Question

Can please solve M,N&O

Czar was authorized to issue 3,000,000 shares of $1 par Common Stock but has only issued 520,000 shares of common stock as of 12/31/2018. No new shares were issued during 2018.

1.         On the “Adjusting Journal Entries” worksheet, prepare in journal entry form all adjusting         and correcting journal entries based on the following information. All information was          provided to you as of 12/31/2018. (Round all numbers to the nearest dollar). Label          journal entries a through t.

Based on your review of the cash balances, you note that there was an overdraft of $9,600 in one of your bank accounts. However, there are many bank accounts at the specific bank where the account with the overdraft is deposited. The total cash at this bank equaled a debit balance of $144,000. The previous accountant moved the overdraft to Accounts Payable. You also note the Board of Directors has restricted $52,000 of cash for future expansion. This $52,000 is part of the cash balance. The future expansion will not occur for several more years.

Based on your inquiries, you note that $28,000 of accounts receivable had been written off during the year. The clerk had debited bad debt expense for $28,000 and credited Accounts Receivable for $28,000. When $6,800 of accounts previously written off had been collected, the accountant debited cash and credited sales. The company uses the allowance method based on the aging of accounts receivable. Based on this method, Czar determines that uncollectible accounts are $36,500 at the end of 2018.

On April 1, 2018, Czar renewed a 15-month insurance policy for $12,000. All cash was paid at the time the policy was signed and insurance expense was increased. All other transactions involving insurance were properly recorded.

On November 1, 2018, Czar loaned a key supplier, $20,000. A promissory note was signed and issued. The note is due in full 6-months. The supplier agrees to pay interest on the note at an annual rate of 3%. Principle and interest will be paid at the end of the 9-months. The note was recorded in Notes Receivable and is the only note outstanding.

Per a physical count of office supplies, $4,615 of supplies remained at the end of 2018. The balance on the worksheet in the office supplies account represents last years ending balance. During the year, $28,000 of office supplies were purchased and immediately expensed.

On November 1, 2018 Czar paid Ewald Advertising $12,800 for a four month campaign of advertising services. Equal services are provided each month.

Because of a new product line, Czar needed some temporary additional storage space so on 3,1, 2018 they rented a unit for an annual rate of $13,600 and they paid the entire amount up front.

The storage building was self-constructing this year by Czar. The Company had their initial expenditure of $400,000 on January 1. They paid an additional $300,000 on May 1^st, $200,000 on August 1^st, and then the final payment of $120,000 on December 1^st when the building was completed, and occupancy occurred. The company has decided to use S/L method for depreciation. The storage building is estimated to have a life of 40 years and a salvage value of $56,615. The company depreciates using partial years.

Czar has two loans outstanding as of 12/31/2018. Interest is paid annually on January 1st.   The facts on each loan are as follows:

                        First Trust Bank Loan – outstanding since January 1, 2018 with a 6.0% interest                                    rate. This loan was taken out to finance the construction of the Storage Building.                                  Interest for the year and 10% of the principle will be paid to the bank on                                       January 1, 2019. Except for recording the initial cash received and loan, no                           additional entries have been made.

Coldwell Bank Loan – also outstanding all of 2018 with 5.05 % interest rate Interest is due on January 1, 2019. Principle is due on January 1, 2025. Since interest will not be paid to the Bank until 2019, Czar’ office staff did not accrue any interest.

On 2,1, 2018 Czar recorded a patent in the amount of $120,000. The company paid outside legal fees of $64,000 to have the patent registered. The other $56,000 represents internal costs in developing the patent. The patent is good for 20 years, but the company estimates that the patent will have a useful life of 8 years with no residual value. Amortization is straight line. The company depreciates using partial years for intangible assets. No amortization has been recorded for 2018.

As of 12/31/2018 the Available for Sale Securities have a fair value of $232,615 Due to the market conditions, the company does not plan on selling the assets in 2019, but their intent is to sell at some point in time. You can ignore the tax effect on unrealized gains and losses.

The office building was bought in January 1, 2016 and Czar plans to use the building for 40 years and believes it will have a salvage value of $200,000 at the end of 40 years. Czar depreciates the building on a straight-line basis. Due to the location of the building and use potential, Czar is concerned about impairment. At 12/31/2018 it is determined that the future cash flows for the building are $2,400,000. The fair value of the building is $2,725,000 at 12/31/2018.

After reviewing details of sales, you note that the sales taxes collected on the last week of December’s sales were included in sales revenue. Sales recorded the last week of December that included the sales tax of 2% amounted to $280,000.

