Question

ABC Corporation
Unadjusted Trial Balance
December 31, 2014
	Debit	Credit
Cash	$     575,232
Short term investments	167,000
Fair value adjustment (Trading)	-
Accounts receivable	190,300
Allowance for doubtful accounts		$             -
Inventory	-
Purchases	350,000
Prepaid insurance	25,600
LT (Debt) investments (HTM)	177,824
Land	75,000
Building	150,000
Accumulated depreciation: building		5,000
Equipment	50,000
Accumulated depreciation: equipment		20,000
Patent	37,500
Accounts payable		65,340
Notes payable		235,000
Income taxes payable		63,800
Unearned rent revenue		36,000
Bonds Payable		800,000
Premium on Bonds Payable		61,771
Common stock		86,000
PIC In Excess of Par-Common Stock		13,000
Retained earnings		-
Treasury stock	49,000
Dividends	41,000
Sales Revenue		792,845
Advertising expense	8,400
Wages expense	67,600
Office expense	21,700
Depreciation expense	24,000
Utilities expense	31,000
Insurance expense	73,800
Income taxes expense	63,800
	$   2,178,756	$2,178,756

1

On March 1, ABC purchased a one-year liability insurance policy for $98,400.

Upon purchase, the following journal entry was made:

Dr Prepaid insurance

98,400

Cr Cash

98,400

The expired portion of insurance must be recorded as of 12/31/14.

Notice that the expired portion from March through November has been recorded already.

Make sure that the Prepaid Insurance balance after the adjusting entry is correct.

2

Depreciation expense must be recorded for the month of December.

The building was purchased with cash on February 1, 2014 for $150,000 with a remaining useful life of 30 years and a salvage value of $6,000.

The method of depreciation for the building is straight-line.

The equipment was purchased with cash on February 1, 2014 for $60,000 with a remaining useful life of 5 years and a salvage value of $3,000.

The method of depreciation for the equipment is double-declining balance.

Depreciation has been recorded for the building and equipment for months February through November.

3

On December 1, XYZ Co. agreed to rent space in ABC's building for $12,000 per month,

and XYZ paid ABC on December 1 in advance for the first three months' rent.

The entry made on December 1 was as follows:

Dr Cash

36,000

Cr Unearned rent revenue

36,000

The unearned revenue account must be adjusted to reflect the amount earned as of 12/31/14.

4

Per timecards, from the last payroll date through December 31, 2014, ABC's employees have worked a total of 250 hours.

Including payroll taxes, ABC's wage expense averages about $51 per hour. The next payroll date is January 5, 2015.

The liability for wages payable must be recorded as of 12/31/14.

5

On November 30, 2014, ABC borrowed $235,000 from American National Bank by issuing an interest-bearing note payable.

This loan is to be repaid in three months (on February 28, 2015), along with interest computed at an annual rate of 6%.

The entry made on November 30 to record the borrowing was: (for Statement of Cash Flow purposes, consider a financing item)

Dr Cash

235,000

Cr Notes payable

235,000

On February 28, 2015 ABC must pay the bank the amount borrowed plus interest.

Assume the beginning balance for Notes Payable is correct.

Interest through 12/31/14 must be accrued on the $235,000 note.

6

ABC uses a periodic inventory system, and the ending inventory for each year is determined by taking a complete

physical inventory at year-end. A physical count was taken on December 31, 2014, and the inventory on-hand at

that time totaled $75,000, which reflects historical cost.

Record the 2014 Cost of Goods Sold and the 12/31/14 Inventory adjustment.

Additionally, ABC adheres to GAAP by recording ending inventory at the lower of cost and net realizable value at a total inventory level.

A review of inventory data further indicated that the current retail sales value of the ending inventory is $110,000 and estimated costs of

completion and shipping is 15% of retail. Be sure to make an additional adjustment, if necessary, to properly value ending inventory

using the Loss and Allowance methodology. For Income Statement presentation purposes, be sure to use the Loss Method for accounting

for adjustments of inventory to market value.

7

It would be unusual for a company to have an asset impairment in Year 1, but for the sake of this example, ABC realized

that their intangible asset might be impaired on December 31, 2014. Record the impairment if any.

The expected future net cash flows for this intangible asset totals $30,000, and the fair value of the asset is $27,500.

8

On 7/1/14, ABC purchased 7,000 shares of its own stock from existing stockholders as treasury stock. The cost of the treasury

stock was $7 per share, or $49,000 in total. The effects of this transaction are already shown in the unadjusted trial balance. On 12/31/14,

ABC reissued these 7,000 shares of treasury stock at $10 per share. Record the journal entry required for the reissuance of the treasury stock.

9

On 12/31/14, ABC issued 5,000 shares of $3 par value common stock at the closing market price of $7 per share. Prepare ABC's journal entry

to reflect the issuance of the stock on 12/31/14.

10

On 7/1/14, ABC sold 12% bonds having a maturity value of $800,000 for $861,771, resulting in an effective yield of 10%. The bonds are

dated 7/1/14, and mature 7/1/19. Interest is payable semiannually on July 1 and January 1. ABC uses the effective interest method of

amortization for bond premium or discount. Record the adjusting entry for the accrual of interest and the related amortization on 12/31/14.

Hint: Develop an abbreviated amortization schedule to accurately determine the interest expense.

11

The following information is available for ABC Corporation at 12/31/14 regarding its investments in stocks of other companies.

