ACTG 1P91 Chapter Notes - Chapter 4: Retained Earnings, Deferral, Accrual
ACTG 1P91 Full Course Notes
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| . Make all 16 adjustments to journal entries. Remember to include a description under each journal entry. |
| 1 | On March 1, ABC purchased a one-year liability insurance policy for $98,400. | ||||||||
| Upon purchase, the following journal entry was made: | |||||||||
| Dr Prepaid insurance | 98,400 | ||||||||
| Cr Cash | 98,400 | ||||||||
| The expired portion of insurance must be recorded as of 12/31/14. | |||||||||
| Notice that the expired portion from March through November has been recorded already. | |||||||||
| Make sure that the Prepaid Insurance balance after the adjusting entry is correct. | |||||||||
| 2 | Depreciation expense must be recorded for the month of December. | ||||||||
| The building was purchased with cash on February 1, 2014, for $150,000 with a remaining useful life of 30 years and a salvage value of $6,000. | |||||||||
| The method of depreciation for the building is straight-line. | |||||||||
| The equipment was purchased with cash on February 1, 2014, for $60,000 with a remaining useful life of 5 years and a salvage value of $3,000. | |||||||||
| The method of depreciation for the equipment is double-declining balance. | |||||||||
| Depreciation has been recorded for the building and equipment for months February through November. | |||||||||
| 3 | On December 1, XYZ Co. agreed to rent space in ABC's building for $12,000 per month, | ||||||||
| and XYZ paid ABC on December 1 in advance for the first three months' rent. | |||||||||
| The entry made on December 1 was as follows: | |||||||||
| Dr Cash | 36,000 | ||||||||
| Cr Unearned rent revenue | 36,000 | ||||||||
| The unearned revenue account must be adjusted to reflect the amount earned as of 12/31/14. | |||||||||
| 4 | Per timecards, from the last payroll date through December 31, 2014, ABC's employees have worked a total of 250 hours. | ||||||||
| Including payroll taxes, ABC's wage expense averages about $51 per hour. The next payroll date is January 5, 2015. | |||||||||
| The liability for wages payable must be recorded as of 12/31/14. | |||||||||
| 5 | On November 30, 2014, ABC borrowed $235,000 from American National Bank by issuing an interest-bearing note payable. | ||||||||
| This loan is to be repaid in three months (on February 28, 2015), along with interest computed at an annual rate of 6%. | |||||||||
| The entry made on November 30 to record the borrowing was: (for Statement of Cash Flow purposes, consider a financing item) | |||||||||
| Dr Cash | 235,000 | ||||||||
| Cr Notes payable | 235,000 | ||||||||
| On February 28, 2015 ABC must pay the bank the amount borrowed plus interest. | |||||||||
| Assume the beginning balance for Notes Payable is correct. | |||||||||
| Interest through 12/31/14 must be accrued on the $235,000 note. | |||||||||
| 6 | ABC uses a periodic inventory system, and the ending inventory for each year is determined by taking a complete | ||||||||
| physical inventory at year-end. A physical count was taken on December 31, 2014, and the inventory on-hand at | |||||||||
| that time totaled $75,000, which reflects historical cost. | |||||||||
| Record the 2014 Cost of Goods Sold and the 12/31/14 Inventory adjustment. | |||||||||
| Additionally, ABC adheres to GAAP by recording ending inventory at the lower of cost and net realizable value at a total inventory level. | |||||||||
| A review of inventory data further indicated that the current retail sales value of the ending inventory is $110,000 and estimated costs of | |||||||||
| completion and shipping is 15% of retail. Be sure to make an additional adjustment, if necessary, to properly value ending inventory | |||||||||
| using the Loss and Allowance methodology. For Income Statement presentation purposes, be sure to use the Loss Method for accounting | |||||||||
| for adjustments of inventory to market value. | |||||||||
| 7 | It would be unusual for a company to have an asset impairment in Year 1, but for the sake of this example, ABC realized | ||||||||
| that their intangible asset might be impaired on December 31, 2014. Record the impairment if any. | |||||||||
| The expected future net cash flows for this intangible asset totals $30,000, and the fair value of the asset is $27,500. | |||||||||
| 8 | On 7/1/14, ABC purchased 7,000 shares of its own stock from existing stockholders as treasury stock. The cost of the treasury | ||||||||
| stock was $7 per share, or $49,000 in total. The effects of this transaction are already shown in the unadjusted trial balance. On 12/31/14, | |||||||||
| ABC reissued these 7,000 shares of treasury stock at $10 per share. Record the journal entry required for the reissuance of the treasury stock. | |||||||||
