Annual Adjustments Palmer Industries prepares annual financial statements and ad

Question

Annual Adjustments

Palmer Industries prepares annual financial statements and adjusts its accounts only at the end of the year. The following information is available for the year ended December 31, 2017:

Required:

1. For each of the following situations, identify and analyze the adjustment to be recorded on December 31, 2017. Do not round intermediate calculations. If required, round your final answer to the nearest dollar.

a. Palmer purchased computer equipment two years ago for $15,000. The equipment has an estimated useful life of five years and an estimated salvage value of $250. Use straight line method of depreciation

How does this entry affect the accounting equation? If a financial statement item is not affected, select "No Entry" and leave the amount box blank. If the effect on a financial statement item is negative, i.e, a decrease, be sure to enter the answer with a minus sign. Remember: if a contra account is increased, it will have the effect of decreasing the corresponding financial statement item.

b. The Office Supplies account had a balance of $3,600 on January 1, 2017. During 2017, Palmer added $17,600 to the account for purchases of office supplies during the year. A count of the supplies on hand at the end of December 2017 indicates a balance of $1,850

How does this entry affect the accounting equation?
If a financial statement item is not affected, select "No Entry" and leave the amount box blank. If the effect on a financial statement item is negative, i.e, a decrease, be sure to enter the answer with a minus sign.

c. On August 1, 2017, Palmer created a liability account, Customer Deposits, for $24,000. This sum represents an amount that a customer paid in advance and that will be earned evenly by Palmer over a six-month period.

How does this entry affect the accounting equation?
If a financial statement item is not affected, select "No Entry" and leave the amount box blank. If the effect on a financial statement item is negative, i.e, a decrease, be sure to enter the answer with a minus sign.

d. Palmer rented some office space on November 1, 2017, at a rate of $2,700 per month. On that date, Palmer recorded Prepaid Rent for three months’ rent paid in advance.

How does this entry affect the accounting equation?
If a financial statement item is not affected, select "No Entry" and leave the amount box blank. If the effect on a financial statement item is negative, i.e, a decrease, be sure to enter the answer with a minus sign.

e. Palmer took out a 120-day, 9%, $200,000 note on November 1, 2017, with interest and principal to be paid at maturity. Assume a 360-day year.

How does this entry affect the accounting equation?
If a financial statement item is not affected, select "No Entry" and leave the amount box blank. If the effect on a financial statement item is negative, i.e, a decrease, be sure to enter the answer with a minus sign.

f. Palmer operates five days per week with an average daily payroll of $500. Palmer pays its employees every Thursday. December 31, 2017, is a Sunday.

How does this entry affect the accounting equation?
If a financial statement item is not affected, select "No Entry" and leave the amount box blank. If the effect on a financial statement item is negative, i.e, a decrease, be sure to enter the answer with a minus sign.

2. Assume that Palmer’s accountant forgets to record the adjustments on December 31, 2017. Will net income for the year be understated or overstated?

By what amount? (Ignore the effect of income taxes.)

Explanation / Answer

Ans 1 a) Depreciation as per Straight Line Method = (Asset Value- Salvage Value)/Useful Life of the asset = (15000-250)/5years = $2,950 Balance Sheet Income Statement Stockholders' Net Assets = Liabilities + Equity Revenues – Expenses = Income -2950 -2950 -2950 Ans b) Office Supplies Expense for the year 2017 = Opening Balance + Purchases - Closing Balance = 3600+17600-1850 = $19350 Balance Sheet Income Statement Stockholders' Net Assets = Liabilities + Equity Revenues – Expenses = Income -19350 -19350 -19350 Ans c) On August 1, 2017 customer paid in advance to Palmer and tit created a liability account of $24,000. As income will be earned evenly for a 6 months period, therefore Income for the year for 5 months to recognised in the current year = 24000/6*5 = $20,000 Balance Sheet Income Statement Stockholders' Net Assets = Liabilities + Equity Revenues – Expenses = Income 24000 4000 20,000 20,000 Ans d) Palmer rented some office on November 1, 2017 at a rate of $2,700per month. Palmer received rent for 3 months (i.e. for Nov 2017, Dec 2017 and Jan 2018) in advance = $(2700*3 months) = $8,100. Current Year's Income for 2 months = (2700*2) = $5,400 and Liability (Rent received in advance for 1month) = $2,700. Balance Sheet Income Statement Stockholders' Net Assets = Liabilities + Equity Revenues – Expenses = Income 8100 2700 5400 5400 Ans e)Palmer took out a 120-day, 9%, $200,000 note on November 1, 2017, with interest and principal to be paid at maturity. Interest Expense = 200000*9% = $18,000 Balance Sheet Income Statement Stockholders' Net Assets = Liabilities + Equity Revenues – Expenses = Income 200000-18000 200000 -18000 -18000 Ans f)Palmer operates five days per week with an average daily payroll of $500. Palmer pays its employees every Thursday. December 31, 2017, is a Sunday. Assuming employee works 5days from Monday to Friday. Therefore Liability for one day i.e for Friday only for the Financial Year 2017 = $500. (Assuming 1 employee, since number of employee details has not been given in question. Balance Sheet Income Statement Stockholders' Net Assets = Liabilities + Equity Revenues – Expenses = Income 500 -500 -500 Ans 2) Since Palmer's accountant forgot to record the above transactions on 31st Dec 2017, therefore the net income will be overstated and it will be "Understated" and it will be understated by $(Revenue 20000+5400+18000)- (Expense2950+19350+18000+500) = $2,600

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