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).

Beginning Balances:

Accounts Receivable: 30,000

Allowance for Doubtful Accounts: 3,000

Cash: 50,000

Inventory: 220,000

Prepaid Advertisement: 36,000

Salary Payable: 3,000

Accounts Payable: 70,000

Accumulated Depreciation: 10,000

Common Stock: 100,000

Machine: 50,000

Retained Earnings: 200,000

During 2017, the following transactions occurred.

Winter Carnival borrowed $500,000 on February 1, 2017 from a local bank, on a 2% note for 5 years. Winter Carnival would pay interest semi-annually on each August 1 and February 1.

Winter Carnival delivered merchandise and earned sales revenue, totaled $300,000, of which $250,000 was on credit. Cost, to Winter Carnival Co., of the merchandise sold, totaled $150,000.

In addition, Winter Carnival signed a sales contract with a customer, Mini-Soda Company to deliver a total of $60,000 merchandise in January 2018. Winter Carnival collected $18,000 cash in advance from this customer on October 17, 2017.

Winter Carnival acquired additional merchandise, totaled $100,000, of which $90,000 was on account.

Winter Carnival paid $80,000 on its accounts payable to its suppliers.

Winter Carnival collected a total of $230,000 on its accounts receivable from its various customers.

Winter Carnival paid its employees $90,000 cash for their salary. At the end of year 2017, the company still owed $2,500 salary payable to its employees.

Winter Carnival incurred insurance expenses of $6,000, all paid in cash in 2017.

The following information was also available during 2017 for Winter Carnival Co.

9.

Its ‘prepaid advertisement’ had 18 months remaining at the beginning of the year 2017.

The existing machine had an estimated life of 10 years with no residual value and had been depreciated using the straight-line method.

Its bad debt expense was estimated to be 10% of its outstanding A/R on 12/31/2017.

The income tax rate was 21% for Winter Carnival and the company would pay its income tax in the first quarter of 2018.

Required:

Based on above transactions, prepare journal entries and adjusting entries in 2017 for Winter Carnival.

Set up T-accounts and post your journal entries and adjusting entries to T-accounts. (A kind reminder: Don’t forget the beginning balances.)

Prepare a pre-closing trial balance, as of December 31, 2017.

Prepare an income statement, in a good format, for the year ended December 31, 2017 for Winter Carnival.

Prepare a statement of retained earnings, in a good format, for the same period for Winter Carnival.

Prepare a balance sheet, in a good format, as of December 31, 2017 for Winter Carnival.

Prepare closing entries and a post-closing trial balance, as of December 31, 2017.