| 9 | On 12/31/14, ABC issued 5,000 shares of $3 par value common stock at the closing market price of $7 per share. Prepare ABC's journal entry | ||||||||
| to reflect the issuance of the stock on 12/31/14. | |||||||||
| 10 | On 7/1/14, ABC sold 12% bonds having a maturity value of $800,000 for $861,771, resulting in an effective yield of 10%. The bonds are | ||||||||
| dated 7/1/14, and mature 7/1/19. Interest is payable semiannually on July 1 and January 1. ABC uses the effective interest method of | |||||||||
| amortization for bond premium or discount. Record the adjusting entry for the accrual of interest and the related amortization on 12/31/14. | |||||||||
| Hint: Develop an abbreviated amortization schedule to accurately determine the interest expense. | |||||||||
| 11 | The following information is available for ABC Corporation at 12/31/14 regarding its investments in stocks of other companies. | ||||||||
| Securities | Cost | Fair Value | |||||||
| 2,200 shares of Toyota Corporation Common Stock | $ 100,000 | $ 125,000 | |||||||
| 1,100 shares of G.M. Corporation Common Stock | $ 67,000 | $ 34,000 | |||||||
| $ 167,000 | $ 159,000 | ||||||||
| Prepare the adjusting entry (if any) for 2014, assuming the securities are classified as trading. | |||||||||
| 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. | |||||||||
After the success of the companyâs first two months, Adria Lopezcontinues to operate Success Systems. The November 30, 2013,unadjusted trial balance of Success Systems (reflecting itstransactions for October and November of 2013) follows. |
| No. | AccountTitle | Debit | Credit | |||
| 101 | Cash | $ | 38,864 | |||
| 106 | Accountsreceivable | 13,618 | ||||
| 126 | Computersupplies | 2,645 | ||||
| 128 | Prepaidinsurance | 1,920 | ||||
| 131 | Prepaid rent | 3,240 | ||||
| 163 | Officeequipment | 8,000 | ||||
| 164 | AccumulateddepreciationâOffice equipment | $ | 0 | |||
| 167 | Computerequipment | 20,400 | ||||
| 168 | AccumulateddepreciationâComputer equipment | 0 | ||||
| 201 | Accountspayable | 0 | ||||
| 210 | Wages payable | 0 | ||||
| 236 | Unearned computerservices revenue | 0 | ||||
| 307 | Common stock | 68,000 | ||||
| 318 | Retainedearnings | 0 | ||||
| 319 | Dividends | 6,300 | ||||
| 403 | Computer servicesrevenue | 32,489 | ||||
| 612 | DepreciationexpenseâOffice equipment | 0 | ||||
| 613 | DepreciationexpenseâComputer equipment | 0 | ||||
| 623 | Wages expense | 2,175 | ||||
| 637 | Insuranceexpense | 0 | ||||
| 640 | Rent expense | 0 | ||||
| 652 | Computer suppliesexpense | 0 | ||||
| 655 | Advertisingexpense | 1,678 | ||||
| 676 | Mileage expense | 694 | ||||
| 677 | Miscellaneousexpenses | 220 | ||||
| 684 | RepairsexpenseâComputer | 735 | ||||
| Totals | $ | 100,489 | $ | 100,489 | ||
| Success Systems had thefollowing transactions and events in December 2013. |
| Dec. | 2 | Paid $925 cash toHillside Mall for Success Systems' share of mall advertisingcosts. |
| 3 | Paid $470 cash forminor repairs to the company's computer. | |
| 4 | Received $4,350 cashfrom Alexâs Engineering Co. for the receivable from November. | |
| 10 | Paid cash to LynAddie for six days of work at the rate of $100 per day. | |
| 14 | Notified by Alex'sEngineering Co. that Success Systems' bid of $7,100 on a proposedproject has been accepted. Alexâs paid a $2,400 cash advance toSuccess Systems. | |
| 15 | Purchased $1,400 ofcomputer supplies on credit from Harris Office Products. | |
| 16 | Sent a reminder toGomez Co. to pay the fee for services recorded on November 8. | |
| 20 | Completed a projectfor Liu Corporation and received $6,525 cash. | |
| 22â26 | Took the week offfor the holidays. | |
| 28 | Received $3,300 cashfrom Gomez Co. on its receivable. | |
| 29 | Reimbursed A. Lopezfor business automobile mileage (600 miles at $0.32 per mile). | |
| 31 | The business paid$1,100 cash for dividends. |
The following additional facts are collected for use in makingadjusting entries prior to preparing financial statements for thecompanyâs first three months: |
| a. | The December 31 inventory countof computer supplies shows $660 still available. |
| b. | Three months have expired sincethe 12-month insurance premium was paid in advance. |
| c. | As of December 31, Lyn Addie hasnot been paid for four days of work at $100 per day. |
| d. | The computer system, acquired onOctober 1, is expected to have a four-year life with no salvagevalue. |
| e. | The office equipment, acquiredon October 1, is expected to have a five-year life with no salvagevalue. |
| f. | Three of the four monthsâ prepaid rent has expired. |
| 2.2 | Post the journal entries to record each of the Decembertransactions and adjusting entries to the accounts in theledger.
