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In: Accounting

McAdoo & Co. is an engineering firm with offices in several cities in the Carolinas. McAdoo’s...

McAdoo & Co. is an engineering firm with offices in several cities in the Carolinas. McAdoo’s fiscal year-end is December 31, and it prepares financial statements just once a year, at year-end. For bookkeeping purposes, McAdoo has adopted a policy to record payments and collections in advance into asset and liability accounts, respectively. The company’s unadjusted trial balance at December 31, 2020 is shown below. All accounts have normal-side balances.

Accounts Payable

$   356,210

Accounts Receivable

781,940

Accumulated Depreciation – Buildings

223,125

Accumulated Depreciation – Equipment

249,075

Advertising Expense

192,530

Allowance for Doubtful Accounts

13,748

Buildings

1,185,000

Cash

952,618

Common Stock ($1 par)

183,000

Dividends

242,750

Equipment

701,200

Insurance Expense

376,220

Interest Expense

39,870

Land

317,510

Notes Payable

729,000

Phone and Internet Expense

166,390

Retained Earnings

872,735

Salaries and Wages Expense

3,916,185

Service Revenue

6,582,630

Supplies

129,785

Unearned Rent Revenue

63,880

Utilities Expense

271,405

Additional information available at year-end is as follows:

1.         In the first week of January 2021, McAdoo received bills for December 2020 utilities totaling $28,985. The company paid all of these bills in late January 2021.

2.         On June 1, 2020, McAdoo purchased a 24-month insurance policy for $306,720 and paid the full cost of the policy in advance. The policy provides coverage through May 31, 2022. Note – Contrary to the company’s normal practice, McAdoo’s bookkeeper recorded the prepayment into the Insurance Expense account. Give the adjusting entry needed when a company uses the expense approach to record a payment in advance.

3.         McAdoo operates 5 days a week, Mondays through Fridays. Employees are paid each Monday, for hours worked through the previous Friday. On Monday, December 28, 2020, the last payday in 2020, McAdoo paid its employees for hours worked during the week of December 21-25. (Note that Christmas Day is a paid holiday for all employees.) The employees then worked their regular schedule through the end of the year. McAdoo’s payroll averages $14,215 per day.

4.         McAdoo sometimes leases unused space in its buildings to other businesses. On November 1, 2020, a new tenant signed a 1-year lease and paid the first 8 months’ rent of $63,880 in advance. The lease began on that date and runs through October 31, 2021.

5.         McAdoo started the year 2020 with a Supplies account balance of $51,320. During the year, McAdoo made several purchases of supplies totaling $78,465. A physical count at year-end 2020 revealed the company had a total of $59,715 of supplies on hand.

6.         The Notes Payable balance relates to a bank loan taken in 2019 that is payable in full on September 30, 2023. The loan agreement specifies that McAdoo pay interest annually on September 30 at the rate of 5.20% per year. McAdoo’s bookkeeper made the proper entry for the first interest payment, on September 30, 2020. (Hint – Think about the entry McAdoo made on the first interest payment date.)

7.         McAdoo performed $291,670 of legal services for several clients in December 2020 that it has not yet billed, recorded or collected.

8.         McAdoo estimates that 8.55% of the 2020 year-end accounts receivable balance will not be collected.

9.         McAdoo purchased its buildings in 2011 and its equipment in 2015. McAdoo depreciates its fixed assets according to the straight-line method. For the buildings, it uses estimates of 36 years for the useful life and $240,000 for the salvage value. For the equipment, it uses estimates of 12 years for the useful life and $37,000 for the salvage value.

10.       The company’s income tax rate for the year is 25%. (Hint – The income tax rate is applied to the company’s income after all revenues and expenses have been considered except for the income tax charge.)

– Instructions –

Complete the following tasks relating to McAdoo & Co.’s accounting process at year-end 2020:

(b)        Prepare the adjusting journal entries needed at December 31, 2020.

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