Answer 1

	Journal entries in the books of Winter Carnival Co. for the year 2017
S.No.	Date	Particulars	Debit	Credit
1	01/01/2017	Accounts Receivable	30000
		Cash	50000
		Inventory	220000
		Prepaid Advertisement	36000
		Machine	50000
		Allowance for doubtful accounts		3000
		Salary Payable		3000
		Accounts Payable		70000
		Accumulated Depreciation		10000
		Common Stock		100000
		Retained Earnings		200000
		Entry for recording all the opening balances in Books for the current year
2	01/02/2017	Cash	500000
		2% Loan		500000
		Entry for recording the borrowing
3	End of the year	Cash	50000
		Accounts Receivable	250000
		Sales		300000
		Entry for recording sales
4	End of the year	Cost of Goods Sold	150000
		Inventory		150000
		Entry for recording consumption of stock
5	17/10/2017	Cash	18000
		Advance for Sales		18000
		Entry for recording advance obtained against a sales contract
6	-	Machine	100000
		Cash		100000
		Entry for acquiring an additional machinery
7	-	Accounts Payable	80000
		Cash		80000
		Entry for payment made to suppliers
8	-	Cash	230000
		Accounts Receivable		230000
		Entry for recording collections from customers
9	-	Salary	89500
		Salary Payable	3000
		Cash		90000
		Salary Payable		2500
		Entry for recording salaries paid and salaries payable
10	-	Insurance	6000
		Cash		6000
		Entry for recording insurance expense
11	31/12/2017	Advertisement	24000
		Prepaid Advertisement		24000
		Entry for recording advertisement expenditure of current year
12	31/12/2017	Depreciation	5000
		Accumulated Depreciation		5000
		Entry for recording depreciation on existing machine (50000/10) Note: Did not consider the additional purchase as nothing has been given in the question
13	31/12/2017	Bad Debts	3000
		Allowance for doubtful accounts		3000
		Entry for recording bad debts of 10% on closing Debtors
14	01/08/2018	Interest	833
		Cash		833
		Entry for interest on loan
14	31/12/2017	Income Tax
		Income Tax payable
T Accounts in the books of Winter Carnival Co. for the year 2017
	Accounts Receivable
Debit			Credit
S.No.	Amount	S.No.	Amount
1	30000	8	230000
3	250000	Balance	50000
	280000		280000
	Cash
Debit			Credit
S.No.	Amount	S.No.	Amount
1	50000	6	100000
2	500000	7	80000
3	50000	9	90000
5	18000	10	6000
8	230000	14	833
		Balance	571167
	848000		848000
	Inventory
Debit			Credit
S.No.	Amount	S.No.	Amount
1	220000	4	150000
		Balance	70000
	220000		220000
	Prepaid Advertisement
Debit			Credit
S.No.	Amount	S.No.	Amount
1	36000	11	24000
		Balance	12000
	36000		36000
	2% Loan
Debit			Credit
S.No.	Amount	S.No.	Amount
		2	500000
Balance	500000
	500000		500000
	Advance for Sales
Debit			Credit
S.No.	Amount	S.No.	Amount
		5	18000
Balance	18000
	18000		18000
	Depreciation
Debit			Credit
S.No.	Amount	S.No.	Amount
12	5000
		Balance	5000
	5000		5000
	Interest
Debit			Credit
S.No.	Amount	S.No.	Amount
12	833
		Balance	833
	833		833
	Machine
Debit			Credit
S.No.	Amount	S.No.	Amount
1	50000	Balance	150000
6	100000
	150000		150000
	Allowance for doubtful accounts
Debit			Credit
S.No.	Amount	S.No.	Amount
Balance	6000	1	3000
		13	3000
	6000		6000
	Salary Payable
Debit			Credit
S.No.	Amount	S.No.	Amount
9	3000	1	3000
Balance	2500	9	2500
	5500		5500
	Accounts Payable
Debit			Credit
S.No.	Amount	S.No.	Amount
7	80000	1	70000
		Balance	10000
	80000		80000
	Sales
Debit			Credit
S.No.	Amount	S.No.	Amount
		3	300000
Balance	300000
	300000		300000
	Salary
Debit			Credit
S.No.	Amount	S.No.	Amount
9	89500	Balance	89500
	89500		89500
	Advertisement
Debit			Credit
S.No.	Amount	S.No.	Amount
11	24000	Balance	24000
	24000		24000
	Accumulated Depreciation
Debit			Credit
S.No.	Amount	S.No.	Amount
Balance	15000	1	10000
		12	5000
	15000		15000
	Common Stock
Debit			Credit
S.No.	Amount	S.No.	Amount
Balance	100000	1	100000
	100000		100000
	Retained Earnings
Debit			Credit
S.No.	Amount	S.No.	Amount
Balance	200000	1	200000
	200000		200000
	Cost of Goods Sold
Debit			Credit
S.No.	Amount	S.No.	Amount
4	150000	Balance	150000
	150000		150000
	Insurance
Debit			Credit
S.No.	Amount	S.No.	Amount
10	6000	Balance	6000
	6000		6000
	Bad Debts
Debit			Credit
S.No.	Amount	S.No.	Amount
13	3000	Balance	3000
	3000		3000
	Pre-closing Trial Balance as on 31st December, 2017 in the books of Winter Carnival Co.
	Account	Debit	Credit
	Accounts Receivable	50000
	Cash	571167
	Inventory	70000
	Prepaid Advertisement	12000
	2% Loan		500000
	Advance for Sales		18000
	Depreciation	5000
	Interest	833
	Machine	150000
	Allowance for dubtful debts		6000
	Salary Payable		2500
	Sales		300000
	Accounts Payable		-10000
	Salary	89500
	Advertisement	24000
	Accumulated Depreciation		15000
	Common Stock		100000
	Retained Earnings		200000
	Cost of Goods sold	150000
	Insurance	6000
	Bad Debts	3000
	Total	1131500	1131500
	Income Statement of Winter Carnival Co. for the year 2017
	Sales	300000
	Total Sales		300000
	Expenses
	Cost of Goods sold	150000
	Salary	89500
	Advertisement	24000
	Insurance	6000
	Interest	833
	Depreciation	5000
	Bad Debts	3000
	Total Expenses		278333
	Income		21667
	Income Tax (21%)		4550
	Net Income		17117
	Statement of Retained Earnings of Winter Carnival Co. for the year 2017
	Retained Earnings on January 1st, 2017		200000
	Net income for the period		17117
	Dividends paid		0
	Retained Earnings as at 31st December, 2017		217117
	Assets	Particulars	Amounts
		Accounts Receivable	50000
		Cash	571167
		Inventory	70000
		Prepaid Advertisement	12000
		Machine	150000
		Total Assets	853167
	Equity and Liabilities	Particulars	Amounts
		2% Loan	500000
		Advance for Sales	18000
		Allowance for dubtful debts	6000
		Salary Payable	2500
		Accounts Payable	-10000
		Accumulated Depreciation	15000
		Common Stock	100000
		Retained Earnings	217117
		Income Tax payable	4550
		Total Liabilities and equity	853167
	Post closing Trial Balance as on 31st December, 2017
	Account	Debit	Credit
	Accounts Receivable	50000
	Cash	571167
	Inventory	70000
	Prepaid Advertisement	12000
	2% Loan		500000
	Advance for Sales		18000
	Machine	150000
	Allowance for dubtful debts		6000
	Salary Payable		2500
	Accounts Payable		-10000
	Accumulated Depreciation		15000
	Common Stock		100000
	Retained Earnings		217117
	Income Tax payable		4550
	Total	853167	853167