|
(a) Record the January transactions in a two-column general journal below.
| General Journal | G1 | |||
| Date | Account Titles | Ref | Debit | Credit |
| Adjusting Entries | ||||
Check figures:
Cash Receipts Journal, total Cash DR: $ 70,348
Cash Payments Journal, total Cash CR: 62,060
Net Income: 25,218 Total Assets: 149,568
Total Post Closing Trial Balance: 151,193
Sun & Surf Company uses a perpetual inventory system and both an accounts receivable and an accounts payable subsidiary ledger. Balances related to both the general ledger and the subsidiary ledger for Sun & Surf are indicated in the working papers. Below are a series of transactions for Sun & Surf Co. for the month of January. Credit sales terms are 2/10, n/30. The cost of all merchandise sold was 55% of the sales price.
Jan.3 Sell merchandise on account to M. Knast $5,100, invoice no. 825, and to C. Ryder $1,900, invoice no. 826.
5 Purchase merchandise from R. Drifter $5,000 and N. Sova $2,200, terms n/30.
7 Receive checks from V. Arnold $4,000 and I. Tan $2,000 after discount period has lapsed.
8 Pay freight on merchandise purchased $235.
9 Send checks to K. Xerxes for $9,000 less 2% cash discount, and to T. Caper for $11,000 less 1% cash discount.
9 Issue credit of $300 to C. Ryder for merchandise returned.
10 Summary daily cash sales total $15,500.
11 Sell merchandise on account to D. Gallagher $1,600, invoice no. 827, and to V. Arnold $900, invoice no. 828.
12 Pay rent of $1,000 for January.
13 Receive payment in full from M. Knast and C. Ryder less cash discounts.
15 Withdrawal of $800 cash by J. Sandy for personal use.
15 Post all entries to the subsidiary ledgers.
16 Purchase merchandise from T. Caper $18,000, terms 1/10, n/30; K. Xerxes $14,200, terms 2/10, n/30; and R. Drifter $1,500, terms n/30.
17 Pay $400 cash for office supplies.
18 Return $200 of merchandise to K. Xerxes and receive credit.
20 Summary daily cash sales total $20,100.
21 Issue $15,000 note, maturing in 90 days, to M. Griffen in payment of balance due.
21 Receive payment in full from V. Arnold less cash discount.
22 Sell merchandise on account to M. Knast $2,700, invoice no. 829, and to D. Gallagher $1,300, invoice no. 830.
22 Post all entries to the subsidiary ledgers.
23 Send checks to T. Caper and K. Xerxes in full payment less cash discounts.
25 Sell merchandise on account to I. Tan $3,500, invoice no. 831, and to C. Ryder $6,100, invoice no. 832.
27 Purchase merchandise from T. Caper $14,500, terms 1/10, n/30; N. Sova $1,200, terms n/30; and R. Drifter $5,400, terms n/30.
27 Post all entries to the subsidiary ledgers.
28 Pay $275 cash for office supplies.
31 Summary daily cash sales total $21,300.
31 Pay salaries and wages of $8,100. (continued)
Page 2 of 2
Instructions
(a) Record the January transactions in a sales journal, a single-column purchases journal, a cash receipts journal, a cash payments journal, and a two-column general journal.
