Question

“Hello, I am very excited to have concluded Kosko Wholesale first full year of operation! We started off on January 1, issuing 100,000 common shares of the company for $4 per share, the next day we purchased equipment for $120,000, paying $60,000 cash and financed the balance using a note payable. At the same time, we paid for a two-year insurance policy covering the new equipment, which cost $4,900. Of course, we needed to rent a space to operate from and we made rent payments of $54,500 for the year which included 12 months’ rent and one month’s damage deposit which we expect to get back at the end of the lease.

Over the course of the year we purchased $185,000 worth of Inventory of which $153,000 was sold to customers. These sales totalled $278,000 in revenue, $192,000 of which was on credit. Throughout the year we collected $153,000 from outstanding customer accounts and paid $78,000 to suppliers. Our employees earned wages totalling $119,000, of which $22,000 remained unpaid at the end of the year.

I know that I need to make changes at my year end to reflect adjustments to ending balances in some of my accounts, but I am unsure how to do so. Could you please ensure that my insurance and interest expense are recorded properly to reflect the full year? Additionally, I will need an adjusted trial balance prepared, as well as closing entries posted to their T accounts. Oh yeah, in case you need it, the note has a one-year term and an interest rate of 6%.

Answer 1

First, let me clarify your query on Insurance and interest expense.

Insurance amount of $ 4,900 is paid for 2 year period. This means, $2,450 is for the current year and $2,450 is for the next year. Hence, current year expense is shown as an expense in Profit and Loss statement and the balance half is shown as an asset; ie, expense paid in advance.

The company has taken notes payable for $60,000 with interst at 6%. Hence, for this year, total interest will be $60,000*6% = $3,600. The same is debited to Profit and loss as the expense for the current year and is added to the Notes Payable balance.

For further clarifications, I am attaching the ledger accounts prepared for all transactions:

Dr Particulars To Share Capital a/c To Sales Dr Particulars To Cash a/c Insurance A/C Amount Particulars 2,450.00 By P&L A/C 2,450.00 Cr Amount 2,450.00 2,450.00 S S S S $ S S Cash A/C Amount Particulars 4,00,000.00 By Equipment a/c S 86,000.00 insurance A/C S Insurance Paid in advance ACS Rent Expense A/C S Security Deposit - Rent A/C S Accounts Payable Alc s Wages a/c s By Balance C/f S 4,86,000.00 $ Cr Amount 60,000.00 2,450.00 2,450.00 50,307.69 4,192.31 78,000.00 97,000.00 1,91,600.00 4,86,000.00 Dr Particulars To Cash a/c Insurance Paid in advance A/C Amount Particulars 2,450.00 By Balance c/f 2,450.00 Cr Amount 2,450.00 2,450.00 S S S $ $ Cr Dr Particulars To Cash a/c Rent Expense Alc Amount Particulars 50,307.69 By P&L A/C 50,307.69 เก Dr Particulars To Balance c/f S $ Amount 50,307.69 50,307.69 $ Share Capital A/C Amount Particulars 4,00,000.00 By Cash a/c 4,00,000.00 Cr Amount 4,00,000.00 4,00,000.00 S $ S S Dr Particulars To Cash a/c Security Deposit - Rent A/C Amount Particulars 4,192.31 By Balance c/f 4,192.31 Cr Amount 4,192.31 4,192.31 Dr S S $ Particulars To Cash a/c To Notes Payable a/c Cr Amount 1,20,000.00 Equipment A/C Amount Particulars 60,000.00 By Balance C/f 60,000.00 1,20,000.00 S S $ S Cr $ 1,20,000.00 Dr Particulars To Cash a/c To balance c/f Accounts Payable Alc Amount Particulars 78,000.00 By Inventory A/C 1,07,000.00 1,85,000.00 Amount 1,85,000.00 S S S S S Dr Particulars To Balance c/f $ 1,85,000.00 S Notes payable A/C Amount Particulars 63,600.00 Equipment A/C Interest on Note payable A/c 63,600.00 S S $ Cr Amount 60.000.00 3,600.00 63,600.00 S

This is the final Trial Balance after passing all the given entries:

Dr Particulars To Accounts Payable a/c Purchases Alc Amount Particulars 1,85,000 By P&L A/C 1,85,000.00 Cr Amount 1,85,000.00 1,85,000.00 Dr Particulars To Cash a/c To Unpaid wages Alc Cr Amount 1,19,000.00 in Wages Alc Amount Particulars 97,000.00 By P&L a/c 22,000.00 1,19,000.00 S $ S $ S $ $ 1,19,000.00 Dr Particulars To P&L alc Sales A/C Amount Particulars 2,78,000.00 By Accounts Receivable Alc By Cash alc 2,78,000.00 Dr Particulars To Balance c/f Unpaid wages A/C Amount Particulars 22,000.00 By Wages a/c 22,000.00 S Cr Amount 86,000.00 1,92,000.00 2,78,000.00 Cr Amount 22,000.00 22,000.00 S $ เก S $ $ $ $ Dr Cr Dr Particulars To Notes Payable a/c Interest on Note payable Alc Amount Particulars 3,600.00 By P&L a/c 3,600.00 Accounts Receivable Alc Amount Particulars 1,92,000.00 By Cash a/c By Balance c/f 1,92,000.00 Cr Amount 3,600.00 3,600.00 Particulars To Sales Alc S $ S $ S Amount 1,53,000.00 39,000.00 1,92,000.00 S $ $

Trial Balance of the company as on 31st December SI NO Ledger Debit Balance Credit Balance 1 Cash A/C 1,91,600 2 Share Capital A/C 4,00,000 3 Equipment A/C 1,20,000 4 Notes payable A/C 63,600 5 Insurance A/C 2,450 6 Insurance Paid in advance A/C 2,450 7 Rent Expense A/C 50,308 8 Security Deposit - Rent A/C 4,192 9 Purchases A/C 1,85,000 10 Accounts Payable A/C 1,07,000 11 Accounts Receivable A/C 39,000 12 Sales A/C 2,78,000 13 Wages A/C 1,19,000 14 Unpaid wages A/C 22,000 15 Interest on Note payable A/C 3,600 16 COGS (Inventory utilised) 1,53,000 TOTAL 8,70,600 8,70,600