Question

Selected transactions completed by Kornett Company during its first fiscal year ended December 31, 20Y5, were as follows:

Jan.	3	Issued a check to establish a petty cash fund of $4,500.
Feb.	26	Replenished the petty cash fund, based on the following summary of petty cash receipts: office supplies, $1,680; miscellaneous selling expense, $570; miscellaneous administrative expense, $880.
Apr.	14	Purchased $31,300 of merchandise on account, terms 1/10, n/30. The perpetual inventory system is used to account for inventory.
May	13	Paid the invoice of April 14 after the discount period had passed.
	17	Received cash from daily cash sales for $21,200. The amount indicated by the cash register was $21,240.
Jun.	2	Received a 60-day, 8% note for $180,000 on the Ryanair account.
Aug.	1	Received amount owed on June 2 note, plus interest at the maturity date. Assume a 360-day year.
	24	Received $7,600 on the Finley account and wrote off the remainder owed on a $9,000 accounts receivable balance. (The allowance method is used in accounting for uncollectible receivables.)
Sep.	15	Reinstated the Finley account written off on August 24 and received $1,400 cash in full payment. (Record as two entries.)

Record the following on journal page 22.

Sep.	15	Purchased land by issuing a $670,000, 90-day note to Zahorik Co., which discounted it at 9%. Assume a 360-day year.
Oct.	17	Sold office equipment in exchange for $135,000 cash plus receipt of a $100,000, 90-day, 9% note. The equipment had a cost of $320,000 and accumulated depreciation of $64,000 as of October 17.
Nov.	30	Journalized the monthly payroll for November, based on the following data:

Salaries:		Deductions:
Sales salaries	$135,000	Income tax withheld	$39,266
Office salaries	77,250	Social security tax withheld	12,735
	$212,250	Medicare tax withheld	3,184

Unemployment Tax rates:
State unemployment	5.4%
Federal unemployment	0.8%
Amount subject to unemployment taxes:
State unemployment	$5,000
Federal unemployment	5,000

	30	Journalized the employer’s payroll taxes on the payroll.
Dec.	14	Journalized the payment of the September 15 note at maturity.
	31	The pension cost for the year was $190,400, of which $139,700 was paid to the pension plan trustee.

	Required:
1.	Journalize the selected transactions, starting on page 21 of the journal.*
2.	Based on the following data, prepare a bank reconciliation for December of the current year. Refer to the Labels and Amount Descriptions list for exact wording of text entries. Enter all amounts as positive numbers. • Balance according to the bank statement at December 31, $283,000. • Balance according to the ledger at December 31, $245,410. • Checks outstanding at December 31, $68,540. • Deposit in transit, not recorded by bank, $29,500. • Bank debit memo for service charges, $750. • A check for $12,700 in payment of an invoice was incorrectly recorded in the accounts as $12,000.
3.	Based on the bank reconciliation prepared in (2), journalize the entry or entries to be made by Kornett Company on page 23 of the journal. Use the Miscellaneous Administrative Expense account to record bank service charges. Round your answers to the nearest dollar.
4.	Based on the following selected data, journalize the adjusting entries as of December 31 of the current year on page 23 of the journal: • Estimated uncollectible accounts at December 31, $16,000, based on an aging of accounts receivable. The balance of Allowance for Doubtful Accounts at December 31 was $2,000 (debit). • The physical inventory on December 31 indicated an inventory shrinkage of $3,300. • Prepaid insurance expired during the year, $22,820. • Office supplies used during the year, $3,920. • Depreciation is computed as follows:

		Residual	Acquisition	Useful Life
Asset	Cost	Value	Date	in Years	Depreciation Method Used
Buildings	$900,000	$0	January 2	50	Double-declining-balance
Office Equip.	246,000	26,000	January 3	5	Straight-line
Store Equip.	112,000	12,000	July 1	10	Straight-line

• A patent costing $48,000 when acquired on January 2 has a remaining legal life of 10 years and is expected to have value for 8 years. • The cost of mineral rights was $546,000. Of the estimated deposit of 910,000 tons of ore, 50,000 tons were mined and sold during the year. • Vacation pay expense for December, $10,500. • A product warranty was granted beginning December 1 and covering a one-year period. The estimated cost is 4% of sales, which totaled $1,900,000 in December. • Interest was accrued on the note receivable received on October 17. Assume a 360-day year. * Refer to the Chart of Accounts for exact wording of account titles. Round your answers to the nearest dollar

5.

