Question

1. ABC Co. borrowed $525,000 on July 1, 20X1 at a 4% annual interest rate. Principal and interest will be repaid to the lender in six months on December 31, 20X1. Interest expense is accrued monthly. What adjusting entry is needed on July 31, 20X1 to accrue interest expense?

a. Debit: Interest expense……………...1,750

Credit: Cash………….…..………….1,750

b. Debit: Interest expense………………1,750

Credit: Interest payable……………...1,750

c. Debit: Interest payable……………..21,000

Credit: Cash………………..………21,000

d. Debit: Interest expense…………......21,000

Credit: Interest payable………….…21,000

2. On October 1, 20X7, XYZ Co. prepaid insurance for $78,000 for the next 12 months (from October 1, 20X7 through September 30, 20X8), recording the entire insurance payment as prepaid insurance on the October 1, 20X7 payment date. If adjusting entries are made monthly, what adjusting journal entry is needed on November 30, 20X7?

a. Debit: Insurance expense.…………...6,500

Credit: Cash………………………...6,500

b. Debit: Insurance expense.……..…...19,500

Credit: Prepaid insurance………….19,500

c. Debit: Insurance expense.………….13,000

Credit: Prepaid insurance………..…13,000

d. Debit: Insurance expense……….…...6,500

Credit: Prepaid insurance……..….….6,500

3. On January 1, 20X3, Emily’s Boutique purchased equipment for $250,000 that is expected to have an 8-year useful life and a $10,000 salvage value. Straight-line depreciation is used. Adjusting entries are made monthly. What is the adjusting entry for depreciation expense for the month ending December 31, 20X3?

a. Debit: Depreciation expense: equipment………………….31,250

Credit: Accumulated depreciation: equipment….…….……31,250

b. Debit: Depreciation expense: equipment…………………30,000

Credit: Accumulated depreciation: equipment………….….30,000

c. Debit: Depreciation expense: equipment…………………..2,500

Credit: Accumulated depreciation: equipment………………2,500

d. Debit: Depreciation expense: equipment…………………..2,604

Credit: Accumulated depreciation: equipment……..………..2,604

Questions 4 through 10 that follow are based on the following December 31, 20X6 year-end account balances for XYZ Co. after adjusting entries had been prepared but before the books were closed for the year.

Cash……………..…………………………….300,000

Accounts receivable…………………….……..701,000

Marketable securities…………………………...62,000

Prepaid insurance……………………………….37,000

Prepaid rent….………………………………….36,000

Office equipment…………………………….....640,000

Accumulated depreciation: equipment………...235,000

Land……………………………………………700,000

Accounts payable………………………………294,010

Dividends payable……………………………… 30,000

Interest payable…………………………………..11,000 I

ncome tax payable……………………………....50,000

Unearned client service revenue………………....51,000

Notes payable (long-term).……………………..471,000

Common stock………………………………….850,000

Retained earnings….…………………………....320,000

Dividends…………………………………….....125,000

Client service revenue………………………...1,300,000

Travel expense………………………………..…..31,000

Office supplies expense…………………………..25,000

Advertising expense………………………………53,000

Salary expense…………………………………...450,000

Utility expense………………………………….....45,000

Depreciation expense: equipment…………………42,000

Interest expense……………………………….…...22,500

Insurance expense……………………………….....61,000

Rent expense……………………………………..200,000

Income tax expense………………………………..81,510

4. Prepare the adjusted trial balance on December 31, 20X6.

5. Prepare the income statement for the year ended December 31, 20X6.

6. Prepare the statement of retained earnings for the year ended December 31, 20X6.

7. Prepare the statement of financial position as of December 31, 20X6.

8. Determine the working capital on December 31, 20X6.

9. Determine the current ratio on December 31, 20X6.

10. Determine the acid-test (quick) ratio on December 31, 20X6.

Answer 1

Calculation:
1. Monthly Interest = $525,000 x 0.04 x 1/12 = $1,750
2. Monthly Insurance Expense = $78,000 x 1/12 = $6,500
3. Monthly Dep. Expense = $ (250,000 - 10,000) / 8 x 12 = $2,500
Answer 1 to 3 for adjusting Entries:
Q. No.	Account Title	Debit	Credit
1	Interest Expenses	$      1,750
	Interest Payable		$   1,750
2	Insurance Expense	$      6,500
	Prepaid Insurance		$   6,500
3	Depreciation Expense	$      2,500
	Accumulated Depreciation-Equip.		$   2,500

