Question

The unadjusted pre-closing 12/31/15 account balances for the Mahoney Company are listed below: Net Sales Net Purchases Selling Expenses Cash Machines Accumulated Depreciation, Machines Accounts Payable Retained Earnings Allowance for Doubtful Accounts Building Accumulated Depreciation, Building Common Stock Accounts Receivable Depreciation Expense, Machines Inventory @ 1/1/15 (periodic method used) $11,450,000 9,800,000 430,000 500,000 6,130,000 2,390,000 2,460,000 4,186,000 54,000 5,200,000 260,000 5,000,000 1,645,000 1,195,000 900,000 During your audit, you discover the following five items that have yet to be recorded: 1. No depreciation on the building has been recorded in 2015. Depreciation on the building is based on Double-Declining Balance. It was purchased on 1/1/14 and has an estimated useful life of 40 years. The estimated salvage value is $670,000. 2. Mahoney exchanged a machine for a similar machine on 12/31/15. The original machine cost $3,540,000 and had a book value of $1,990,000. The new machine had a fair value of $1,520,000; Mahoney also received $220,000 in cash. The exchange did not have commercial substance. 3. Mahoney also exchanged its only other machine for a different machine on 12/31/15. The original machine cost $2,590,000 and had a book value of $1,750,000. The fair value was $2,100,000. Mahoney paid cash of $420,000 as well. The exchange had commercial substance. 4. Mahoney uses the Balance Sheet approach to adjust Accounts Receivable to Net Realizable Value. At 12/31/15, uncollectible receivables are estimated to be 5% of Accounts Receivable. Ending Inventory is to be estimated using the Gross Profit Method. The historic Gross Profit percentage is 20%

Answer 1

A) JOURNAL ENTRIES: Computation of depreciation Particulars Amount 5% ((100/40)*2) S4,940,000 (5200000* 95) $247,000 DDB rate Depreciation base for 2016 Depreciation at 5% 1) Date Accounts title and explanation Depreciation expense - Buildings Accumulated depreciation - Buildings Debit Credit $247,000 $247,000 2) Date Accounts title and explanation Machine (for new) Cash Accumulated depreciation - Machines Loss on exchange of machine Machine (for old) Debit Credit $1,520,000 $220,000 |(3540000-19900000) $1,550,000 $250,000 $3,540,000 3) Date Accounts title and explanation Machine (for new) Accumulated depreciation - Machines Debit Credit $2,170,000 $840,000 |(2100000+420000) |(2590000 -1750000) Gain on exchange of machine Machine (for old) S2,590,000 Cash $420,000 4) Date Accounts title and explanation Bad debts expense Debit Credit $28,250 (1645000*5%-54000) $28,250 Allowance for doubtful debts Calculation of COGS, ending inventory Particulars Amount Beginning inventory Add: purchases $900,000 $9,800,000 $10,700,000 $9,160,000 (Sales*0.8) $1,540,000 Less: COGS Ending inventory

Accounts title and explanation Cost of goods sold Inventory Purchases 5) Date Debit Credit $9,160,000 $640,000 (1540000-900000) $9,800,000 B) INCOME STATEMENT Particulars Amount Amount $11,450,000 Net sales Less: COGS Gross profit Selling & administrative expenses: Selling expenses Bad debts expense Depreciation expense-machines Depreciation expense-buildings Operating Income Loss: on exchange of machine Net Income $9,160,000 $2,290,000 $430,000 $28,250 $1,195,000 $1,900,250 $247,000 $389,750 $250,000 $139,750

BALANCE SHEET Assets Amount Amount Current assets cash accounts receivable Less: allowance for doubtful debts Inventory Fixed assets: $300,000 $1,645,000 -$82,250 $1,540,000 $3.402,750 Buildings Less: accumulated depreciation Machines Less: accumulated depreciation TOTAL ASSETS Liabilities: Current liabilities: Accounts payable Shareholders' equity $5,200,000 $507,000 $3,690,000 $4,693,000 $3,690,000 $11,785,750 $2,460,000| $2,460,000 $5,000,000| common stock Retained earnings TOTAL LIABILITIES & EQUITY $4,325,750 $9,325,750 si1,785,750