Question

Exercise 7-21B Complete the accounting cycle using long-term asset transactions (LO7-4, 7-7)

[The following information applies to the questions displayed below.]
  
On January 1, Year 1, the general ledger of a company includes the following account balances:
  

Accounts	Debit				Credit
Cash	$	59,800
Accounts Receivable		27,200
Allowance for Uncollectible Accounts					$	3,300
Inventory		37,400
Notes Receivable (5%, due in 2 years)		25,200
Land		166,000
Accounts Payable						15,900
Common Stock						231,000
Retained Earnings						65,400
Totals	$	315,600			$	315,600

  
During January Year 1, the following transactions occur:
  

January		1		Purchase equipment for $20,600. The company estimates a residual value of $2,600 and a five-year service life.
January		4		Pay cash on accounts payable, $10,600.
January		8		Purchase additional inventory on account, $93,900.
January		15		Receive cash on accounts receivable, $23,100.
January		19		Pay cash for salaries, $30,900.
January		28		Pay cash for January utilities, $17,600.
January		30		Sales for January total $231,000. All of these sales are on account. The cost of the units sold is $120,500.

Information for adjusting entries:

1. Depreciation on the equipment for the month of January is calculated using the straight-line method.
2. The company estimates future uncollectible accounts. The company determines $4,100 of accounts receivable on January 31 are past due, and 50% of these accounts are estimated to be uncollectible. The remaining accounts receivable on January 31 are not past due, and 3% of these accounts are estimated to be uncollectible. (Hint: Use the January 31 accounts receivable balance calculated in the general ledger.)
3. Accrued interest revenue on notes receivable for January.
4. Unpaid salaries at the end of January are $33,700.
5. Accrued income taxes at the end of January are $10,100.

rev: 11_22_2018_QC_CS-148298, 06_13_2019_QC_CS-170054

Exercise 7-21B Part 3

3. Prepare an adjusted trial balance as of January 31, Year 1.
  

4. Prepare a multiple-step income statement for the period ended January 31, Year 1.

Answer 1

Firstly we need to pass journal entries for the given transactions and adjusting entries which are shown as follows:-

Journal Entries (Amounts in $)

Date	Account Titles and Explanations	Debit	Credit
Jan 1	Equipment	20,600
	Cash		20,600
	(To record the purchase of equipment)
Jan 4	Accounts Payable	10,600
	Cash		10,600
	(To record the cash paid on accounts payable)
Jan 8	Inventory	93,900
	Accounts Payable		93,900
	(To record the inventory purchased on account)
Jan 15	Cash	23,100
	Accounts Receivable		23,100
	(To record the cash received from customers)
Jan 19	Salaries expense	30,900
	Cash		30,900
	(To record the salaries expense paid)
Jan 28	Utilities Expense	17,600
	Cash		17,600
	(To record the utilities expense paid)
Jan 30	Accounts Receivable	231,000
	Sales Revenue		231,000
	(To record the sales revenue on account)
Jan 30	Cost of goods sold	120,500
	Inventory		120,500
	(To record the cost of units sold)
Jan 31	Depreciation Expense [(20,600-2,600)/5 yrs]*1/12	300
	Accumulated Depreciation-Equipment		300
	(To record the depreciation expense)
Jan 31	Bad Debt Expense	5,680
	Allowance for Uncollectible Accounts (8,980-3,300)		5,680
	(To record the bad debt expense
Jan 31	Interest Receivable (25,200*5%*1/12)	105
	Interest Revenue		105
	(To record the interest revenue on note)
Jan 31	Income Tax Expense	10,100
	Income Tax Payable		10,100
	(To record the income tax payable)

Working Note:-

1) Calculation of Accounts Receivable balance as on Jan 31 (Amounts in $)

Beginning Balance on Jan 1	27,200
Less: Cash received from customers	23,100
Add: Sales on Account	231,000
Balance as on Jan 31	235,100

Ending Balance of Allowance = (4,100*50%)+[(235,100-4,100)*3%]

= $2,050+6,930 = $8,980

3) Adjusted Trial Balance as on Jan 31 (Amounts in $)

Accounts	Debit	Credit
Cash (59,800-20,600-10,600+23,100-30,900-17,600)	3,200
Accounts Receivable	235,100
Allowance for Uncollectible Accounts (3,300+5,680)		8,980
Inventory (37,400+93,900-120,500)	10,800
Notes Receivable (5%, due in years)	25,200
Land	166,000
Accounts Payable (15,900-10,600+93,900)		99,200
Common Stock		231,000
Retained Earnings		65,400
Equipment	20,600
Accumulated Depreciation-Equipment		300
Salaries expense	30,900
Utilities expense	17,600
Sales revenue		231,000
Cost of goods sold	120,500
Depreciation Expense	300
Bad debt expense	5,680
Interest Receivable	105
Interest Revenue		105
Income Tax Expense	10,100
Income Tax Payable		10,100
Total	646,085	646,085

4) Multi-Step Income Statement for the month of January (Amounts in $)

Sales Revenue	231,000
Cost of goods sold	(120,500)
Gross Profit (A)	110,500
Expenses:
Salaries expense	30,900
Utilities expense	17,600
Depreciation Expense	300
Bad debt expense	5,680
Total Expenses (B)	54,480
Other Revenue:
Interest Revenue (C)	105
Income before tax (D = A-B+C)	56,125
Income tax expense (E)	10,100
Net Income	46,025