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3.11: Problems

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    30387
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    • Contributed by Henry Dauderis and David Annand
    • Athabasca University
    • Sourced from Lyryx Learning

    PROBLEM 3–1 (LO1,2) Adjusting Entries

    The following unrelated accounts are extracted from the records of Meekins Limited at December 31, its fiscal year-end:

    Balance
    Unadjusted Adjusted
    (a) Prepaid Rent $900 $600
    (b) Wages Payable 500 700
    (c) Income Taxes Payable -0- 1,000
    (d) Unearned Commissions Revenue 4,000 3,000
    (e) Other Unearned Revenue 25,000 20,000
    (f) Advertising Expense 5,000 3,500
    (g) Depreciation Expense – Equipment -0- 500
    (h) Supplies Expense 850 625
    (i) Truck Operation Expense 4,000 4,500

    Required: For each of the above unrelated accounts, prepare the most likely adjusting entry including plausible description/narrative.

    PROBLEM 3–2 (LO1,2) Adjusting Entries

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    The unadjusted trial balance of Lukas Films Corporation includes the following account balances at December 31, 2015, its fiscal year-end. Assume all accounts have normal debit or credit balances as applicable.

    Prepaid Rent $1,500
    Unused Supplies -0-
    Equipment 2,400
    Unearned Advertising Revenue 1,000
    Insurance Expense 900
    Supplies Expense 600
    Telephone Expense 825
    Wages Expense 15,000

    The following information applies at December 31:

    1. A physical count of supplies indicates that $100 of supplies have not yet been used at December 31.
    2. A $75 telephone bill for December has been received but not recorded.
    3. One day of wages amounting to $125 remains unpaid and unrecorded at December 31; the amount will be included with the first Friday payment in January.
    4. The equipment was purchased December 1; it is expected to last 2 years. No depreciation has yet been recorded.
    5. The prepaid rent is for three months: December 2015, January 2016, and February 2016.
    6. Half of the unearned advertising has been earned at December 31.
    7. The $900 balance in Insurance Expense is for a one-year policy, effective August 1, 2015.

    Required: Prepare all necessary adjusting entries at December 31, 2015. Descriptions are not needed.

    PROBLEM 3–3 (LO1,2) Adjusting Entries

    The unadjusted trial balance of Mighty Fine Services Inc. includes the following account balances at December 31, 2015, its fiscal year-end. No adjustments have been recorded. Assume all accounts have normal debit or credit balances.

    Notes Receivable $10,000
    Prepaid Rent -0-
    Prepaid Insurance 600
    Unused Supplies 500
    Bank Loan 5,000
    Subscription Revenue 9,000
    Rent Expense 3,900
    Truck Operation Expense 4,000

    The following information applies to the fiscal year-end:

    1. Accrued interest of $250 has not yet been recorded on the Notes Receivable.
    2. The $600 prepaid insurance is for a one-year policy, effective September 1, 2015.
    3. A physical count indicates that $300 of supplies is still on hand at December 31.
    4. Interest on the bank loan is paid on the fifteenth day of each month; the unrecorded interest for the last 15 days of December amounts to $25.
    5. The Subscription Revenue account consists of one $9,000 cash receipt for a 6-month subscription to the corporation's Computer Trends report; the subscription period began December 1, 2015.
    6. Three days of salary amounting to $300 remain unpaid and unrecorded at December 31.
    7. The rent expense account should reflect 12 months of rent. The monthly rent expense is $300.
    8. A bill for December truck operation expense has not yet been received; an amount of $400 is owed.

    Required: Prepare all necessary adjusting entries at December 31, 2015. Descriptions are not needed.

    PROBLEM 3–4 (LO1,2) Adjusting Entries

    The following accounts are taken from the records of Bill Pitt Corp. at the end of its first 12 months of operations ended December 31, 2015, prior to any adjustments.

    In addition to the balances in each set of accounts, additional data are provided for adjustment purposes if applicable. Treat each set of accounts independently of the others.

    1. Depreciation
      Truck Expense – Truck Acc. Dep'n – Truck
      6,000 600 600

      Additional information: The truck was purchased July 1; it has an estimated useful life of 4 years.

    2. Cash Unearned Rent Rent Earned
      600 -0- 600

      Additional information: A part of the office was sublet during the entire 12 months for $50 per month.

    3. Unused Supplies Supplies Expense
      1,250

      Additional information: A physical inventory indicated $300 of supplies still on hand at December 31.

    4. Prepaid Rent Rent Expense
      1,200 4,400

      Additional information: The monthly rent is $400.

    5. Wages Expense Wages Payable
      6,000 -0-

      Additional information: Unrecorded wages at December 31 amount to $250.

    6. Bank Loan Interest Expense Interest Payable
      8,000 600 100

      Additional information: The bank loan bears interest at 10 per cent. The money was borrowed on January 1, 2015.

