You have been assigned to examine the financial statements of Novak Company for

Question

You have been assigned to examine the financial statements of Novak Company for the year ended December 31, 2017. You discover the following situations.

1. Depreciation of $3,100 for 2017 on delivery vehicles was not recorded.

2. The physical inventory count on December 31, 2016, improperly excluded merchandise costing $18,500 that had been temporarily stored in a public warehouse. Novak uses a periodic inventory system.

3. A collection of $6,000 on account from a customer received on December 31, 2017, was not recorded until January 2, 2018.

4. In 2017, the company sold for $3,800 fully depreciated equipment that originally cost $26,500. The company credited the proceeds from the sale to the Equipment account.

5. During November 2017, a competitor company filed a patent-infringement suit against Novak claiming damages of $241,500. The company’s legal counsel has indicated that an unfavorable verdict is probable and a reasonable estimate of the court’s award to the competitor is $123,000. The company has not reflected or disclosed this situation in the financial statements.

6. Novak has a portfolio of trading investments. No entry has been made to adjust to market. Information on cost and fair value is as follows. Cost Fair Value December 31, 2016 $99,200 $99,200 December 31, 2017 $84,800 $82,700

7. At December 31, 2017, an analysis of payroll information shows accrued salaries of $12,300. The Salaries and Wages Payable account had a balance of $16,700 at December 31, 2017, which was unchanged from its balance at December 31, 2016.

8. A large piece of equipment was purchased on January 3, 2017, for $43,000 and was charged to Maintenance and Repairs Expense. The equipment is estimated to have a service life of 8 years and no residual value. Novak normally uses the straight-line depreciation method for this type of equipment.

9. A $12,300 insurance premium paid on July 1, 2016, for a policy that expires on June 30, 2019, was charged to insurance expense.

10. A trademark was acquired at the beginning of 2016 for $47,700. No amortization has been recorded since its acquisition. The maximum allowable amortization period is 10 years.

Assume the trial balance has been prepared but the books have not been closed for 2017. Assuming all amounts are material, prepare journal entries showing the adjustments that are required. (Ignore income tax considerations.) (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

Explanation / Answer

Novak Company Adjusting Journal Entries for the year ended December 31, 2017 Ref Account Title Debit Credit 1 Depreciation Expense 3100 Accumulated depreciation - Delivery vehicles 3100 (To record the depreciation expense on vehicles) 2.a. Merchandise Inventory 18500 Retained earnings 18500 (To record the inventory excluded in 2016) 2.b. Cost of goods sold Merchandise Inventory (To correct the mecrhandise inventory account) 3 Cash 6000 Accounts Receivable 6000 (Collection from customer not recorded earlier) 4 Equipment 3800 Gain on sales of equipment 3800 (to record sale proceeds of equipment collrectly) 5 Lawsuit Expense 123000 Lawsuit Payable 123000 (Te liability on the patent-infringement suit) 6 Unreaized loss on trading investments 2100 Trading Investments fair value adjustments 2100 (To record the loss on fair value adjustment) 7 Salaries and wages payable 4400 Salaries and wages expense 4400 (To record correction to salaries and wages payable account) 8 Equipment 43000 Repqirs and maintenance expense 43000 (To record correction for equipment purchased) Depreciation Expense 5375 Accumulated depreciation - equipment 5375 (To record depreciation expense on the equipment purchased) 9 Retained earnings (2016 expense - (12300/3)/2 ) 2050 Insurance Expense 4100 Prepaid Insurance 6150 (Insurance expense for 2016 and 2017 recorded) 10 Retained Earnings ( Amortization of patent for 2016) 4770 Amortization of patent 4770 Patent Account 9540 (Amortization of patent for 2016 and 2017 recorded)

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