On the designated worksheet, prepare in journal entry form all adjusting and cor
ID: 2541598 • Letter: O
Question
On the designated worksheet, prepare in journal entry form all adjusting and correcting journal entries based on the following information (round all numbers to the nearest dollar). Letter entries to correspond to the below information and present them in alphabetical order. Add any new accounts as needed to the trial balance.
Smith Co. was authorized to issue 3,000,000 shares of $1 par Common Stock but has only issued 650,000 shares of common stock as of 12/31/2018. No new shares were issued during 2018.
On the “Adjusting Journal Entries” worksheet, prepare in journal entry form all adjusting and correcting journal entries based on the following information. All information was provided to you as of 12/31/2018. (Round all numbers to the nearest dollar). Label journal entries a through t.
a) Based on your review of the cash balances, you note that there was an overdraft of $12,000 in one of your bank accounts. However, there are many bank accounts at the specific bank where the account with the overdraft is deposited. The total cash at this bank equaled a debit balance of $180,000. The previous accountant moved the overdraft to Accounts Payable. You also note the Board of Directors has restricted $65,000 of cash for future expansion. This $65,000 is part of the cash balance. The future expansion will not occur for several more years.
b) Based on your inquiries, you note that $35,000 of accounts receivable had been written off during the year. The clerk had debited bad debt expense for $35,000 and credited Accounts Receivable for $35,000. When $8,500 of accounts previously written off had been collected, the accountant debited cash and credited sales. The company uses the allowance method based on the aging of accounts receivable. Based on this method, Smith Co. determines that uncollectible accounts are $46,600 at the end of 2018.
c) On April 1, 2018, Smith Co. renewed a 16 month insurance policy for $15,000. All cash was paid at the time the policy was signed and insurance expense was increased. All other transactions involving insurance were properly recorded.
d) On November 1, 2018, Smith Co. loaned a key supplier, $25,000. A promissory note was signed and issued. The note is due in full 6-months. The supplier agrees to pay interest on the note at an annual rate of 4%. Principle and interest will be paid at the end of the 6-months. The note was recorded in Notes Receivable and is the only note outstanding.
e) Per a physical count of office supplies, $5,896 of supplies remained at the end of 2018. The balance on the worksheet in the office supplies account represents last years ending balance. During the year, $35,000 of office supplies were purchased and immediately expensed.
f) On November 1, 2018 Smith Co. paid ABC Advertising $16,000 for a four month campaign of advertising services. Equal services are provided each month.
g) Because of a new product line, Smith Co. needed some temporary additional storage space so on April 1, 2018 they rented a unit for an annual rate of $17,000 and they paid the entire amount up front.
h) The storage building was self-constructed this year by Smith Co. The Company had their initial expenditure of $500,000 on January 1. They paid an additional $375,000 on May 1st, $250,000 on August 1st, and then the final payment of $150,000 on December 1st when the building was completed and occupancy occurred. The company has decided to use S/L method for depreciation. The storage building is estimated to have a life of 40 years and a salvage value of $76,896. The company depreciates using partial years.
i) Smith Co.'s Double Entry has two loans outstanding as of 12/31/2018. Interest is paid annually on January 1st. The facts on each loan are as follows:
Onstar Bank Loan – outstanding since January 1, 2018 with a 4.0% interest rate. This loan was taken out to finance the construction of the Storage Building. Interest for the year and 10% of the principle will be paid to the bank on January 1, 2019. Except for recording the initial cash received and loan, no additional entries have been made.
Coldstar Bank Loan – also outstanding all of 2018 with 3.06 % interest rate interest is due on January 1, 2019. Principle is due on January 1, 2024. Since interest will not be paid to the Bank until 2019, Smith Co.’s office staff did not accrue any interest.
j) On March 1, 2018, Smith Co. recorded a patent in the amount of $150,000. The company paid outside legal fees of $80,000 to have the patent registered. The other $70,000 represents internal costs in developing the patent. The patent is good for 20 years, but the company estimates that the patent will have a useful life of 6 years with no residual value. Amortization is straight line. The company depreciates using partial years for intangible assets. No amortization has been recorded for 2018.