Based on the following information and the post-closing trial balance that follows, prepare a balance sheet in report form at December 31 of the current year. Be sure to complete the heading of the balance sheet. Enter assets in the order in which they appear in the post-closing trial balance. Refer to information given in the problem and the Labels and Amount Descriptions list for exact wording of text entries. There is no need to include “(current portion)” or a due date with any account titles. For those boxes in which you must enter subtracted or negative numbers use a minus sign. Round your answers to the nearest dollar • The merchandise inventory is stated at cost by the LIFO method. • The product warranty payable is a current liability. • Vacation pay payable: Current liability: $7,140 Long-term liability: 3,360 • The unfunded pension liability is a long-term liability. • Notes payable: Current liability: $70,000 Long-term liability: 630,000

Kornett Company

POST-CLOSING TRIAL BALANCE

December 31, 20Y5

	ACCOUNT TITLE	DEBIT	CREDIT
1	Petty Cash	4,500.00
2	Cash	243,960.00
3	Notes Receivable	100,000.00
4	Accounts Receivable	470,000.00
5	Allowance for Doubtful Accounts		16,000.00
6	Inventory	320,000.00
7	Interest Receivable	1,875.00
8	Prepaid Insurance	45,640.00
9	Office Supplies	13,400.00
10	Land	654,925.00
11	Buildings	900,000.00
12	Accumulated Depreciation-Buildings		36,000.00
13	Office Equipment	246,000.00
14	Accumulated Depreciation-Office Equipment		44,000.00
15	Store Equipment	112,000.00
16	Accumulated Depreciation-Store Equipment		5,000.00
17	Mineral Rights	546,000.00
18	Accumulated Depletion		30,000.00
19	Patents	42,000.00
20	Social Security Tax Payable		25,470.00
21	Medicare Tax Payable		4,710.00
22	Employees Income Tax Payable		40,000.00
23	State Unemployment Tax Payable		270.00
24	Federal Unemployment Tax Payable		40.00
25	Salaries Payable		157,000.00
26	Accounts Payable		131,600.00
27	Interest Payable		28,000.00
28	Product Warranty Payable		76,000.00
29	Vacation Pay Payable		10,500.00
30	Unfunded Pension Liability		50,700.00
31	Notes Payable		700,000.00
32	Common Stock		500,000.00
33	Retained Earnings		1,845,010.00
34	Totals	3,700,300.00	3,700,300.00

Answer 1

Answer:

1.

	20Y5
	Jan.	3	Petty Cash	4,500
			Cash		4,500
	Feb.	26	Office Supplies	1,680
			Miscellaneous Selling Expense	570
			Miscellaneous Administrative Expense	880
			Cash		3,130
	Apr.	14	Inventory	31,300
			Accounts Payable		31,300
	May	13	Accounts Payable	31,300
			Cash		31,300
		17	Cash	21,200
			Cash Short and Over	40
			Sales		21,240
	June	2	Notes Receivable	180,000
			Accounts Receivable—Ryanair		180,000
	Aug.	1	Cash	182,400
			Notes Receivable		180,000
			Interest Revenue		2,400
			($180,000 ´ 8% ´ 60 ÷ 360 = $2,400).
		24	Cash	7,600
			Allowance for Doubtful Accounts	1,400
			Accounts Receivable—Finley		9,000
	Sept.	15	Accounts Receivable—Finley	1,400
			Allowance for Doubtful Accounts		1,400
		15	Cash	1,400
			Accounts Receivable—Finley		1,400

20Y5
Sept.	15	Land	654,925
		Interest Expense ($670,000 ´ 90 ÷ 360 ´ 9%)	15,075
		Notes Payable		670,000
Oct.	17	Cash	135,000
		Notes Receivable	100,000
		Accumulated Depreciation—Office Equipment	64,000
		Loss on Sale of Office Equipment	21,000
		Office Equipment		320,000
Nov.	30	Sales Salaries Expense	135,000
		Office Salaries Expense	77,250
		Employees Income Tax Payable		39,266
		Social Security Tax Payable		12,735
		Medicare Tax Payable		3,184
		Salaries Payable		157,065
	30	Payroll Tax Expense	16,229
		Social Security Tax Payable		12,735
		Medicare Tax Payable		3,184
		State Unemployment Tax Payable		270
		Federal Unemployment Tax Payable		40
Dec.	14	Notes Payable	670,000
		Cash		670,000
	31	Pension Expense	190,400
		Cash		139,700
		Unfunded Pension Liability		50,700
		Pension cost of $190,400 funded
		at $139,700.

State Unemployment Tax Payable = $5,000 x 5.4%

Federal Unemployment Tax Payable = $5,000 x 0.8%

2.

