Question

1. Assuming in its first year of operations in 2018, that ABC issued 100,000 shares of 3.00 par stock to an investor for $800,000.

On January 2, ABC issued bonds with a face of 200,000, stated rate of 9%, term 5 years and received cash of either $195,000 or $205,000. Market Rate is 10%. Interest is paid every January 1

On March 1, ABC financed machinery. The cost of the machinery was $100,000. ABC financed this through a long-term note that charges interest of 8%. The interest is payable each January 1 starting next year. The $100,000 is to be paid back on January 1 of the 5^th year.   

ABC acquired an investment in stock of another company for $50,000. The investment did not change in value at 12/31.

ABC purchased inventory on credit throughout the year. The inventory purchases were on 1/20/18 - 20,000 units at $1.00/unit; on 6/1 10,000 at $2.00/unit; and finally, on 9/1 they purchased 20,000 units at $3.00/unit.   ABC uses LIFO periodic method (on an annual basis) for accounting for inventory.

On 9/1 ABC sold 15,000 units at a total price of $160/unit on credit.

On 12/1 ABC sold 20,000 units at a total price of $140/unit on credit

ABC received $1,500,000 of cash for credit sales and wrote off $40,000 as bad debts at year-end.   Assuming that ABC uses the aging method and that the aging method determined that 80% of its ending balance of AR is current with a 2% likely uncollectible rate; and that 20% of the ending balance is noncurrent with a likely 20% uncollectible rate

ABC purchased $250,000 worth of supplies on credit. By year-end only 20% of supplies remained.

ABC received $800,000 of cash in advance for delivery of 5,000 units of inventory. This inventory will be delivered January of next year.

ABC had depreciation expense related to the machinery of $5,000. Paid cash for rent (expense) of $20,000. Total salary expense was $1,200,000; of which 1,000,000 was paid in cash and ABC owed the remainder at year-end. ABC paid down ½ of it’s A/P with cash. ABC incorporates the Lower of Cost or Market in determining ending inventory. Assume that the lower of cost or market value of the inventory suggested a value of $12,000.

Accrue income tax at a rate of 21%. ABC received $1,000 in divdends but paid $23,000 in dividends to its owners.

Please prepare all Journal Entries (including closing entries);

Answer 1

1st Question:

At Discount:

Bank Account Dr 195,000

Discount 5,000

To Debenture 200,0000

( Being Cash received 195,000)

At Premium

Bank Account Dr 205,000

To Debenture 200,0000

To Premium 5,000

( Being Cash received 205,000)

Interest Entry for 1st year and will continue for next 4 years:

Interest account Dr. 18,000

To Provision interest 18,000

(Being Interest Accrued each year)

Interest Paid in the following year 1st January

Provision Ac Dr. 18,000

To Bank 18,000

(Being interest paid Each Year)

On March 1, ABC financed machinery. The cost of the machinery was $100,000. ABC financed this through a long-term note that charges interest of 8%. The interest is payable each January 1 starting next year. The $100,000 is to be paid back on January 1 of the 5^th year.   

Long term loan taken

Bank A/c    Dr. 100,000

To Long term Loan       100,000

Machinery purchased

Machinery Dr. 100,000

To Bank                      100,000

Interest Entry provision 1^st year – 10 Months

Interest Ac        Dr. 6,667

To Interest Provision     6,667

(Being 10 month interest provision created)

2^nd Year entry for Int provision & paid

Int. Paid

Interest Provision A/c Dr. 6667

To Bank                                    6667

(Interest Paid on 1^st January – 1^st year)

2^nd year Int. Provision

Interest Ac        Dr. 8000

To Interest Provision     8000

(Being interest provision created)

3rd Year entry for Int provision & paid

Int. Paid

Interest Provision A/c Dr. 8000

To Bank                                    8000

(Interest Paid on each year )

year Int. Provision

Interest Ac        Dr. 8000

To Interest Provision     8000

(Being interest provision created)

4th Year entry for Int provision & paid

Int. Paid

Interest Provision A/c Dr. 8000

To Bank                                    8000

(Interest Paid on each year )

year Int. Provision

Interest Ac        Dr. 8000

To Interest Provision     8000

(Being interest provision created)

5th Year entry for Int provision & paid

Int. Paid

Interest Provision A/c Dr. 8000

To Bank                                    8000

(Interest Paid on each year )

Loan repayment

Long Term Loan Ac Dr. 100000

To Bank                                 100,000

(Being loan settled)

ABC acquired an investment in stock of another company for $50,000. The investment did not change in value at 12/31.

