Question

Accounting Creations 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. 1.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, Accounting Creations determines that uncollectible accounts are $46,600 at the end of 2018.

c. On April 1, 2018, Accounting Creations 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, Accounting Creations 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 8%. 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, $5,006 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 Accounting Creations 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, Accounting Creations needed some temporary additional storage space so on August 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 Accounting Creations. 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 $77,006. The company depreciates using partial years (Hint: (1) only consider depreciation expense after the completion of the construction; (2) use the avoidable interest computed from i).

i. Accounting Creations 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, Accounting Creations’ office staff did not accrue any interest.

j. On July 1, 2018, Accounting Creations 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 $290,006. 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 Accounting Creations 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. Accounting Creations depreciates the building on a straight-line basis. Due to the location of the building and use potential, Accounting Creations 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 $3,406,000 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 7% amounted to $350,000.

n. Accounting Creations 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. Accounting Creations 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 July 1, 2018, Accounting Creations rented a portion of one store to Marketing Majors Inc. The contract was for 15 months and Accounting Creations 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. Accounting Creations 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 $3,506. These costs were expensed and recorded as a miscellaneous selling expense. Accounting Creations 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. Accounting Creations 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 Accounting Creations 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. 16,000 rebates have been refunded. Without any direction, the accounting clerk debited Miscellaneous Selling Expense and credited Cash for the $16,000. The management of Accounting Creations would prefer to have this type of expense in a separate account (Rebate Expense) so they can properly analyze for future ideas.

t. Accounting Creations 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.)

2. After the above adjusting entries are entered on the adjustment worksheet, the cells should be linked to the adjustments column of the worksheet. Your adjustment amounts in the worksheet column should be linked to the adjustment sheet so if you change the debit/credit amount in the adjusting entry, the column amount will automatically change. All adjustments should be labeled a–t and be in the order of the information provided.

3. Complete the adjusted columns by the use of a formula. Think about the best way to do this. Your last two columns should never contain constant numbers but will include formulas only. (Maximum points are given for using an ‘if” statement).

4. Prepare a multiple-step income statement on the proper worksheet. Your Income Statement should be in good form (proper titles, etc., use examples from your book) and well formatted. Do your best designating between selling and administrative expenses. You should use formulas in all cells, not constant numbers. (That means, your income statement should be linked to the adjusted numbers on your worksheet.)

5. Prepare a Comprehensive Income Statement on the proper worksheet. You should use formulas in all cells, not constant numbers.

6. Prepare a Statement of Changes in Stockholder’s Equity. You should use formulas in all cells, not constant numbers.

7. Prepare a Classified Balance Sheet on the proper worksheet as of 12/31/18. Your Statement should be formatted. You should use formulas in all cells, not constant numbers.

8. Prepare closing entries on the proper tab. You may close directly to Retained Earnings

PLEASE HELP ME WITH THIS PROBLEM!!!!

Answer 1

1. ADJUSTING JOURNAL ENTRIES WORKSHEET AS ON 12/31/2018

PARTICULARS	DR. (in $)	CR. (in $)
A) i) Accounts payable a/c dr	12000
To Bank Overdraft a/c		12000
(Bank overdraft wrongly classified in accounts payable)
ii) No entry for restricting cash for future use as the amount is shown in cash balance itself and not transferred to any other account.
B) i) Entry for Bad debts has been correctly accounted for
ii) Credit Sales a/c Dr.	8500
To Profit and Loss a/c		8500
(Being recovery of bad debts written off wrongly credited to Credit sales a/c. The same is debited and the amount received is credit to P&L a/c)
iii) Allowance of Doubtful Accounts Dr.	46600
To Accounts Receivable a/c		46600
C) Prepaid insurance a/c Dr.	8437
To insurance expense a/c		8437
(Being Insurance expense paid for 16 months of which 7 months are prepaid as on 12/312018.) (15000*9/16)
D) Outstanding interest income a/c Dr.	333
To interest income a/c		333
(Being interest income accrued for 2 months on loan advanced to a supplier of $25,000 @ 8% p.a. as on 12/31/2018)
E) The accounting entry cannot be formulated as the value of opening balance is not given of office supplies, and hence the required calculations cannot be made.
F) Prepaid expense a/c Dr	8000
To Advertising expense a/c		8000
(Being advertisement expenses of $16000 paid on 11/1/2018 was for 4 months)
G) Prepaid expense a/c Dr	9916
To Rent paid a/c		9916
(Being Rent paid on 8/1/2018 for 1 year of $17000) [17000*7/12]
H) Depreciation a/c Dr.	2496
To Accumulated Depreciation a/c		2496
(Being depreciation charged on SLM basis from the date the building was completed and occupancy occurred i.e. on 12/1/2018) ={(500000+375000+250000+150000)-77006]/40}/12
Profit and Loss a/c Dr.	2496
To Depreciation a/c		2496
(Being closing of depreciation a/c)
I) Interest expense a/c Dr	51000
To outstanding interest on loan a/c		51000
(Being interest accrued but not due on 12/31/2018 on Onstar Bank loan and Coldstar Bank loan) = Interest of Onstar = Value of storage building *4%=1275000*4%=51000 =Int of Coldstar=value of loan (not given)*3.06%
Profit and loss a/c Dr	51000
To Interest expense a/c		51000
J) Profit and Loss a/c Dr.	25000
To Amortization expense a/c		25000
(Being amortization expense charged) = {(150000+80000+70000)/6)*6/12} = 25000
Amortization expense a/c Dr.	25000
To Patent A/c.		25000
K) As the original cost of Securities are not given, hence unrealized gain or loss cannot be determined.
L) The purchase price of office building on 1/1/2016 has not been given nor the book value of the building on 12/31/2018 is given. Hence, respective calculation are not possible based on fair/market values.
M) Sales a/c Dr.	24500
To Sales tax payable a/c		24500
(Being sales tax included in sales.) (350000*7%)
O) The purchase value of office equipment is not given, hence its depreciation cannot be calculated based on DDB method
P) The value of rent received is not given hence, the prepaid rent income cannot be calculated. Only period of rent is given i.e. 15months. Though the entry is as follows: Rent income a/c Dr. To Prepaid rent a/c
Q) Fixtures a/c Dr.	3506
To Miscellaneous expense a/c		3506
(Being installation costs wrongly charged to misc exp a/c than capitalisation a/c)
As the total value of fixtures are not given, hence calculation of depreciation is not feasible.
R) Goods in transit a/c	7000
Marketing Majors Inc.	12500
To Inventory a/c		19500
S) Rebate a/c Dr.	16000
To Misc Selling exp a/c		16000
(Being rebate amount wrongly debited to misc selling exp a/c)

2. In this given part, i presume, it is instructed in the question to form an excel worksheet of the workings and link the respective values to respective accounts. Hence, the student should copy these answers in an excel worksheet and link the same.

3. This also is based on linking the above values in the excel sheet and does not require a separate answer.

5. Changes in Stockholder's equity

Authorized share: 3000000*1 = $ 3000000

Issued Share: 650000*1 = 650000

+ Retained earning