Part 1 - Accounting in Business · Web view2021. 3. 26. · Question 1.1 Classifying accounts....

ContentsPart 1 - Accounting in Business.....................................................................................................................3

Question 1.1 Classifying accounts.........................................................................................................3

Question 1.2.1 Introduction to income statements.................................................................................4Question 1.2.2 Introduction to statements of changes in equity............................................................5

Question 1.2.3 Introduction to balance sheets.......................................................................................6Question 1.3 Analyzing transactions and preparing financial statements.............................................7

Part 2 – Analyzing and Recording Transactions............................................................................................9Question 2.1 Analyzing transactions.....................................................................................................9

Question 2.2 Analyzing and journalizing revenue transactions...........................................................11Question 2.3 Analyzing and journalizing expense transactions..........................................................12

Question 2.4.1 Preparing and posting journal entries; preparing a trial balance.................................13Question 2.4.2 Preparing financial statements from a trial balance....................................................16

Part 3 – Adjusting Accounts for Financial Statements................................................................................17Question 3.1 Preparing adjusting entries (annual)—prepaid expense.................................................17

Question 3.2 Preparing adjusting entries (annual)—unearned revenue...............................................18Question 3.3 Preparing adjusting entries (annual)—accrued expenses and revenue...........................19

Question 3.4 Adjusting entries (annual)..............................................................................................20Question 3.5 Adjusting entries (annual) from unadjusted trial balance...............................................22

Part 4 – Completing the Accounting Cycle and Classifying Accounts.......................................................25Question 4.1 Closing entries................................................................................................................25

Question 4.2 Adjusting entries and closing entries..............................................................................27Question 4.3 Preparing a Classified Balance Sheet.............................................................................31

Question 4.4 Preparing closing entries and the post-closing trial balance..........................................33Part 5 – Accounting for Merchandising Activities......................................................................................35

Question 5.1 Calculating expenses and income...................................................................................35Question 5.2 Recording journal entries for merchandise transactions—periodic...............................36

Question 5.3 Income statement - periodic inventory system...............................................................37Question 5.4 Recording journal entries for merchandise transactions—perpetual..............................39

Question 5.5 Income Statements—Perpetual......................................................................................41Part 6 – Inventory Costing and Valuation....................................................................................................44

Question 6.1 Alternative Cost Flow Assumptions - Perpetual Inventory System...............................44Question 6.2 Alternative Cost Flow Assumptions - Perpetual Inventory System...............................47

Question 6.3 Lower of Cost and Net Realizable Value.......................................................................50Question 6.4 Lower of Cost and Net Realizable Value.......................................................................52

Part 7 – Internal Control and Cash...............................................................................................................54

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Question 7.1 Preparation of Bank Reconciliation and Recording Adjustments..................................54Question 7.2 Preparation of Bank Reconciliation and Recording Adjustments..................................58

Part 8 - Receivables.....................................................................................................................................62Question 8.1 Balance Sheet Presentation.............................................................................................62

Question 8.2 Estimating bad debt expense—Aging analysis..............................................................63Question 8.3 Estimating bad debt expense—percentage of sales........................................................64

Question 8.4 Estimating bad debt expense—percentage of receivables..............................................66Question 8.5 Estimating bad debt expense—Direct write-off method................................................68

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Part 1 - Accounting in Business

Question 1.1 Classifying accounts

Below is a list of accounts that you may find in a chart of accounts for a business. Organize the accounts by categorizing all of the following accounts into a table with the headings from a balance sheet, income statement, and statement of changes in equity. Some accounts may be used more than once.

Accounts Payable Accounts Receivable Advertising Expense Insurance ExpenseOwner's Capital, Ending balance

Interest Payable Rent Revenue Interest Expense

Withdrawals Owner's Capital, Beginning balance

Prepaid Rent Vehicle Expenses

Bank Loan Payable Salaries Expense Service Revenue LandUnearned Revenue Cash Telephone Expense Investment by OwnerSupplies Wages Expense Cost of Goods Sold Rent ExpenseMerchandise Inventory

Utilities Expense Vehicles Salaries Payable

Building Prepaid Subscription Equipment Supplies Expense

Balance SheetIncome Statement Statement of

Changes in Equity

Assets Liabilities Owner’s Equity

Revenues Expenses

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Question 1.2.1 Introduction to income statements

On April 1 Andrew Comerford decided to turn his passion for photography into a business, Picture Perfect Ltd.. On April 30 the company’s general ledger showed the following balances. Use this information to prepare an April income statement for the business.

