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Chapter2: Review of the Accounting Process

Problems

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An alternate exercise and problem set is available on the text website: www.mhhe.com/spiceland6e

P 2-1

 

Accounting cycle through unadjusted trial balance

 

 LO2 LO3

Halogen Laminated Products Company began business on January 1, 2011. During January, the following transactions occurred:

Jan.

  

Issued common stock in exchange for $100,000 cash.

  

Purchased inventory on account for $35,000 (the perpetual inventory system is used).

  

Paid an insurance company $2,400 for a one-year insurance policy.

10 

  

Sold merchandise on account for $12,000. The cost of the merchandise was $7,000.

15 

  

Borrowed $30,000 from a local bank and signed a note. Principal and interest at 10% is to be repaid in six months.

20 

  

Paid employees $6,000 wages for the first half of the month.

22 

  

Sold merchandise for $10,000 cash. The cost of the merchandise was $6,000.

24 

  

Paid $15,000 to suppliers for the merchandise purchased on January 2.

26 

  

Collected $6,000 on account from customers.

28 

  

Paid $1,000 to the local utility company for January gas and electricity.

30 

  

Paid $4,000 rent for the building. $2,000 was for January rent, and $2,000 for February rent.

p. 103

Required:

1.

 

Prepare general journal entries to record each transaction. Omit explanations.

2.

 

Post the entries to T-accounts.

3.

 

Prepare an unadjusted trial balance as of January 30, 2011.

P 2-2

 

Accounting cycle through unadjusted trial balance

 

 LO2 LO3

The following is the post-closing trial balance for the Whitlow Manufacturing Corporation as of December 31, 2010.

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The following transactions occurred during January 2011:

Jan.

  

Sold merchandise for cash, $3,500. The cost of the merchandise was $2,000. The company uses the perpetual inventory system.

  

Purchased equipment on account for $5,500 from the Strong Company.

  

Received a $150 bill from the local newspaper for an advertisement that appeared in the paper on January 2.

  

Sold merchandise on account for $5,000. The cost of the merchandise was $2,800.

10 

  

Purchased merchandise on account for $9,500.

13 

  

Purchased equipment for cash, $800.

16 

  

Paid the entire amount due to the Strong Company.

18 

  

Received $4,000 from customers on account.

20 

  

Paid $800 to the owner of the building for January’s rent.

30 

  

Paid employees $3,000 for salaries for the month of January.

31 

  

Paid a cash dividend of $1,000 to shareholders.

Required:

1.

 

Set up T-accounts and enter the beginning balances as of January 1, 2011.

2.

 

Prepare general journal entries to record each transaction. Omit explanations.

3.

 

Post the entries to T-accounts.

4.

 

Prepare an unadjusted trial balance as of January 31, 2011.

P 2-3

 

Adjusting entries

 

 LO4 LO5

Pastina Company manufactures and sells various types of pasta to grocery chains as private label brands. The company's fiscal year-end is December 31. The unadjusted trial balance as of December 31, 2011, appears below.

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p. 104

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   Information necessary to prepare the year-end adjusting entries appears below.

1.

 

Depreciation on the equipment for the year is $10,000.

2.

 

The company estimates that of the $40,000 in accounts receivable outstanding at year-end, $5,500 probably will not be collected.

3.

 

Employee wages are paid twice a month, on the 22nd for wages earned from the 1st through the 15th, and on the 7th of the following month for wages earned from the 16th through the end of the month. Wages earned from December 16 through December 31, 2011, were $1,500.

4.

 

On October 1, 2011, Pastina borrowed $50,000 from a local bank and signed a note. The note requires interest to be paid annually on September 30 at 12%. The principal is due in 10 years.

5.

 

On March 1, 2011, the company lent a supplier $20,000 and a note was signed requiring principal and interest at 8% to be paid on February 28, 2012.

6.

 

On April 1, 2011, the company paid an insurance company $6,000 for a two-year fire insurance policy. The entire $6,000 was debited to insurance expense.

7.

 

$800 of supplies remained on hand at December 31, 2011.

8.

 

A customer paid Pastina $2,000 in December for 1,500 pounds of spaghetti to be manufactured and delivered in January 2012. Pastina credited sales revenue.

9.

 

On December 1, 2011, $2,000 rent was paid to the owner of the building. The payment represented rent for December and January 2012, at $1,000 per month.

Required:

Prepare the necessary December 31, 2011, adjusting journal entries.

P 2-4

 

Accounting cycle; adjusting entries through post-closing trial balance

 

 LO3 LO5 through LO7

Refer to Problem 2–3 and complete the following steps:

1.