Czar uses the Dollar Value LIFO inventory method. For internal purposes, the Merchandise Inventory Account is maintained at FIFO (current costs). At the end of the year, the LIFO reserve account is adjusted so inventory on the balance sheet reflects Dollar Value LIFO. You need to calculate the proper inventory balance and adjust the LIFO reserve. The price index for this year is 1.25 Prior year inventory records show the following calculation for 2018:

                   140,000 X 1.0 =    140,000

                      80,000 X 1.05 =    84,000

All office equipment was purchased January 1, 2017. Czar uses the DDB method to depreciate office equipment. No office equipment has been added since the initial purchase. It is estimated that the office equipment has a useful life of 10 years with a salvage value of $9,600.

On 2,1, 2018, Czar rented a portion of one store to Pellston Inc. The contract was for 15 months and Czar required all of the cash up front. The rent is being earned equally each month. This is the only item in which rent is being earned by the company.

Czar started to lease some new retail space in 2018 and added shelving and fixtures to this leased space. Based on your review of invoices, the previous accountant capitalized the cost of fixtures but did not capitalize the shipping and installation costs of $2,815. These costs were expensed and recorded as a miscellaneous selling expense. Czar has decided to use double declining balance (DDB) depreciation for this item and to take a full year of depreciation in the year of acquisition. The leasehold improvements have a useful life of 15 years with a salvage value of $12,000.  

Czar uses the FIFO Inventory Method in valuing inventory. The inventory balance of $340,000 was based on a physical count at 12/31/2018. Based on your analysis, you have noted that $10,000 of marketing games that belonged to Pellston Inc. was included in the account. You also note that $5,600 of goods shipped to Czar f.o.b. destination were in transit on December 31, 2018 and included in the physical count.

You note during the review of sales, that a rebate was issued for the 2018 Income Tax Game to encourage sales. 24,500 games were sold. Customers can mail in their receipt and receive a $1 rebate per game. It is estimated that 48% of customers will send in the rebate. The rebate expires on January 31, 2019. To date, 12,800 rebates have been refunded. Without any direction, the accounting clerk debited Miscellaneous Selling Expense and credited Cash for the $12,800. The management of Czar would prefer to have this type of expense in a separate account (Rebate Expense) so they can properly analyze for future ideas.

                       

Czar has a straight tax rate of 30%. Income tax expense is Net Income before taxes times 30%. (Hint: Prepare the Income Statement up to Net Income before Taxes and then record this adjusting journal entry.)

M-After reviewing details of sales, you note that the sales taxes collected on the last week of December’s sales were included in sales revenue. Sales recorded the last week of December that included the sales tax of 2% amounted to $280,000.

N- Czar uses the Dollar Value LIFO inventory method. For internal purposes, the Merchandise Inventory Account is maintained at FIFO (current costs). At the end of the year, the LIFO reserve account is adjusted so inventory on the balance sheet reflects Dollar Value LIFO. You need to calculate the proper inventory balance and adjust the LIFO reserve. The price index for this year is 1.25 Prior year inventory records show the following calculation for 2018:

                   140,000 X 1.0 =    140,000

                      80,000 X 1.05 =    84,000

O- All office equipment was purchased January 1, 2017. Czar uses the DDB method to depreciate office equipment. No office equipment has been added since the initial purchase. It is estimated that the office equipment has a useful life of 10 years with a salvage value of $9,600.