Cash $11,000 Photoshoot Revenue $17,000

Supplies 14,000 Rent Expense 1,800

Equipment 12,000 Supplies Expense 2,600

Accounts Payable 5,500 Utilities Expense 950

Notes Payable 11,900 Advertising Expense 1,200

Owners Investment 9,500 Interest Expense 350

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Question 1.2.2 Introduction to statements of changes in equity

Use the information from question 1.2.1 to prepare an April statement of changes in equity for Perfect Picture Ltd..

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Question 1.2.3 Introduction to balance sheets

Use the information from question 1.2.1 and question 1.2.2 to prepare an April 30 balance sheet for Picture Perfect Ltd.

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Question 1.3 Analyzing transactions and preparing financial statements

Emilija Hilton started a new architecture firm called Genuine Drawings. The following activities occurred during its first month of operations, July:July 1 Hilton invested $40,000 cash and office equipment valued at $10,000 in the business.July 3 Signed a lease for a small building to pay $1,500 to be used as an office. Prepaid the first six

months of rent.July 3 Took a small business loan out for $10,000 from the local credit union.July 4 Purchased $2,500 of office supplies with cash.July 5 Purchased a $4,600 drafting table on credit.July 8 Hilton committed to a recruitment agency to help find an associate architect in the following year,

the deposit is due in November.July 16 Completed a project on credit and billed the client $4,800 for the work.July 18 Advertised the new business on the radio for $850.July 20 Completed a project for a client and collected $6,000 cash.July 22 Made a $3,500 payment on the drafting table from July 5.July 25 Received $2,200 from the customer from July 16.July 27 Paid $650 cash for the utilities bill.July 29 Hilton withdrew $5,600 cash from the company bank account to pay personal living expenses.

T-Charts:

Cash

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Prepare an income statement, a statement of changes in equity, and a balance sheet

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Part 2 – Analyzing and Recording Transactions Question 2.1 Analyzing transactions

Glenn Mcfarlane is a personal injury lawyer and owns the business Clumsy Payday Law, or CP Law for short. This is his first month of operations and he has the following transactions which must be recorded. For each transaction, determine the accounts used, categorize the account, show if the balance of the accounts is increasing or decreasing using arrows, and assign debit or credit to each account. Afterwards, enter all of the transactions into the general journal.

On May 1, Glenn Mcfarlane invested $23,900 cash into his business.

On May 3, Mcfarlane purchased $720 of office supplies for cash.

On May 6, Mcfarlane purchased $15,600 of office equipment on credit.

On May 11, Mcfarlane received $5,200 cash as revenue for a unsalted sidewalk settlement for his client.

On May 13, Mcfarlane paid for half of the office equipment purchased on May 6.

On May 17, Mcfarlane sent a bill to a client for an initial consult of $800.

On May 21, Mcfarlane paid June rent for his office with $1,700 cash.

On May 26, Mcfarlane collected cash for all of the account receivable created on May 17.

On May 29, Mcfarlane withdrew $3,000 cash from the business to give to his daughter for college.

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Date Account Titles and Explanation PR Debit Credit

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Question 2.2 Analyzing and journalizing revenue transactions

Examine the following transactions and identify those that created revenues for RJ Equipment repairs, a sole proprietorship owned by Rod James. Prepare general journal entries to record the revenue transactions. Explain why the other transactions did not create revenues.

December 8 Invested $56,500 cash in the business.

December 12 Provided $3,700 of services on credit.

December 15 Received $4,200 cash for services provided to a client.

December 17 Received $11,300 from a client in payment for services to be provided next year.

December 24 Received $1,000 from a client in partial payment of an account receivable.

December 29 Borrowed $80,000 from the bank as a business loan.


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Question 2.3 Analyzing and journalizing expense transactions

Examine the following transactions and identify those that were expenses for Extreme Fitness, a local fitness studio owned by Juan Rodrigo. Prepare journal entries to record the expense transactions and explain why the other transactions did not create expenses.

January 4 Purchased office supplies on credit for $1,870.

January 7 Paid the $1,125 salary of the front desk clerk.

January 10 Paid $2,100 to the bank for the principle of the business loan owing.

January 13 Paid utility bill with $630 cash.

January 20 Withdrew $4,000 from the business account for personal use.

January 27 Received the January telephone bill for $120 due next month.


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Question 2.4.1 Preparing and posting journal entries; preparing a trial balance

Gerard Churchill has decided to use his exceptional accounting skills along with his natural ability to sell. Churchill opened up Future Savings Financial Services and had the following transactions in the first month. Prepare journal entries to record the transactions. Use the T-accounts to maintain balances. Prepare a Trial Balance at December 31.