(b) Post the journals to the general ledger.
(c) Prepare a trial balance at January 31, 2017, in the trial balance columns of the worksheet. Complete the worksheet using the following additional information.
1. Office supplies at January 31 total $900.
2. Insurance coverage expires on September 30, 2017.
3. Annual depreciation on the equipment is $1,500.
4. Interest of $50 has accrued on the note payable.
(d) Prepare a multiple-step income statement and an owner's equity statement for January and a classified balance sheet at the end of January.
(e) Prepare and post adjusting and closing entries.
(f) Prepare a post-closing trial balance, and determine whether the subsidiary ledgers agree with the control accounts in the general ledger.
| General Ledger | |||||
| Cash | No. 101 | ||||
| Date | Explanation | Ref. | Debit | Credit | Balance |
| Jan. 1 | Balance | â | $ 37,150 | ||
| Accounts Receivable | No. 112 | ||||
| Date | Explanation | Ref. | Debit | Credit | Balance |
| Jan. 1 | Balance | â | $ 13,000 | ||
| Notes Receivable | No. 115 | ||||
| Date | Explanation | Ref. | Debit | Credit | Balance |
| Jan. 1 | Balance | â | $ 39,000 | ||
| Inventory | No. 120 | ||||
| Date | Explanation | Ref. | Debit | Credit | Balance |
| Jan. 1 | Balance | â | $ 17,795 | ||
| Office Supplies | No. 125 | ||||
| Date | Explanation | Ref. | Debit | Credit | Balance |
| Jan. 1 | Balance | â | $ 1,200 | ||
| Prepaid Insurance | No. 130 | ||||
| Date | Explanation | Ref. | Debit | Credit | Balance |
| Jan. 1 | Balance | â | $ 2,205 | ||
| Equipment | No. 157 | ||||
| Date | Explanation | Ref. | Debit | Credit | Balance |
| Jan. 1 | Balance | â | $ 6,450 | ||
| Accumulated Depreciation - Equipment | No. 158 | ||||
| Date | Explanation | Ref. | Debit | Credit | Balance |
| Jan. 1 | Balance | â | $ 1,500 | ||
| Notes Payable | No. 200 | ||||
| Date | Explanation | Ref. | Debit | Credit | Balance |
| Accounts Payable | No. 201 | ||||
| Date | Explanation | Ref. | Debit | Credit | Balance |
| Jan. 1 | Balance | â | $ 35,000 | ||
| Interest Payable | |||||
| Date | Explanation | Ref. | Debit | Credit | Balance |
| J. Sandy, Capital | No. 301 | ||||
| Date | Explanation | Ref. | Debit | Credit | Balance |
| Jan. 1 | Balance | â | $ 80,300 | ||
| J. Sandy, Drawing | No. 306 | ||||
| Date | Explanation | Ref. | Debit | Credit | Balance |
| Income Summary | No. 350 | ||||
| Date | Explanation | Ref. | Debit | Credit | Balance |
| Sales | No. 401 | ||||
| Date | Explanation | Ref. | Debit | Credit | Balance |
| Sales Returns and Allowances | No. 412 | ||||
| Date | Explanation | Ref. | Debit | Credit | Balance |
| Sales Discounts | No. 414 | ||||
| Date | Explanation | Ref. | Debit | Credit | Balance |
| Cost of Goods Sold | No. 505 | ||||
| Date | Explanation | Ref. | Debit | Credit | Balance |
| Salaries and Wages Expense | No. 627 | ||||
| Date | Explanation | Ref. | Debit | Credit | Balance |
| Depreciation Expense | No. 711 | ||||
| Date | Explanation | Ref. | Debit | Credit | Balance |
| Interest Expense | No. 718 | ||||
| Date | Explanation | Ref. | Debit | Credit | Balance |
| Insurance Expense | No. 722 | ||||
| Date | Explanation | Ref. | Debit | Credit | Balance |
| Office Supplies Expense | No. 728 | ||||
| Date | Explanation | Ref. | Debit | Credit | Balance |
| Rent Expense | No. 729 | ||||
| Date | Explanation | Ref. | Debit | Credit | Balance |
