Question

Harry & Lloyd operates a call-in accounting homework advisory service using a 900 telephone exchange (1-900-BALANCE) called NO SOLUTIONS, INC. The company also sells, installs and maintains accounting and homework preparation equipment. The business started on 3/2/17 with invested and borrowed funds. The following is a list of unadjusted account balances at August 31, 2018 the end of the fiscal year:

Cash	$11,001
Accounts Receivable	60,000
Litigation Receivable	10,000
Inventory	52,667
Prepaid Insurance	9,000
Office Equipment	40,000
Trademark	8,600
Goodwill	3,000
Supplies	2,000
I have no idea	30,000
Accounts Payable	9,310
7.5% Demand Notes payable	45,000
Common stock	100,000
Accumulated deficit	83,660
Sales	265,125
Gain from lawsuit	10,000
Homework fees earned	156,500
Cost of Goods Sold	164,500
Travel & Entertainment	2,000
Maintenance expense	500
Miscellaneous expense	8,000
Alimony Expense	45,074
Salaries & Wages	38,300
Postage Expense	1,333
Advertising expense	5,300
Telephone Expense	1,000
Office Rent Expense	10,000

Additional information:

            1. Included in accounts receivable is $12,000 for purchases of soiled accounting paper that Harry & Lloyd hopes to sell to his callers.

            2. Harry & Lloyd forgot to bill his callers for services rendered in the amount of $7,500.

            3. Harry & Lloyd estimates that 40% of all the Accounts Receivable balances on 8/31/18 will become uncollectible.

            4. The Gain from lawsuit is a result of litigation filed against a local TV station who claimed that Harry & Lloyd were a ½ wits instead of their certifiable ¾ wit status. The jury verdict also proclaimed them distinguished citizens. Based upon the settlement, the company owes legal counsel one-third of the damage settlement.

            5. Per a physical inventory, $40,000 was on hand at 8/31/18.

            6. Prepaid insurance contains the premium costs of two policies: Policy A, original cost of $6,000, 3-year term effective on 8/1/17; Policy B, original cost of $3,000, 2-year term, effective 9/1/17.

            7. The regular rate of depreciation is 10% per year. Salvage value is ignored. Acquisitions and retirements during a year are depreciated at half this rate. The only acquisition ($30,000) during this fiscal year was recorded as I have no idea. There was $10,000 of retirements during the year. All the remaining equipment was acquired at the beginning of the prior fiscal year.

  

            8. The trademark represents payment for a T account tattoos on Harry & Lloyd's foreheads.

            9. Harry & Lloyd signed a five-year lease for a suite of offices which was occupied on March 1, 2018. The lease requires a monthly rental of $1,500 per month.

            10. Goodwill represents donations to Goodwill.

            11. The advertising expense represents payment for two Buffalo Bill season tickets. Two tickets are distributed to selected customers for each home game.

12. On July 15, 2018, Harry & Lloyd contracted with a consultant for $15,000 to survey the local female Jesuits. Payment is due upon the completion of the survey. The transaction was never recorded.

13. Supplies costing $2,000 were received but never recorded. A count of supplies on hand at 8/31/18 revealed that $3,000 was still on hand.

14. Harry & Lloyd received $5,000 for consulting services on 8/30/18 for homework assistance on     when chapter 6 was assigned.

           

            Required:

(a) All necessary adjusting/correcting entries in accordance with GAAP using the information above.

            (b) Indicate in the right margin using an R the entries that are candidates for reversal.

Answer 1

a)

J/E		Debit	Credit
1	Cost of Goods Sold A/C	12,000.00
	Account Receivable a/c		12,000.00
2	Account Receivable a/c	7,500.00
	Sales a/c		7,500.00
3	Bad & Doubtful Debts a/c	22,200.00
	Provision for Bad & Doubtful Debts a/c		22,200.00
4	Legal fee a/c	3,333.00
	Accounts payable		3,333.00
5	Inventory a/c	40,000.00
	Cost of Goods Sold A/C		40,000.00
6	Insurance a/c	3,500.00
	Prepaid Insurance a/c		3,500.00
7	Depreciation a/c	6,000.00
	Accumulated Depreciation a/c		6,000.00
8	Withdrawal a/c	8,600.00
	Trade mark a/c		8,600.00
9	Rent a/c	9,000.00
	Account payable		9,000.00
10	Donation a/c	3,000.00
	Goodwill a/c		3,000.00
11	Sales promotion expense a/c	5,300.00
	Advertisement exp a/c		5,300.00
12	Survey expense a/c	15,000.00
	Account payable		15,000.00
13	Cost of Goods Sold A/C	2,000.00
	Account payable		2,000.00
	Inventory a/c	3,000.00
	Cost of Goods Sold A/C		3,000.00
14	This transaction already recorded in the accounts as the cash collected on 30th Aug 18		Working for J/E 3 Account Recivable Balance    60,000.00 J/E 1 (12,000.00) J/E 2      7,500.00 Account Recivable Balance (Adjusted Balance)    55,500.00 0.4 Provision for Bad & Doubtful Debts 40% Provision for Bad & Doubtful Debts amount    22,200.00 Working for J/E 6 Insurance for 3 years      6,000.00 Insurance for 1 year 2,000.00 Insurance for two years      3,000.00 Insurance for 1 year 1,500.00 Insurance for 1 year 3,500.00 Working for J/E 7 Office Equipment    40,000.00 10%     4,000.00 Purchase    30,000.00 5%     1,500.00 Retirement    10,000.00 5%        500.00 Depreciation Amount     6,000.00