k) As of 12/31/2018 the Available for Sale Securities have a fair value of $290,896. Due to the market conditions, the company does not plan on selling the assets in 2019, but their intent is to sell at some point in time. You can ignore the tax effect on unrealized gains and losses.
l) The office building was bought in January 1, 2016 and Smith Co.'s plans to use the building for 40 years and believes it will have a salvage value of $250,000 at the end of 40 years. Smith Co. depreciates the building on a straight line basis. Due to the location of the building and use potential, Smith Co. is concerned about impairment. At 12/31/2018 it is determined that the future cash flows for the building are $3,000,000. The fair value of the building is $3,400,000 (last digit of your student number) at 12/31/2018.
m) After reviewing details of sales, you note that the sales taxes collected on the last week of December’s sales were included in sales revenue. Sales recorded the last week of December that included the sales tax of 3% amounted to $350,000.
n) Smith Co. uses the Dollar Value LIFO inventory method. For internal purposes, the Merchandise Inventory Account is maintained at FIFO (current costs). At the end of the year, the LIFO reserve account is adjusted so inventory on the balance sheet reflects Dollar Value LIFO. You need to calculate the proper inventory balance and adjust the LIFO reserve. The price index for this year is 1.26 . Prior year inventory records show the following calculation for 2018:
175,000 X 1.0 = 175,000
100,000 X 1.05 = 105,000
o) All office equipment was purchased January 1, 2017. Smith Co. uses the DDB method to depreciate office equipment. No office equipment has been added since the initial purchase. It is estimated that the office equipment has a useful life of 10 years with a salvage value of $12,000.
p) On March 1, 2018, Smith Co. rented a portion of one store to Marketing Majors Inc. The contract was for 15 months and Smith Co. required all of the cash up front. The rent is being earned equally each month. This is the only item in which rent is being earned by the company.
q) Smith Co. started to lease some new retail space in 2018 and added shelving and fixtures to this leased space. Based on your review of invoices, the previous accountant capitalized the cost of fixtures but did not capitalize the shipping and installation costs of $3,596. These costs were expensed and recorded as a miscellaneous selling expense. Smith Co. has decided to use double declining balance (DDB) depreciation for this item and to take a full year of depreciation in the year of acquisition. The leasehold improvements have a useful life of 15 years with a salvage value of $15,000.
r) Smith Co. uses the FIFO Inventory Method in valuing inventory. The inventory balance of $425,000 was based on a physical count at 12/31/2018. Based on your analysis, you have noted that $12,500 of marketing games that belonged to Marketing Majors Inc. was included in the account. You also note that $7,000 of goods shipped to Smith Co. f.o.b. destination were in transit on December 31, 2018 and included in the physical count.
s) You note during the review of sales, that a rebate was issued for the 2018 Income Tax Game to encourage sales. 36,000 games were sold. Customers can mail in their receipt and receive a $1 rebate per game. It is estimated that 60% of customers will send in the rebate. The rebate expires on January 31, 2019. To date, 8,000 customers have sent in the rebate and $16,000 has been refunded. Without any direction, the accounting clerk debited Miscellaneous Selling Expense and credited Cash for the $16,000. The management of Smith Co. would prefer to have this type of expense in a separate account (Rebate Expense) so they can properly analyze for future ideas.
t) Smith Co. has a straight tax rate of 35%. Income tax expense is Net Income before taxes times 35%. (Hint: Prepare the Income Statement up to Net Income before Taxes and then record this adjusting journal entry.)
