Question 1

Always Fit Company is engaged in providing group fitness classes in a studio. Customers are required to purchase group classes coupons in advance. Coupons are redeemed when customers attend fitness classes. Adjusting entries are performed on a monthly basis. Closing entries are performed annually on December 31. Below is the Company’s unadjusted trial balance at the year ended December 31, 2018.


Always Fit Company Unadjusted Trial Balance December 31, 2018 Account Title Debit $ Credit $ Cash 114,400 Accounts receivable 220,100 Unexpired insurance 36,000 Supplies 6,500 Equipment 120,000 Accumulated depreciation: Equipment 21,200 Accounts payable 24,000 Income taxes payable 9,100 Unearned revenue 21,000 8% Notes payable 42,000 Share capital (100,000 shares) 200,000 Retained earnings 77,000 Services revenue 304,000 Wages expense 50,000 Rent expense 91,000 Insurance expense 12,000 Depreciation expense 18,000 Supplies expense 3,000 Income taxes expense 27,300 $698,300 $698,300
  

Information on adjusting entries:

(1) The estimated useful life of equipment is five years and straight-line depreciation method is adopted. Depreciation expense had been updated to end of September 2018.

(2) Accrued, but unrecorded and unpaid wages amounted to $7,000.

(3) On November 1, 2018, the company borrowed $42,000 from its owner by signing 9-month note at 8% interest rate per annum. The monthly interests were paid by the company at the end of the next months. No entries had been made after recording the note.

(4) Physical count shows supplies on hand were $6,000 on December 31, 2018.

(5) On August 1, 2018, the company prepaid a 12-month insurance policy, which was effective on September 1, 2018.

(6) On December 31, 2018, the Company declared a cash dividend of $0.10 per share to be paid in the following year.

(7) Group class coupons amounting $8,000 were redeemed in December, 2018.

(8) The Company estimated that the income taxes expense for the entire year was $30,300, which to be paid next year.

(9) Unrecorded and unpaid fuel expenses of the owner’s private vehicle amounted to $2,000.


Required:

(a) Prepare the necessary adjusting journal entries on December 31, 2018 so as to bring the financial records of Always Fit Company up-to-date. Workings are required, but explanations are NOT required. If no adjusting entries are required, state “No entry” and name the accounting principle applied.

(b) Prepare the income statement of the Company for the year ended December 31, 2018, showing breakdown of items under the captions of Total Revenues, Total Expenses, Profit before Tax, Profit after Tax.

(c) Prepare the statement of financial position as of December 31, 2018, showing breakdown of items under the captions of Total Assets, Total Liabilities, Total Shareholder’s Equity and Total Liabilities & Shareholders’ Equity.

Problem 24-3

Metlock Corporation was formed 5 years ago through a public subscription of common stock. Daniel Brown, who owns 15% of the common stock, was one of the organizers of Metlock and is its current president. The company has been successful, but it currently is experiencing a shortage of funds. On June 10, 2018, Daniel Brown approached the Topeka National Bank, asking for a 24-month extension on two $34,960 notes, which are due on June 30, 2018, and September 30, 2018. Another note of $6,030 is due on March 31, 2019, but he expects no difficulty in paying this note on its due date. Brown explained that Metlock’s cash flow problems are due primarily to the company’s desire to finance a $299,210 plant expansion over the next 2 fiscal years through internally generated funds.

The commercial loan officer of Topeka National Bank requested the following financial reports for the last 2 fiscal years.

(a) Compute the following items for Metlock Corporation. (Round answer to 2 decimal places, e.g. 2.25 or 2.25%.)

Cantonio Corporation adjusts its accounts only at year-end. The following information is available as a source for preparing adjusting entries at December 31, 2018. For each of the numbered items, prepare the necessary adjusting journal entry.

1. On August 31, 2018, Cantonio paid $12,000 for a two-year insurance policy and Cantonio recognized the entire amount as a debit to prepaid insurance.
2. On September 1, 2018, Cantonio sold 100 one-year subscriptions for their monthly publication at $90 each, with the subscriptions starting September 1. The total amount received was credited to Unearned Subscription Revenue.
3. The Supplies Inventory account had a $15,000 balance at the beginning of the year (January 1, 2018). During the year, $7,000 of supplies were acquired, with the Supplies Expense account debited at the time of purchase. The supplies count at the end of the year (December 31, 2018) showed $17,000 of supplies still on hand.
4. The company failed to recognize $4,000 in rent owed to them by another company that rents a part of Cantonio’s building.