 

Enter the unadjusted balances from the trial balance into T-accounts.

2.

 

Post the adjusting entries prepared in Problem 2–3 to the accounts.

3.

 

Prepare an adjusted trial balance.

4.

 

Prepare an income statement and a statement of shareholders' equity for the year ended December 31, 2011, and a classified balance sheet as of December 31, 2011. Assume that no common stock was issued during the year and that $4,000 in cash dividends were paid to shareholders during the year.

5.

 

Prepare closing entries and post to the accounts.

6.

 

Prepare a post-closing trial balance.

   

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P 2-5

 

Adjusting entries

 

 LO5

Howarth Company's fiscal year-end is December 31. Below are the unadjusted and adjusted trial balances for December 31, 2011.

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Required:

Prepare the adjusting journal entries that were made at December 31, 2011.

P 2-6

 

Accounting cycle

 

 LO2 through LO7

The general ledger of the Karlin Company, a consulting company, at January 1, 2011, contained the following account balances:

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The following is a summary of the transactions for the year:

a.

 

Sales of services, $100,000, of which $30,000 was on credit.

b.

 

Collected on accounts receivable, $27,300.

c.

 

Issued shares of common stock in exchange for $10,000 in cash.

d.

 

Paid salaries, $50,000 (of which $9,000 was for salaries payable).

e.

 

Paid miscellaneous expenses, $24,000.

f.

 

Purchased equipment for $15,000 in cash.

g.

 

Paid $2,500 in cash dividends to shareholders.

p. 106

Required:

1.

 

Set up the necessary T-accounts and enter the beginning balances from the trial balance.

2.

 

Prepare a general journal entry for each of the summary transactions listed above.

3.

 

Post the journal entries to the accounts.

4.

 

Prepare an unadjusted trial balance.

5.

 

Prepare and post adjusting journal entries. Accrued salaries at year-end amounted to $1,000. Depreciation for the year on the equipment is $2,000. The allowance for uncollectible accounts is estimated to be $1,500.

6.

 

Prepare an adjusted trial balance.

7.

 

Prepare an income statement for 2011 and a balance sheet as of December 31, 2011.

8.

 

Prepare and post closing entries.

9.

 

Prepare a post-closing trial balance.

P 2-7

 

Adjusting entries and income effects

 

 LO4 LO5

The information necessary for preparing the 2011 year-end adjusting entries for Vito's Pizza Parlor appears below. Vito's fiscal year-end is December 31.

a.

 

On July 1, 2011, purchased $10,000 of IBM Corporation bonds at face value. The bonds pay interest twice a year on January 1 and July 1. The annual interest rate is 12%.

b.

 

Vito's depreciable equipment has a cost of $30,000, a five-year life, and no salvage value. The equipment was purchased in 2009. The straight-line depreciation method is used.

c.

 

On November 1, 2011, the bar area was leased to Jack Donaldson for one year. Vito's received $6,000 representing the first six months' rent and credited unearned rent revenue.

d.

 

On April 1, 2011, the company paid $2,400 for a two-year fire and liability insurance policy and debited insurance expense.

e.

 

On October 1, 2011, the company borrowed $20,000 from a local bank and signed a note. Principal and interest at 12% will be paid on September 30, 2012.

f.

 

At year-end there is a $1,800 debit balance in the supplies (asset) account. Only $700 of supplies remain on hand.

Required:

1.

 

Prepare the necessary adjusting journal entries at December 31, 2011.

2.

 

Determine the amount by which net income would be misstated if Vito's failed to make these adjusting entries. (Ignore income tax expense.)

P 2-8

 

Adjusting entries

 

 LO4 LO5

Excalibur Corporation manufactures and sells video games for personal computers. The unadjusted trial balance as of December 31, 2011, appears below. December 31 is the company's fiscal year-end. The company uses the perpetual inventory system.

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   Information necessary to prepare the year-end adjusting entries appears below.

1.

 

The equipment was purchased in 2009 and is being depreciated using the straight-line method over an eight-year useful life with no salvage value.

2.

 

Accrued wages at year-end should be $4,500.

p. 107

3.

 

The company estimates that 2% of all year-end accounts receivable will probably not be collected.

4.

 

The company borrowed $30,000 on September 1, 2011. The principal is due to be repaid in 10 years. Interest is payable twice a year on each August 31 and February 28 at an annual rate of 10%.

5.

 

The company debits supplies expense when supplies are purchased. Supplies on hand at year-end cost $500.

6.

 

Prepaid rent at year-end should be $1,000.

