Question

The Unadjusted pre-closing 12/31/2020 account balances for the Mahoney Company are listed below:

Net Sales	$12,540,000
Net Purchases	9,000,000
Selling Expenses	424,000
Cash	487,000
Machines	6,019,000
Accumulated Depreciation, Machines	2,154,000
Accounts Payable	1,445,000
Retained Earnings	4,182,000
Allowance for Doubtful Accounts	60,000
Building	4,800,000
Accumulated Depreciation, Building	468,000
Common Stock	4,760,000
Accounts Receivable	2,877,000
Depreciation Expense, Machines	1,077,000
Inventory @ 1/1/2020	925,000

During your audit, you discover the following four items that have yet to be recorded:

1) No depreciation on the building has been recorded for 2020. Depreciation on the building is based on Double-Declining Balance. It was purchased on 1/1/18 and has an estimated useful life of 40 years. The estimated salvage value is $1,000.

2) Mahoney exhanged a machine for a similar machine on 12/31/2020. The origianl machine cost $3,429 and has a book value of $2,134. The new machine had a fair value of $1,823; Mahoney also received $511 in cash. The exchange lacked commercial substance.

3) Mahoney uses the Income Statement approach to record Bad Debts. Bad Debts in 2020 are estimate to be 4% of Sales.

4) Ending Inventory is to be estimated using the Gross Profit Method. The historic Gross Profit percentage is 20%.

Required

A) Record journal entries for items #1-3 above; show supporting computations. In addition, compute ending inventory per #4 above; show supporting computations. Assume adjusting/closing entries to adjust inventory, closing Purchases, and Record Cost of Goods Sold were properly made.

B) Draft the 2020 Condensed Income Statement and the 12/31/2020 Balance Sheet. Assume no Taxes. Do not include Earnings Per Share.

Answer 1

Journal entries-

sr. no.	Particulars	Debit	Credit
1	accumulated depreciation	227540
	Building		227540
2	Fixed asset (machine)	1823
	cash	511
	fixed asset		2134
	Profit and loss		200
3	bad debts	501600
	debtors		501600

WN. calculation of accumulated depreciation on building

4800000*5/100*347/366= 227540

4) Calculation of ending inventory-

Ending inventory= 20% of Gross profit

= 20% of (925000+12540000-9000000)= 893000

B) Condensed income statement

Particulars	Amount
opening inventory	925000
net sales	12540000
less: net purchase	9000000
Gross profit	4465000
less: Selling expense	424000
less; accumulated depreciation building 227540 machine 1077000	1304540
bad debts	501600
Add:machine exchanged	200
net profit	2235060

liabilities	amount	asset	amount
accumulated depreciation-machine	2154000	building	4800000
accumulated depreciation- building (468000+227540)	695540	machine	6019000
retained profit 4182000 add: net profit 2235060	6417060	inventory	893000
doubtful debts 60000 add: 501600	561600	account receivable	2877000
accounts payable	1445000	cash	487000
		common stock	476000