Question

Cheese Pouf Catering, Inc. Year ending December 31, 2017 At 11:00 PM New Year's Eve, Judy Asiago, the owner of Cheese Pouf Catering, Inc (CPC), was just packing up the company's equipment after a very successful and lucrative pre teen New Year's Eve party. CPC was just an hour away from ending its first year in business Asudy was stacking plates and packing up supplies, she thought about her finance accounting dass at YSU and began to think about the accounting issues that she would have to face to wind up the year and create the company's financial statements She remembered that she would have to make adjusting journal entries to record expenses and revenues that should be recognized in 2017, even though there were no concrete transactions to mark those entries. The following facts floated up in her awareness as situations requiring adjusting journal entries (AJES): 1 CPC had borrowed $20.000 from FNB Bank on May 19, 2017. promising to pay the principal and interest at 8% 9 months later on February 19, 2018 2 Tonight's event (representing revenue of $32,500) and several other events CPC catered during the holiday season (representing $184,200 in revenue) would not be billed until January 5, 2018, even though they were all completed and billable in 2017. Judy vaguely remembers something called the revenue recognition principle and thinks an AJE is called for here. 3. CPC purchased a Pouffer 3000, a specialized piece of cooking equipment, for $8,000 on August 1, 2017. Judy estimates that CPC should be able to use the Pouffer 3000 for 5 years and that it would be worth $400 as scrap. CPC takes depreciation to the nearest month, but only records depreciation at the end of each year. 90000 - 400 4. Judy's staff of cooks and servers will receive their next paychecks on Friday, January 5". The 31" represents the 7" day of a 12 day pay period. She estimates that the payroll will total $15,600 by the end of the pay period and that salaries and wages are earned evenly over the period. 5. On November 14, 2017, Cleveland Clinic paid CPC a retainer of $240.000 to provide pop-up catered lunches to Clinic staff at various locations over three months, starting November 1". The work load required is equally spread over those three months. 6. Judy knows that the balance in the Catering Supplies account shows a balance of $16,500, but that a count made right after the pre-teen New Year's event showed that CPC only had $3,100 of catering supplies on hand. Create the adjusting journal entries for CPC. Please round to the nearest dollar and show your calculations. Also indicate what type of AJE each is, as well as any subsequent journal entry in 2018 that relates to accrued revenues or expenses.

Answer 1

1.

Journal entry	Dr.	Cr.
1-May	Cash	20000
	Bank Loan		20000
	(entry recorded on May1)

Principal	20,000
Rate	8%
Interest for 9 months
	20000*8%*9/12
=	1200
May1, 2017- Dec31, 2018
8 months
Interest for 8 months	(1200/9)*8
	1067

As per accrued expense principle,

8 months of interest on this loan will be recognized this year in income statement and a current liability will be created.

AJE		Dr.	Cr.
	Interest expense	1067
	Accrued interest		1067

	Journal entry in 2018
31-Jan	Interest expense	133		(1200-1067)
	accrued interest		133
	(interest for 1 month accrued)

2.

	$
Sales revenue	32500	new year eve
	184200	Holiday season
Total sales revenue	216700
Accrued revenue- Revenue should be recognized in the year in which it is actually earned.
Therefore, sales revenue will be recognized in Current year income statement and an asset (amount to be received next year but earned) will be created.

		Dr.	Cr.
AJE	Accrued income	216700
	sales revenue		216700

3.

Journal entry
		Dr.	Cr.
1 august, 2017	Cooking equipment	8000
	Cash		8000
	(equipment purchased)

Depreciation
cost	8000
life	5 years
scrap value	400
depreciable value	8000-400
=	7600
Per annum dep	7600/5
=	1520
no. of month CY	1aug-31 dec
=	5 months
dep expense for CY	(1520/12)*5
	$633

Depreciation entry year end, recognizing dep as expense

AJE		Dr.	Cr.
	Dep expense	633
	Accumulated dep		633

4.

	Total salary for 12 day pay period	15600
	No . Of days worked	10 days
	payroll expense for cy (5 days till dec31)	(15600/10)*5
		7800
	since the entire payment will be made next year, we will post an ADJe to recognize current year payroll expense and create a current liab
	Accrued Expense
AJE		Dr.	Cr.
	Salary	7800
	accrued salary		7800

Journal entry for 2018

		Dr.	Cr.
5-Jan-18	Salary	7800
	accrued salary	7800
	cash		15600
	(cash paid for salary, salary expense for Jan debited and accrued salary balance from prior year written off)

5.

Journal entry on
		Dr.	Cr.
1-Nov-17	Cash	240000
	Unearned revenue		240000
	(since revenue will be earned only after services are performed)
	revenue for 3 months	240000
	Nov-17	80000	240000/3
	Dec-17	80000
	Jan-18	80000
Accrued Revenue will be recognized as revenue in the month the services are performed
Nov-31	unearned revenue	80000
	Service revenue		80000
	(revenue recognized for the month of nov)
31-Dec	unearned revenue	80000
	Service revenue		80000
	(revenue recognized for the month of Dec)

Journal entry for 2018

unearned revenue	80000
Service revenue		80000
(revenue recognized for the month of jan and unearned accountbalance from prior year written off)

6.

6			$
Balance in supplies account		16500
balance in hand		3100
difference		13400
therefore, $13400 of the supplies will be expensed in CY and supplies asset balance will be reduced
		Dr.	Cr.
	Supplies expense	13400
	Supplies		13400