Question

Required:

1. Complete the adjusting entries that you determine are necessary, based on the data that you have been given.  Record then in the general ledger and on the worksheet.  Make sure that the entries entered are in perfect form with all required data.  You may use SA as the source (for supervisor approval).  Show any computations necessary to justify the entries you make. Write the journal entries by hand in the general journal. You can print general journal sheets from the Excel file given (tab 2).
2. Extend, and complete the worksheet and determine net income BEFORE computing income tax expense (Part 14 below).  Then create the journal entry for income tax expense, record the entry in the general journal and on the worksheet, extend the amount, and recompute net income.
3. Prepare the combined statement of income and other comprehensive income.  Assume that the number of common shares outstanding has not changed from the beginning to the end of the year. Prepare this statement by hand in in perfect form.
4. Prepare the balance sheet by hand and in perfect form.
5. You do NOT have the data to create a statement of cash flows.  It is not required.

Data for Adjusting Entries:

1. The bank statement as of December 31, 2019 shows service charges of $240 and NSF checks for items recorded as sales in the amount of $3,400.  Interest was shown earned in December is $2,420.
2. An aging schedule shows that $25,000 of the Accounts Receivable balance is likely to be uncollected.  
3. The end-of-year inventory counts show a final balance of $245,000 in Merchandise Inventory and $14,000 in Supplies Inventory.
4. Rent for one year for the building was prepaid on September 1, 2019.  No adjustments have been made since that time.  20% of the space is used by the Selling area, and 30% is used for production space.  The rest is all used for administrative space.
5. The liability insurance policies were paid for two years coverage on July 1, 2019.
6. The investment trustee reports that $20,000 in dividends and $35,000 in interest were earned in the Debt Service Fund during 2019.
7. Unfortunately, there was a fire in part of the production area and some of the equipment was harmed.  The nondiscounted future cash flows related to this machinery (Cost $150,000 and Accum. Deprec. $25,000) is estimated to be $100,000, and the fair value of the machinery is $105,000.
8. Depreciation is done using straight-line depreciation with no salvage.  None has been taken for the year. Machinery and equipment is estimated to last for 10 years, and buildings are estimated to last for 20 years. 20% of the space is used by the Selling area, and 30% is used for production space.  The rest is all used for administrative space.  The machinery is 70% for production, 15% for administrative, and 15% for sales.
9. Finite-lived intangible assets are amortized over their legal lives with no salvage.  Assume that they are all new in 2019 and that all legal years are remaining (years beyond the life of the author for the copyright). The patents are used in production. The copyright is used by the administrative area, and the trademark is used by the sales area to promote product.
10. Goodwill must be tested for impairment each year.  It was first recorded when your firm purchased 60% of another firm.  The Fair value of the entire subsidiary with goodwill is $700,000.  The fair value of the entire subsidiary without goodwill is $600,000.
11. The derivatives are options purchased to protect the firm from loss.  The derivatives served their purpose but no longer have any remaining value.
12. Only part of the interest expense on the note payable, mortgage payable, and bonds payable has been expensed for the entire year.  Determine the correct amount of total interest expense for the year and accrue what is necessary.
13. The Board of Directors declared dividends for the common shareholders of $50,000 plus the amount due for the preferred shareholders.  No dividends have been paid for the year 2019.
14. The income tax rate is 20%.
    244000 65000 195000 2500 240000 285000 250001 90000 360000 400000 950000 400000 4600000 31000000 245000 123000 75000 135000 50000 240000 230000 175000 95000l 340001 Cash Cash Equivalents Accounts Receivable Allowance for Doubtful Accounts Short-Term Investments Merchandise inventory Supplies Inventory Prepaid Rent Prepaid Insurance Long-Term Investment (60% ownership) Land for Future Expansion Debt Service Fund Land Machinery & Equipment Buildings Accumulated Depreciation Patents Copyright loodwill Trademark Derivatives Defened Tax Assets Deferred Pension Assets Accounts Payable Income Taxes Payable Sales Taxes Payable Dividends Payable Interest Payable Notes Payable (8% interest rate) Mortgage Payable (5% interest rate) Bonds Payable 16% interest rate) Common Stock (1,000,000 shares outstanding) Preferred Stock (4% Paid in Capital in Excess of Par-Common Paid in Capital in Excess of Par-Preferred Retained Eamings Accumulated Other Comprehensive Income Sales Revenue Sales Retums & Allowances Sales Discounts Cost of Goods Sold Seling Expense General Administrative Expense Rent Expense Insurance Expense Research and Development Expense Impament Expense Bad Debts Expense Interest Revenue Dividend Revenue Other Expense Interest Expense Income Tax Expense Gain/Loss on Derivatives Gain on Sale of investments Loss on sale of Machinery TOTALS 14000 1000000 850000 2500000 1000000 500000 1800000l 200000 29000 9800000 37000 56000 3517000 482200 2120000 136000 120000 ol 22000 35000l 95000 o 44200 23000 18640700 18640700
    