Required:

Prepare the necessary December 31, 2011, adjusting entries.

P 2-9

 

Accounting cycle; unadjusted trial balance through closing

 

 LO3 LO4 LO5 LO7

The unadjusted trial balance as of December 31, 2011, for the Bagley Consulting Company appears below. December 31 is the company's fiscal year-end.

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Required:

1.

 

Enter the account balances in T-accounts.

2.

 From the trial balance and information given, prepare adjusting entries and post to the accounts.

a.

 

The buildings have an estimated useful life of 50 years with no salvage value. The company uses the straight-line depreciation method.

b.

 

The equipment is depreciated at 10 percent of original cost per year.

c.

 

Prepaid insurance expired during the year, $1,500.

d.

 

It is estimated that 10% of the accounts receivable balance will be uncollectible.

e.

 

Accrued salaries at year-end, $1,500.

f.

 

Unearned rent revenue at year-end should be $1,200.

3.

 

Prepare an adjusted trial balance.

4.

 

Prepare closing entries.

5.

 

Prepare a post-closing trial balance.

P 2-10

 

Accrual accounting; financial statements

 

 LO4 LO6 LO8

McGuire Corporation began operations in 2011. The company purchases computer equipment from manufacturers and then sells to retail stores. During 2011, the bookkeeper used a check register to record all cash receipts and cash disbursements. No other journals were used. The following is a recap of the cash receipts and disbursements made during the year.

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p. 108

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   You are called in to prepare financial statements at December 31, 2011. The following additional information was provided to you:

1.

 

Customers owed the company $22,000 at year-end. Of this amount, it was anticipated that $3,000 would probably not be collected. There were no actual bad debt write-offs in 2011.

2.

 

At year-end, $30,000 was still due to suppliers of merchandise purchased on credit.

3.

 

At year-end, merchandise inventory costing $50,000 still remained on hand.

4.

 

Salaries owed to employees at year-end amounted to $5,000.

5.

 

On December 1, $3,000 in rent was paid to the owner of the building used by McGuire. This represented rent for the months of December through February.

6.

 

The equipment, which has a 10-year life and no salvage value, was purchased on January 1, 2011. Straight-line depreciation is used.

Required:

Prepare an income statement for 2011 and a balance sheet as of December 31, 2011.

P 2-11

 

Cash versus accrual accounting

 

 LO8

Selected balance sheet information for the Wolf Company at November 30, and December 31, 2011, is presented below. The company uses the perpetual inventory system and all sales to customers are made on credit.

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   The following cash flow information also is available:

a.

 

Cash collected from credit customers—$80,000.

b.

 

Cash paid for insurance—$5,000.

c.

 

Cash paid to suppliers of inventory—$60,000 (the entire accounts payable amounts relate to inventory purchases).

d.

 

Cash paid to employees for wages—$10,000.

Required:

1.

 

Determine the following for the month of December:

a.

 

Sales revenue

b.

 

Cost of goods sold

c.

 

Insurance expense

d.

 

Wage expense

2.

 

Prepare a summary journal entry to record the month's sales and cost of those sales.

P 2-12

 

Cash versus accrual accounting

 

 LO8

Zambrano Wholesale Corporation maintains its records on a cash basis. At the end of each year the company's accountant obtains the necessary information to prepare accrual basis financial statements. The following cash flows occurred during the year ended December 31, 2011:

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p. 109

Selected balance sheet information:

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Additional information:

1.

 

On March 31, 2010, Zambrano lent a customer $50,000. Interest at 8% is payable annually on each March 31. Principal is due in 2014.

2.

 

The annual insurance payment is made in advance on April 30.

3.

 

On October 31, 2011, Zambrano borrowed $100,000 from a local bank. Principal and interest at 6% are due on October 31, 2012.

4.

 

Annual rent on the company's facilities is paid in advance on June 30.

Required:

1.

 

Prepare an accrual basis income statement for 2011 (ignore income taxes).

2.

 

Determine the following balance sheet amounts on December 31, 2011:

a.

 

Prepaid insurance

b.

 

Prepaid rent

c.

 

Interest receivable

d.

 

Interest payable

P 2-13

 

Worksheet

 

 Appendix A

Using the information from Problem 2–8, prepare and complete a worksheet similar to Illustration 2A–1. Use the information in the worksheet to prepare an income statement and a statement of shareholders' equity for 2011 and a balance sheet as of December 31, 2011. Cash dividends paid to shareholders during the year amounted to $6,000. Also prepare the necessary closing entries assuming that adjusting entries have been correctly posted to the accounts.

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