    7. Cash Utilities Expense Utilities Payable
      1,000 1,200 200

      Additional information: The December bill has not yet been received or any accrual made; the amount owing at December 31 is estimated to be another $150.

    8. Cash Prepaid Insurance Insurance Expense
      1,200 600 600

      Additional information: A $1,200 one-year insurance policy had been purchased effective February 1, 2015; there is no other insurance policy in effect.

    9. Unearned Rent Revenue Rent Earned
      900 -0-

      Additional information: The Unearned Rent Revenue balance applies to three months: November 2015, December 2015, and January 2016. $600 of the $900 has been earned as at December 31, 2015.

    10. Cash Other Unearned Revenue Commissions Earned
      25,200 -0- 25,200

      Additional information: $2,000 of the total $25,200 balance in commission revenue has not been earned at December 31, 2015.

    Required: Prepare all necessary adjusting entries. Include descriptions/narratives.

    PROBLEM 3–5 (LO1,2,3) Adjusting Accounts

    Roth Contractors Corporation was incorporated on December 1, 2015 and had the following transactions during December:

    Part A

    1. Issued share capital for $5,000 cash.
    2. Paid $1,200 for three months' rent: December 2015; January and February 2016.
    3. Purchased a used truck for $10,000 on credit (recorded as an account payable).
    4. Purchased $1,000 of supplies on credit. These are expected to be used during the month (recorded as expense).
    5. Paid $1,800 for a one-year truck insurance policy, effective December 1.
    6. Billed a customer $4,500 for work completed to date.
    7. Collected $800 for work completed to date.
    8. Paid the following expenses: advertising, $350; interest, $100; telephone, $75; truck operation, $425; wages, $2,500.
    9. Collected $2,000 of the amount billed in (f) above.
    10. Billed customers $6,500 for work completed to date.
    11. Signed a $9,000 contract for work to be performed in January.
    12. Paid the following expenses: advertising, $200; interest, $150; truck operation, $375; wages, $2,500.
    13. Collected a $2,000 advance on work to be done in January (the policy of the corporation is to record such advances as revenue at the time they are received).
    14. Received a bill for $100 for electricity used during the month (recorded as utilities expense).

    Required:

    1. Open general ledger T-accounts for the following: Cash (101), Accounts Receivable (110), Prepaid Insurance (161), Prepaid Rent (162), Truck (184), Accounts Payable (210), Share Capital (320), Repair Revenue (450), Advertising Expense (610), Interest Expense (632), Supplies Expense (668), Telephone Expense (669), Truck Operation Expense (670), Utilities Expense (676), and Wages Expense (677).
    2. Prepare journal entries to record the December transactions. Descriptions are not needed.
    3. Post the entries to general ledger T-accounts.

    Part B

    At December 31, the following information is made available for the preparation of adjusting entries.

    1. One month of the Prepaid Insurance has expired.
    2. The December portion of the December 1 rent payment has expired.
    3. A physical count indicates that $350 of supplies is still on hand.
    4. The amount collected in transaction (m) is unearned at December 31.
    5. Three days of wages for December 29, 30, and 31 are unpaid; the unpaid amount of $1,500 will be included in the first Friday wages payment in January.
    6. The truck has an estimated useful life of 4 years.

    Required:

    1. Open additional general ledger T-accounts for the following: Supplies (173), Accumulated Depreciation – Truck (194), Wages Payable (237), Unearned Revenue (249), Depreciation Expense – Truck (624), Insurance Expense (631), and Rent Expense (654).
    2. Prepare all necessary adjusting entries. Omit descriptions.
    3. Post the entries to general ledger T-accounts and calculate balances.
    4. Prepare an adjusted trial balance at December 31, 2015.

    PROBLEM 3–6 (LO6) Closing Accounts

    Required:

    1. Using the adjusted trial balance answer from Problem 3–5, journalize the appropriate closing entries (create additional accounts if required).
    2. Prepare a post-closing trial balance.

    PROBLEM 3–7 (LO1,2,3,4,5,6) Comprehensive Accounting Cycle Review Problem

    The unadjusted trial balance of Packer Corporation showed the following balances at the end of its first 12-month fiscal year ended August 31, 2015:

    Balance
    Debits Credits
    Cash $12,000
    Accounts Receivable 3,600
    Prepaid Insurance -0-
    Supplies 2,500
    Land 15,000
    Building 60,000
    Furniture 3,000
    Equipment 20,000
    Accumulated Depreciation – Building $-0-
    Accumulated Depreciation – Equipment -0-
    Accumulated Depreciation – Furniture -0-
    Accounts Payable 4,400
    Salaries Payable -0-
    Interest Payable -0-
    Unearned Commissions Revenue 1,200
    Unearned Subscriptions Revenue 800
    Bank Loan 47,600
    Share Capital 52,100
    Retained Earnings -0-
    Income Summary -0-
    Commissions Earned 37,900
    Subscriptions Revenue 32,700
    Advertising Expense 4,300
    Depreciation Expense – Building -0-
    Depreciation Expense – Equipment -0-
    Depreciation Expense – Furniture -0-
    Insurance Expense 1,800
    Interest Expense 2,365
    Salaries Expense 33,475
    Supplies Expense 15,800
    Utilities Expense 2,860