The Bradford Company issued 8% bonds, dated January 1, with a face amount of $100 million on January 1, 2018 to Saxton-Bose Corporation. The bonds mature on December 31, 2037 (20 years). For bonds of similar risk and maturity, the market yield is 10%. Interest is paid semiannually on June 30 and December 31. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.):

Required:
1. to 3. Prepare the journal entry to record the purchase of the bonds by Saxton-Bose on January 1, 2018, interest revenue on June 30, 2018 and interest revenue on December 31, 2018 (at the effective rate). (Enter your answers in whole dollars. If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Record the purchase of the bonds by Saxton-Bose.

Record the interest revenue on June 30, 2018

Record the interest revenue on December 31,2018

Mills Corporation acquired as a long-term investment $240 million of 6% bonds, dated July 1, on July 1, 2018. Mills determined that it should account for the bonds as an available-for-sale investment. The market interest rate (yield) was 4% for bonds of similar risk and maturity. Mills paid $280 million for the bonds. The company will receive interest semiannually on June 30 and December 31. As a result of changing market conditions, the fair value of the bonds at December 31, 2018, was $270 million.

Required:
1. & 2. Prepare the journal entry to record Mills’ investment in the bonds on July 1, 2018 and interest on December 31, 2018, at the effective (market) rate.
3. At what amount will Mills report its investment in the December 31, 2018, balance sheet?
4. Suppose Moody’s bond rating agency upgraded the risk rating of the bonds, and Mills decided to sell the investment on January 2, 2019, for $290 million. Prepare the journal entries to record the sale.

1. Brassard Company manufactured 1,500 units of its only product during 2019. The inputs for this production are as follows:

450 pounds of Raw Material G at $1.50 per pound

300 pounds of Raw Material H at cost of $2,75 per pound

300 direct labor hours at $20 per hour

The firm manufactured 1,800 units of the same product in 2017 with the following inputs:

500 pounds of Raw Material G at a cost of $1,20 per pound

360 pounds of Raw Material H at a cost of $2.50 per pound

400 direct labor hours at $18 per hour

Required:

-The 2017 and 2018 operational partial productivity of Raw Material G and Raw Material H

-The 2017 and 2018 direct labor operational partial productivity

- The 2017 and 2018 financial partial productivity of Raw Material G and Raw Material H

-The 2017 and 2018 financial partial productivity of direct labor

-The total productivity ratio in 2017 and 2018

Computing and Recording Proceeds from the Sale of PPE

The following information was provided in the 2018 10-K of Hilton Worldwide Holdings, Inc.

Note 7: Property and Equipment ($ millions)

Note 7 also revealed that depreciation expense on property and equipment totaled $70 million in 2018. The cash flow statement reported that expenditures for property and equipment totaled $94 million in 2018 and that there was no gain or loss on the sale of property and equipment during the year.

Using the information provided, prepare a journal entry to record the sale of property and equipment in 2018.

On June 30, 2018, Georgia-Atlantic, Inc., leased a warehouse facility from IC Leasing Corporation. The lease agreement calls for Georgia-Atlantic to make semiannual lease payments of $478,550 over a four-year lease term, payable each June 30 and December 31, with the first payment at June 30, 2018. Georgia-Atlantic’s incremental borrowing rate is 12%, the same rate IC uses to calculate lease payment amounts. Depreciation is recorded on a straight-line basis at the end of each fiscal year. The fair value of the warehouse is $3.2

Required:

1. Determine the present value of the lease payments at June 30, 2018 that Georgia-Atlantic uses to record the right-of-use asset and lease liability.

2. What pretax amounts related to the lease would Georgia-Atlantic report in its balance sheet at December 31, 2018?

3. What pretax amounts related to the lease would Georgia-Atlantic report in its income statement for the year ended December 31, 2018?

Midwest Bank invests in trading securities. At the beginning of December 2018, the bank held no trading securities. During December of 2018, it entered into the following trading securities transactions:

At the end of December, the Carroll Company common stock had a quoted market price of $79 per share, and the Dynamo Company common stock had a quoted market price of $33 per share.

Required:

Mills Corporation acquired as a long-term investment $260 million of 7% bonds, dated July 1, on July 1, 2018. Mills determined that it should account for the bonds as an available-for-sale investment. The market interest rate (yield) was 5% for bonds of similar risk and maturity. Mills paid $320 million for the bonds. The company will receive interest semiannually on June 30 and December 31. As a result of changing market conditions, the fair value of the bonds at December 31, 2018, was $300 million.

Required:
1. & 2. Prepare the journal entry to record Mills’ investment in the bonds on July 1, 2018 and interest on December 31, 2018, at the effective (market) rate.
3. At what amount will Mills report its investment in the December 31, 2018, balance sheet?
4. Suppose Moody’s bond rating agency upgraded the risk rating of the bonds, and Mills decided to sell the investment on January 2, 2019, for $330 million. Prepare the journal entries to record the sale.