Acquired Investment

Investment Account Dr. 50,000

To Bank                                   50,000

ABC purchased inventory on credit throughout the year. The inventory purchases were on 1/20/18 - 20,000 units at $1.00/unit; on 6/1 10,000 at $2.00/unit; and finally, on 9/1 they purchased 20,000 units at $3.00/unit.   ABC uses LIFO periodic method (on an annual basis) for accounting for inventory. On 9/1 ABC sold 15,000 units at a total price of $160/unit on credit.

On 12/1 ABC sold 20,000 units at a total price of $140/unit on credit

ABC received $1,500,000 of cash for credit sales and wrote off $40,000 as bad debts at year-end.   Assuming that ABC uses the aging method and that the aging method determined that 80% of its ending balance of AR is current with a 2% likely uncollectible rate; and that 20% of the ending balance is noncurrent with a likely 20% uncollectible rate

Inventory Purchased 1/20/2018 @1$:

Inventory Ac Dr. 20000

To Creditor           20000

Inventory Purchased 6/01/2018 @ 2$:

Inventory Ac Dr. 20000

To Creditor           20000

Inventory Purchased 9/01/2018 @ 3$:

Inventory Ac Dr. 60000

To Creditor           60000

Inventory Sold 9/01/2018 @ 160$:

Debtor Ac Dr 2400000

To Sales                     2400000

Material Cost Charged:

Cost of Goods Sold Ac Dr. 45,000

To Inventory                                      45000

Inventory Sold 12/01/2018 @ 140$:

Debtor Ac Dr 2800000

To Sales                     2800000

Cost of Goods Sold Ac Dr. 40,000

To Inventory                                      40000

(5000*3+10000*2+5000*1=40000)

Cash received and Bad debt:

Bank Ac Dr. 1,500,000

Bad Debt Dr. 40,000

To Debtors               1,540,000

Doubtful debt Dr. 204,960

Provision for Doubtful debts 204,960

(Provision created 3660000*80%*2%+3660000*20%*20%)

ABC purchased $250,000 worth of supplies on credit. By year-end only 20% of supplies remained.

Supplies Ac Dr. 250000

To Creditor                    250000

(Credit purchase)

ABC received $800,000 of cash in advance for delivery of 5,000 units of inventory. This inventory will be delivered January of next year.

Advance Received

Bank Ac Dr 800,000

To Advance from Customer 800,000

ABC had depreciation expense related to the machinery of $5,000.

Depreciation Ac Dr.5000

To Accumulated Depreciation 5000

Paid cash for rent (expense) of $20,000.

Rent Ac Dr 20,000

To Cash               20,000

(Being Rent paid in Cash)

Total salary expense was $1,200,000; of which 1,000,000 was paid in cash and ABC owed the remainder at year-end.

Salary Ac Dr. 1,200,000

To Cash                         1,000,000

To Salary Payable         200,000

(Being salary entry passed)

ABC paid down ½ of it’s A/P with cash.

Creditor Ac Dr. 175,000

To Cash 175,000

(Half of 350,000 paid in cash)

ABC incorporates the Lower of Cost or Market in determining ending inventory. Assume that the lower of cost or market value of the inventory suggested a value of $12,000.

Inventory valuation entry

Inventory write-off Ac Dr. 3,000

To Inventory                            3,000

Accrue income tax at a rate of 21%.

Income Tax Ac Dr 757,548

To Tax Payable 757,548

ABC received $1,000 in dividends but paid $23,000 in dividends to its owners.

Bank Ac Dr. 1,000

Dividend Account 1,000

Retained Earning Dr. 13,000

To Proposed Dividend 13,000

Proposed Dividend Dr. 13,000

To Bank 13,000