December 1 Invested $36,500 cash and $33,000 of office equipment in the business.

December 1 Signed a lease on a new office and prepaid the first three months of rent for $12,900.

December 2 Purchased $4,200 worth of office supplies on credit.

December 6 Completed a weekend workshop for a local training company and was paid $7,500 cash.

December 9 Provided advice to a wealthy family and billed them for $11,200.

December 10 Paid half of the account payable from the December 2 bill.

December 12 Purchased a $7,200 annual premium for business insurance.

December 18 Paid salaries of staff for $7,800.

December 23 Withdrew $2,400 cash for Christmas gifts.

December 30 Paid $800 for this month’s utilities bill.


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Cash

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Question 2.4.2 Preparing financial statements from a trial balance

Using the trial balance prepared for Future Savings Financial Services in Question 2.4.1, prepare an income statement and statement of changes in equity for the month ended December 31, and a balance sheet at December 31.

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Part 3 – Adjusting Accounts for Financial Statements Question 3.1 Preparing adjusting entries (annual)—prepaid expense

Dr. Erica Chan, MD owns EC Health Clinic. She prepares annual financial statements and has a December 31 year-end.

On October 1 Dr. Chan prepaid $8,000 for four months of rent. On November 1 Dr. Chan prepaid $480 to renew the clinic's magazine subscriptions. The

subscription is for one year. On December 1 Dr. Chan pays $3,000 for supplies. At the end of the year, $2,000 of supplies had

not been used.

Required For each transaction, record the initial journal entry and the adjusting entry required on December 31.


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Question 3.2 Preparing adjusting entries (annual)—unearned revenue

Dynamic Music is a centre that offers piano and clarinet lessons. Dynamic Music prepares annual financial statements and has a December 31 year-end.

a. On September 1, Dynamic Music collects $12,000 cash for piano lessons running from September 1 to December 31.

b. On October 1 Dynamic Music collects $8,000 cash for four months of clarinet lessons. The lessons run from October 1 to January 31 the following year.

c. On October 1 Dynamic Music collects $12,000 cash for four months of clarinet lessons. The lessons run from October 1 to January 31 the following year.

For each transaction, record the initial journal entry and the adjusting entry required on December 31.


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Question 3.3 Preparing adjusting entries (annual)—accrued expenses and revenue

Go Go Go Karts is a centre that offers indoor Go Karting for groups. Go Go Go Karts prepares annual financial statements and has a December 31 year-end.

a. On June 1 Go Go Go Karts took out a five-year, $150,000 bank loan with an interest rate of 3%. Interest expense is paid on the first day of each month.

b. On July 1 Go Go Go Karts issued a two-year, $40,000 Note Receivable with an interest rate of 10%. Interest income will be collected on January 1 and July 1 of each year.

c. On December 15 Go Go Go Karts took a high school class for $2,000. The student club was invoiced on December 31st and pays Go Go Go Karts on January 15 the following year.

Record the adjusting journal entries at December 31.


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Question 3.4 Adjusting entries (annual)

On January 1, Tonisha Graham started a business of recording voice overs for commercials online. Tonisha charges $30 an hour for voice over work. The following are her transactions for the year.

a. On January 1, Tonisha purchased a computer $1,800 cash. The computer has to be upgraded in two years to stay up to date with the competitors, after which it will be donated to the local library.

b. On March 1, Tonisha paid $600 cash for one-year of insurance coverage.

c. On July 1, Tonisha purchased supplies from the local office supplies store for $380 cash. At the end of the year, $170 was left.

d. On November 1, a client paid cash for six hours of voice over work per month for three months beginning immediately.

e. Tonisha completed voice over work on a cartoon for six hours on December 29 and sent the bill which was paid a month later.

f. At the end of December Tonisha received her December business cell phone bill for $95. The bill is due January 25.

Assume Tonisha Graham uses Straight Line Method to depreciate assets.

Journalize the transactions at the initial time of the transaction and then the adjusting entries on December 31.