Smith Co End of Period Worksheet For the Year Ended December 31, 2018 Unadjusted Trial Balance Adjusted Trial Balance Adjustments DR Account Title DR 330,000 694,980 Cash 17,000 Allowance for Doubtful Accounts Interest Receivable Merchandise I 425,000 LIFO Reserve Prepaid Adve Prepaid Rent Office Supplies Note Receirable Avaiable for Sale Secres Office Buiding Accumulated Depreciation Office Building 32,000 17,000 6,000 25,000 375,000 3,750,000 87,500 1,275,000 AccumulateDepreiaio Storage Building 750,000 225,000 325,000 Accumulated Depreciation Office Equipment Patent Accounts Payable Sales Tax Payable Salaries Payable Payrol Taxes Payable Interest Payable Income Tax Payable Uneamed Rent Revenue Loan Payable - Onstar Bank Loan Payable - Codstar Bank Common Stock Additional Paid in Retained Ea Accumulated Other Com Dividends 65,000 150,000 345,000 25,000 650,000 2,000,000 650,000 1,998,750 920,000 25,000 84,750 4,528 Sales Returns and Alowances Sales Discounts Cost of Goods Sokd Sales Salaries Office Salaries Ex 1,979,500 436,400 274,000 16,000 Office Buid - Stores 23,000 15,000 Research & Insurance Ex 35,000 Miscelaneous Administrative Rent Revenue Interest Revenue on Note Receivable Dividend Revene on AFS Securities Interest Expense Bad Debt Expense Amortization Expense Income Tax Expense 75,000 25,000 35,000 121,150 11,585,450 11,585,450Explanation / Answer
JOURNAL ENTRIES
S.NO. ACCOUNT DEBIT AMOUNT CREDIT AMOUNT
A(1) Account Payable 12000
Short Term Borrowings 12000
A(2) Its been Rightly Treated as it is part of Current Assets in Cash Balance, because non-occurrence of future event will lead to have the same in cash only.
B(1) Sales 8500
ACCUMULATED OTHER INCOME 8500
B(2) Bad debts Ecpenses 11600
Receivables 11600 (Extra Provision made as per allowance plicy)
C Prepaid Insurance 6562.50
insurance exp 6562.50 (Being 9 month of Insurance is bedited to exp and rest in Preapid exp)
D Note receivable 166
Interst Income 166 (Being Interst Incme recoreded on accrual basis for 2 months @4%)
E office supplies expenses 104
office supplies 104
F Prepaid Advertisment Exp 8000
Advertisment Exp 8000
G Rent EXp 12750
Prepaid Rent 12750
H Dep On storage Buiding 21666
Storage Building 21666
I Interest Exp 87200
Onstar loan 26000
coldstar loan 61200
J Amortization of patent 20833
patent 20833
K Unrealized loss on Security 84104
Available for sale security 84104
L Impairment Loss 400000
office building 400000
M sales 10194
Sales tax payable 10194
N merchendie inventory 78500
LIFO Reserve 78500
O accumulated dep-office eqp 52000
office eqp 52000
P advance rent received 25000
rent revenue 25000
Q(1) leashold improvement 3596
missellaneous selling exp 3596
Q(2) dep on leashold improvement 28707
leasehold improvement 28707
R Marketing Major 12500
goods in transit 7000
merchandise inventory 19500
S (1) rebate expesnes 16000
missllenaouse selling exp 16000
S(2) rebate exp 5600
provision for rebate 5600
T Interest Exp 286141
provision for income tax 286141
FINAL TRAIL BALANCE
ACCOUNTS UNADJUSTED BALANCE ADJUSTMENTS ADJUSTED TRAIL BALANCE
TITLE
DR.
CR.
DR.
CR.
DR.
CR.
