Question

The Queen of the Snows started a business, Winter Carnival Co., a company that specializes in merchandise for ice-fishing, snow-sliding, treasure-hunting and other winter activities. In 2015, the company had the following beginning balances (in dollar).

Accounts receivable $30,000

Allowance for doubtful accounts$1,500

Cash $10,000

Inventory $200,000

Prepaid advertisement $48,000

Salary payable $6,500

Accounts payable $50,000

Accumulated depreciation – machine $90,000

Common stock $100,000

Machine $120,000

Retained earnings $160,000

During 2015, the following transactions occurred.

1. Winter Carnival acquired additional merchandise, totaled $70,000, of which $20,000 was on account.

2. Winter Carnival delivered merchandise and earned sales revenue, totaled $350,000, of which $200,000 was on credit. Cost, to Winter Carnival Co., of the merchandise sold, totaled $170,000.

3. Winter Carnival collected a total of $180,000 on its accounts receivable from its various customers.

4. Winter Carnival borrowed $100,000 on May 1, 2015 from a local bank, on a 6% note for 5 years. Winter Carnival would pay interest semi-annually on each May 1 and November 1.

5. In addition, Winter Carnival signed a sales contract with a customer, Mini-Soda Company to deliver a total of $90,000 merchandise January 2016. Winter Carnival collected $9,000 cash in advance from this customer on November 17, 2015.

6. Winter Carnival paid $60,000 on its accounts payable to its suppliers.

7. Winter Carnival incurred insurance expenses of $5,000, all paid in cash in 2015.

8. Winter Carnival paid its employees $80,000 cash for their salary. At the end of year 2015, the company still owed $5,500 salary payable to its employees. The following information was also available during 2015 for Winter Carnival Co.

9. Its ending balance of ‘allowance for doubtful accounts’ was estimated to be 5% of its outstanding A/R at the end of 2015.

10. Its ‘prepaid advertisement’ had 16 months remaining at the beginning of the year 2015.

11. The existing machine had an estimated life of 20 years with no residual value and had been depreciated using the straight-line method.

12. The income tax rate was 30% for Winter Carnival and the company would pay its income tax in the first quarter of 2016.

Required:

1. Based on above transactions, prepare journal entries and adjusting entries in 2015 for Winter Carnival.

2. Set up T-accounts and post your journal entries and adjusting entries to T-accounts. (A kind reminder: Don’t forget the beginning balances.)

3. Prepare a pre-closing trial balance, as of December 31, 2015.

4. Prepare an income statement, in a good format, for the year ended December 31, 2015 for Winter Carnival.

5. Prepare a statement of retained earnings, in a good format, for the same period for Winter Carnival.

6. Prepare a balance sheet, in a good format, as of December 31, 2015 for Winter Carnival.

7. Prepare closing entries and a post-closing trial balance, as of December 31, 2015.

Answer 1

Credit Calculation Winter Carnival Co. Journal entries Date Account 1 Inventory Accounts Payable Cash Debit $ 70,000 $ 20,000 $ 50,000 2 $ 200,000 $ 150,000 Accounts Receivable Cash Sales Revenue Cost of goods sold Inventory $ 350,000 $ 170,000 $ 170,000 3 $ 180,000 Cash Accounts Receivable $ 180,000 4 $ 100,000 $ 3,000 Cash Notes Payable Interest expense Cash Interest expense Interest Payable 6% note for 5 yrs $ 100,000 100000*6%*6/12 $ 3,000 May 1 to Nov 1 is 6 months 100000*6%*2/12 $ 1,000 Nov 1 to Dec 31 is 2 months $ 1,000 5 $ 9,000 Cash Unearned Revenue $ 9,000 6 $ 60,000 Accounts Payable Cash $ 60,000 7 $ 5,000 Insurance expense Cash $ 5,000 8 6500-5500 Salary Payable Salary expense Cash $ 1,000 $ 79,000 $ 80.000 9 $ 1,000 (50000*5%)-1500 Bad debts expense Allowance for doubtful accounts $ 1,000 10 $ 36,000 48000/16*12 Advertisement expense Prepaid advertisement $ 36,000 $ 6,000 120000/20 years 11 Depreciation expense Accumulated depreciation - machine $ 6,000 $ 14,700 49000*30% $ 14,700 From Income Stmt 12 Income tax expense Income Taxes Payable Closing entries 13 Sales Revenue Income Summary $ 350,000 $ 350,000 14 $ 315,700 Income Summary Cost of goods sold Salary expense Advertisement expense Insurance expense Depreciation expense Bad debts expense Interest expense Income tax expense $ 170,000 $ 79,000 $ 36,000 $ 5,000 S 6,000 S $ 4,000 $ 14,700 1,000 $ 34,300 15 Income Summary Retained Earnings $ 34,300

