ACCTG 101 Lecture Notes - Lecture 6: Deferred Income, Income Statement
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FNEC 1600
Comprehensive Problem â Due Date: December 1, 2017
Fall 2017
Your score on the following problem will carry a weight of 13% in determining your overall course grade. A hard copy of your solution must be submitted by December 1st. Any submission after the beginning of class on that date is subject to a 10 point per day late point reduction.
Description:
You have been charged with preparing year-end adjusting entries along with a multiple-step income statement and a classified balance sheet for Fat Tire, Inc., a wholesaler of bicycles and bicycle parts. The financial statements will cover the year ended December 31, 2016. A December 31 bank reconciliation, an unadjusted trial balance, and other information to help with the adjusting entries follow.
Fat Tire, Inc. | ||||||
Bank Reconciliation | ||||||
31-Dec-16 | ||||||
Balance per Bank Statement | $297,000 | |||||
Deposits in Transit | $4,500 | |||||
Bank Error (See note 1 below) | 1,200 | |||||
Outstanding Checks | (2,000) | 3,700 | ||||
Adjusted Balance | $300,700 | |||||
Balance per Fat Tire's Books | $300,000 | |||||
Interest Earned per bank statement | $450 | |||||
Book Error (See note 2 below) | 1,170 | |||||
NSF Check (See note 3 below) | (500) | |||||
December bank service charges | (420) | 700 | ||||
Adjusted Balance | $300,700 | |||||
note 1: The bank incorrectly charged Fat Tire's account for a fee | ||||||
that belonged to another client of the bank. | ||||||
note 2: A check for $130 to pay a cash miscellaneous operating | ||||||
expense was incorrectly recorded as $1,300 on Fat Tire's | ||||||
note 3: The bank returned a bad check deposited by Fat Tire | ||||||
that represented a receipt of payment from one of Fat Tire's | ||||||
customers. | ||||||
Fat Tire, Inc. | ||||||
Unadjusted Trial Balance | ||||||
December 31, 2016 | ||||||
Debit | Credit | |||||
Accounts Payable | 50,000 | |||||
Accounts Receivable | 425,700 | |||||
Accumulated Depreciation (Equip) | 4,305 | |||||
Accumulated Depreciation (F & F) | 23,600 | |||||
Advertising Expense | 18,000 | |||||
Allowance for Doubtful Accounts | $1,500 | |||||
Cash | $300,000 | |||||
Common Stock | 180,000 | |||||
Cost of Goods Sold | 2,613,000 | |||||
Depreciation Expense | 6,455 | |||||
Equipment | 10,000 | |||||
Furniture & Fixtures | 50,000 | |||||
Income Tax Expense | 228,323 | |||||
Insurance Expense | 7,500 | |||||
Interest Revenue | 5,200 | |||||
Inventory | 325,000 | |||||
Miscellaneous Operating Expense | 2,500 | |||||
Note Payable | 35,000 | |||||
Payroll Tax Expense | 23,680 | |||||
Prepaid Insurance | 10,500 | |||||
Rent Expense | 168,000 | |||||
Rent Revenue | 4,000 | |||||
Retained Earnings | 242,553 | |||||
Salary Expense | 264,500 | |||||
Sales Discounts | 42,000 | |||||
Sales Returns | 30,000 | |||||
Sales Revenue | 4,020,000 | |||||
Supplies | 2,000 | |||||
Supplies Expense | 17,000 | |||||
Unearned Rent | 2,000 | |||||
Utilities Expense | 24,000 | |||||
Totals | 4,568,158 | 4,568,158 | ||||
Information related to adjusting entries:
No entries have been made for the December 31 bank reconciliation. Use the bank reconciliation provided to prepare the necessary entries.
Fat Tire pays employees and all payroll related liabilities semi-monthly. Each payment of payroll related liabilities is for the previous pay period. Thus, Fat Tire needs to accrue salaries and payroll related expenses for the December 16th-31st pay period. The following information was obtained for the last pay period of the year.
Gross Pay = $12,000
Federal Income Tax withholding rate = 20%
FICA rate for employees and employers = 8%
State unemployment taxes for the pay period = $250
Federal unemployment taxes for the pay period = $75
Fat Tire maintains a liability account for federal income tax withheld from employees and a separate liability account for its own corporate income taxes.
Based on a count taken on December 31st, the amount of supplies that remain on hand is $500.
Unbilled sales as of December 31 totaled $5,000. The cost of those bikes sold was $2,000.
The Allowance for Doubtful accounts is adjusted at the end of each year using the percentage of sales method. Fat Tires estimates that 1% of adjusted net sales will go uncollected.
The Prepaid Insurance balance represents an $18,000 one-year policy that began on July 1. The company adjusts any prepaid items on a monthly basis.
Fat Tire decided to sublease some of its rental space. On October 1, the company received $6,000 in advance from a neighboring business for 3 monthâs rent. The lease period began on October 1. Fat Tire adjusts rent related accounts on a monthly basis.
