Question

The Queen of the Snows started a business, Winter Carnival Co., a company that specializes in merchandise for ice-fishing, snow-sliding, treasure-hunting and other winter activities. In 2017, the company had the following beginning balances (in dollar). Accounts receivable $60,000 Accounts payable $30,000 Allowance for doubtful accounts $6,000 Accumulated depreciation – machine $50,000 Cash $25,000 Common stock $100,000 Inventory $300,000 Machine $150,000 Prepaid advertisement $27,000 Notes payable $200,000 Salary payable $5,000 Retained earnings $171,000 During 2017, the following transactions occurred. 1.Winter Carnival acquired additional merchandise, totaled $90,000, of which $60,000 was on account. 2.Winter Carnival delivered merchandise and earned sales revenue, totaled $550,000, of which $150,000 was on credit. Cost, to Winter Carnival Co., of the merchandise sold, totaled $300,000. 3.Winter Carnival collected a total of $120,000 on its accounts receivable from its various customers. 4.Winter Carnival borrowed $50,000 on May 1, 2017 from a local bank, on a 6% note for 5 years. Winter Carnival would pay interest semi-annually on each May 1 and November 1. 5.In addition, Winter Carnival signed a sales contract with a customer, Mini-Soda Company to deliver a total of $100,000 merchandise January 2018. Winter Carnival collected $10,000 cash in advance from this customer on November 17, 2017. 6.Winter Carnival paid $70,000 on its accounts payable to its suppliers. 7.Winter Carnival incurred insurance expenses of $12,000, all paid in cash in 2017. 8.Winter Carnival paid its employees $95,000 cash for their salary. At the end of year 2017, the company still owed $3,000 salary payable to its employees. The following information was also available during 2017 for Winter Carnival Co. 9.Its existing “notes payable” at the beginning of the year 2017 had a due date in 2020 and an interest rate of 3%. The interest would be paid in cash at the end of each calendar year. 10.The ending balance of “allowance for doubtful accounts” was estimated to be 10% of the ending balance of its “accounts receivable” at the end of 2017. 2 11.Its ‘prepaid advertisement’ had 18 months remaining at the beginning of the year 2017. 12.The existing machine had an estimated life of 15 years with no residual value and had been depreciated using the straight-line method. And lastly, 13.The income tax rate was 20% for Winter Carnival and the company would pay its income tax in the first quarter of 2018. Required: 1.Based on above transactions, prepare journal entries and adjusting entries in 2017 for Winter Carnival. 2.Set up T-accounts and post your journal entries and adjusting entries to T-accounts. (A kind reminder: Don’t forget the beginning balances.) 3.Prepare a pre-closing trial balance, as of December 31, 2017. 4.Prepare an income statement, in a good format, for the year ended December 31, 2017 for Winter Carnival. 5.Prepare a statement of retained earnings, in a good format, for the same period for Winter Carnival. 6.Prepare a balance sheet, in a good format, as of December 31, 2017 for Winter Carnival. 7.Prepare closing entries and a post-closing trial balance, as of December 31, 2017.

Answer 1

Winter Carnival Co.
Journal entries for the year ending December31, 2017
Event	Account Title	Debit	Credit
1	Inventory	90000
	Cash		30000
	Accounts Payable		60000
	(Purchase of additional merchandise)
2	Cash	400000
	Accounts Receivable	150000
	Sales Revenue		550000
	(Sale of merchandise recorded)
	Cost of goods sold	300000
	Inventory		300000
	(Cost of the above sale recorded)
3	Cash	120000
	Accounts Receivable		120000
	(Cash collected from customers)
4	Cash	50000
	Note payable		50000
	(Cash received on note payable)
5	Cash	10000
	Unearned Revenue		10000
	(Advance received from a customer)
6	Accounts Payable	70000
	Cash		70000
	(Cash paid on account )
7	Insurance expense	12000
	Cash		12000
	(Insurance expense incurred and paid)
8	Salary Expense	90000
	Salary payable	5000
	Cash		95000
	(Cash payment for salary )
	Salary expense	30000
	Salary payable		30000
	(Salary accrued and not paid)
9	Interest expense	6000
	Cash		6000
	(Interest paid on the old note payable of $200,000)
	Interest expense	1500
	Cash		1500
	(Interest paid on the new note payable of $50,000 from May 1 to Oct.30)
	Interest expense	500
	Interest Payable		500
	(Interest paid on the new note payable for Nov and Dec.recorded)
10	Bad debts expense	3000
	Allowance for doubtful acounts		3000
	(Allowance for doubtful accounts recorded)
11	Advertising expense	18000
	Prepaid advertisement		18000
	(Advertising expense for 12 months recorded)
12	Depreciation expense	10000
	Accumulaed Depreciation		10000
	(Depreciation on 150,000 for 15 years)
13	Incometax expense	21200
	Incometax payable		21200
	(Income tax expense for the year recorded)