Answer 1

a & b   Adjusting entries for the year ended December 31,2019
Account Title and Explanation	Debit	Credit
Service Charges	$240
Cash		$240
(to record the service charges as per the bank statements not
yet recorded and reconciling the bank accounts)
Cash	$3,400
Accounts Receivable		$3,400
(to record the amount deposited against sales as per the bank
statements not yet recorded and reconciling the bank accounts)
Cash	$2,420
Interest Income		$2,420
(to record the interest earned as per the bank statements not
yet recorded and reconciling the bank accounts)
Bad Debts	$27,500
Allowance for Doubtful Debts		$27,500
(to record the estimated amount of debts likely to be uncolected
at the year end)
Cost of Goods Sold	$40,000
Merchandise Inventory		$40,000
(to record the end of the year inventory at the actual physical value)
General and Administrative Expense	$14,000
Supplies Inventory		$14,000
(to record the end of the year inventory at the actual physical value)
Rent Expense	$30,000
Prepaid Rent		$30,000
(to record the rent expenses for the year)
Selling Expenses	$6,000
Cost of Goods Sold	$9,000
General and Administrative Expenses	$15,000
Rent Expense		$30,000
(to record the apportionment of the rent expense in the proportion of the
space utilized by the respective departments)
Prepaid Insurance	$102,000
Insurance Expense		$102,000
(to record the insurance expense for the year and transfer the
amount paid for the next year to prepaid insurance)
Dividend Income	$20,000
Dividend Receivable		$20,000
(to record the dividend received as per the investment trustee)
Interest Income	$35,000
Interest Receivabe		$35,000
(to record the interest received as per the investment trustee)
Impairment Loss - Equipment	$20,000
Machinery & Equipment		$20,000
(to record the impairment loss due to fire and adjust the book
value of the equipment to its fair market value)
Depreciation - Machinery & Equipment	$460,000
Depreciation - Building	$155,000
Accumulated Depreciation		$615,000
(to record the depreciation expenses for the year)
Selling Expenses	$31,000
Cost of Goods Sold	$46,500
General and Administrative Expenses	$77,500
Depreciation - Machinery & Equipment		$155,000
(to record the apportionment of the depreciation expense in the proportion
of the space utilized by the respective departments)
Selling Expenses	$69,000
Cost of Goods Sold	$322,000
General and Administrative Expenses	$69,000
Depreciation - Building		$460,000
(to record the apportionment of the depreciation expense in the proportion
of the space utilized by the respective departments)
Cost of Goods Sold	$24,500
General and Administrative Expenses	$12,300
Selling Expenses	$13,500
Accumulated Amortization		$50,300
(to record the amortization of intangible assets and the apportionment of the
amortization expense in the proportion of the space utilized by the
respective departments)
No entry required
Impairment Loss - Derivatives	$50,000
Derivatives		$50,000
(to record the impairment loss on derivatives and adjust the book
value to its fair market value)
Interest Expenses	$177,500
Interest Payable		$177,500
(to record the interest expenses for the year)
Preferred Stock Dividend	$20,000
Common Stock Dividend	$50,000
Dividend Payable		$70,000
Income Tax Expense	$490,576
Income Tax Payable		$490,576
(to record the income tax payable for the year)
c.
Comprehensive Profit and Loss Statement
For the Year Ended December 31,2019
Sales Revenue	$9,800,000
Less:
Sales Returns and Allowances	$37,000
Sales Discounts	$56,000
Net Sales		$9,707,000
Cost of Goods Sold		($3,959,000)
Gross Profit		$5,748,000
Expenses
Selling Expenses		($601,700)
General and Administrative Expenses		($2,305,040)