Czar Incorporated
End of Period Worksheet
For the Year Ended December 31, 2018
	Unadjusted				Adjusted
Account Title	Trial Balance		Adjustments		Trial Balance
	DR	CR	DR	CR	DR	CR
Cash	264,000	-
Accounts Receivable	555,984	-
Allowance for Doubtful Accounts	-	13,600
Interest Receivable	-	-
Merchandise Inventory	340,000	-
Prepaid Insurance	-	-
LIFO Reserve	-	25,600
Prepaid Advertising	-	-
Prepaid Rent	13,600	-
Office Supplies	4,800	-
Note Receivable	20,000
Available for Sale Securities	300,000	-
Office Building	3,000,000	-
Accumulated Depreciation - Office Building	-	70,000
Storage Building	1,020,000	-
Accumulated Depreciation - Storage Building	-	-
Land	600,000	-
Leasehold Improvements	180,000	-
Accumulated Depreciation - Leasehold Improvements	-	-
Office Equipment	260,000	-
Accumulated Depreciation - Office Equipment	-	52,000
Patent	120,000	-
Accounts Payable	-	276,000
Sales Tax Payable	-	-
Salaries Payable	-	113,600
Payroll Taxes Payable	-	20,000
Interest Payable	-	-
Income Tax Payable	-	-
Unearned Rent Revenue	-	-
Loan Payable - First Trust	-	520,000
Loan Payable - Coldwell Bank	-	1,600,000
Common Stock	-	520,000
Additional Paid in Capital	-	1,599,000
Retained Earnings	-	736,000
Accumulated Other Comprehensive Income	-	20,000
Dividends	67,800	-
Sales	-	3,622,560
Sales Returns and Allowances	33,800	-
Sales Discounts	15,400	-
Cost of Goods Sold	1,583,600	-
Sales Salaries Expense	349,120	-
Office Salaries Expense	219,200	-
Advertising Expense	12,800	-
Depreciation Expense - Office Building	-
Depreciation Expense - Leasehold Improvements	-	-
Depreciation Expense - Office Equipment	-	-
Leasing Expense - Stores	105,600	-
Miscellaneous Selling Expense	18400	-
Research & Development Expense	12,000
Rent Expense - Storage Facility	-	-
Insurance Expense	12,000	-
Office Supplies Expense	28,000	-
Miscellaneous Administrative Expense	7,336	-
Rent Revenue	-	60,000
Interest Revenue on Note Receivable	-	-
Dividend Revenue on AFS Securities	-	20,000
Interest Expense	-	-
Bad Debt Expense	28,000	-
Amortization Expense	-	-
Income Tax Expense	-	-
Payroll Taxes Expense	96,920	-
Rebate Expense	-	-
Unrealized holding loss	-	-
Depreciation Expense-Storage Building	-	-
Loss on Impairment	-	-
Rebate Liability	-	-
Restricted Cash for Future Expansion	-	-
	9,268,360	9,268,360

Answer 1

Hey there !!

Good to know that you have solved the question yourself first :)

Definitely i'll help you with the parts M,N and O.

Have a look below :

Part M.

Pass following adjustment entries to reverse the sales tax payable from the total sales revenue :

1	Reversal of Sales tax from Revenue A/c :
	Sales Revenue A/c	2,80,000
	To Sales Tax Payable A/c		2,80,000
2	On payament of Sales Tax :
	Sales Tax Payable	2,80,000
	To Bank A/c		2,80,000

Part on Inventory Valuation

Well, this is a tricky part but let me help you with it !! :)

Given information :

Inventory	3,40,000
LIFO Reserve	25,600
Price Index for current Year	1.25
Previous Year
= 140,000*1	=      1,40,000
= 80,000 * 1.0	= 84,000

Now ,

Step 1: Convert Ending Inventory to Base Year Cost

(1/Conversion Index)(FIFO “Current” Ending Inventory)

= 1/1.25 * 3,40,000

= 2,72,000 (Base Year Cost)

Step 2: Determine the Increase in Inventory at Base Year Cost

Ending Inventory in Base Year Dollars- Beginning Inventory in Base Year Dollars

=272,000 - (140,000 + 80,000)

= 52,000

Step 3: Convert the Increase in Inventory to Current Year Prices

(Conversion Index)(Current Year Layer at Base Year

= 1.25 * 52000

= 65000

Step 4: Compute Ending Inventory under Dollar Value LIFO, which is reported on the Balance Sheet

Beginning Inventory + Increase in Inventory (From Step 3) = Dollar Value Ending Inventory

= 220,000 +65,000

= 285,000 ending inventory value !!

Part O.

Calulation of correct depreciation :

Given :

Office Equipment	2,60,000
Acc Dep	52,000
Life	10 Years
Salvage Value	9,600

Now,

Double-declining Depreciation Rate = Straight-line Depreciation Rate x 2

Straight-line Depreciation Rate = Depreciation Expense / Depreciable Base Depreciable Base =              2,50,400 ( 260,000 - 9600) Depreciation p.a = =250,400/10 = 25040 SLM Dep Rate =25040/250400 = 10% DDB Rate =10% x 2 =20%

Depreciation Year 2017	50,080	= 25040x 2
Depreciation Year 2018	50,080	= 25040x 2
Total Depreciation ( 2017 & 18)	1,00,160
Amount in Acc Dep A/c	52,000
Difference (to be tfd to Acc dep A/c)	48,160

Now we shall pass the following journal entry :

Depreciation A/c	48,160
To Accumulated Depreciation A/c		48,160

I hope the solution is nw clear to you....do let me know if you have any other queries !!

happy to help :)

All the best :)