XYX COMPANY
Adjusted Trial Balance
For the Year Ended Dec. 31, 20X6
Account Tittle	Debit	Credit
Cash	$     300,000
Account Receivable	$     701,000
Marketable Securities	$       62,000
Prepaid Insurance	$       37,000
Prepaid Rent	$       36,000
Office Equipment	$     640,000
Acc. Depreciation: Equipment		$    235,000
Land	$     700,000
Account Payable		$    294,010
Dividend Payable		$     30,000
Interest Payable		$     11,000
Income Tax Payable		$     50,000
Unearned client service revenue		$     51,000
Notes Payable- Long Term		$    471,000
Common Stock		$    850,000
Retained Earning		$    320,000
Dividend	$     125,000
Client Service Revenue		$ 1,300,000
Travel Expense	$       31,000
Office Supplies Expense	$       25,000
Advertising Expense	$       53,000
Salaries Expense	$     450,000
Utilities Expense	$       45,000
Depreciation Expense-Equip.	$       42,000
Interest Expense	$       22,500
Insurance Expense	$       61,000
Rent Expense	$     200,000
Income Tax Expense	$       81,510
Net Income
Total	$   3,612,010	$ 3,612,010

Question 4,5, 6,7 and 8 are done as follows:

Income Statement
For the Year Ended Dec. 31, 20X6
Client Service Revenue		$   1,300,000
Less: Expenses
Travel Expense	$      31,000
Office Supplies Expense	$      25,000
Advertising Expense	$      53,000
Salaries Expense	$     450,000
Utilities Expense	$      45,000
Depreciation Expense-Equip.	$      42,000
Interest Expense	$      22,500
Insurance Expense	$      61,000
Rent Expense	$     200,000
Income Tax Expense	$      81,510
Total Expenses		$   1,011,010
Net Income		$     288,990

XYX COMPANY
Statement of Retained Earning
For the Year Ended Dec. 31, 20X6
Retained Earning Beg. Balance		$     320,000
Net Income	$ 1,011,010
Less: Dividends	$     125,000	$     886,010
Ending Balance		$1,206,010

XYX COMPANY
Statement of Financial Position
For the Year Ended Dec. 31, 20X6
Assets
Current Assets:
Cash	$     300,000
Account Recievable	$     701,000
Marketable Securities	$      62,000
Prepaid Insurance	$      37,000
Prepaid Rent	$      36,000
Total Current Assets		$   1,136,000
Non-Current Assets:
Office Equipment (Net)	$     405,000
Land	$     700,000
Total Non-Current Assets:		$   1,105,000
Total Assets		$2,241,000
Liabilities & Stockholders' Equity
Current Liabilities:
Account Payable	$     294,010
Dividend Payable	$      30,000
Interest Payable	$      11,000
Income Tax Payable	$      50,000
Unearned client service revenue	$      51,000
Total Current Liabilities	$     436,010
Non Current Liabilities
Notes Payable	$     471,000
Total Liabilities		$907,010
Stock Holders' Equity
Common Stock	$     850,000
Retained Earnings	$483,990
Total Stockholders' Equity		$   1,333,990
Total Liabilities & Stockholders' Equity		$2,241,000

8. Working Capital on Dec. 31, 20X6:

Working Capital = Current Assets - Current Liabilities = $1,136,000 - $436,010 = $699,990

Note: Do yourself Q9 and Q10:

9. Current Ratio = Current Assets /Current Liabilities = ?

10. Quick Ratio = Quick Assets / Current Liabilities = ?

Quick Assets = Cash + Marketable Securities + Account Receivable