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Question 3.5 Adjusting entries (annual) from unadjusted trial balance

Elliot & Freeman Management Consulting is just finishing its third year of operations. The company's unadjusted trial balance at October 31 follows:

Elliot & Freeman Management ConsultingUnadjusted Trial Balance

October 31

AccountsDebit Credit

Cash $ 31,000

Accounts receivable 56,000

Interest receivable -

Notes receivable 40,000

Supplies 7,000

Prepaid insurance 1,600

Prepaid rent 27,000

Office furniture 96,000

Accumulated depreciation, office furniture 28,000

Accounts payable 13,000Wages payable -Unearned consulting revenue 13,000Freeman, capital 250,000

Freeman, withdrawals 34,000

Consulting revenue 229,780Interest Income 2,620Depreciation expense, office furniture -

Wages expense 190,600

Insurance expense -

Rent expense 44,000

Supplies expense 9,200

Totals 536,400

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536,400

Elliot & Freeman Management Consulting prepares adjustments each October 31. The following additional information is available on October 31.

a. After a report from the management consultants, it was determined that $8,000 of the unearned revenues had not been realized.

b. The report also determined that $10,000 of the revenue that was already expected to be completed and journalized had been postponed and won’t be completed until November.

d. Accrued wages at October 31 totalled $7,200.

e. A count of the supplies on October 31 revealed a balance remaining of $1,620.

f. The office furniture was purchased on March 1 of this year and has an estimated useful life of two years. After two years of use, it is expected that the furniture will be worthless.

g. Interest of $115 had accrued on the note receivable for the month of October.

h. The balance in the Prepaid Insurance account represents the balance of a two-year policy purchased on March 1 of this year.

i. The balance in the Prepaid Rent account represents three months of rent beginning August 1.

Elliot & Freeman Management Consulting uses Straight Line Method to depreciate assets.

Prepare the annual adjusting journal entries for October 31 based on the above.


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Part 4 – Completing the Accounting Cycle and Classifying Accounts Question 4.1 Closing entries

Prepare the closing entries for Elliot & Freeman Management Consulting using the adjusted trial balance, with accounts in alphabetical order, as at December 31.

Elliot & Freeman Management ConsultingTrial BalanceDecember 31


Accounts payable $ 13,000Accounts receivable $ 56,000Accumulated depreciation, office furniture 40,000Cash 31,000Consulting revenue 229,880Depreciation expense, office furniture 12,000Freeman, capital 250,000Freeman, withdrawals 24,000Insurance expense 1,200Interest Income 2,820Interest receivable 200Notes receivable 40,000Office furniture 96,000Prepaid insurance 500Prepaid rent 27,000Rent expense 44,000Supplies 7,000Supplies expense 9,200Unearned consulting revenue 3,000Wages expense 191,800

Wages payable 1,200 Totals $ 539,900 $ 539,900

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Question 4.2 Adjusting entries and closing entries

Jared Wilson opened up a fire suppression firm that services restaurants and camps for their fire safety equipment called Wilson Fire Safety. He also provides training for groups for companies to enhance safety on the worksite. The unadjusted trial balance is as follows:

Wilson Fire SafetyTrial BalanceDecember 31


Accounts payable and Accrued Liabilities $ 4,300Accounts receivable $ 7,200Accumulated depreciation, office furniture 5,900Cash 11,200Depreciation expense, office furniture -Insurance expense 1,050Interest expense 200Jared Wilson, capital 33,200Jared Wilson, withdrawals 12,000Notes receivable 1,000Office furniture 22,000Patent 6,500Rent expense 7,500Revenue 64,500Supplies 7,000Supplies expense 9,200Telephone expense 2,750Unearned revenue 10,100Wages expense 31,600

Wages payable 1,200 Totals $ 119,200 $ 119,200

The following adjustments need to be made before the closing entries can be made.a. On December 28, Wilson Fire Safety provided training to a camp services company. An invoice

had not been sent yet to the business for $3,000.

b. On December 31, Wilson Fire Safety received the telephone bill for the month of December for $250, due in January.

c. The office furniture has an estimated useful life of 20 years with no salvage value. Straight line depreciation is used.

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d. On December 31, Wilson Fire Safety completed the two-month online training for people across the province. All of the entries had been prepaid in October for a total of $7,600.

Prepare the missing adjusting entries for transactions. Prepare an adjusted trial balance. Based on your new adjusted trial balance, prepare the closing entries.


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Wilson Fire SafetyTrial BalanceDecember 31


Accounts payable and Accrued LiabilitiesAccounts receivableAccumulated depreciation, office furnitureCashDepreciation expense, office furnitureInsurance expenseInterest expenseJared Wilson, capitalJared Wilson, withdrawalsNotes receivableOffice furniturePatentRent expenseRevenueSuppliesSupplies expenseTelephone expenseUnearned revenueWages expense

Wages payable Totals

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Question 4.3 Preparing a Classified Balance Sheet Use the following adjusted trial balance of Rosario Moving Company to prepare a classified balance sheet as of December 31.

