ACCT-3220 Lecture Notes - Lecture 9: Trial Balance, Bank Statement, General Ledger
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Ferntree Clothing Inc. is a company that makes and sellsclothing to upscale shops across the country. In 2005, the companydecided to add the sale of fabric to the company portfolio, sellingmainly to other clothing manufacturing companies. Ferntree soonrealized that this market was unprofitable with low margins andwith the continued increase in on-line sales ,their fabric divisionwas suffering.
The companyâs current controller vacated the position withoutnotice four months ago and Ferntree has hired you as their newcontroller to make any adjustments necessary and correct any errorsyou may find. The fiscal year end is January 31, 2017 and you willneed to correct errors, make adjustments and draft financialstatements using ASPE in preparation for the annual audit. Thefollowing information has been gathered for you to work with.
The trial balance at January 31, 2017, before any adjustments isprovided on the attached excel worksheet.
Your review through the company files has led you to thefollowing information, which may require adjustments:
1. In October of 2016, the shareholders met and decided to sellthe fabric division. By December 2016, it became apparent that abuyer is unlikely to be found. The only asset of this division isthe inventory, and all attempts have been made to sell this byyear-end. The company is expected to recover the book value of theinventory as it is being carried at its current fair value. Thereare no liabilities relating to this division. (Hint: Regardless ofa buyer, this would be classified as a gain/loss from discontinuedoperations).
2. The company paid a dividend of $25,000 to its shareholders inDecember 2016. This amount was incorrectly recorded as a cost ofgoods sold for the clothing division.
3. Last years accounts payable had been paid: $25,000 for theclothing division and $15,000 for the fabric division. When theywere paid, they had been debited to cost of goods sold for clothingdivision and operating expenses for the fabric division.
4. Upon reviewing the aged accounts receivable, it is apparentthat one account in the amount $5,000 had become uncollectible andwas written off to bad debt expense. In the past, 1% of accountsreceivable had been used to estimate the allowance for doubtfulaccounts, but this year given the past history, they have decidedto increase that amount to 2% of accounts receivable. All accountsreceivable and the allowance account relate to the clothingdivision.(Hint: adjust the bad debt expense and allowance accountfirst before you adjust for the allowance for doubtfulaccounts).
5. In January 2017, some old equipment was sold for proceeds of$250 cash. The original equipment cost $5,000 and had accumulateddepreciation of $4,900. The entry made when depositing the cash wasdebit Cash, credit equipment for $250. The equipment is beingamortized using the straight-line method over 10 years.Depreciation has not been recorded for the current year for theremainder of the equipment in this account.
6. FV-NI investments are long-term investments. The fair valueof the portfolio investments at January 31, 2017 was $35,000.
7. Insurance is paid each November 30th and covers a 12-monthperiod. When the company paid the insurance, it was debited toinsurance expense.
8. The note payable is due in two equal installments of $25,000each, plus interest on January 31, 2018 and 2019. The annualinterest rate is 5% and the note has been outstanding since August1, 2016.
9. Unpaid salaries and wages amounted to $1,500 at January 31,2017 and will be paid in the first payroll of February 2017. Thesehave not been recorded.
10. In reviewing sales, it was determined that the balance inthe unearned revenue account as at January 31, 2017 should be$30,000. The entire amount relates to the clothing division.
11. Ferntree has been making some income tax installments anddebiting these payments to the Income Taxes Payable account. It hasbeen determined that the applicable tax rate is 25%. The adjustingentry needed for taxes has not been recorded yet. (Hint: do thisentry last)
Required: a) Prepare all adjusting and correcting entries basedon the above information.