Insurance Expense		($34,000)
Research and Development Expense		($120,000)
Bad Debts Expense		($27,500)
Other Expense		$0
Interest Expense		($272,500)
Net Profit		$2,387,260
Other Comprehensive Income & Expenses
Interest Revenue		$59,420
Dividend Revenue		$55,000
Impairment Expense		($70,000)
Gain/Loss on Derivatives
Gain on Sale of Investments		$44,200
Loss on Sale of Machinery		($23,000)
Profit before Tax		$2,452,880
Tax @ 20%		($490,576)
Profit after Tax		$1,962,304
Less: Dividends
Preferred Stock Dividend		($20,000)
Common Stock Dividend		($50,000)
Profit transferred to Retained Earnings		$1,892,304
d.
Balance Sheet
For the Year Ended December 31,2019
Current Assets
Cash		$249,580
Cash Equivalents		$65,000
Accounts Receivable	$191,600
Less: Allowance for Doubtful Debts	($25,000)	$166,600
Interest Receivable		$35,000
Dividend Receivable		$20,000
Short-term Investments		$240,000
Merchandise Inventory		$245,000
Supplies Inventory		$14,000
Prepaid Rent		$60,000
Prepaid Insurance		$102,000
Total Current Assets		$1,197,180
Non-Current Assets
Investments & Other Long-term Assets
Long-Term Investments(60% ownership)		$360,000
Debt Service Fund		$950,000
Deferred Tax Assets		$240,000
Deferred Pension Assets		$230,000
Total Investments & Other Long-term Assets		$1,780,000
Tangible Assets
Land for Future Expansion		$400,000
Land		$400,000
Machinery & Equipment		$4,580,000
Buildings		$3,100,000
Accumulated Depreciation		($1,157,500)
Total Tangible Assets		$7,322,500
Intangible Assets
Patents		$245,000
Copyright		$123,000
Goodwill		$75,000
Trademark		$135,000
Accumulated Amortization		($50,300)
Total Intangible Assets		$527,700
Total Non-Current Assets		$9,630,200
Total Assets		$10,827,380
Current Liabilities
Accounts Payable		$175,000
Income Taxes Payable		$585,576
Sales Taxes Payable		$34,000
Dividends Payable		$70,000
Accumulated Other Comprehensive Income		$29,000
Interest Payable		$191,500
Total Current Liabilities		$1,085,076
Non-Current Liabilities
Notes Payable (8% interest rate)		$1,000,000
Mortgage Payable (5% interest rate)		$850,000
Bonds Payable (6% interest rate)		$2,500,000
Total Non-Current Liabilities		$4,350,000
Total Liabilities		$5,435,076
Owner's Equity
Common Stock(1000,000 shares outstanding)		$1,000,000
Preferred Stock (4%)		$500,000
Paid in Capital in Excess of Par - Common		$1,800,000
Paid in Capital in Excess of Par - Preferred		$200,000
Retained Earnings		$1,892,304
Total Owner's Equity		$5,392,304
		$10,827,380
Working Notes
Cost of Goods Sold
	Trial Balance	Adjustments	Difference
Opening Inventory	-	-	-
Add : Purchases	-	-	-
Less: Closing Inventory	($285,000)	($245,000)	$40,000
Cost of Goods Sold	($285,000)	($245,000)	$40,000
Hence, as shown above, due to reduction in closing value of Merchandise Inventory by
$ 40,000 the value of Cost of Goods Sold increases by $ 40,000
Bifurcation of Rent Expense
Total Rent Expense		$30,000
Selling Expenses	20%	$2,460
Cost of Goods Sold	30%	$3,690
General and Administrative Expenses	50%	$6,150
Bifurcation of Depreciation Expense
Total Depreciation - Machinery & Equip.		$460,000
Selling Expenses	15%	$69,000
Cost of Goods Sold	70%	$322,000
General and Administrative Expenses	15%	$69,000
Total Depreciation - Building		$155,000
Selling Expenses	20%	$31,000
Cost of Goods Sold	30%	$46,500
General and Administrative Expenses	50%	$77,500
Computation of Interest Costs
Notes Payable (8% interest rate)	$1,000,000	0.08	$80,000
Mortgage Payable (5% interest rate)	$850,000	0.05	$42,500
Bonds Payable (6% interest rate)	$2,500,000	0.06	$150,000
Total Interest Expense			$272,500
Less: Interest accounted for in books			($95,000)
Interest Expense needed to be booked in accounts			$177,500