Question

Balance Sheet accounts are provided in the table below. *The debits and credits do not equal/balance because the net income earned so far this year ($79,000) has not yet been included in retained earnings. This amount will show up as part of the net income when you prepare the financial statements

Account	Debit	Credit
Cash	100,000
Trading Securities	50,000
Available-for-Sale Securities	50,000
Fair Value Adjustment-AFS		5,000
Accounts Receivable	75,000
Receivable from Employee	10,000
Inventories	200,000
Assets Held-for-Sale	25,000
Cash Value of Insurance	10,000
Equipment	54,000
Accumulated Depreciation-Equipment		16,500
Building	96,000
Accumulated Depreciation-Building		32,000
Land	25,000
Goodwill	275,000
Accounts Payable		80,000
Interest Payable		15,000
Salaries Payable		10,000
Taxes Payable		5,000
Current Portion of Note		40,000
Note Payable (noncurrent portion of note)		190,000
Mortgage Liability		110,000
Common Stock		300,000
Retained Earnings		92,500
Accumulated Other Comprehensive Income/Loss	5,000	______
	$975,000	$896,000

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The following information relates to the revenues earned and expenses incurred during the first half of 2012.

	Debit	Credit
Sales		$1,911,500
Sales Returns and Allowances	100,000
Sales Discounts	22,500
Cost of Goods Sold	1,240,000
Selling Expenses	250,000
General and Administrative Expenses	220,000

Transactions occurring in 2012 but not considered in the current net income of 79,000 are as follows:

1. On July 1^st, the corporation entered into a lease agreement for a machine that qualifies as a capital lease. The lease calls for annual lease payments of $26,269 over a six-year lease term, with the first payment at July 1^st, the leases inception. The interest rate is 5%. *(Round your answer to the nearest whole dollar).

2. On July 1^st, the corporation sold a $15,000, 5 year bond with a stated rate of 8%. The effective yield on the bonds is 10%. Interest on the bond is paid semiannually on January 1^st and July 1^st. The company uses the effective interest method to amortize any bond discount or premium. *(Round your answer to the nearest whole dollar).

3. One month following the issue of the bonds, the corporation invested $5,000 into a sinking fund in order to have the money to pay off the bonds when they come due.

4. On September 3^rd, the corporation experienced an uninsured flood loss (extraordinary) which destroyed the building. The tax rate is 40%.

5. On September 20^th, the company sold their shares in Hobokin Company resulting in a loss of $1,000 (pretax). See the portfolio tables below.

6. When its president died, on October 8^th, the corporation realized $110,000 from an insurance policy. The cash surrender value of this policy had been carried on the books as an investment in the amount of $10,000 (the gain is nontaxable).

7. On November 1^st, the corporation filed a suit against Tri-Star, Inc. seeking damages for patent infringement. Legal counsel believes that it is probable that the company will be successful against Tri-Star for an estimated amount in the range of $100,000 to $150,000, with all amounts in the range considered equally likely.

8. On November 15^th, the corporation disposed of its wholesale division at a loss of $5,000 before taxes. The wholesale operations were shut down at the beginning of the year. This transaction meets the criteria for discontinued operations. The assets associated with this sale are being classified as “Assets Held-For-Saleâ€.

9. The corporation decided to change its method of inventory pricing from average cost to the FIFO method. The effect of this change on prior years is to increase 2010 income by $60,000 and decrease 2011 income by $20,000 before taxes. The FIFO method has been used for 2012. The tax rate on these items is 40%.

10. On December 18^th, the corporation purchased 2,000 shares of its own common stock at $20 a share.

11. On December 20^th, the corporation paid off the current portion of the note payable along with the $15,000 in interest that had been accrued.

12. December 31^st, interest on the lease has accrued.

13. December 31^st, interest on the bonds has accrued.

14. The company’s products carry a one year warranty against manufacturer’s defects. Warranty costs are expected to be 1% of net sales.

15. At the beginning of 2011, the corporation purchased a piece of equipment for $54,000, salvage value of $9,000 that had a useful life of 6 years. The bookkeeper used straight-line depreciation for 2011 and 2012. However, in 2012 the bookkeeper failed to deduct the salvage value in computing the depreciation base (an error was made). The journal entry for this year depreciation has already been made, but a correcting entry is required to fix the mistake.