b) Post these entries journal entries to the trial balance andcomplete other columns of the work in good form
c) Prepare the January 31, 2017 Combined IncomeStatement/Comprehensive Income using the Multi-step incomestatement format, Statement of Financial Position and Statement ofRetained Earnings for Ferntree Clothing Inc. for the fiscal yearended January 31, 2017
| Ferntree Clothing Inc. | January 31, 2017 | ||||||
| Unadjusted Trial Balance | Adjustments | Adjusted Trial Balance | |||||
| Account | Debit | Credit | Debit | Credit | Debit | Credit | |
| Petty Cash | 500 | ||||||
| Cash | 63,250 | ||||||
| Accounts Receivable | 252,000 | ||||||
| Allowance for doubtful accounts | 7,500 | ||||||
| Preapaid Insurance | 5,000 | ||||||
| Inventory- Clothing | 400,000 | ||||||
| Inventory- Fabric | 150,000 | ||||||
| FV-NI Investments | 30,000 | ||||||
| Equipment | 499,750 | ||||||
| Accum. Depreciation- Equipment | 200,000 | ||||||
| Goodwill | 25,000 | ||||||
| Accounts Payable | 75,000 | ||||||
| Salaries & wages Payable | 0 | ||||||
| Interest payable | 0 | ||||||
| Notes Payable | 50,000 | ||||||
| Unearned Revenue | 20,000 | ||||||
| Income tax payable | 60,000 | ||||||
| Common shares | 75,000 | ||||||
| Retained Earnings | 588,000 | ||||||
| Dividends | 0 | ||||||
| Sales Revenue- Clothing | 2,000,000 | ||||||
| Sales Revenue- Fabric | 250,000 | ||||||
| Unrealized Gain/loss- FV-NI | 0 | ||||||
| Gain/loss on disposal of equipment | 0 | ||||||
| Cost of Goods sold- Clothing | 1,200,000 | ||||||
| Cost of Goods sold- Fabric | 275,000 | ||||||
| Operating expenses-Fabric | 100,000 | ||||||
| Operating Expenses-Clothing: | |||||||
| Depreciation expense | 0 | ||||||
| Office expense | 12,000 | ||||||
| Travel expense | 4,800 | ||||||
| Insurace expense | 7,200 | ||||||
| Interest expense | 1,200 | ||||||
| Utilities expense | 2,600 | ||||||
| Rent expense | 41,000 | ||||||
| Salaries & wages expense | 125,000 | ||||||
| Supplies expense | 500 | ||||||
| Bad debt expense | 5,000 | ||||||
| Telephone & internet expense | 4,200 | ||||||
| Repairs & maintenance expense | 1,500 | ||||||
| Income tax expense | 0 | ||||||
| 3,265,500 | 3,265,500 | 0 | 0 | 0 | 0 | ||
1. Make all adjustments on the "Adjusting Journal Entries". Remember to include a description under each journal entry.
| 12 | . On 1/1/14, ABC Corporation purchased, as a held-to-maturity investment, $200,000 of the 8%, 5-year bonds of Intuit Corporation for $177,824, | ||||||||
| which provides an 11% return. Prepare ABC's 12/31/14 journal entry to reflect the receipt of annual interest and discount amortization. | |||||||||
| Assume the bond investment pays interest annually on 12/31 each year and that effective interest amortization is used. | |||||||||
| Note: Notice that a discount account is not used for this investment. Therefore, for purposes of this adjusting entry, amortize the discount directly to the | |||||||||
| investment account. | |||||||||
| 13. | ABC Corporation prepares an aging schedule on 12/31/14 that estimates total uncollectible accounts at $25,000. Assuming that the allowance method is used, | ||||||||
| prepare the entry to record bad debt expense. | |||||||||
| 14 | On 1/1/14, ABC Corporation signed a 5-year noncancelable lease for a delivery vehicle. The terms of the lease called for ABC to Corporation to make | ||||||||
| annual payments of $10,503 at the beginning of each year, starting January 1, 2014. The delivery vehicle has an estimated useful life of 6 years and a $7,000 | |||||||||
| unguaranteed residual value. The delivery vehicle reverts back to the lessor at the end of the lease term. ABC Corporation uses the straight-line method | |||||||||
| of depreciation for the delivery vehicle. ABC Corporation's incremental borrowing rate is 10%, and the Lessor's implicit rate is unknown. No entries have yet | |||||||||
| been made concerning this lease arrangement. After determining the type of lease arrangement (capital or operating), prepare the necessary multiple-part journal | |||||||||
| entry for 2014 for ABC Corporation. (Hints: You will need to compute the present value of the minimum lease payments and 4 separate sub-entries for | |||||||||
| this lease transaction. Also, for Statement of Cash Flow purposes, the principal portion of lease payments are correctly categorized as a financing activity.) | |||||||||
| 15 | ABC Corporation provides a defined benefit pension plan for its employees. A combination adjusting entry should be made to correctly account for this type of pension | ||||||||
