Taxes and Withholding Payable 297.00
303 Accrued Interest Payable 100.00
310 Notes Payable, Long Term 46,000.00
401 Capital Stock 60,000.00
402 Retained Earnings 120,632.00
403 Dividends
501 Sales
502 Sales Discounts
503 Sales Returns
601 Purchases
602 Purchase Discounts
603 Purchase Returns
701 Wages Expense
702 Advertising Expense
703 Utilities Expense
704 Supplies and Services Expense
705 Interest Expense
706 Payroll Tax Expense
707 Insurance Expense
708 Depreciation Expense
802 Dividend Income
803 Interest Income
804 Cost of Goods Sold
_ _
$ 245,522.00 $ 245,522.00

TRANSACTIONS
# Date
1 12/1 A 2-year casualty insurance policy is purchased from NRCB Agency with check #1009 for $600.
2 12/1 Declare dividend of $0.20 per share, payable on 12/8/22
3 12/3 Pay $6,000 on the Goodbuy account with check #1010.
4 12/3 Check #1011 voided.
5 12/4 Pay Michelyear $1,950 in full payment of account with check #1012.
6 12/4 Use check #1013 to pay Firerich $2,000 for payment of account.
7 12/4 Sold to Hilliard, on account, 22 Everstart Batteries at $50 each for a total of $1,100.
8 12/5 Sold merchandise for $2,660 to Josephine’s Auto Parts on account. This included 40 radials at $61 each and 4 snow tires at $55 each.
9 12/6 Order 150 Ever Start Batteries at $24.00 from Sparkman.
10 12/6 Check #1014 is used to disburse $4,000 to the Thundering Herd Securities Company for 200 shares of Graham Magnetics common stock. This is a temporary investment.
11 12/6 A new customer, Maline & Quit, is allowed to make credit purchases, and orders $1,200 of merchandise consisting of 24 snow tires at $50.
12 12/6 Hilliard returns 4 defective Ever Start Batteries that had been sold at $50 each for credit to his account. The defective batteries are disposed of by sending them to a recycler. No cost or revenue is incurred/received from the disposal of the defective batteries.
13 12/7 Merchandise is ordered:
B.F. Goodbuy (100 snow tires @ $35.00 each) $ 3,500
14 12/8 Shipped the goods ordered by Maline & Quit. Used Invoice #1717 to bill them.
15 12/8 Received goods from Sparkman ordered in transaction #9.
16 12/8 New tire display racks are purchased from Eastern Auto Company. The racks cost $1,500 and are paid for in full with check #1015. The racks are classified as equipment and have an expected life of 5 years and no salvage value.

17 12/8 Dividends are paid:
A. King, check # 1016 $ 3,000
J.J. Weeks, check # 1017 1,000
K. Hemphill, check #1018 1,200
F. Flintstone, check #1019 800
18 12/8 Pay $2,100 to Sparkman as partial payment on account with check #1020.
19 12/8 Radio advertising costing $500 is purchased from WKRP-AM on account. The advertising will be run throughout the remainder of December.20 12/9 Received merchandise ordered in transaction #13. Terms are n/30 for all purchases.
(transaction #13 12/7 Merchandise is ordered:
B.F. Goodbuy (100 snow tires @ $35.00 each) $ 3,500)
21 12/10 Groniak Auto Supply purchases old tire racks, paying $450 in cash. The old racks (classified as equipment) cost $900, with accumulated depreciation of $525 to December 1.
22 12/11 Disburse $600 to WKRP-AM in full payment of account with check #1021.
23 12/12 Make a payment on the Goodbuy account, $3,500, Check #1022.
25 12/14 Maline & Quit purchases 40 Firepower Plus at $60 each for a total $4,200 purchase on account.
26 12/14 Hilliard buys 20 snow tires at $70 each on account.
27 12/14 A cash customer, Jane Bester, reports that one of her mechanics was injured by acid from a defective battery purchased November 27. She receives a $60 cash refund.
28 12/14 The company’s lawyers, Suall & Wynne, are consulted for five minutes concerning legal liability regarding the battery accident. The attorneys bill Arthur King $300 for their services. Arthur pays the fees from his personal checking account and takes $300 cash from the cash register for reimbursement.
29 12/15 The period’s receipts are recorded:
Cash Sales $ 14,755
25 Ever Start @ $ 55.00
20 Radials @ $ 64.00
100 radials @ 125.00
Collect on Account:
Jack Hilliard Motors (check # 3742) 3,250
Josephine’s Auto Parts (check # 9768) 2,833
Blackwell Motors (check # 2113) 540
H. Winston ($2 discount, check # 478) 198
Maline & Quit (Check 2214, $ 48 discount) 2,352
30 12/15 An ad costing $1200 is purchased on account in a trade magazine, PartsWeek. The ad will run for two months starting 12/15.
31 12/20 The Board of Directors meets and votes to issue 1,000 shares of no par value common stock. The shares are sold to B. Gates for $20,000.
32 12/22 A cash dividend of $2 per share is received on Graham Magnetics common stock.
33 12/23 The December phone bill for $218 is received. It is due on January 14.
34 12/29 Quarterly interest on the Worthen Bank note is paid with check #1023.
35 12/30 The monthly payment to Equity Mortgage is made with check #1024.
36 12/31 Employees are paid (they are paid monthly):
Employee Gross Pay Deductions Net Pay Check#
K. Hemphill $ 3,500 $ 876 $ 2624 1025
R. Hezekiah 2,560 470 2030 1026
G. Forestal 2,050 390 1660 1027
The employer’s portion of the payroll tax amounts to $460 ($320 Federal and $140 state unemployment taxes). The employee deductions include Federal income taxes of $1212 and State income taxes of $524. Taxes are not paid at this time.
37 12/31 The quarterly payroll tax payment for withholdings and employer taxes is made to the IRS for $8,115 with check #1028.
38 12/31 Sell 100 shares of Graham Magnetics common stock for $3,750.
You have been called in as a consultant to help convert Merlin Auto Supply, Inc. from a paper-based system to a computerized system. The client has provided you with the current records. Prior to this Merlin has entered and maintained all records manually (warning – all data should be reviewed prior to entry into any new system as this has previously been a manual system). Since Merlin is a privately held corporation, an accountant was only prepared annual tax returns. You are to:
a. Enter the initial account balances
b. Record the current month’s transactions
c. Generate the trial balance, income statement and balance sheet as of 12/31/22
The following information is needed for closing the books at the end of December.
1. Interest for one month is accrued on the Note Receivable from Rubble and Rothrock.
2. One month of the insurance policy has expired.
3. Office supplies costing $525 are on hand.
4. Depreciation must be recorded on the fixed assets (except for Land) for the month of December.
You must submit (preferably as a PDF) all the information required for a good audit trail (e.g., a listing of all the transactions you entered).
THE DELIVERABLES (Submitted via Dropbox) FOR THIS ASSIGNMENT ARE: Audit Trail of all transactions (PDF format only)
REQUIRED: Answer all the transactions, need to know what account chart is the debit and credit, and also what is the amount of it.

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