Credit Date Credit Winter Carnival Co. T Accounts Date Debit Date Cash Op bal $ 10,000 1 2 $ 150,000 4 3 $ 180,000 6 4 $ 100,000 7 5 $ 9,000 8 Debit Date Credit Accounts Receivable $ 30,000 $ 200,000 3 $ 180,000 Date Debit Date Credit Date Allowance for doubtful accounts Op bal $ 1,500 Op bal 9 $1,000 1 Debit Date Inventory $ 200,000 $ 70,000 2 $ 170,000 $ 50,000 Op bal $ 3,000 2 $ 60,000 $ 5,000 $ 80,000 Bal. Bal. Bal. $ 251,000 Prepaid advertisement $ 48,000 10 $ 36,000 $ 50,000 Machine $ 120,000 Bal. $ 2,500 Accumulated depreciation-machine Op bal $ 90,000 11 $ 6,000 $ 100,000 Accounts Payable Op bal $ 60,000 1 Op bal Op bal $ 50,000 $ 20,000 6 Bal. Bal. Bal. $ 10,000 $ 12,000 Salary Payable $ 1,000 Op bal $ 120,000 Interest Payable Op bal 4 Bal. $ 96,000 Income Taxes Payable Op bal $ 12 $ 14,700 8 $ 6,500 - $ $ 1,000 Unearned Revenue Op bal 5 $ $ 9,000 $ 5,500 Bal. $ 1,000 $ 14,700 Bal. $ 9,000 Bal. Notes Payable Bal. Retained Earnings Common Stock Op bal Op bal $ 100,000 Op bal $ 160,000 $ $100,000 4 Bal. $ 100,000 $ 100,000 $ 160,000 Sales Revenue $ 350,000 2 Bal. Cost of goods sold $ 170,000 14 Bal. Salary expense $ 79,000 14 Advertisement expense $ 36,000 14 $ 36,000 13 $ 350,000 2 $ 170,000 8 $ 79,000 10 $ - Bal. Bal. Bal. Bal. Insurance expense $ 5,000 14 $ Depreciation expense $ 6,000 14 $ 6,000 $ Bad debts expense $ 1,000 14 $ Interest expense $ 3,000 $ 1,000 14 7 11 9 4 $ 5,000 $ 1,000 4 $ 4,000 Bal. Bal. $ Bal. $ Bal. $ - $ Income tax expense $ 14,700 14 $ 14,700 12 Bal. $

Winter Carnival Co. Account Names Cash Accounts Receivable Allowance for doubtful accounts Inventory Prepaid advertisement Machine Accumulated depreciation - machine Accounts Payable Salary Payable Interest Payable Income Taxes Payable Unearned Revenue Notes Payable Common Stock Retained Earnings Sales Revenue Cost of goods sold Salary expense Advertisement expense Insurance expense Depreciation expense Bad debts expense Interest expense Income tax expense Totals Pre-closing TB Debit Credit 251,000 50,000 2,500 100,000 12,000 120,000 96,000 10,000 5,500 1,000 14,700 9,000 100,000 100,000 160,000 350,000 170,000 79,000 36,000 5,000 6,000 1,000 4,000 14,700 848,700 848,700 Post Closing TB Debit Credit 251,000 50,000 2,500 100,000 12,000 120,000 96,000 10,000 5,500 1,000 14,700 9,000 100,000 100,000 194,300 533,000 533,000

350,000 170,000 180,000 Winter Carnival Co. Income Statement For the year ended December 31, 2015 Sales Revenue Cost of goods sold Gross Profit Operating expenses Salary expense Advertisement expense Insurance expense Depreciation expense Bad debts expense Total Operating expenses Operating Income Interest expense Net Income before taxes Income tax expense Net Income 79,000 36,000 5,000 6,000 1,000 127,000 53,000 4,000 49,000 14,700 49000*30% 34,300 Statement of Retained Earnings For the year ended December 31, 2015 Beginning Retained Earnings Net Income Less Dividends Ending Retained Earnings 160,000 34,300 194,300

Winter Carnival Co. Balance Sheet As of December 31, 2015 Assets Current Assets Cash Accounts Receivable Allowance for doubtful accounts Inventory Prepaid advertisement Total Current Assets 251,000 50,000 (2,500) 47,500 100,000 12,000 410,500 Property, Plant & Equipment Machine Accumulated depreciation - machine Total Property, Plant & Equipment Total Assets 120,000 (96,000) 24,000 434,500 Liabilities & Stockholders Equity Current Liabilities Accounts Payable Salary Payable Interest Payable Income Taxes Payable Unearned Revenue Total Current Liabilities 10,000 5,500 1,000 14,700 9,000 40,200 Non-Current Liabilties Notes Payable Total Liabilties 100,000 140,200 Stockholders Equity Common Stock Retained earnings Total Stockholders Equity Total Liabilities & Stockholders Equity 100,000 194,300 294,300 434,500