In: Accounting
Bug-Off Exterminators provides pest control services and sells extermination products manufactured by other companies. The following six-column table contains the company’s unadjusted trial balance as of December 31, 2018.
BUG-OFF EXTERMINATORS | |||||||
December 31, 2018 | |||||||
Unadjusted Trial Balance |
|||||||
Cash | $ | 15,800 | |||||
Accounts receivable | 4,300 | ||||||
Allowance for doubtful accounts | $ | 824 | |||||
Merchandise inventory | 11,100 | ||||||
Trucks | 30,900 | ||||||
Accum. depreciation—Trucks | 0 | ||||||
Equipment | 53,000 | ||||||
Accum. depreciation—Equipment | 14,000 | ||||||
Accounts payable | 4,700 | ||||||
Estimated warranty liability | 1,200 | ||||||
Unearned services revenue | 0 | ||||||
Interest payable | 0 | ||||||
Long-term notes payable | 15,000 | ||||||
Common stock | 11,000 | ||||||
Retained earnings | 48,200 | ||||||
Dividends | 11,000 | ||||||
Extermination services revenue | 45,000 | ||||||
Interest revenue | 860 | ||||||
Sales (of merchandise) | 88,211 | ||||||
Cost of goods sold | 46,000 | ||||||
Depreciation expense—Trucks | 0 | ||||||
Depreciation expense—Equipment | 0 | ||||||
Wages expense | 33,000 | ||||||
Interest expense | 0 | ||||||
Rent expense | 7,400 | ||||||
Bad debts expense | 0 | ||||||
Miscellaneous expense | 1,205 | ||||||
Repairs expense | 8,400 | ||||||
Utilities expense | 6,890 | ||||||
Warranty expense | 0 | ||||||
Totals | $ | 228,995 | $ | 228,995 | |||
The following information in a through h applies to the company at the end of the current year.
a. The bank reconciliation as of December 31, 2018, includes the following facts.
Cash balance per bank | $ | 15,100 |
Cash balance per books | 17,000 | |
Outstanding checks | 1,800 | |
Deposit in transit | 2,450 | |
Interest earned (on bank account) | 52 | |
Bank service charges (miscellaneous expense) | 15 | |
Reported on the bank statement is a canceled check that the company failed to record. (Information from the bank reconciliation allows you to determine the amount of this check, which is a payment on an account payable.)
b. An examination of customers’ accounts shows that accounts totaling $679 should be written off as uncollectible. Using an aging of receivables, the company determines that the ending balance of the Allowance for Doubtful Accounts should be $700.
c. A truck is purchased and placed in service on January 1, 2018. Its cost is being depreciated with the straight-line method using the following facts and estimates.
Original cost | $ | 32,000 |
Expected salvage value | 8,000 | |
Useful life (years) | 4 | |
d. Two items of equipment (a sprayer and an injector) were purchased and put into service in early January 2016. They are being depreciated with the straight-line method using these facts and estimates.
Sprayer | Injector | ||||
Original cost | $ | 27,000 | $ | 18,000 | |
Expected salvage value | 3,000 | 2,500 | |||
Useful life (years) | 8 | 5 | |||
e. On August 1, 2018, the company is paid $3,840 cash in advance to provide monthly service for an apartment complex for one year. The company began providing the services in August. When the cash was received, the full amount was credited to the Extermination Services Revenue account.
f. The company offers a warranty for the services it sells. The expected cost of providing warranty service is 2.5% of the extermination services revenue of $42,760 for 2018. No warranty expense has been recorded for 2018. All costs of servicing warranties in 2018 were properly debited to the Estimated Warranty Liability account.
g. The $15,000 long-term note is an 8%, five-year, interest-bearing note with interest payable annually on December 31. The note was signed with First National Bank on December 31, 2018.
h. The ending inventory of merchandise is counted and determined to have a cost of $11,700. Bug-Off uses a perpetual inventory system.
e. The adjusted 2018 ending balances of the Extermination Services Revenue and Unearned Services Revenue accounts.
f. The adjusted 2018 ending balances of the Warranty Expense and the Estimated Warranty Liability accounts.
g. The adjusted 2018 ending balances of the Interest Expense and the Interest Payable accounts.
(Need answers for h-g)
h)
The ending inventory balance is found to have a cost of 11,700 but only 11,100 has been accounted, this can be due to not recording the purchases made or due to over recording the cost of goods sold
If purchases were not recorded earlier they are to be recorded by debiting Purchases / Inventory account and crediting the accounts payable / cash account
If Cost of goods sold were over recorded then they are to be reversed by debiting the inventory account and crediting the cost of goods sold account.
e)
Extermination service revenue = $ 42,760
Unearned service revenue = $ 2,240
Only revenue of 1,600 are to be accounted for the period (out of 3,840) since only 1,600 pertains to income from August 2018 to December 2018 (3,840 x 5 /12)
f)
Warranty expense = $ 1,069
Estimated warranty liability = $ 2,269
Warranty liability for the year = Estimated warranty expense in percentage x revenue for the year =>2.5% x 42,760 =>1,069. Balance of 1,200 in estimated warranty liability account pertains to prior years.
g)
Interest expense = $ 1,200
Interest payable = $ 1,200
15,000 x 8% = 1,200 interest for a year.