Question

The unadjusted trial balance for PT&M, Inc. is below. On December 31, 20xx the balance of inventory is $30,000 not counting any estimated returned inventory. The company uses GAAP for financial reporting. Additional information is on the next page. The cost principle requires that all costs reasonable and necessary to put an asset into a working condition should be capitalized. The accrual method requires that revenues be recorded when earned and expenses when incurred. The conservative convention means that accountants do not want to overstate assets, revenues or owner’s equity.

Penn, Teller & Mifflin, Inc.
Unadjusted Trial Balance
December 31, 20xx
Cash	$5,000
Prepaid Insurance	$10,000
Accounts Receivable	$30,000
Allowance for Bad debts		$0
Inventory (Jan. 1, 20xx bal.)	$15,000
Estimated Inventory Returns	$0
Land	$20,000
Building	$180,000
Accumulated Depreciation		$0
Accounts Payables		$20,000
Wages Payable		$0
Inventory Refunds Payable		$0
Interest Payable		$0
Unearned Revenue		$0
Notes Payable (Due in 7 Yrs)		$80,000
Common Stock		$65,000
Retained Earnings		$0
Dividends	$25,000
Income Summary		$0
Sales		$280,000
Purchases	$50,000
Purchases Returns		$3,000
Purchases Discounts		$2,000
Freight In	$5,000
Operating Expense	$90,000
Wages Expense	$5,000
Depreciation Expense	$0
Interest Expense	$0
Loss from Natural Disaster	$15,000
	$450,000	$450,000

1. Prepare the adjusting journal entries. 2. Prepare the closing journal entries. Don’t forget to adjust ending inventory onto the books. 3. Use columns 7 and 8 of the worksheet to verify that the net income equals the closing journal entry to close the income summary account and increase retained earnings. Use excel.

A. The company sold goods near the end of the year with a selling price of $200,000 and terms of 5/30, N/120. This transaction was recorded as a debit to Accounts Receivable and a credit to Sales for $200,000.

B. The company made a sale on 6/30/20xx for $80,000 recorded as a debit to Cash and a credit to Sales for $80,000. $44,000 of the contract price related to goods sold FOB shipping point and the remainder related to services that will be provided over the next 24 months.

C. Inventory returns are estimated to be three percent of merchandise sales. None of the inventory has actually been returned yet. Cost of Goods Sold is twenty-five percent of the merchandise selling price.

D. The company paid $10,000 for prepaid Insurance on 10/1/20xx. The prepaid insurance is a one-year contract.

E. An aging of accounts receivables reveals that $3,500 of accounts receivables is expected to be uncollectible.

F. The land and building was purchased on 4/1/20xx for a lump sum of $200,000. If purchased separately, they would have cost 45,000 and $255,000 for the L and B. Additional costs needed to get the building ready for use were $3,000 and were charged to the Operating Expenses account. The building’s estimated useful live is 20 years and the estimated salvage value is $0. The straight-line method is used to depreciate long-term assets.

G. The company owes its employees $1,000 that has not yet been recorded. Unrecorded Interest expense on the note payable is $1,500.   

I. The replacement value of inventory at 12/31/20xx is $32,000.

K. At the end of the year, the accounting department did a bank reconciliation to verify that the accounting records matched up to the bank’s balance for cash and discovered that the bank had collected a $2,500 account receivable on the company’s behalf.

Answer 1

ANSWER

1. Adjusting Entries
Date	Account Tittle	Debit	Credit
A	No Adjusting entry required
B	Sales	$        27,000
	Unearned Revenue		$          27,000
C	Estimated Inventory Return	$          7,320
	Inventory Refund Payable		$            7,320
D	Insurance Expense	$          2,500
	Prepaid Insurance		$            2,500
E	Bad Debts Expense	$          3,500
	Allowance for Bad Debts		$            3,500
F	Building	$          3,000
	Operating Expense		$            3,000
F	Depreciation Expense	$          6,863
	Accumulated Depreciation		$            6,863
G	Wage Expense	$          1,000
	Wage Payable		$            1,000
G	Interest Expense	$          1,500
	Interest Payable		$            1,500
K	Cash	$          2,500
	Account Receivable		$            2,500
I	Inventory	$        15,000
	Purchase(Inventory change)		$          15,000
2.Closing Entries
	Sales	$      253,000
	Purchase Return	$          3,000
	Purchase Discount	$     2,000.00
	Income Summary		$     258,000
	Income Summary	$   164,363
	Purchase		$          35,000
	Freight In		$            5,000
	Operating Expense		$          87,000
	Wage Expense		$            8,000
	Depreciation Expense		$            6,863
	Interest Expense		$            1,500
	Insurance Expense		$            2,500
	Bad Debts Expense		$            3,500
	Loss from natural disaster		$ 15,000
	Income Summary	$ 93,637
	Retained Earning		$ 93,637
	Retained Earning	$ 25,000
	Dividends		$          25,000

Penn, Teller & Mifflin,Inc.
Worksheet (Completed)
Month Ended Dec. 31, 2019
Account Name	Unadjusted Trial Balance		Adjustment		Adj. Trial Balance		Income Statement		Balance Sheet
	Debit	Credit	Debit	Credit	Debit	Credit	Debit	Credit	Debit	Credit
Cash	$          5,000		$       2,500		$       7,500				$        7,500
Prepaid Insurance	$        10,000			$         2,500	$       7,500				$        7,500
Account Receivable	$        30,000			$         2,500	$     27,500				$      27,500
Allowance for bad debts		$            -		$         3,500		$       3,500			$      (3,500)
Inventory (Jan.1, 20XX)	$        15,000		$     15,000		$     30,000				$      30,000
Estimated Inventory Return	$               -		$       7,320		$       7,320				$        7,320
Land	$        20,000				$     20,000				$      20,000
Building	$      180,000		$       3,000		$   183,000				$    183,000
Accumulated Depreciation		$            -		$         6,863		$       6,863			$      (6,863)
Account Payable		$     20,000				$     20,000				$    20,000
Wage payable		$            -		$         3,000		$       3,000				$      3,000
Inventory Refund Payable		$            -		$         7,320		$       7,320				$      7,320
Interest Payable		$            -		$         1,500		$       1,500				$      1,500
Unearned Revenue		$            -		$       27,000		$     27,000				$    27,000
Notes Payable (due in 7 year)		$     80,000				$     80,000				$    80,000
Common Stock		$     65,000				$     65,000				$    65,000
Retained Earnings		$            -
Dividend	$        25,000				$     25,000					$   (25,000)
Income Summary		$            -
Sales		$   280,000	$     27,000			$   253,000		$ 253,000
Purchase	$        50,000			$       15,000	$     35,000		$        35,000
Purchase Return		$       3,000				$       3,000		$      3,000
Purchase Discount		$       2,000				$       2,000		$      2,000
Freight in	$          5,000				$       5,000		$          5,000
Operating Expense	$        90,000			$         3,000	$     87,000		$        87,000
Wage Expense	5000		$       3,000		$       8,000		$          8,000
Depreciation Expense	0		$       6,863		$       6,863		$          6,863
Interest Expense	0		$       1,500		$       1,500		$          1,500
Insurance Expense			$       2,500		$       2,500		$          2,500
Bad Debt Expense			$       3,500		$       3,500		$          3,500
Loss from Natural Disaster	15000				$     15,000		$        15,000
Sub Total	$      450,000	$   450,000	$     57,820	$       72,183	$   472,183	$   472,183
Net Income							$        93,637			$    93,637
Total							$      258,000	$ 258,000	$    272,457	$ 272,457

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