A. Allowance for uncollectible accounts   79,205
              Accounts Receivable                               79,205

B.  Credit sales	        2,186,429
 x historical % sales  	      x .022
= Bad debt expense 	  48,101   

Record the calculated amount

Bad Debt Expense			48,101
	Allowance for uncollectible accounts	48,101     

This was recorded each month (a portion) during the year using % of sales and must be included.

B. % of A/R Aging Method

Balance	   x  %     = Amount uncollectible
                                                   
368,128	   .01		  3,681
128,427	   .08		10,274
  29,034	   .24		  6,968
  53,936	   .55		29,665

Total uncollectible		50,588

50,588 must be the ending credit balance in the allowance account

Beginning allowance balance	          (42,170)
+ bad debt expense % sales	          (48,101)
- write-offs					 79,205
+ bad debt expense % a/r			 ??    
= ending allowance balance		(50,588)  

The allowance account must be increased (credit) by $39,522 to get to the ending balance to 50,588. Bad debt expense is increased for the same amount

Bad Debt Expense				39,522
	Allowance for uncollectible accounts	39,522
	

C.

  Accounts Receivable		    579,525     
- Allowance for U.A.			(50,588)
 = Net Accounts Receivable	    528,937

You must correct what the company has already done. Correct means the asset = have, the liability = owed, the revenue = earned this period only, the expense = incurred this period only. Use the information provided to determine one of these and make the adjustment to get it to what it should be.

a. The “prepaid insurance” account shows a balance of $4,500, representing the cost of a 2-year fire insurance policy purchased on August 1st of the current year.

The prepaid insurance account is the asset and it should have a balance of what the company has paid ahead of time on December 31st.

$4,500 / 24 months = $187.50 per month
x 5 months used = $937.50 used                                                               is the expense this year

5 months used this year =19 months left
x $187.50 = $3,562.50 left = the balance
of prepaid insurance must be on 12/31

5 months has been used this year and you must reduce the prepaid account for 5 months x $187.50 = $937.50. An asset used is also an expense

Insurance Expense       $937.50
              Prepaid Insurance       $937.50

The balance in the prepaid insurance account is now $3,562.50 (4,500 – 937.50) and is equal to the amount still paid ahead on December 31st.

b. On October 1st of the current year the “unearned rent revenue” account balance was increased (credited) for $4,000 when cash was collected for rent revenue for a 6-month rental beginning December 1st.

“Unearned Rent Revenue” must only have the amount not yet earned at the end of December. The company has earned from December 1 to December 31st = 1 month.

$4,000 / 6 months = $667 per month
x 1 months earned = $667 earned = revenue

Revenue currently has $0 and must be increased by $667 to get to the $667 earned. Revenue is increased with a credit.

Unearned Revenue     $667
             Revenue                $667

The amount that is earned is no longer unearned revenue and unearned revenue must be decreased with a debit to the liability.

c. The balance in the “prepaid advertising” account on January 1 of the current year was $2500. Purchase of advertising for $1,900 during the year was recorded in the “advertising expense” account. On December 31, $800 paid for advertising had not yet been provided.

Begin by putting the amounts given in the accounts.

    Prepaid Advertising    
       2,500      |

       have 800

    Advertising expense   
       1,900     |

used ?

The company recorded amounts paid to advertising expense assuming this was the amount that would be used this period. If it is not, an adjusting entry must be made.

You really have $800 left and the prepaid advertising account must also have a balance of 800.

Reduce prepaid advertising (credit) to get it to be what you really have (2,500 – 800 = 1,700 adjustment).

Advertising Expense    1,700
          Prepaid Advertising             1,700

Since you do not have as much as you had recorded, you have used more. The amount that you have used must be recorded as an expense. The amount that was already recorded to expense (1,900) has been used so no adjustment is required for this amount. You add more expense to this amount.

d. “Office supplies” was increased (debited) when office supplies of $250 were purchased during the year. On December 31st, $44 in office supplies is on hand.

The company recorded purchases to office supplies as an asset assuming the supplies purchased would not be used. This is not true, since you have less, some were used and an adjusting entry must be made.

The amount on hand of $44 must be the balance in the asset account “office supplies”. The current balance is $250, so you must decrease this account by $206 to get it to be what you really have on 12/31.

Supplies expense           206
             Office Supplies          206

Using office supplies (an asset) is also an expense.

e. On May 1st, the company signed a note payable in the amount of $20,000 carrying 6% annual interest. Interest is to be paid every six month and principle will be repaid in 2 years.

A note payable means the company borrowed money in return for paying interest. The company incurs interest as time passes. Interest will be paid every 6 months, on November 1st and May 1st of each year. Interest that has been incurred and not paid must be recorded. Interest was last paid on November 1st this year.

Principle   x   Rate   x   Time

$20,000    x   .06  x   2/12 (Nov to Dec)
= $200 incurred, not yet paid

Interest Expense     200
          Interest Payable      200

f. On March 1st of the prior year the company loaned $20,000 to a supplier of the company. The loan carries an interest rate of 10% and the loan and all interest must be repaid in 2 years.

