Question

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).

(a) 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.   

(b) 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 $36,000 at the end of 2018.

(c) On April 1, 2018, Czarrenewed a 10 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.

(d) On November 1, 2018, Czarloaned 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 2%. 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.

Answer 1

a)

Date	Account Description	Debit	Credit
31-Dec-18	Bank Overdraft	$    9,600
	Cash		$    9,600
	(To Record the payment of Bank OD)

b)

Date	Account Description	Debit	Credit
31-Dec-18	Bad-Debt Expenses (36000-28000)	$    8,000
	Accounts Receivable	$ 28,000
	Allowance accounts receivable		$ 36,000
	(To record the adjustment for Rectification of Bad-Debt provision)
31-Dec-18	Sales	$    6,800
	Bad-Debt Recovery		$    6,800
	(To record the adjustment for Rectification of Bad-Debt recovery)

c)

Date	Account Description	Debit	Credit
31-Dec-18	Prepaid Insurance (12000/10*1)	$    1,200
	Insurance Expenses		$    1,200
	(To record the rectification of Insurance expenses)

d)

Date	Account Description	Debit	Credit
31-Dec-18	Accrued Interest (20000 x 2% x 3/12)	$ 100.00
	Interest Income on Note		$ 100.00
	(To Record the accrual of Interest Income on Note)

Since it is mentioned in the question that note is due in 6 months that means 3 months already over as on 31st Dec 2018 , So the interest income is recorded for 3 months.