Question
Use the unadjusted trial balance on the Original Trial Balance worksheet, plus the information you gather from the owner / accountant's discussion to develop GAAP-compliant financial statements
Prepare adjusting / error correction journal entries in the General Journal worksheet.
Prepare an Adjusted Trial Balance on the Trial Balance worksheet.
Prepare an Income Statement, Statement of Retained Earnings, and Balance Sheet
Accountant Business Owner Accountant Business Owner Accountant Business Owner Accountant Business Owner Accountant Business Owner Accountant Business Owner Accountant Business Owner Accountant Business Owner Accountant Business Owner Accountant Business Owner Come in Thank you for seeing me today. First Bank recommended t l see an accountant, but I'm not sure exactly why. I'm just trying to set up a line of credit so that I can stock up on inventory before the Christmas buying season. The bank is asking for an income statement and balance sheet on my business I'm sure l can help you. That's a very standard request. Let me see the information you have This is the print out from my accounting software I'm very careful to enter every transaction, so l don't see why this list isn't good enough That's a great start. Let's see if I understand what you have here. (Pause) You seem to have a very high accounts receivable Yes. That's one of the strongest points of the business to show the bank. We have just received a $20,000 order, so I entered it right away as sales and accounts receivable. want to keep track of every transaction Have you delivered anything on the order yet? No. We're on track to finish by the 15th and then inspect and ship by the end of the month That's actually something that will need to be adjusted. Did you decrease your inventory yet for this order? No.It hasn't been shipped yet, so l wouldn't change inventory. Isn't that righ Yes, that's good that your inventory here matches your inventory at your business today. Now l noticed something else about the assets you have listed. You have a building listed, but no land. That's very unusual. Do you own your own building? Yes, we've just closed on our headquarters. Ofcourse, we own the land too. The $250,000 lrecorded for the building is for both That's what I thought. We'll have to separate out the value for the building and land because they are separate assets and have different accounting treatment But I didn't pay a separate price for the land and building. How would l know the separate values? Most appraisers apply 20% of the total price to the land and 80% to the building in these cases, so we can follow that rule of thumb safely for a new standard purchase I notice that your income statement is missing two expenses that l would normally expect. There is no depreciation listed What's that Depreciation is an expense because all equipment and facilities have a limited life. As they are used, there is wear and tear and their productivity goes down. Now, since you have just purchased the building, it wouldn't have any depreciation yet But I wonder about the equipment. When did you purchase the equipment? At the beginning of the year And how long do you expect before you replace the equipment? About five years
Explanation / Answer
Unadjusted Trial Balance Adjusted Trial balance Accounts Title Dr Cr Dr Cr Cash 4,850 4,850 Accounts Receivable 25000 5,000 Inventory 11,700 11,700 Land 50,000 Building 250000 200,000 Equipment 16000 16,000 Accumulated Depreciation-Equipment 3200 Accounts Payable 8,300 8,300 Notes Payable $250,000 $250,000 Common Stock 30,000 30,000 Sales Revenue 60000 40,000 Cost of Good Sold 20220 20220 Wages Expense 6,000 6,000 Rent Expense 3,450 3,450 Depreciation Expenses 3,200 Other Expenses 11,080 11,080 Total 348,300 348,300 331,500 331,500 Correcting Entries 1 Sales 20000 Accounts receivable 20000 (As order is received so no journal required at that point) 2 Land 50000 Building (250000*20%) 50000 (Being 20% is the land cost so adjusted) 3 Depreciation Expense (16000/5) 3200 AccumulatedDepreciation-Building 3200 4 Income Tax Expense -As loss so no entry Income Statement Sales Revenue 40000 Cost of Good Sold 20220 Gross Profit 19780 Less: Operating Expenses Wages Expense 6,000 Rent Expense 3,450 Depreciation Expenses 3,200 Other Expenses 11,080 Total operating Expenses 23,730 Net Loss -3,950 Balance Sheet Assets Cash 4,850 Accounts Receivable 5,000 Inventory 11,700 Land 50,000 Building 200,000 Equipment 16,000 Accumulated Depreciation-Equipment -3200 12,800 Total assets 284,350 Liabilities Accounts Payable 8,300 Notes Payable 250,000 Common Stock 30,000 Net Loss -3,950 Total Liabilities and Equity 284,350