Rosario Moving CompanyTrial BalanceDecember 31


Cash $ 14,500Accounts receivable 31,500Office Supplies 4,460Trucks 170,000Accumulated Depreciation, trucks $ 46,000Land 289,000Accounts Payable 28,500Interest Payable 350Long-term notes payable (due in 6 years) 140,000Halima Rosario, capital 244,110Halima Rosario, Withdrawals 22,000Moving Revenue 168,000Depreciation Expense, trucks 22,500Salaries Expense 59,800Office supplies Expense 5,300Repairs expense, trucks 7,900 Totals $ 626,960 626,960

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Question 4.4 Preparing closing entries and the post-closing trial balance

The adjusted trial balance at December 31 for Anya and Co. follows.

Anya and CoTrial BalanceDecember 31


Cash $4,500Accounts receivable 12,000Equipment 34,000Accumulated depreciation, equipment 8,000Patent 19,000Notes Receivable 45,000Accounts Payable 5,500Salary Payable 2,400Unearned Revenue 3,500Aya Sheridan, capital 76,560Aya Sheridan, withdrawals 4,400Electrical revenue 50,200Depreciation expense, equipment 4,000Salaries expense 18,640Rent expense 2,500Insurance expense 640Utilities expense 1,480Income Summary

Totals $ 146,160 146,160

Prepare the four closing entries and prepare a post-closing trial balance.


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AdjustedTrial Balance

Account Title Dr. Cr.

Part 5 – Accounting for Merchandising Activities

Question 5.1 Calculating expenses and income

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Determine each of the missing numbers in the following situations:

Company A Company B Company C

Purchases $94,000 $157,000 $122,000

Purchase discounts (5,000) (3,600)

Purchase returns and allowances (6,500) (4,400)

Transportation-in 4,400 16,000 17,000

Cost of goods purchased $89,400 $156,000 $129,000

Beginning inventory $ 6,000 $ 35,000

Cost of goods purchased 89,400 154,000

Ending inventory (5,400) (29,000)

Cost of goods sold $166,400 $136,520

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Question 5.2 Recording journal entries for merchandise transactions—periodic

Journalize the following merchandising transactions for Silva Parts and Service assuming a periodic system:February 1 Silva Parts and Service purchase merchandise for $3,700 on credit with terms 2/10, n/30.February 3 Silva Parts and Service pays for previous purchaseFebruary 8 Silva Parts and Service receives payment for returned defective merchandise of $750 that

was purchased on February 1.February 11 Silva Parts and Service pays $300 for freight to its store.February 15 Silva Parts and Service sells merchandise on account for $6,500. The cost of the

merchandise was $4,200.February 19 A customer returns merchandise from the February 15 transaction. The return item sold

for $1,150 and cost $640. The item will be returned to inventory.


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Question 5.3 Income statement - periodic inventory system

The following amounts appeared on the Anya and Co's adjusted trial balance as of December 31, the end of its fiscal year:

Anya and CoTrial BalanceDecember 31


Merchandise Inventory $1,400Other Assets 40,000Liabilities $36,340Rental Income 150Sales 96,400Sales Returns and Allowances 7,500Sales Discounts 1,125Purchases 43,500Purchase Returns and Allowances 2,150Purchase Discounts 900Anya Surano, Withdrawals 3,200Anya Surano, Capital 37,375Transportation-in 5,050Salaries Expense - Sales Staff 17,800Salaries Expense - Office Staff 22,000Rent Expense - Show room 9,200Rent Expense - Office 7,600Advertising Expense 9,000Office Supplies Expense 2,940

Totals $ 170,315 $ 173,315

A physical count shows that the cost of the ending inventory is $11,200.

Present a multiple-step income statement and a condensed single-step income statement.

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Question 5.4 Recording journal entries for merchandise transactions—perpetual

Journalize the following merchandising transactions for McKinney Campgear assuming a perpetual system:

September 1 McKinney Campgear purchase merchandise from Villa Steel for $3,700 on credit with terms 2/15, n/30. FOB shipping point.

September 3 McKinney Campgear pays $300 for freight to its store.September 8 McKinney Campgear returns unacceptable merchandise to Villa Steel with an invoice

price of $500.September 11 McKinney Campgear pays for previous purchase from Villa Steel.September 15 McKinney Campgear purchase merchandise from Quality Polyester for $8,700 on credit

with terms 2/10, n/30. FOB shipping point.September 18 McKinney Campgear received a $2,100 allowance on the purchase from September 15.September 19 McKinney Campgear sold merchandise for $8,700 cash to Trinity Camps with a cost of

$3,900.September 27 McKinney Campgear paid Quality Polyster the remaining balance.