16. Adjust the Trading securities and AFS securities to their respective fair values. See the portfolio tables below.

Portfolio Tables

AFS Securities Portfolio	Cost	Fair Value 2011	Fair Value 2012
Disney Corporation	$5,000	$8,000	$10,000
Monster Truck, Inc.	25,000	20,000	22,000
Hobokin Company	20,000	17,000	______
Totals	$50,000	$45,000	$32,000

Trading Securities Portfolio	Cost	Fair Value 2011	Fair Value 2012
GM Company	$15,000	$20,000	$23,000
Shaffer Corporation	35,000	30,000	34,000
Totals	$50,000	$50,000	$57,000

Required:

(1) Journalize transactions 1 – 14. The corporation’s tax rate is 40%.

(2) Remember to include a journal entry for income taxes once you have prepared the income statement.

(3) Prepare a multiple-step income statement, statement of retained earnings, and a balance sheet.

Answer 1

Date	Transaction	Account	Debit $	Credit $
1st July 2017	lease agreement for a machine that qualifies as a capital lease 26,269 *0.05=	Interest on Capital Lease	1314
1st July 2017		Cash		1314
1st July 2017	lease agreement for a machine that qualifies as a capital lease 26,269 *0.05=1314	Profit and loss	1314
		Interest on Capital Lease		1314
1st July 2017	Interest payment on the bond	Interest expense	750
	10% on 15000-1500/2=750 Paid 8% on 15000=1200/2=600 750-600=150 Amortization of interest on the bond	Amortization of Bond discount		150
		Cash		600
1st July 2017	Interest payment on the bond	Profit and loss	750
		Interest expense		750
September 20th	Loss on sale of shares	Profit and loss	1000
		Loss on sale of shares		1000
October 8th	the corporation realized from an insurance policy	Cash	110,000
		Profit and loss		110,000
November 1st	seeking damages for patent infringement towards Tristar	Profit and Loss	10,000
		patent infringement cost		10,000
November 1st	seeking damages for patent infringement towards Tristar	patent infringement cost	10,000
		Cash		10,000
November 15th	the corporation disposed of its wholesale division at a loss of $5,000 before taxes	Assets sold	5,000
		Profit & Loss		5,000
November 15th	the corporation disposed of its wholesale division at a loss of $5,000 before taxes	Cash	5,000
		Assets sold		5,000
Dec	Change in method of Inventory pricing from average cost to FIFO method. Income increase(2015) –income decrease(2016) 60000-20000=40000 Tax=40000*0.4=16000 After tax =40000-16000=24,000	Increase in stock value	24,000
		Profit and Loss		24,000
December 18th	8.On December 18th, the corporation purchased 2,000 shares of its own common stock at $20 a share.	Common Stock	2000
		Cash		2000
Dec 20th	9.On December 20th, the corporation paid off the current portion of the note payable along with the $15,000 in interest that had been accrued.	Accounts Payable	80000
		Interest Payable	15,000
		Cash		95,000
Dec 31	10.December 31st, interest on the lease has accrued.	Profit and Loss	1314
		Interest on Capital Lease		1314
Dec 31	11.December 31st, interest on the bonds has accrued.	Profit and loss	750
		Interest expense		750
Dec 31	12.The company’s products carry a one-year warranty against manufacturer’s defects. Warranty costs are expected to be 1% of net sales. 1,911,500 * 1%	Profit and loss	19,115
		Warranty cost		19,115
Dec 31	13.At the beginning of 2016, the corporation purchased a piece of equipment for $54,000, salvage value of $9,000, and that had a useful life of 6 years. The bookkeeper used straight-line depreciation for 2016 and 2017. However, in 2017, the bookkeeper failed to deduct the salvage value in computing the depreciation base (an error was made). The journal entry for this year's depreciation has already been made, but a correcting entry is required to fix the mistake.	Profit & Loss 2016 –cost -54,000 Salavage value=9000 54000-9000=45,000 Depreciation in 2016=45000/6=7500 In 2017 –depreciation already provided =54000/6=9000 Correct depreciation=7500. Excess depreciation provided=9000-7500=1500		1500
		Depreciation	1500
Dec 31	unrealized loss of 3,000 reported at the end of 2016- reversal entry	Fair Value Adjustment - AFS	3000
Dec 31		Accumulated Other Comprehensive Income		3,000
Dec 31	AFS securities - Fair value adjustment 5000 -increase in Disney Corporation 3000 -decrease in Monster Truck, Inc.	Fair Value Adjustment - AFS		2000
Dec 31		Profit & Loss	2000
		Profit & Loss	7000
	increase in value =8000 decrease in value=1000 8000-1000=7000	Fair Value Adjustment-Trading Securities