	Kornett Company Bank Reconciliation December 31, 20Y5
	Balance according to bank statement		$ 283,000
	Add: Deposit in transit on December 31		29,500
	Deduct: Outstanding checks		(68,540)
	Adjusted balance		$ 243,960
	Balance according to company’s records		$ 245,410
	Deduct: Bank service charges	$750
	Error in recording check	700
	Total deductions		(1,450)
	Adjusted balance		$ 243,960

3.

	20Y5
	Dec.	31	Miscellaneous Expense	750
			Accounts Payable	700
			Cash		1,450

4.

	a.	20Y5
		Dec.	31	Bad Debt Expense	18,000
				Allowance for Doubtful Accounts		18,000
				To record estimated uncollectible
				accounts ($16,000 + $2,000).

b.		31	Cost of Goods Sold	3,300
			Inventory		3,300
			To record inventory shrinkage.

c.		31	Insurance Expense	22,820
			Prepaid Insurance		22,820
			To record expired insurance.

d.		31	Office Supplies Expense	3,920
			Office Supplies		3,920
			To record supplies used during the
			period.

e.	20Y5
	Dec.	31	Depreciation Expense—Buildings	36,000
			Depreciation Expense—Office Equipment	44,000
			Depreciation Expense—Store Equipment	5,000
			Accum. Depreciation—Buildings		36,000
			Accum. Depreciation—Office Equipment		44,000
			Accum. Depreciation—Store Equipment		5,000
			To record depreciation for the period.

Computations:

Buildings ($900,000 x 4.0%).............................................................. $36,000

Office Equipment

[20% x ($246,000 – $26,000)]....................................................... 44,000

Store Equipment

[6/12 x 10% x ($112,000 – $12,000)]............................................ 5,000

f.	20Y5		Amortization Expense—Patents	6,000
	Dec.	31	Patents		6,000
			To record patent amortization
			($48,000 ÷ 8 years).

g.		31	Depletion Expense	30,000
			Accumulated Depletion		30,000
			To record depletion
			[($546,000 ÷ 910,000 tons) x 50,000 tons].

h.		31	Vacation Pay Expense	10,500
			Vacation Pay Payable		10,500
			To record vacation pay for the period.

i.		31	Product Warranty Expense	76,000
			Product Warranty Payable		76,000
			To record product warranty for the
			period ($1,900,000 ´ 4%).

j.		31	Interest Receivable	1,875
			Interest Revenue		1,875
			To record interest earned on note
			receivable ($100,000 ´ 75* ÷ 360 ´ 9%).

* Oct 17 to Oct 31 = 14 days

Nov 1 to Nov 30 = 30 days

Dec 1 to Dec 31 = 31 days

Total 75 days

5.

	Kornett Company Balance Sheet December 31, 20Y5
	Assets
	Current assets:
	Petty cash		$ 4,500
	Cash		243,960
	Notes receivable		100,000
	Accounts receivable	$470,000
	Allowance for doubtful accounts	(16,000)
	Accounts receivable, net		454,000
	Inventory		320,000
	Interest receivable		1,875
	Prepaid insurance		45,640
	Office supplies		13,400
	Total current assets			$1,183,375
	Property, plant, and equipment:
	Land		$654,925
	Buildings	$900,000
	Accumulated depreciation—buildings	(36,000)
	Book value—buildings		864,000
	Office equipment	$246,000
	Accumulated depreciation—
	office equipment	(44,000)
	Book value—office equipment		202,000
	Store equipment	$112,000
	Accumulated depreciation—
	store equipment	(5,000)
	Book value—store equipment		107,000
	Mineral rights	$546,000
	Accumulated depletion—mineral rights	(30,000)
	Book value—mineral rights		516,000
	Total property, plant,
	and equipment			2,343,925
	Intangible assets:
	Patents			42,000
	Total assets			$3,569,300

Liabilities
Current liabilities:
Social security tax payable		$ 25,470
Medicare tax payable		4,710
Employees federal income tax payable		40,000
State unemployment tax payable		270
Federal unemployment tax payable		40
Salaries payable		157,000
Accounts payable		131,600
Interest payable		28,000
Product warranty payable		76,000
Vacation pay payable (current portion)		7,140
Notes payable (current portion)		70,000
Total current liabilities			$ 540,230
Long-term liabilities:
Vacation pay payable		$ 3,360
Unfunded pension liability		50,700
Notes payable		630,000
Total long-term liabilities			684,060
Total liabilities			$ 1,224,290
Stockholders’ Equity
Common stock		$ 500,000
Retained earnings		1,845,010
Total stockholders’ equity			2,345,010
Total liabilities and stockholders’ equity			$ 3,569,300