Question

The Unadjusted pre-closing 12/31/2020 account balances for the Mahoney Company are listed below:

Net Sales	$12,540,000
Net Purchases	9,000,000
Selling Expenses	424,000
Cash	487,000
Machines	6,019,000
Accumulated Depreciation, Machines	2,154,000
Accounts Payable	1,445,000
Retained Earnings	4,182,000
Allowance for Doubtful Accounts	60,000
Building	4,800,000
Accumulated Depreciation, Building	468,000
Common Stock	4,760,000
Accounts Receivable	2,877,000
Depreciation Expense, Machines	1,077,000
Inventory @ 1/1/2020	925,000

During your audit, you discover the following four items that have yet to be recorded:

1) No depreciation on the building has been recorded for 2020. Depreciation on the building is based on Double-Declining Balance. It was purchased on 1/1/18 and has an estimated useful life of 40 years. The estimated salvage value is $1,000,000.

2) Mahoney exhanged a machine for a similar machine on 12/31/2020. The origianl machine cost $3,429,000 and has a book value of $2,134,000. The new machine had a fair value of $1,823,000; Mahoney also received $511,000 in cash. The exchange lacked commercial substance.

3) Mahoney uses the Income Statement approach to record Bad Debts. Bad Debts in 2020 are estimate to be 4% of Sales.

4) Ending Inventory is to be estimated using the Gross Profit Method. The historic Gross Profit percentage is 20%.

Required

A) Record journal entries for items #1-3 above; show supporting computations. In addition, compute ending inventory per #4 above; show supporting computations. Assume adjusting/closing entries to adjust inventory, closing Purchases, and Record Cost of Goods Sold were properly made.

B) Draft the 2020 Condensed Income Statement and the 12/31/2020 Balance Sheet. Assume no Taxes. Do not include Earnings Per Share.

Answer 1

Journal entry for 1)

original rate of depreciation

depreciation under straightline = 4800000/40 = 120,000 per year;

this is 120,000/4,800,000 = 2.5%

so In double declining balance method rate will be 2.5% *2 = 5%

YEAR 1 depreciation = 5%* 4,800,000 = 240,000

Year 2 declining balance = 4,800,000-240,000 =4,560,000

year 2 depreciation = 4,560,000*5% =228,000

year 3 (Year 2020) declining balance = 4,560,000-228,000 = $4,332,000

alternatively 4,800,000-468,000 = $4,332,000

Year 3 depreciation for 2020 = $4,332,000*5% = $216,600

Journal entry for 1)

Depreciation a/c Dr. 216,600

To Accumulated Depreciation for Building 216,600

Later we will transfer this depreciation account to Income statement to close it and the entry will be

Income statement a/c Dr. 216,600

To Depreciation a/c 216,600

Journal entry for 2)

Book value of asset exchanged = $2,134,000

Cost of new machine = $1,823,000

Cash recieved in the transaction = $511,000

Therefore gain on transaction = 1,823,000+$511,000 - $2,134,000 = $200,000

Accumulated depreciation on machinery in books = Historical cost less book value

=$3,429,000 - $2,134,000 = $1,295,000

Thus the journal entry will be made to remove the old machinery from books, get in the new machinery and record the gain on the transaction

Accumulated depreciation on machiney a/c Dr. $1,295,000 (depreciation already recorded being reversed)

Machinery a/c Dr $ 1,823,000 (new machinery being recorded)

cash a/c Dr. $ 511,000 ( cash received)

To Machinery a/c $ 3,429,000 ( old machine replaced/exchanged)

To Income statement a/c $ 200,000 ( gain on transaction being recorded)

Journal entry for 3)

bad debts = 4% of sales

= 4% of $12,540,000 = $501,600

Journal entry

bad debts a/c Dr. $501,600

To allowance for doubtful accounts $501,600

Computation of ending Inventory

Opening inventory $925,000

Net Purchases $ 9,000,000

Sales $12,540,000

GP = 20% of profit

COGS = Sales* (1-GP)

=12,540,000*(1-0.2)

=$10,032,000

Closing stock = COGS - (Opening stock + Purchases)

=10,032,000-(925,000+9,000,000)

=$107,000 Ans

Condensed Income statement

Net Sales = $12,540,000

Less: COGS = $10,032,000

Gross Profit = $2,508,000

Add: gain on exchange of machinery 200,000

less: Selling expenses 424,000

less: Depreciation on building 216,600

less: Bad debts 501,600

less: depreciation expense machine 1,077,000

Net profit = $488,800