This is a note receivable and the company earns interest as time passes.

Principle  x  Rate  x  Time

$20,000   x .10  x  12/12 (Jan to Dec)
= $2,000 earned this year, not yet collected

Important: You record the amount earned this year and not yet received only. They have used your money for the entire year this year. You are adjusting for this year, not last year and not both years, since you made last year’s adjustment last year. The adjustment made last year would be for the partial year amount.

Interest Receivable      2,000
                Interest Revenue         2,000

Cash – $200,000 (1) -8,700 (4) – 500 (5) + 10,000 (6) – 50,000 (7) -6,000 (8)
Accounts Receivable (3)
Inventory 67,000 (2) – 32,000 (3)
Long Term Notes Receivable (6)
Computer Equipment (8)
Accumulated depreciation = all months’ expense which is only the current month so far –
$6,000 / 3 years = $2,000 a year x 1/12 = 167

Accounts Payable $67,000 (2) + $198 (5) – $50,000 (7)
Salaries Payable (4), amount not yet paid is what you owe (10,500 earned – 8,700 paid)
Interest Payable $600 x 1/12 = $50 one month incurred

Common Stock (1)

Retained Earnings = this months’ profits,
This is the first month of operations, so there is no beginning balance and no dividends were paid.

Income Statement:

Sales					     65,000
- Cost of Goods Sold		        (32,000)
= Gross Profit                                    33,000
- Operating Expenses
     Salaries Expense             10,500
     Utilities Expense			      198
     Advertising Expense                       500
     Depreciation Expense                      167
 = Operating Income		     21,635
 - Other Expenses
         Interest Expense		              (50)
= Income before Tax		     21,585
  -  Tax Expense			                  0
= Net Income				     21,585

 A. Cash exchanged is computed:

Maturity Value			     250,000
x price of bond in a %		  1.036
= Cash exchanged			259,000

B. A premium occurs when the cash exchanged is more than maturity value:

Cash exchanged		259,000
Maturity value                  250,000
Premium			        9,000

C. Amortization Schedule:

	     7% / 2       8% / 2 x MV
    Interest	      Coupon	   Difference	    Premium	   Owed

1/1							                                9,000	      259,000
7/1	9,065	           10,000	              935		        8,065	      258,065
1/1	9,032		   10,000	              968		        7,097	      257,097

D. Total interest expense over the life of the bond is

cash paid each period		           10,000   
x number of payments per year       x  2
x years to maturity				    10  
= total cash paid for interest	          200,000
-  premium					  (9,000)
= total interest expense	                   191,000

E. The cash paid over the life of the bond is 200,000, computed in D.

F. The amount that is repaid on the maturity date is the maturity value, $250,000

G. The amount that will be reported on the balance sheet is the amount of the carrying
value on that date: $257,097; the amount owed on 1/1 is equivalent to 12/31
H. Interest expense of 9,065 for the first 6 months and 9,032 for the second 6 months for a total of 18,097 reported on the income statement for interest expense.

A.

				      Cash		Bank

Ending Balance 5/31	  $4,126	    $1,674

Bank service charge	   ($56)
Deposits in transit				    $3,975
Outstanding Checks		             ($1,934)			
Customer auto payment	    (600)
Interest earned		     146
Error – utilities expense	      99				
				        _____ 	______
  Adjusted 5/31 balance      $3,715     =   	$3,715

B. Make a journal entry for items in the cash column only.

Accounts Payable	    	600
Service Charge	     	  56	
	Interest Revenue		     	146
	Utilities Expense			  99
	Cash					411

Cash has decreased and must be a credit.
A payment to a supplier reduces accounts payable
The company recorded too much utilities expense and must decrease it

Decreases on the reconciliation are recorded as a debit
Increases on the reconciliation are recorded as a credit

The company’s legal counsel’s opinion determines what must be recorded. In this case, they believe it is probable that $500,000 will be paid. When a contingency is probable an expense and liability is recorded and the situation is disclosed in the footnotes. The company must disclose the range of what may be paid, up to $2,000,000 and expense $500,000 (the amount they expect to pay). 

Legal Expense            $500,000
            Legal Liability            $500,000

Sales
– Cost of goods sold
= Gross profit
–     Operating expenses:
          Salaries expense
         Depreciation expense
         Rent expense
         Selling (Commission) expense
         Bad debt expense
         Restructuring expense
= Income from operations
– + Other revenues and expenses
         Loss from fire
         Rent income
         Dividend income
         Interest expense
         Gain on sale of building
=Income before tax
– income tax expense
= income from continuing operations
– Discontinued operation – Loss
          = Net income

Periodic:

Purchases 6/1:		

Purchases		85,000
	Accounts Payable 	85,000

Sales 6/14:		

Accounts receivable (cash)    63,000
	Sales				        63,000

(cost of inventory sold is not recorded)


Return 6/18:		

Accounts Payable 	       2,000
	Purchase Returns		2,000

Adjustment at end of period:

Cost of Goods sold	           42,750
Inventory (ending)		64,250
Purchase Returns		  2,000	
	Purchases				85,000
	Inventory (beginning)		24,000

			Or

Cost of Goods sold		42,750
Purchase Returns		  2,000
Inventory			    40,250
	Purchases				85,000

1st: Make purchases must be 0; credit purchases for the total amount debited

2nd: Make ending inventory equal to what you really have on hand.