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Question 5.5 Income Statements—Perpetual

The following adjusted trial balance for Mullins Inc.was prepared at the end of the fiscal year, December 31:

Mullins Inc.Trial BalanceDecember 31


Merchandise Inventory $1,400Other Assets 45,000Liabilities $ 36,340Interest Expense 150Sales 96,400Sales Returns and Allowances 7,500Sales Discounts 1,125Cost of Goods Sold 43,500Moshin Mullins, Withdrawals 3,200Moshin Mullins, Capital 61,525Salaries Expense - Sales Staff 17,800Salaries Expense - Office Staff 22,000Insurance Expense - Show Room 1,400Insurance Expense - Office 1,650Depreciation Expense - Show Room 8,500Depreciation Expense - Office 12,600Rent Expense - Show Room 9,200Rent Expense - Office 7,600Advertising Expense 9,000Office Supplies Expense 2,940

Totals $ 194,415 $ 194,415

1. Prepare a classified multiple-step income statement that would be used by the business's owner.

2. Prepare a multiple-step income statement that would be used by external users.

3. Prepare a single-step income statement that would be provided to decision makers outside the company.

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Part 6 – Inventory Costing and Valuation Question 6.1 Alternative Cost Flow Assumptions - Perpetual Inventory System

Mclaughlin Harmonicas sells a wide variety of harmonicas and supporting items. The following is information on the purchases and sales of their top selling harmonica which sells for $65.

Date Description Units Unit Costs

July 1 Beginner Inventory 15 $28

July 3 Purchase 60 $33


July 17 Sale 45


July 31 Sale 120

Calculate the cost of goods sold and ending inventory under the perpetual inventory system using

1. First in First Out.

2. Moving weighted average. Round all unit costs to two decimal places and round all other numbers to the nearest dollar.

3. Specific Identification. The 165 units sold were specifically sold as follows:

July 17 5 units from beginning inventory, 20 units from July 3 inventory, and 20 units from July 6.

July 31 30 units from July 3 inventory, 70 units from July 6 inventory, and 20 units from July 23 inventory.

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Date Purchase Sale Balance


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Question 6.2 Alternative Cost Flow Assumptions - Perpetual Inventory System

Keeling Golf Balls sells tournament level golf ball sleeves. The following is information on the purchases and sales of their top selling golf ball sleeves.

Date Description Units Unit Cost/Price

March 1 Beginner Inventory 140 $5.50

March 2 Sale 70 $20.00

March 3 Purchase 280 $5.95

March 6 Sale 110 $20.00



March 31 Sale 600 20.00

Calculate the cost of goods sold and ending inventory under the perpetual inventory system using

1. First in First Out.

2. Moving weighted average. Round all unit costs to two decimal places and round all other numbers to the nearest dollar.

3. Specific Identification. The 780 units sold were specifically sold as follows:

March 2 70 units from beginning inventory

March 17 50 units from beginning inventory, 60 units from March 3 inventory.

March 31 20 units from beginning inventory, 380 units from March 17 inventory, and 200 units from March 23 inventory.

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Question 6.3 Lower of Cost and Net Realizable Value

Surfworld is a surfing mega store off the California coast. Heading into low season, they gather the following information regarding their inventory.

Per UnitProduct Units on

HandCost NRV

Surfboards: O’Nice Smooth 315 $580 $615 Billa Water 280 490 420 Wavefront 245 415 425

Wakeboards: Shortboard S300 473 285 335 Foam Master 5 281 260 248 Sand Stainer 185 245 223

Wetsuits: Double Layer X3 165 80 110 Slim Slip 120 65 105

1) Calculate the LCNRV:a) For the inventory by major groupb) For the inventory, applied separately to each product.

2) Prepare the appropriate entry, if any, for 1(a) and 1(b).

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Per Unit LCNRV applied to:

Inventory Items

Units on

Hand Cost NRVTotal Cost

Total NRV

a. Major Group

b.Separately

to EachProduct


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Question 6.4 Lower of Cost and Net Realizable Value

Golf City is a major golf store in Saskatchewan. Heading into winter, they gather the following information regarding their inventory.

Per UnitProduct Units on

HandCost NRV

Drivers: Big Barry 3.2 285 $185 $205 Desblast 9 305 205 190 Chonker 8 605 145 150

Iron Sets: P182 212 245 185 Series Y Fat 311 268 275 Recover 9 279 290 285

Putters: Pendulum 2 168 105 102 Soft Shot X 128 45 40

1) Calculate the LCNRV for the:a) Inventory by major categoryb) Inventory, applied separately to each product.

