Question

Account balances from the ledger of Crosby Company on December 31, 2019, are as follows:

Accounts Payable ..................................................................................	$   23,000
Accounts Receivable .............................................................................	38,000
Accumulated Depreciation--Equipment .................................................	64,000
Allowance for Doubtful Accounts ...........................................................	2,000
Patent ....................................................................................................	8,400
Capital Stock, $10 par ...........................................................................	100,000
Cash ......................................................................................................	60,260
Inventory ................................................................................................	105,000
Sales Supplies Inventory .......................................................................	900
Interest Expense ....................................................................................	6,600
Inventory, December 31, 2018 ..............................................................	104,850
Contributed Capital in Excess of Par Value ...........................................	15,000
Long-Term Note Receivable, 14% .........................................................	12,000
Mortgage Payable, 12% .........................................................................	60,000
Investment Revenue ......... ....................................................................	1,120
Accumulated Depreciation-Equipment ...................................................	64,000
Rent Revenue ........................................................................................	3,000
Retained Earnings, December 31, 2018 ................................................	32,440
Sales ......................................................................................................	700,000
Cost of Goods Sold ................................................................................	380,000
Selling Expenses ...................................................................................	164,400
General and Administrative Expenses ..................................................	55,000
Equipment .............................................................................................	180,000

Adjustments required on December 31, 2019:

(a)	Estimated bad debt rate is 1/4 percent of credit sales.  Credit sales for the year amounted to $200,000.  [this method ignores the existing balance in the A/DA]
(b)	Interest on the long-term note receivable was last collected August 31, 2019.
(c)	Estimated life of the equipment is 10 years, with a residual value of $20,000.  Allocate 10 percent of depreciation expense to general and administrative expense and the remainder to selling expenses.  Use straight-line depreciation.
(d)	Estimated economic life of the patent is 14 years (from January 1, 2019) with no residual value. Straight-line amortization is used. Depreciation expense is classified as selling expense.
(e)	Interest on the mortgage payable was last paid on November 30, 2019.
(f)	On June 1, 2019, the company rented some office space to a tenant for one year and collected $3,000 rent in advance for the year; the entire amount was credited to rent revenue on this date.
(g)	On December 31, 2019, the company received a statement for calendar year 2019 property taxes amounting to $1,300.  The payment will be made on its due date of February 15, 2020.
(h)	Sales supplies on hand at December 31, 2019, amounted to $300.
(i)	Assume an average income tax rate of 25 percent corporate tax rate on all items.

5-1.	Prepare adjusting journal entries.
5-2.	How much should be reported as selling expenses?
5-3.	What is the ending balance in retained earnings?

Answer 1

Requirement 5-1: Adjusting entries:

	Date	Account title and explanation	Debit	Credit
a	12/31/2019	Bad debt expense [200,000 x 0.25%]	$500
		Allowance for Doubtful Accounts		$500
		[To record bad debt expense]
b	12/31/2019	Interest receivable	$560
		Interest revenue [12,000 x 14% x (4/12)]		$560
		[To record accrued interest earned]
c	12/31/2019	Depreciation expense [(180,000-20,000)/10]	$16,000
		Accumulated depreciation-Equipment		$16,000
		[To record depreciation expense]
d	12/31/2019	Amortization Expense (8,400/14)	$600
		Accumulated amortization-patents		$600
		[To record amortization expense]
e	12/31/2019	Interest expense [60,000 x 12% x (1/12)]	$600
		Interest payable		$600
		[To record accrued interest expense]
f	12/31/2019	Rent revenue	$1,750
		Unearned rent revenue (3,000 x 7/12)		$1,750
		[To record unearned rent revenue]
g	12/31/2019	Property taxes expense	$1,300
		Property taxes payable		$1,300
		[To record accrued property taxes expense]
h	12/31/2019	Sales Supplies expense [900-300]	$600
		Sales supplies		$600
		[To record supplies used]
i	12/31/2019	Income tax expense (83,930 x 25%)	$20,983
		Income tax payable		$20,983
		[To record income tax expense]

Requirement 5-2: Selling expenses:

Selling expenses	$164,400
Bad debt expense	$500
Depreciation expense (16,000 x 90%)	$14,400
Amortization expense	$600
Sales supplies expense	$600
Total Selling expenses	$180,500

Requirement 5-3:

Retained earnings, Dec 31,2018	$32,440
Net income	$62,948
Retained earnings, Dec 31,2019	$95,388

Calculations:

Income Statement
Revenues:
Sales		700,000
Investment revenue		1,120
Rent revenue (3,000-1,750)		1,250
Interest revenue		560
Total revenues		702,930
Expenses:
Cost of goods sold	380,000
Selling expenses	164,400
General and administrative expenses	55,000
Bad debt expense	500
Depreciation expense	16,000
Amortization expense	600
Interest expense	600
Property taxes expense	1,300
Sales supplies expense	600
Total Expenses		619,000
Income before income tax		83,930
Income tax expense (83,930 x 25%)		20,983
Net income		62,948