Securities

Cost

Fair Value

2,200 shares of Toyota Corporation Common Stock

$ 100,000

$ 125,000

1,100 shares of G.M. Corporation Common Stock

$    67,000

$ 34,000

$ 167,000

$ 159,000

Prepare the adjusting entry (if any) for 2014, assuming the securities are classified as trading.

12

On 1/1/14, ABC Corporation purchased, as a held-to-maturity investment, $200,000 of the 8%, 5-year bonds of Intuit Corporation for $177,824,

which provides an 11% return. Prepare ABC's 12/31/14 journal entry to reflect the receipt of annual interest and discount amortization.

Assume the bond investment pays interest annually on 12/31 each year and that effective interest amortization is used.

Note: Notice that a discount account is not used for this investment. Therefore, for purposes of this adjusting entry, amortize the discount directly to the

investment account.

13

ABC Corporation prepares an aging schedule on 12/31/14 that estimates total uncollectible accounts at $25,000. Assuming that the allowance method is used,

prepare the entry to record bad debt expense.

14

On 1/1/14, ABC Corporation signed a 5-year noncancelable lease for a delivery vehicle. The terms of the lease called for ABC to Corporation to make

annual payments of $10,503 at the beginning of each year, starting January 1, 2014. The delivery vehicle has an estimated useful life of 6 years and a $7,000

unguaranteed residual value. The delivery vehicle reverts back to the lessor at the end of the lease term. ABC Corporation uses the straight-line method

of depreciation for the delivery vehicle. ABC Corporation's incremental borrowing rate is 10%, and the Lessor's implicit rate is unknown. No entries have yet

been made concerning this lease arrangement. After determining the type of lease arrangement (capital or operating), prepare the necessary multiple-part journal

entry for 2014 for ABC Corporation. (Hints: You will need to compute the present value of the minimum lease payments and 4 separate sub-entries for

this lease transaction. Also, for Statement of Cash Flow purposes, the principal portion of lease payments are correctly categorized as a financing activity.)

15

ABC Corporation provides a defined benefit pension plan for its employees. A combination adjusting entry should be made to correctly account for this type of pension

plan given the following items of information for the 2014 plan year, including the recording of pension expense and the employer's contribution to the pension plan in 2014.

Note: Use the summary entry method as demonstrated and discussed in the chapter lectures on pension accounting to prepare the adjusting entry.

Pension asset/liability (January 1)

$0

Actual return on plan assets

$40,000

Expected return on plan assets

$20,000

Contributions (funding) in 2014

$37,000

Fair value of plan assets (December 31)

$75,000

Settlement rate

10%

Projected benefit obligation (January 1)

$0

Service cost

$60,000

Benefits paid in 2014

$0

*For purposes of financial statement presentation, consider Pension Expense as an operating item and any resulting Pension Asset/Liability as long-term in nature.

16

On December 31, 2014, ABC Corporation issued 1,000 shares of restricted stock to its Chief Financial Officer. ABC stock had a fair value (closing market price) of

$10 per share on December 31, 2014. Additional information is as follows:

a. The service period related to the restricted stock is 2 years.

b. Vesting occurs if the CFO stays with the company for a two-year period.

c. The par value of the common stock is $3 per share.

Make the appropriate accounting entry as of the grant date, 12/31/14. Note: use the alternative method as described in your textbook for deferred compensation.

Do this step after preparing the Income Statement except for the Income taxes line: (You need to calculate Income Before Income Taxes in order to calcualte total Income Tax Expense)

17

Corporate taxes are due in four estimated quarterly payments on April 15, June 15, September 15, and December 15.

However, for the purposes of this ABC illustration, we will assume that estimates are not paid, and that the tax is paid in full

on the return's March 15, 2015 due date.

ABC's income tax rate is 40%. The entire year's income tax expense was estimated at the beginning of 2014 to be $69,600,

so January through November income tax expense recognized amounts to $63,800 (11/12 months).

Since we are assuming estimates are not made during the year, the balance in Income taxes payable represents

tax accrued for January through November. Assume no deferred tax assets or deferred tax liabilities.

Based on the income before income taxes figure from the income statement, record December's income tax expense

so that the entire year's total tax expense is correct.

Answer 1

Answer	Date	Particular		Debit	Credit
1	31-12-2014	Insurance Expense A/c	Dr	$          8,200
		To Prepaid Expense A/c			$          8,200
2	31-12-2014	DepreciationA/c	Dr	$          1,350
		To Building A/c			$              400
		To Equipment A/c			$              950
	Calculation of Depreciation on Building
	Builidng Cost	$                                             150,000
	Less Salvage Value	$                                                 6,000
		$                                             144,000
	Useful Life	30
	Depreciation	$144000/30=$4800
	Depreciation for 1 month	$4800/12*1=$400
	Calculation of Depreciation on office Equipment
	Equipment Cost	$                                               60,000
	Less Salvage Value	$                                                 3,000
		$                                               57,000
	Useful Life	5
	Depreciation	$57000/5=$11400
	Depreciation for 1 month	$11400/12*1=$950
3	31-12-2014	Unearned Income A/c	Dr	$        12,000
		To Rental Income			$        12,000
4	31-12-2014	Wages A/c	Dr	$        12,750
		To Wages Payable A/c			$        12,750
5	31-12-2014	Interest on credit noteA/c	Dr	$          1,175
		To Credit note Payable			$          1,175