2) Prepare the appropriate entry, if any, for (a) and (b).

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Per Unit LCNRV applied to:

Inventory Items

Units on

Hand Cost NRVTotal Cost Total NRV

a. Major Group

b.Separately

to EachProduct


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Part 7 – Internal Control and Cash Question 7.1 Preparation of Bank Reconciliation and Recording Adjustments

The bank reconciliation prepared by June Bug Inc on June 30, appeared as follows:

June Bug Inc.Bank Reconciliation

June 30Bank Statement Balance $ 12,351.18 Book Balance $ 16,874.59Add:

Deposit of June 30 in transit 1,208.51

13,559.69Deduct: Deduct:

Outstanding cheques: NSF cheque plus#265 $ 455.85 service charge: $ 5,035.75#276 1,400.00 1,855.85 Bank service charge 135.00 5,170.75

Adjusted bank balance $ 11,703.84 Adjusted book balance $ 11,703.84

The Cash account in the general ledger appeared as follows on July 31:

Cash - Acct No 1001Date Explanation PR Debit Credit Balance

July 1 Balance $11,703.84

1 Cheque # 280 GJ458 $ 1,269.88

10,433.96

1 Cheque # 281 GJ459 1254.32 9,179.644 Cheque # 282 GJ460 741.59 8,438.056 Cheque # 283 GJ461 455.85 7,982.207 Cheque # 284 GJ462 1748.44 6,233.768 Deposit GJ463 $ 3,751.56 9,985.32

12 Cheque # 285 GJ464 1375.06 8,610.2612 Cheque # 286 GJ465 1374.67 7,235.5914 Cheque # 287 GJ466 647.32 6,588.2718 Cheque # 288 GJ467 1153.06 5,435.2119 Deposit GJ468 4,611.27 10,046.4820 Cheque # 289 GJ469 2386.52 7,659.9624 Cheque # 290 GJ470 304.05 7,355.9125 Cheque # 291 GJ471 337.08 7,018.8331 Deposit GJ472 4,152.36 11,171.19

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The following bank statement is available for July:

Bank StatementTo: June Big Inc.

July 31

Cheques/Charges Deposits/Credits Balance

July 1 Balance $12,351.181 Deposit $1,208.51 13,559.696 Cheque # 280 $1,269.88 12,289.818 Cheque # 282 741.59 11,548.228 Cheque # 265 455.85 11,092.379 Cheque # 284 1,748.44 9,343.939 Deposit 3,751.56 13,095.49

14 Cheque # 286 1,374.67 11,720.8215 Cheque # 287 674.32 11,046.5018 Cheque # 285 1,375.06 9,671.4420 Deposit 4,611.27 14,282.7123 Cheque # 289 2,386.52 11,896.1928 Cheque # 291 337.08 11,559.1131 Interest 4.50 11,563.6131 Service Charge 60.00 11,503.61

Prepare a bank reconciliation at July 31 Assume that any errors made were by the bookkeeper (cheque #287 was for office supplies).

Prepare the necessary entries resulting from the bank reconciliation.

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Question 7.2 Preparation of Bank Reconciliation and Recording Adjustments

The bank reconciliation prepared by Chapman Inc. on September 30 appeared as follows:

Chapman Inc.Bank Reconciliation

September 30Bank Statement Balance $ 16,518.15 Book Balance $ 34,648.55Add:

Deposit of Sept 30 in transit 17,351.00 33,869.15

Deduct: Deduct:

Outstanding cheques: Interest Payment $ 450.00

#551 $ 2,945.15 Principle Payment $ 4,500.00

#558 850.45 3,795.60 Bank service charge 75.00 4,575.00

Adjusted bank balance $ 30,073.55 Adjusted book balance $ 30,073.55

The Cash account in the general ledger appeared as follows on October 31:

Cash - Acct No 1001Date Explanation PR Debit Credit BalanceOctober 1 Balance $30,073.55

1 Cheque # 565 GJ121 $ 1,235.26 28,838.292 Cheque # 566 GJ122 850.07 27,988.223 Cheque # 567 GJ123 1,354.71 26,633.516 Cheque # 568 GJ124 858.71 25,774.806 Cheque # 569 GJ125 1,253.92 24,520.888 Deposit GJ126 3,193.93 27,714.81

12 Cheque # 570 GJ127 810.37 26,904.4412 Cheque # 571 GJ128 1,458.10 25,446.3414 Cheque # 572 GJ129 816.54 24,629.7918 Cheque # 573 GJ130 1,014.34 23,615.4519 Deposit GJ131 1,139.68 24,755.1320 Cheque # 574 GJ132 2,386.52 22,368.6224 Cheque # 575 GJ133 780.85 21,587.7725 Cheque # 576 GJ134 925.60 20,662.1631 Deposit GJ135 1,264.08 21,926.25

The following bank statement is available for October:

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Bank StatementTo: Chapman Inc.

