To practice making necessary correcting and adjusting entries and using them to

Question

To practice making necessary correcting and adjusting entries and using them to create an adjusted trial balance. (See Topic Guides AC 6, 11, 12, 14. Information: The table on the next page reports Terry's account balances on December 31st for the current and prior years. The following entries have not yet been made for the current year: During the year the board declared and paid a $300,00o dividend. During the year the sales department wrote off $360,000 of accounts receivable (already included in the current account balances). They have now decided that 8% of their ending A/R balance is uncollectible. Terry uses the Percentage of A/R method for recognizing bad debt expense. On September 1st, a year's premiums on a new insurance policy was prepaid for $120,0oo. The original payment was recorded as a debit to insurance expense. No other entries have been made for this contract since that time. Terry's reported income tax expense (see below) includes an estimate for this year's taxes. Only the three adjustments mentioned above have not yet been included in this tax estimate. Because of this, you will need to record any tax effects from the transactions throughout this case (starting with the tax effects, if any, of these three entries). Since another tax payment will not be made until April, these adjustments should be accounted for in Income Tax Expense and Income Tax Payable. Terry's tax rate is 30%. Assignment: Calculations 1. Make the appropriate journal entries, if any, to account for the adjustments mentioned above (including any necessary changes to income tax expense). 2. Create Terry's Year 2 adjusted trial balance. Hint: Trial balances need to be in a specific order and they are only for the current year! Critical Thinking 3. Do you think it's a problem that Terry is still making these changes, even when all of their other numbers are set? What do these last minute corrections suggest about the company's accounting department?

Explanation / Answer

1 Appropriate journal entries a Retained Earnings $300,000 Dividend payable $300,000 b Dividend Payable $300,000 Cash $300,000 (To record dividend declared and paid) c Bad debts $129,600 Allowance for Bad debts $129,600 (to record 8% of AR as uncollectible) d Prepaid Insurance $90,000 Insurance expense $90,000 (To record insurance expense for 9 months in Prepaid balance) (120000 x 9/12) Tax effects Bad debts-Tax will get reduced as expense will be recorded $129,600 ($38,880) Insurance expense-9 months insurance expense is transferred to Prepaid account thus will reduce the expense and increase the income $90,000 $27,000 Net tax effect ($11,880) Income tax expenses for the current year will be decreased by $11880 Journal entry Income tax payable $11,880 Income tax expenses $11,880 Dividend is distributed from retained earnings thus there will no tax effect on that 2 Adjusted trial balance Account Titles Debit Credit A/R $1,620,000 Accounts payable $179,604 Accumulated Depreciation $2,880,000 Addittional paid in capital $540,000 Advertisement expenses $337,500 Allowance for Bad debts $219,600 Bad debts $129,600 Building $1,440,000 Cash $780,000 Common stock $2,100,000 Consulting and legal fee expenses $11,250 Cost of goods sold $9,852,457 Current portion of Loan Payable $90,000 Depreciation expenses $1,080,000 Equipment $5,040,000 Executives Salaries expense $787,500 Expansion fund $540,000 Income tax expenses $914,084 Income tax payable $303,200 Insurance expense $65,250 Interest expense $114,750 Inventory $2,160,000 Land $1,980,000 Loan payable $450,000 Loans to other businesses $720,000 Misc. Admin. Expenses $8,888 Misc. Selling expenses $87,750 Notes Payable $2,520,000 Office supplies expenses $69,750 Patents $270,000 Prepaid Insurance $225,000 Prepaid rent $225,000 Rent revenue $56,250 Retained Earnings $2,955,000 Sales discount $180,000 Sales Force salaries expense $247,500 Sales returns $855,000 Sales Revenue $18,000,000 Selling Commission Expenses $900,000 Shipping expenses $147,375 Unearned revenue $450,000 Utilities expenses $135,000 Wages payable $180,000 Total $30,923,654 $30,923,654

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.