Question

Infometrix Inc. completed its fourth year of operations on December 31, 2010. A student working in the company’s office on a part-time basis assembled the following list of accounts and their related balances. The accounts are not arranged in any particular order.

Account Title	Balance	Account Title	Balance
Cost of goods sold	$590,000	Accounts receivables	$150,000
Inventory	140,000	Cash	54,000
Equipment	200,000	Building	320,000
Accumulated depreciation – equipment	20,000	Accounts payables	68,600
Retained earnings, January 1, 2010	177,000	Unearned rent revenue	6,000
Accumulated depreciation – building	40,000	Salaries expense	120,000
Note payable	30,000	Note receivable	30,000
Sales revenue	983,000	Share capital (10,000 shares)	570,000
Interest expense	2,400	Land	160,000
Advertising expense	76,000	Dividends	12,000
Insurance expense	6,300	Office supplies inventory	8,900

Each of the account balances above has a "normal" balance, as the term is defined in the textbook. The following additional information was not taken into consideration in determining the account balances:

The amount shown as insurance expense includes $900 for coverage during the first two months of 2011.

The note receivable was received on September 1, 2010 and carries an interest rate of 10 percent per year. Interest on the note will be received by the company when the note becomes due on February 28, 2011.

The building is depreciated over 40 years on a straight-line basis with no salvage value. Depreciation on the equipment was determined to be $10,000 per year.

Additional dividends of $50,000 were declared in December 2010, but will not be paid until January 2011.

The cost of office supplies still on hand at December 31, 2010 is $600.

The company rented surplus space in its building to a tenant on November 1, 2010 for $1,000 per month, payable in advance for six months. The entire amount received was credited to Unearned rent revenue.

Employees earned $3,000 of salaries in December 2010 that will be paid on the first pay day in January 2011.

The company is subject to an income tax rate of 30 percent. Income taxes for the year 2010 will be paid on March 15, 2011.

Required (show all calculations):

Prepare the necessary adjusting journal entries as at December 31, 2010 for events (a) to (h) above. You may wish to complete requirement 2 (below) before recording the journal entry for item (h). Please skip a line between journal entries, and omit narrative explanations. Set up new accounts if needed.

Prepare, in proper form, a "multi-step" income statement for Infometrix Inc. for the year ended December 31, 2010.

Prepare in proper form the Assets section of a classified statement of financial position for Infometrix Inc. as at December 31, 2010. A complete statement of financial position is not required.

Question 5: Broadway Limited had an $800 credit balance in Allowance for Doubtful Accounts at December 31, 2018, before the current year's provision for uncollectible accounts. An aging of the accounts receivable revealed the following:

                                                                                                         Estimated Percentage

                                                                                                                Uncollectible

       Current Accounts.......................................     $150,000                       1%

       1-30 days past due.....................................         15,000                       3%

       31-60 days past due...................................           8,000                       6%

       61-90 days past due...................................           5,000                     12%

       Over 90 days past due................................           6,000                     30%

       Total Accounts Receivable........................     $184,000

Instructions

(a)   Prepare the adjusting entry at December 31, 2018, to recognize bad debts expense.

(b) Assume the same facts as above except that the Allowance for Doubtful Accounts account had an $800 debit balance before the current year's provision for uncollectible accounts. Prepare the adjusting entry for the current year's bad debts.

Answer 1

In the books of Infometrics Inc.

Adjusting entries:

Adjustment #	Account Titles	Debits	Credits
		$	$
a.	Prepaid Insurance	900
	Insurance Expense		900
b.	Interest Receivable ( 30,000 x 10% x 4/12)	1,000
	Interest Revenue		1,000
c.	Depreciation Expense	8,000
	Accumulated Depreciation : Building		8,000
d.	Depreciation Expense	10,000
	Accumulated Depreciation : Equipment		10,000
e.	Retained Earnings	50,000
	Dividends Payable		50,000
f.	Office Supplies Expense	8,300
	Office Supplies Inventory		8,300
g.	Unearned Rent Revenue	2,000
	Rent Revenue		2,000
h.	Salaries Expense	3,000
	Salaries Payable		3,000
i.	Income Tax Expense	48,870
	Income Tax Payable		48,870

Infometrix Inc.

Income Statement

For the year ended December 31, 2010

	$	$
Income from Operations
Sales Revenue		983,000
Cost of Goods Sold		590,000
Gross Profit		393,000
Operating Expenses
Advertising Expense	76,000
Salaries Expense	123,000
Insurance Expense	5,400
Office Supplies Expense	8,300
Depreciation Expense: Building	8,000
Depreciation Expense: Equipment	10,000
Total Operating Expenses		230,700
Income from Operations		162,300
Non-operating Income / Expenses
Interest Revenue	1,000
Rent Revenue	2,000
Interest Expense	(2,400)	600
Income before Taxes		162,900
Income Tax Expense ( 30%)		48,870
Net Income		114,030

Infometrics Inc.

Balance Sheet

December 31, 2010

Assets	$	$
Current Assets
Cash	54,000
Accounts Receivable	150,000
Inventory	140,000
Interest Receivable	1,000
Office Supplies	600
Note Receivable	30,000
Prepaid Insurance	900
Total Current Assets		376,500
Property Plant and Equipment
Equipment	200,000
Accumulated Depreciation : Equipment	(30,000)
Building	320,000
Accumulated Depreciation : Building	(48,000)
Land	160,000
Total Property Plant and Equipment		602,000
Total Assets		978,500
Liabilities and Equity
Current Liabilities
Accounts Payable	68,600
Salaries Payable	3,000
Dividends Payable	50,000
Unearned Rent Revenue	4,000
Income Taxes Payable	48,870
Total Current Liabilities		174,470
Note Payable		30,000
Total Liabilities		204,470
Equity
Share Capital	570,000
Retained Earnings	229,030
		799,030
		1,003,500

Question 5 :

a. Balance required in allowance for doubtful accounts = $ 4,830 ( $ 150,000 x 1% + $ 15,000 x 3% + $ 8,000 x 6% + $ 5,000 x 12% + $ 6,000 x 30%)

	Debit	Credit
	$	$
Bad Debt Expense	4,030
Allowance for Doubtful Accounts		4,030

b. If the allowance account has a debit balance of $ 800:

	Debit	Credit
	$	$
Bad Debt Expense	5,630
Allowance for Doubtful Accounts		5,630