Question

Erskine Consulting Ltd. has been in business for several years, providing software consulting to its customers on an annual contract or special assignment basis. All work is done over the Internet, although some travel is occasionally required for meeting with customers to negotiate contracts and renewals of contracts, as well as resolving possible disputes in invoicing for their services. Erskine operates out of rented premises and has a modest investment in equipment that is used by the consulting team. Erskine is a private company that follows ASPE and that has a calendar year end.

At the end of each year, Erskine obtains the services of an accountant to complete the annual accounting cycle of the business and prepare any year-end adjusting of journal entries, financial statements, and corporate tax returns.

Upon arrival in early 2020, the accountant was given an unadjusted trial balance and obtained the following additional information to complete his work.

Show any calculations used in completing this question.

Erskine Consulting Ltd. Unadjusted Trial Balance December 31, 2020
Account	Debit	Credit
Petty cash	$   600
Cash	18,500
Accounts receivable	44,700
Allowance for doubtful accounts		$  1,800
Interest receivable	–0–
Prepaid insurance	4,000
Supplies	2,000
FV-NI investments	20,000
Notes receivable	25,000
Equipment	94,000
Accumulated depreciation—equipment		36,000
Goodwill	22,000
Bank loans		18,000
Accounts payable		7,950
Salaries and wages payable		–0–
Interest payable		–0–
Unearned revenue		4,200
Litigation liability		–0–
Income tax payable	30,000
Common shares		36,000
Retained earnings		59,800
Dividends	26,000
Service revenue		242,768
Interest income		1,042
Unrealized gain or loss		–0–
Gain on disposal of equipment		300
Depreciation expense	–0–
Office expense	4,100
Travel expense	6,700
Insurance expense	900
Interest expense	1,300
Utilities expense	750
Rent expense	54,000
Salaries and wages expense	49,510
Supplies expense	–0–
Bad debt expense	–0–
Telephone and Internet expense	3,200
Repairs and maintenance expense	600
Litigation expense	–0–
Income tax expense	–0–
	$407,860	$407,860

Additional information:

1. 1. Management has been going over the list of accounts receivable for possible accounts that are not collectible. One account for $700 must be written off. In the past, 5% of the balance of all accounts receivable has been the basis of an estimate for the required balance in the allowance for doubtful accounts. Management feels that this estimate should be followed for 2020.
2. 2. After doing a count of supplies on hand, management determined that $400 of supplies remained unused at December 31, 2020.
3. 3. The account balance in Prepaid Insurance of $4,000 represents the annual cost of the renewal of all of Erskine's insurance policies that expire in one year. The policies' coverage started April 1, 2020.
4. 4. FV-NI Investments are long-term investments. The fair value of the portfolio of investments was $22,500 at December 31, 2020, based on quoted market values on the TSX.
5. 5. In January 2020, some old equipment was sold for proceeds of $300 cash. The entry made when depositing the cash was debit Cash, credit Gain on Disposal of Equipment. The original cost of the equipment was $4,300 and the accumulated depreciation was $4,200.
6. 6. The depreciation expense for the remaining equipment was calculated to be $7,200 for the 2020 fiscal year.
7. 7. The notes receivable from customers are due October 31, 2023, and bear interest at 5%, with interest paid semi-annually. The last interest collected related to the notes was for the six months ended October 31, 2020.
8. 8. Bank loans are demand bank loans for working capital needs and vary in amount as the needs arise. The bank advised that the interest charge for December 2020 that will go through on the January 2021 bank statement is in the amount of $200.
9. 9. Unpaid salaries and wages at December 31, 2020, totalled $790. These will be paid as part of the first payroll of 2021.
10. 10. After some analysis, management informs the accountant that the Unearned Revenue account should have a balance of $1,000.
11. 11. Erskine was sued by one of its former clients for $50,000 for giving bad advice and instructions. Upon discussion with legal counsel, it has been agreed that it will likely take $5,000 to settle this dispute out of court, in the next fiscal year. No entry has yet been recorded.
12. 12. The accountant is told that a sublet lease arrangement for some excess office space has been negotiated and signed. It will provide Erskine with rent revenue starting on February 1, 2021, at a rate of $400 per month.
13. 13. Erskine has been making income tax instalments as required by the Canada Revenue Agency. All instalment payments have been debited to the Income Taxes Payable account.
14. 14. After recording all of the necessary adjustments and posting to the general ledger, management drafted a new trial balance to arrive at the income before income taxes. Using this result, the accountant prepared the tax returns, and determined that a tax rate of 28% needed to be applied to the income before income tax amount. The necessary adjusting entry for taxes has not yet been recorded.

Instructions

a. Prepare all necessary adjusting and correcting entries required based on the information given, up to item 13.

b. Post the journal entries in adjustment columns and arrive at an adjusted trial balance. Enter the journal entries in the following worksheet format:

	Unadjusted Trial Balance		Adjustments		Adjusted Trial Balance
Account	Debit	Credit	Debit	Credit	Debit	Credit

c. Using the adjusted trial balance columns of your worksheet, calculate the amount of income before income taxes. Use the information provided in item 14 to record income tax expense for the year.

d. Prepare a single-step statement of income, a statement of retained earnings, and a statement of financial position for 2020.