| plan given the following items of information for the 2014 plan year, including the recording of pension expense and the employer's contribution to the pension plan in 2014. | |||||||||
| Note: Use the summary entry method as demonstrated and discussed in the chapter lectures on pension accounting to prepare the adjusting entry. | |||||||||
| Pension asset/liability (January 1) | $0 | ||||||||
| Actual return on plan assets | $40,000 | ||||||||
| Expected return on plan assets | $20,000 | ||||||||
| Contributions (funding) in 2014 | $37,000 | ||||||||
| Fair value of plan assets (December 31) | $75,000 | ||||||||
| Settlement rate | 10% | ||||||||
| Projected benefit obligation (January 1) | $0 | ||||||||
| Service cost | $60,000 | ||||||||
| Benefits paid in 2014 | $0 | ||||||||
| *For purposes of financial statement presentation, consider Pension Expense as an operating item and any resulting Pension Asset/Liability as long-term in nature. | |||||||||
| 16 | On December 31, 2014, ABC Corporation issued 1,000 shares of restricted stock to its Chief Financial Officer. ABC stock had a fair value (closing market price) of | ||||||||
| $10 per share on December 31, 2014. Additional information is as follows: | |||||||||
| a. The service period related to the restricted stock is 2 years. | |||||||||
| b. Vesting occurs if the CFO stays with the company for a two-year period. | |||||||||
| c. The par value of the common stock is $3 per share. | |||||||||
| Make the appropriate accounting entry as of the grant date, 12/31/14. Note: use the alternative method as described in your textbook for deferred compensation. | |||||||||
| Do this step after preparing the Income Statement except for the Income taxes line: (You need to calculate Income Before Income Taxes in order to calcualte total Income Tax Expense) | |||||||||
| 17 | Corporate taxes are due in four estimated quarterly payments on April 15, June 15, September 15, and December 15. | ||||||||
| However, for the purposes of this ABC illustration, we will assume that estimates are not paid, and that the tax is paid in full | |||||||||
| on the return's March 15, 2015 due date. | |||||||||
| ABC's income tax rate is 40%. The entire year's income tax expense was estimated at the beginning of 2014 to be $69,600, | |||||||||
| so January through November income tax expense recognized amounts to $63,800 (11/12 months). | |||||||||
| Since we are assuming estimates are not made during the year, the balance in Income taxes payable represents | |||||||||
| tax accrued for January through November. Assume no deferred tax assets or deferred tax liabilities. | |||||||||
| Based on the income before income taxes figure from the income statement, record December's income tax expense | |||||||||
| so that the entire year's total tax expense is correct. | |||||||||
Now that you have reviewed information about Hi-Fi Way, you are ready to begin the first step in the accounting cycle, recording transactions. On this page of the practice set, you are asked to record transactions that occurred during the first week of June into the company's journals and post the appropriate entries to the ledger accounts. The following transactions occurred throughout the first week of June:
| Week 1 | ||
| Date | Transaction description | |
| 1 | Issued Check No. 570 for $8,400 to pay Realty Bites for two month's worth of rent in advance. | |
| 1 | Obtained a loan of $59,000 from ZNZ Bank at a simple interest rate of 6% per year. The first interest payment is due at the end of August 2017 and the principal of the loan is to be repaid on June 1, 2021. | |
| 3 | Made payment of $764 to Integer Energy for 3 months of electricity up to and including May 31, Check No. 571. | |
| 4 | Turbo Tech paid the full amount owing on their account. | |
| 4 | Paid sales staff wages of $13,224 for the week up to and including yesterday, Check No. 572. Note that $6,637 of this payment relates to the wages expense incurred during the last week of May. | |
| 5 | Paid the full amount owing to Big Telco, Check No. 573. | |
| 7 | Issued Check No. 574 to Office Supplies Warehouse for the purchase of $301 worth of office supplies. | |
After completing this practice set page, you should know how to record basic transactions in the journals provided below and understand the posting process in the manual accounting system. Note that you will record the remaining June transactions in the following sections of this practice set.
