Jefferson Jerome is interested in purchasing “Art Specialists Inc.”, an auction
ID: 2491532 • Letter: J
Question
Jefferson Jerome is interested in purchasing “Art Specialists Inc.”, an auction house. The company receives the right to sell art but not to purchase the art themselves for a 5% commission. Art Specialists rents office space and Chelsea and holds its auctions at local hotels.
Art Specialist Inc.
Unadjusted Trial Balance
December 31, 2013
Cash
$ 35,000.00
Accounts receivable
$ 60,000.00
Supplies
$ 8,000.00
Equipment
$ 53,000.00
Accumulated Depreciation
$ 14,500.00
Accounts payable
$ 5,600.00
Dividends
$ 50,000.00
Capital stock
$ 25,000.00
Retained earnings
$ 84,900.00
Commission income
$ 244,000.00
Rent Expense
$ 20,000.00
Wages Expense
$ 70,000.00
Auction Expenses
$ 56,000.00
Depreciation Expenses
$ 7,000.00
Membership Expenses
$ 6,000.00
Supplies Expense
$ 9,000.00
TOTAL
$ 374,000.00
$ 374,000.00
As Jefferson’s accountant, you have received the trial balance above as well as the general ledger. The review has found the following errors:
Year end bank reconciliation showed that the balance should be $30,000. A customer should have been billed for commissions earned but it was recorded as a cash payment of the commission income.
Membership expenses are not related to the business and should be shown as a dividend to shareholder.
Depreciation expense should be $3,500 for the year.
Supplies expenses failed to record $2,000 in packing supplies used during the year.
Accounts receivables that have not been billed $10,000.
Required:
1.Record the correcting entry.
2.Prepare financial statements
3.Current owners want $250,000 for the business. Jefferson does not want to pay more than Net Worth x 1.5. Should he buy? For how much?
Cash
$ 35,000.00
Accounts receivable
$ 60,000.00
Supplies
$ 8,000.00
Equipment
$ 53,000.00
Accumulated Depreciation
$ 14,500.00
Accounts payable
$ 5,600.00
Dividends
$ 50,000.00
Capital stock
$ 25,000.00
Retained earnings
$ 84,900.00
Commission income
$ 244,000.00
Rent Expense
$ 20,000.00
Wages Expense
$ 70,000.00
Auction Expenses
$ 56,000.00
Depreciation Expenses
$ 7,000.00
Membership Expenses
$ 6,000.00
Supplies Expense
$ 9,000.00
TOTAL
$ 374,000.00
$ 374,000.00
Explanation / Answer
1) Entries to be rectified are Particulars Debit Credit 1 Accounts Receivable 5000 Cash 5000 Amount to be received from customer now rectified correction of bank balance by 5000 difference amount 2 Dividends 6000 Membership expenses 6000 Membership expenses transferred to dividends 3 Accumulated depreciation 3500 Depreciation expense 3500 Reversal of excess depreciation of 3500 4 Supplies expense 2000 Supplies 2000 unrecorded Supplies expense, now recorded 5 Accounts Receivables 10000 Commision Income 10000 Unbilled income recorded
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