3rd: Cost of goods sold is debited for the amount it takes to make the j/e balance

Periodic:

Purchases 6/1:		

Inventory		85,000
	Accounts Payable       85,000


Sales 6/14:		

Accounts receivable (cash)     63,000
	Sales					    63,000

Cost of Goods Sold		     39,000
	Inventory				        39,000
			

Returns 6/18:		

Accounts Payable 	                 2,000
	Inventory				        2,000


Adjustment at end of period:
				
Cost of Goods Sold		       3,750
	Inventory 				   3,750	

Beginning inventory				24,000
+ purchases					     85,000
- purchase returns			           (    2,000)
- cost of sales			               (  39,000)			
= Ending inventory per account		 68,000
Compare to inventory counted		(64,250)
= Adjustment to inventory			   3,750   less

Inventory must be decreased by 3,750 to get the balance to actual on hand

Important : The total cost of goods sold recorded must be the same for both methods: The perpetual method identifies shrink with the adjusting entry and the periodic method does not identify shrink.

A. Trading:

Investment			25,000	
	Unrealized Gain/Loss-IS	  25,000

Available for sale:

Unrealized Gain/Loss - OE	  10,000
	Investment			     10,000

Dividends – trading and available for sale:

Cash				2,200
	Dividend Income		2,200

Equity Method:

Investment Expense	40,819
	Investment 			40,819	

(127,560  x .32 = 40,819)


Cash				3,200
	Investment			 3,200

(10,000 x .32 = 3,200)

B.

Balance Sheet:

S/T Investments – FMV 		    55,000
L/T Investments – FMV		    12,000
L/T Investments – Equity             55,981  
Unrealized Gain/(Loss)	           (10,000)

    Income Statement:

Unrealized Gain/(Loss)		  25,000	
Dividend Income			    2,200
Investment Expense	          (40,819)

Important: If your instructor/text book uses the “allowance for gain/loss on securities” account, you will adjust the investment account with this account in all entries that record an adjustment to fair market value.

A. $200,000 – $25,000 = $21,875 each year
          8 years

1st, 2nd and 3rd year until the change

B. The formula for computing depreciation expense in future years after you have added costs or revised an estimate is:

Current book value – new residual value
       New life from this point forward

$169,375 – 5,000 = $14,943
        11 years

each year for the next 11 years

(8 original – 3 past + 6 more = 11 years to use the asset)

Cost		    235,000   (200,000 + 35,000)
- A/D              (65,625)  3 years x $21,875
Book Value   169,375

The 4th year depreciation expense is $14,943

1st – compute the par value $15,000 / 150,000 = $0.10 par value per share

2nd – determine the number of treasury shares held at year end

Issued 150,000 – outstanding 140,000 = 10,000 shares of treasury shares held with an average cost of $8 per share ($80,000 / 10,000 shares)

A.   1/15   		

Cash			450,000
     Common Stock	          3,000
	 Paid in Capital – C.S.	  447,000
	

2/1 

Cash				50,000
	Treasury Stock		  32,000 **
	Paid in Capital – TS		  18,000 plug

** $8 original cost per share x 4,000 shares



3/1

Treasury Stock	46,000
	Cash			46,000


6/1

Paid in Capital – TS		16,000 **
Cash				24,000
	Treasury Stock		40,000 **

** $8 original cost per share x 5,000 shares
10,000 shares from the beginning less 4,000 sold previously gives 6,000 left from the beginning and 5,000 of the beginning shares are sold

*** Debit Treasury Stock – paid in capital for an amount up to the balance you have.
If you need more debit, you use retained earnings.

B.

Beginning TS balance		    $80,000
less sold				        (32,000)
plus purchase			          46,000
less sold                                         (40,000)
  = Ending balance TS		     54,000

Additional Paid in Capital – TS	2,000

C. Paid in capital – Treasury stock represents the economic net gain that occurred from treasury stock transactions. This gain is NOT reported on the income statement, it directly increases owner’s equity.

B. Income Statement 

C. Closing Entries

Gain on sale 	    8,000
Sales 		316,000
	Retained Earnings 	324,000

Retained Earnings   	77,000
	  Administrative Expense 	     35,000
	  Selling Expense 		         24,000	
	  Depreciation Expense 	     18,000

Retained Earnings  	5,000
	Dividends Paid	      5,000

D.  Ending Retained Earnings:

Beginning Retained Earnings	    112,000
+ Income				          247,000
- Dividends Paid			     (5,000)
Ending Retained Earnings	     354,000