T-accounts

	Cash					Inventory					Accounts Receivable
	Event	Debit	Credit	Event		Event	Debit	Credit	Event		Event	Debit	Credit	Event
	Beg.Bal.	25000	30000	1		Beg.Bal.	300000	300000	2		Beg.Bal.	60000	120000	3
	2	400000	70000	6		1	90000				2	150000
	3	120000	12000	7
	4	50000	95000	8
	5	10000	7500	9			390000	300000				210000	120000
						End Bal.	90000				End Bal.	90000
		605000	214500
	End Bal.	390500				Accounts Payable					Allowance for doubtful accounts
						Event	Debit	Credit	Event		Event	Debit	Credit	Event
	Machine					6	70000	30000	Beg.Bal.				6000	Beg.Bal.
	Event	Debit	Credit	Event				60000	1				3000	10
	Beg.Bal.	150000
							70000	90000				0	9000
								20000	End Bal.				9000	End Bal.
		150000	0
						Accumulated Depreciation - machine
	Common Stock					Event	Debit	Credit	Event		Notes Payable
	Event	Debit	Credit	Event				50000	Beg.Bal.		Event	Debit	Credit	Event
			100000	Beg.Bal.				10000	12				200000	Beg.Bal.
							0	60000					50000	4
		0	100000					60000	End Bal.			0	250000
			100000	End Bal.									250000	End Bal.
						Retained earnings
	Salary payable					Event	Debit	Credit	Event		Prepaid Advertisement
	Event	Debit	Credit	Event				171000	Beg.Bal.		Event	Debit	Credit	Event
	8	5000	5000	Beg.Bal.							Beg.bal.	27000	18000
			3000	9			0	171000
		5000	8000					171000	End Bal.			27000	18000
			3000	End Bal.							End Bal.	9000
	Sales Revenue					Cost of goods sold
	Event	Debit	Credit	Event		Event	Debit	Credit	Event		Salary expense
			550000	2		Beg.Bal.	300000				Event	Debit	Credit	Event
											8	90000
		0	550000				300000				8	3000
			550000	End Bal.		End Bal.	300000					93000
	Unearned Revenue					Insurance expense
	Event	Debit	Credit	Event		Event	Debit	Credit	Event
			10000	5		7	12000				Interest expense
							12000				Event	Debit	Credit	Event
		0	10000								9	6000
			10000	End Bal.		Bad debt expense					9	1500
						Event	Debit	Credit	Event		9	500
	Advertising expense					10	3000					8000
	Event	Debit	Credit	Event			3000				Depreciation expense
	11	18000									Event	Debit	Credit	Event
		18000				Interest Payable					12	10000
						Event	Debit	Credit	Event			10000
	Income tax expense							500	9
	Event	Debit	Credit	Event							Income tax payable
	13	21200					0	500			Event	Debit	Credit	Event
		21200						500	End Bal.				21200	13
												0	21200

Winter Carnival Co.
Trial Balance as at December 31,2017
Account	Adjusted
	Debit	credit
Cash	390500
Inventory	90000
Accounts Receivable	90000
Allowance for doubtful accounts		9000
Prepaid advertiseent	9000
Machine	150000
Accumulated depreciation - Machine		60000
Accounts Payable		20000
Salary Payable		3000
Interest Payable		500
Unearned Revenue		10000
Notes Payable		250000
Income tax payable		21200
Common stock		100000
Retained Earnings		171000
Sales Revenue		550000
Cost of goods sold	300000
Salary expense	93000
Advertining expense	18000
Insurance expense	12000
Interest expense	8000
Bad Debt expense	3000
Depreciation expense	10000
Income Tax expense	21200
T o t a l	1194700	1194700

Winter Carnival Co.
Income statement for the year ended December31 ,2017
Sales revenue	550000
Expenses:
Cost of goods sold	300000
Salary expense	93000
Advertining expense	18000
Insurance expense	12000
Interest expense	8000
Bad Debt expense	3000
Depreciation expense	10000
Total expenses	444000
Income before taxes	106000
Income tax expense @20%	21200
Net income	84800
Winter Carnival Co.
Statement of retained earnings for the year ending December 31, 2017
Balance as at January 1, 2017	171000
Net Income for the year	84800
Balance as at December 31, 2017	255800
Winter Carnival Co.
Balance sheet as at December 31, 2017
Assets
Cash		390500
Inventory		90000
Accounts Receivable	90000
Allowance for doubtful accounts	9000	81000
Prepaid advertiseent		9000
Machine	150000
Accumulated depreciation - Machine	60000	90000
Total Assets		660500
Liabilitis and stockholder's equity
Accounts Payable		20000
Salary Payable		3000
Interest Payable		500
Unearned Revenue		10000
Income tax payable		21200
Notes Payable		250000
Total liabilities		304700
Common stock		100000
Retained earnings		255800
Total stockholders' equity		355800
Total liabilities and stockholders' equity		660500