Question

2. The following trial balance was prepared by OZ Company as of December 31, 2005. The adjusting entries for 2004 have made, except for any specifically noted below. Cash Account Receivable Inventories Equipment Land Building Deferred charges Accounts Payable Note Payable Capital stock (par $10) Earned surplus 15,000 15,000 - 17,000 22,400 6,400 7,600 1,100 5,500 8,000 38,500 32,500 84,500 84,500

You find that certain errors and omissions are reflected in the above trial balance, including the following:
a. The $15000 balance in the accounts receivable represents the entire amount owed to the company of this amount, $12,400 is from trade customers, and 5% of that amount is estimated to be uncollectible. The remaining amount owed to the company represents a long-term advance to its president.
b. Inventories include $1000 of goods incorrectly valued at double their cost (i.e reported at $2000). No correction has been recorded. Office supplies on hand of $500 also are included in the balance inventories
c. When the equipment and building were purchased new on January 1, 1993, they had estimated lives of 10 and 25 years respectively. They have been depreciated using the straight line method on assumption of zero residual value, and depreciation has been credited directly to the asset accounts. Depreciation has been recorded for 2005.
d. The balance in the land includes $1000 payment made as a deposit of earnest money on the purchase of an adjoining tract. The option to buy it has not yet been exercised and probably will not exercised during the coming year.
e. The interest bearing noted dated April 1, 2005 matures March 31,2006. Interest has not been recorded.
f. There are 2500 common stock shares still outstanding.

Required:
Prepare a correct balance sheet with appropriate captions and sub-caption. Use preferred terminology. Show computation of the ending balance in the retained earning.

Answer 1

Solution:

Retained earnings
Opening balance	32,500
Reduction for inventory overstatement	-1,000
Reduction for bad debt expense	-620
Reduction for interest expense	-600
Ending balance	30,280
BALANCE SHEET
Current assets:
Cash		15000
Accounts receivable	12,400
Less: Allowance for doubtful accounts	-620	11,780
Merchandise inventory		15,500
Office supplies inventory		500
Prepaid expenses		1100
Total current assets		43880
Investments and funds:
Advance on purchase of land		1,000
Capital assets:
Land		5,400
Equipment	56,000
Less: Accumulated amortization	33,600	22,400
Building	10,000
Less: Accumulated amortization	2,400	7,600
Total capital assets		35,400
Other assets:
Due from officers		2,600
Total assets		82,880
Liabilities
Current liabilities:
Accounts payable	5,500
Interest payable	600
Notes payable	8,000
Total current liabilities:		14,100
Shareholders’ Equity
Contributed capital:
Common shares	38,500
Retained earnings	30,280
Total shareholders’ equity		68,780
Total liabilities and shareholders’ equity		82,880