Remember, one purpose of using special journals is to make the posting process more efficient by posting the total of most columns in the special journals after all of the transactions for the period have been recorded. However, some parts of a journal entry are still required to be posted on a daily basis. View the company's accounting policies and procedures for details of what is to be posted daily or monthly.
Instructions for week 1
1)Record all week 1 transactions in the relevant journals.
Note that special journals must be used where applicable. Any transaction that cannot be recorded in a special journal should be recorded in the general journal.
2)Post entries recorded in the journals to the appropriate ledger accounts according to the company's accounting policies and procedures.
Note that the relevant totals of the special journals will be posted to the general ledger accounts at the end of the month. You will enter this before you prepare the Bank Reconciliation Statement.
Remember to enter all answers to the nearest whole dollar. When calculating a discount, if a discount is not a whole number, round the discount to the nearest whole dollar. Then, to calculate the cash amount, subtract the discount from the original amount.
Additional instructions
Displaying selected accounting records:
To save space, not all accounting records (e.g. journals and ledgers) will be displayed on every page. However, on each page you can access all accounting records necessary to answer the questions on that page.
There are several tabs representing different views of the accounting records. The active tab by default is Show All, but you may also select to view just one particular accounting record by selecting the appropriate tab.
If you fill in any accounting records and change the view on the page by selecting a different tab, the information that you have entered will remain in that accounting record and be displayed whenever you can see that accounting record.
Before submitting your answers, we recommend that you click the Show All tab and check that all relevant accounting records have been completed. You are required to complete all relevant accounting records before pressing the Submit answers button. Once submitted, you will not be able to return to the page to re-enter or alter your answers.
Journals:
Each transaction recorded in a special journal must be entered in one line. In order to receive full points, you must not split up the relevant transaction into more than one line in the special journal.
For certain transactions in special journals, some accounting textbooks do not always require an account to be chosen under the column labeled Account. In this practice set you arerequired to select an account for each transaction in the special journals. Specifically, in all special journals, under the column labeled Account, you must select the correct account name for each transaction in order to receive full points. Note that for some transactions, this will mean that the account name selected will correspond to the heading of one of the columns in that special journal.
For each journal, in the Post Ref. column you will need to correctly type the account number of the account you are posting to. In particular, in special journals, some accounting textbooks do not always require a reference to be recorded in the Post Ref. column. In this practice set, in order to receive full points, every transaction entered in a special journal requires an entry in the Post Ref. column. Note that in the special journals, if the account name selected for a transaction corresponds to the heading of one of the columns in that special journal, the post ref is to be recorded as an X. This is because these transactions are not posted on a daily basis. In order to receive full points, you must record only the letter Xin the Post Ref. column for these transactions.
Note that in special journals, the Other Accounts column should not be used to record movements of inventory.
There may be entries in the general journal that require posting to both a control account and a subsidiary ledger. In these cases, after you have posted to both ledgers, you should enter the reference for both the general ledger account and the subsidiary ledger account in the Post Ref. column to indicate that you have posted to both accounts. For example, if the reference number for the control account is 110 and the reference number for the subsidiary ledger account is 110-1, you should type '110/110-1' into the Post Ref. column.
General journal entries do NOT require a description of the journal entries.
Ledgers:
When posting a transaction to a ledger account, under the Description column, please type the description of the transaction directly into the field. The exact wording does not matterfor grading purposes. For example, it does not matter in an electricity transaction if you type 'Paid for electricity' or 'Paid electricity bill'.
For each ledger, under the Ref. column, you need to select the correct journal from a list in the drop-down box provided in order to receive full points.
If the balance of a ledger account is zero you do not need to select a debit or credit from the drop-down box.
Each transaction posted to the subsidiary ledgers must be entered in one line. In order to receive full points, you must not split up the relevant transaction into more than one line in the subsidiary ledger.
Both journals and ledgers:
Most journals and ledgers will have blank rows left at the end of the page.
Some journals and ledgers may not require any entries.
When purchases and sales are recorded in special journals, changes in inventory must not be posted to the Merchandise Inventory account in the general ledger on a daily basis.