    Totals

    $176,700

    $176,700

    At the end of August, the following additional information is available:

    1. The company's insurance coverage is provided by a single comprehensive 12-month policy that began on March 1, 2015.
    2. Supplies on hand total $2,850.
    3. The building has an estimated useful life of 50 years.
    4. The furniture has an estimated useful life of ten years.
    5. The equipment has an estimated useful life of 20 years.
    6. Interest of $208 on the bank loan for the month of August will be paid on September 1, when the regular $350 payment is made.
    7. A review of the unadjusted balance in the unearned commissions revenue account indicates the unearned balance should be $450.
    8. A review of the unadjusted balance in the subscription revenue account reveals that $2,000 has not been earned.
    9. Salaries that have been earned by employees in August but are not due to be paid to them until the next payday (in September) amount to $325.

    Required:

    1. Set up necessary general ledger T-accounts and record their unadjusted balances. Create and assign account numbers that you deem appropriate.
    2. Prepare the adjusting entries. Descriptions are not needed.
    3. Post the adjusting entries to the general ledger T-accounts and calculate balances.
    4. Prepare an adjusted trial balance at August 31, 2015.
    5. Prepare an income statement and balance sheet.
    6. Prepare and post the closing entries.
    7. Prepare a post-closing trial balance.

    PROBLEM 3–8 (LO1,2,3) Challenge Question – Adjusting Entries

    Below is an unadjusted trial balance for Smith and Smith Co., at June 30, 2016.

    Smith and Smith Co.

    Unadjusted Trial Balance

    At June 30, 2016

    Debit Credit
    Cash $50,400
    Accounts receivable 25,000
    Shop supplies 1,500
    Prepaid insurance expense 4,500
    Prepaid advertising expense 2,000
    Prepaid rent expense
    Building 74,000
    Accumulated depreciation, building $–
    Equipment 10,000
    Accumulated depreciation, equipment 2,000
    Accounts payable 12,000
    Accrued salaries payable 15,500
    Interest payable
    Income taxes payable
    Notes payable 20,000
    Unearned service revenue 30,000
    Share capital 1,000
    Retained earnings 24,900
    Service revenue 125,000
    Salaries expense 22,000
    Insurance expense
    Interest expense
    Shop supplies expense 200
    Advertising expense 2,200
    Depreciation expense 1,400
    Maintenance service expense 5,200
    Rent expense 20,000
    Income tax expense
    Utilities expense 12,000
    $230,400 $230,400

    Additional information for June not yet recorded:

    1. Unbilled and uncollected work to June 30 totals $45,000.
    2. An analysis of prepaid advertising shows that $500 of the balance was consumed.
    3. A shop supplies count on June 30 shows that $1,200 are on hand.
    4. Equipment has an estimated useful life of ten years and an estimated residual value of $500.
    5. The records show that fifty percent of the work, for a $10,000 fee received in advance from a customer and recorded last month, is now completed.
    6. Salaries of $5,800 for employees for work done to the end of June has not been paid.
    7. Utilities invoice for services to June 22 totals $3,500.
    8. Accrued revenues of $7,800 previously recorded to accounts receivable were collected.
    9. A building was purchased at the end of May. Its estimated useful life is fifty years and has an estimated residual value of $10,000.
    10. Rent expense of $5,000 cash for July has been paid and recorded directly to rent expense.
    11. Interest for the 6% note payable has not yet been recorded for June.
    12. Income taxes of $3,000 is owing but not yet paid.
    13. Unrecorded and uncollected service revenue of $9,000 has been earned.
    14. A two year, $1,800 insurance policy was purchased on June 1 and recorded to prepaid insurance expense.
    15. The prior balance in the unadjusted prepaid insurance account (excluding the insurance in item n. above), shows that $300 of that balance is not yet used.

    Required:

    1. Prepare the adjusting and correcting entries for June.
    2. Prepare an adjusted trial balance at June 30, 2016.

    PROBLEM 3–9 (LO4) Challenge Question – Preparation of Financial Statements

    Using the adjusted trial balance in PROBLEM 3–8 above:

    Required: Prepare an income statement, statement of changes in equity and a balance sheet as at June 30, 2016. (Hint: For the balance sheet, also include a subtotal for each asset's book value).

    PROBLEM 3–10 (LO6) Closing Entries and Post-Closing Trial Balance

    Required: Using the adjusted trial balance in PROBLEM 3–8 above:

    1. Assuming that June 30, 2016, is the year-end, prepare the closing journal entries.
    2. Prepare a post-closing trial balance at June 30, 2016.
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