October 31

Cheques/Charges Deposits/Credits Balance

October 1 Balance $16,518.151 Deposit $17,351.00 33,869.153 Cheque # 551 $2,945.15 30,924.008 Cheque # 565 1,235.26 29,688.748 Cheque # 568 858.71 28,830.039 Cheque # 569 1,253.92 27,576.119 Deposit 3,193.93 30,770.04

17 Cheque # 572 816.54 29,953.5019 Cheque # 558 850.45 29,103.0521 NSF Cheque 1,284.83 27,818.2220 Deposit 1,139.68 28,957.9026 Cheque # 574 2,386.52 26,571.3828 Cheque # 575 780.85 25,790.5331 Cheque # 571 1,458.10 24,332.4331 Principle 4,500.00 19,832.4331 Interest 440.00 19,392.4331 Service Charge 60.00 19,332.43

Prepare a bank reconciliation at October 31. The NSF cheque was for a customer payment Jessica Pearson.

Prepare the necessary entries resulting from the bank reconciliation.

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Part 8 - Receivables Question 8.1 Balance Sheet Presentation

From the following alphabetized list of adjusted account balances, prepare the current asset section of Richmond Supplies August 31 balance sheet.

Cash $4,500Accounts receivable 120,000Accumulated depreciation, equipment 8,000Allowance for doubtful accounts 3,350Bad debt expense 1,900Building 135,000Equipment 34,000Notes Receivable 45,000Patent 19,000Supplies 3,500

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Question 8.2 Estimating bad debt expense—Aging analysis

Chang Foods had an unadjusted credit balance in its Allowance for Doubtful Accounts at December 31 of $2,100.

Prepare the adjusting entry assuming that Chang estimates uncollectible accounts based on an aging analysis as follows:

December 31 Age of Accounts Expected PercentageAccounts Receivable Receivable Uncollectible

$140,000.00 Not Due 1%25,000.00 1-30 days past due 5%4,500.00 31-60 days past due 12%1,500.00 Over 60 days past due 50%

Accounts Receivable Chart


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Question 8.3 Estimating bad debt expense—percentage of sales

Selected unadjusted account balances at December 31, are shown below for Fizbeau Sales.

Account Debit CreditAccounts receivable $80,000Allowance for doubtful accounts $2,200Sales (on credit) 525,000Sales discounts $6,500

Fizbeau estimates that 1.5% of net credit sales will prove to be uncollectible. Prepare the adjusting entry required on December 31 to estimate uncollectible receivables.


During the following year, credit sales were $580,000 (cost of sales $394,500); sales discounts of $14,000 were taken when accounts receivable of $485,000 were collected; and accounts written off during the year totalled $14,000. Prepare the entries for these transactions.


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Record the adjusting entry required on December 31 to estimate uncollectible receivables, assuming it is based on 1.0% of net credit sales.


Show how accounts receivable would appear on the December 31 balance sheet.

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Question 8.4 Estimating bad debt expense—percentage of receivables

Selected unadjusted account balances at December 31, are shown below for Shark Servicing.

Account Debit CreditAccounts receivable $80,000Allowance for doubtful accounts $2,200Sales (on credit) 525,000Sales discounts $6,500

Assume that Shark estimates uncollectible accounts as 2% of receivables. Prepare the adjusting entry required on December 31 to estimate uncollectible receivables.


During the following year, credit sales were $580,000 (cost of sales $394,500); sales discounts of $14,000 were taken when accounts receivable of $485,000 were collected; and accounts written off during the year totalled $14,000. Prepare the entries for these transactions.


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Record the adjusting entry required on December 31, of the following year, to estimate uncollectible receivables, assuming it is based on 2% of receivables.


Show how accounts receivable would appear on the December 31 balance sheet.

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Question 8.5 Estimating bad debt expense—Direct write-off method

Shabaz Wells owns and operates Wells Sewing Machine Repair. She doesn’t have many customers and most pay cash so she uses the direct write-off method to account for uncollectible accounts receivable. On June 18, after seeing the obituaries in the paper, she determined that the Silas Callahan account would be uncollectable. The account was for $780. During the year, she had total credit sales of $115,400 and her balance of accounts receivable was $8,800.

Record the June 18 write-off using the direct write-off method.


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