CASH
330000
ACCOUNT RECEIBVABLE
694980
11600
683380
ALLOWANCE FOR DOUBTFUL DEBTS
17000
MERCHANDISE INVENTORY
425000
78500
503500
LIFO RESERVE
32000
78500
110500
PREPAID RENT
17000
12750
4250
OFFICE SUPLIES
6000
104
5896
NOTE RECEIVABLE
25000
166
25166
AVAILBLE FOR SALE
375000
84104
290896
OFFICE BUILDING
3750000
400000
3350000
ACCUMULATED DEP-OFFICE BUIDING
87500
STORAGE BUILDING
1275000
21666
1253334
LAND
750000
LEAEHOLD INSTRUMENT
225000
OFFICE EQP
325000
52000
273000
ACCUMULATED DEP-OFFICE EQP
65000
PATENT
150000
20833
129167
ACCOUNT PAYABLE
345000
12000
333000
SALARIES PAYABLE
142000
PAYROLL TAX PAYABLE
25000
LOAN PAYABLE-ONSATR
650000
26000
6526000
LOAN PAYABLE-COLDSATR
2000000
61200
2061200
COMMON STCK
650000
ADDITIONAL CAPITAL
1998750
REATINED EARNING
920000
ACCUMULATED OTHER INCOME
25000
8500
33500
DIVIDEND
84750
SALES
4528200
18694
4509506
SALES RETURN AND ALLOANCE
42250
SALES DISCOUNT
19250
COST OF GOODS SOLD
1979500
SALES SALARIES
436400
OFFICE SALARIES
274400
ADVERTISMENT EXO
16000
8000
8000
LEASING EXP-STORE
132000
MIS. SEELING EXP
23000
R&d EXP
15000
INSURANCE EXP
15000
6562.50
8437.50
OFFICE SUPPLIES EXP
35000
104
35104
MISC ADMIN EXP
9170
RENT REVENUE
75000
25000
50000
DIVIDEND REVENUR
25000
BAD DEBTS EXP
35000
11600
46600
PAYROLL TAX EXP
121150
SHORT TERM NORROWINGS
12000
12000
PREPAID INSURANCE
6562.50
6562.50
INTERST INCOEM
166
166
PREPAID ADVET. EXP
8000
8000
REBT EXP
12750
12750
DEP ON STORAGE BUILING
21666
21666
INTESRT EXP
87200
87200
AMMORTIXZATION PATENT
20833
20833
UNREALIZED LOSS ON SECURITY
84104
84104
IMAPUIRMENT LOSS
400000
400000
SALES TAX
10194
10194
DEP-OFFICE EXP
52000
52000
ADVANCE RENBT
25000
25000
TITLE
DR.
CR.
DR.
CR.
DR.
CR.
CASH
330000
ACCOUNT RECEIBVABLE
694980
11600
683380
ALLOWANCE FOR DOUBTFUL DEBTS
17000
MERCHANDISE INVENTORY
425000
78500
503500
LIFO RESERVE
32000
78500
110500
PREPAID RENT
17000
12750
4250
OFFICE SUPLIES
6000
104
5896
NOTE RECEIVABLE
25000
166
25166
AVAILBLE FOR SALE
375000
84104
290896
OFFICE BUILDING
3750000
400000
3350000
ACCUMULATED DEP-OFFICE BUIDING
87500
STORAGE BUILDING
1275000
21666
1253334
LAND
750000
LEAEHOLD INSTRUMENT
225000
OFFICE EQP
325000
52000
273000
ACCUMULATED DEP-OFFICE EQP
65000
PATENT
150000
20833
129167
ACCOUNT PAYABLE
345000
12000
333000
SALARIES PAYABLE
142000
PAYROLL TAX PAYABLE
25000
LOAN PAYABLE-ONSATR
650000
26000
6526000
LOAN PAYABLE-COLDSATR
2000000
61200
2061200
COMMON STCK
650000
ADDITIONAL CAPITAL
1998750
REATINED EARNING
920000
ACCUMULATED OTHER INCOME
25000
8500
33500
DIVIDEND
84750
SALES
4528200
18694
4509506
SALES RETURN AND ALLOANCE
42250
SALES DISCOUNT
19250
COST OF GOODS SOLD
1979500
SALES SALARIES
436400
OFFICE SALARIES
274400
ADVERTISMENT EXO
16000
8000
8000
LEASING EXP-STORE
132000
MIS. SEELING EXP
23000
R&d EXP
15000
INSURANCE EXP
15000
6562.50
8437.50
OFFICE SUPPLIES EXP
35000
104
35104
MISC ADMIN EXP
9170
RENT REVENUE
75000
25000
50000
DIVIDEND REVENUR
25000
BAD DEBTS EXP
35000
11600
46600
PAYROLL TAX EXP
121150
SHORT TERM NORROWINGS
12000
12000
PREPAID INSURANCE
6562.50
6562.50
INTERST INCOEM
166
166
PREPAID ADVET. EXP
8000
8000
REBT EXP
12750
12750
DEP ON STORAGE BUILING
21666
21666
INTESRT EXP
87200
87200
AMMORTIXZATION PATENT
20833
20833
UNREALIZED LOSS ON SECURITY
84104
84104
IMAPUIRMENT LOSS
400000
400000
SALES TAX
10194
10194
DEP-OFFICE EXP
52000
52000
ADVANCE RENBT
25000
25000
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