Answer 1

Ans: Erskine Consulting Ltd

Journal entries

Date	Particulars		Dr. ($)	Cr. ($)
	Bad Debts A/c Dr. To Allowance for Bad debts A/c To Account Receivable A/c ( Being entry for creating bad debts)	(700+(44,000*5%)	2,900	2,200 700
	Supplies expenses A/c Dr.    To Supplies A/c (being Entry for use of Supplies in operation)	(2,000-400)	1,600	1,600
	Insurance Expense A/c Dr. To Prepaid Insurence A/c (Being entry for recording Insurance expenses)	(4,000*(9/12))	3,000	3,000
	FV-NI investments A/c Dr. To Unrealized gain or loss—FV-NI A/c (Being entry for recording unrealized gain on FV-IN)		2,500	2,500
	Gain on disposal of equipment A/c Dr. Accumulated Depreciation A/c Dr.    To Equipment A/c (Being entry for correctly recording sale of equipment)		100 4,200	4,300
	Depriciation expenses A/c Dr. To Accumulated Depreciation A/c (Being Entry For Recording Depreciation Expenses)		7,200	7,200
	Interest receivable A/c Dr. To Interest Income A/c (being Interest receivable on Note Receivable )	(25000*5%*(2/12))	208	208
	Interest Expenses A/c Dr. To Accrued liabilities A/c (Being entry for Interest payable on demand bank loan)		200	200
	Salaries and Wages Payable A/c Dr. To Salaries and wages expense A/c (being salaries and wages expenses due recorded)		790	790
	Unearned revenue A/c Dr.    To Revenue A/c (being Unearned Revenue Due)	4,200-1,000	3,200	3,200
	Litigation Expenses A/c Dr.    To Provision for Litigation Expenses A/c (being provision for Legal Ramification created)		5,000	5,000
	Income tax Expenses A/c Dr. To Income tax Payable A/c (Being income tax payable is paid)		30,287	30,287

	Unadjusted Trial Balance		Adjustments		Adjusted Trial Balance
Account	Debit	Credit	Debit	Credit	Debit	Credit
Petty cash	600				600
Cash	18,500				18,500
Accounts receivable	44,700			700	44,000
Allowance for doubtful accounts		1,800		2,200		4,000
Interest receivable	0		208		208
Prepaid insurance	4,000			3,000	1,000
Supplies	2,000			1,600	400
FV-NI investments	20,000		2,500		22,500
Notes receivable	25,000				25,000
Equipment	94,000			4,300	89,700
Accumulated depreciation—equipment		36,000	4,200	7,200		39,000
Goodwill	22,000				22,000
Bank loans		18,000				18,000
Accounts payable		7,950				7,950
Salaries and wages payable		0		790		790
Accrued liabilities		0		200		200
Unearned revenue		4,200	3,200			1,000
Litigation liability		0		5,000		5,000
Income tax payable	30,000			30,287		287
Common shares		36,000				36,000
Retained earnings		59,800				59,800
Dividends	26,000					26,000
Service revenue		242,768		3,200		245,968
Interest revenue		1,042		208		1,250
Unrealized gain or loss—FV-NI		0		2,500		2,500
Gain on disposal of equipment		300	100			200
Depreciation expense	0		7,200		7,200
Office expense	4,100				4,100
Travel expense	6,700				6,700
Insurance expense	900		3,000		3,900
Interest expense	1,300		200		1,500
Utilities expense	750				750
Rent expense	54,000				54,000
Salaries and wages expense	49,510		790		50,300
Supplies expense	0		1,600		1,600
Bad debt expense	0		2,900		2,900
Telephone and Internet expense	3,200				3,200
Repairs and maintenance expense	600				600
Litigation expense	0		5,000		5,000
Income tax expense	0		30,287		30,287

Income Statement

Particulars		Amount ($)
Revenue
Service revenue		245,968
Interest Revenue		1,250
Unrealized gain or loss—FV-NI		2,500
Gain on disposal of equipment		200
Total		249,918
Less
Depreciation expense		7,200
Office expense		4,100
Travel expense		6,700
Insurance expense		3,900
Interest expense		1,500
Utilities expense		750
Rent expense		54,000
Salaries and wages expense		50,300
Supplies expense		1,600
Bad debt expense		2,900
Telephone and Internet expense		3,200
Repairs and maintenance expense		600
Litigation expense		5,000
Income tax expense		30,287
Income		77,881

Statement of Retained Earning

Particulars		Amount ($)
Opening		59,800
Add: Net Income		77,881
Less: Dividend Paid		-26,000
Closing		111,681

Financial Statement

Particulars		Amount ($)
Assets
Petty cash		600
Cash		18,500
Accounts receivable		44,000
Allowance for doubtful accounts		-4,000
Interest receivable		208
Prepaid insurance		1,000
Supplies		400
FV-NI investments		22,500
Notes receivable		25,000
Equipment		89,700
Accumulated depreciation—equipment		-39,000
Goodwill		22,000
Total		180,908
Liabilities And Equity
Bank loans		18,000
Accounts payable		7,950
Salaries and wages payable		790
Accrued liabilities		200
Unearned revenue		1,000
Litigation liability		5,000
Income tax payable		287
Shareholder's Capital
Common shares		36,000
Retained earnings		111,681
Total		180,908

e) 1)Current Ratio = Current Asset/ Current Liabilities

=(600+18,500+40,000+208+1,000+400)/ (18,000+7,950+790+200+1,000+5,000+287)

   =$ 60,708/$33,227

   = 1.827

2) Payout ratio= Dividend paid/ Net income

= $26,000/$77,881

= 0.334