Furniture and Fixtures were acquired on January 2, 2012 at a cost of $50,000. Management selected a 10 year life and a $2,000 residual value. Fat Tire depreciates Furniture and Fixtures on a monthly basis using the straight-line method of depreciation.
The Equipment was purchased on January 2, 2015 at a cost of $10,000. Management selected a productive life of 6,000 hours and a $1,000 residual value. Fat Tire depreciates Equipment on a monthly basis using the units-of-production method. The equipment was used 200 hours in December.
The Note Payable was issued on December 1, 2016. The terms of the note state that the principal and interest is to be paid two years from the issuance date. The interest rate stated on the note is 6 percent.
Accrued advertising expenses incurred but not yet paid totaled $1,000 on December 31.
Fat Tire makes quarterly payments for its income taxes. No entry has been made for the fourth quarter income taxes of 2016 which will be paid in 2017. To make this entry, you will have to determine the Income Before Tax for the year. One-fourth of that amount represents income earned in the fourth quarter. Fat Tireâs corporate tax rate is 40%.
Required:
Prepared the adjusting journal entries required on December 31, 2016.
Prepared a multiple-step income statement for the year ended December 31, 2016. Make sure your operating expenses are listed in descending order. Use the Income statement example that I provided as supplemental notes to chapter 6 as a guide.
Prepare a classified balance sheet as of December 31, 2016. List your current assets in order of liquidity.
Note: If it helps, prepare a supplemental schedule like we completed in problem 4.6A. It may help organize your data prior to preparing the financial statements.
Appropriate Use of Office Hours:
Office hours are held so that students can ask questions about assignments and/or concepts. For assignments that are to be submitted for a grade, it is unreasonable for you to ask âis my assignment correctâ or âcan you find my mistakesâ. That is why the assignments are graded. A reasonable request is to ask âhow toâ questions if you are stuck on a step or âcan you help me understand this data or this requirementâ. We (Iâm speaking for the TAs as well) want to help, but we are not there to complete your assignments for you.
Print Formats: Be sure to use the print preview feature in Excel and adjust your spreadsheets so that they can be easily read. Points will be deducted if I have to work just to read your printouts. Use normal size fonts and make sure that when reading left to right, you do not have sheets starting on one page and finishing on another. In other words, pretend Iâm your client.
. Make all 16 adjustments to journal entries. Remember to include a description under each journal entry. |
1 | On March 1, ABC purchased a one-year liability insurance policy for $98,400. | ||||||||
Upon purchase, the following journal entry was made: | |||||||||
Dr Prepaid insurance | 98,400 | ||||||||
Cr Cash | 98,400 | ||||||||
The expired portion of insurance must be recorded as of 12/31/14. | |||||||||
Notice that the expired portion from March through November has been recorded already. | |||||||||
Make sure that the Prepaid Insurance balance after the adjusting entry is correct. | |||||||||
2 | Depreciation expense must be recorded for the month of December. | ||||||||
The building was purchased with cash on February 1, 2014, for $150,000 with a remaining useful life of 30 years and a salvage value of $6,000. | |||||||||
The method of depreciation for the building is straight-line. | |||||||||
The equipment was purchased with cash on February 1, 2014, for $60,000 with a remaining useful life of 5 years and a salvage value of $3,000. | |||||||||
The method of depreciation for the equipment is double-declining balance. | |||||||||
Depreciation has been recorded for the building and equipment for months February through November. | |||||||||
3 | On December 1, XYZ Co. agreed to rent space in ABC's building for $12,000 per month, | ||||||||
and XYZ paid ABC on December 1 in advance for the first three months' rent. | |||||||||
The entry made on December 1 was as follows: | |||||||||
Dr Cash | 36,000 | ||||||||
Cr Unearned rent revenue | 36,000 | ||||||||
The unearned revenue account must be adjusted to reflect the amount earned as of 12/31/14. | |||||||||
4 | Per timecards, from the last payroll date through December 31, 2014, ABC's employees have worked a total of 250 hours. | ||||||||
Including payroll taxes, ABC's wage expense averages about $51 per hour. The next payroll date is January 5, 2015. | |||||||||
The liability for wages payable must be recorded as of 12/31/14. | |||||||||
5 | On November 30, 2014, ABC borrowed $235,000 from American National Bank by issuing an interest-bearing note payable. | ||||||||
This loan is to be repaid in three months (on February 28, 2015), along with interest computed at an annual rate of 6%. | |||||||||
The entry made on November 30 to record the borrowing was: (for Statement of Cash Flow purposes, consider a financing item) | |||||||||
Dr Cash | 235,000 | ||||||||
Cr Notes payable | 235,000 | ||||||||
On February 28, 2015 ABC must pay the bank the amount borrowed plus interest. | |||||||||
Assume the beginning balance for Notes Payable is correct. | |||||||||
Interest through 12/31/14 must be accrued on the $235,000 note. | |||||||||
6 | ABC uses a periodic inventory system, and the ending inventory for each year is determined by taking a complete | ||||||||
physical inventory at year-end. A physical count was taken on December 31, 2014, and the inventory on-hand at | |||||||||
that time totaled $75,000, which reflects historical cost. | |||||||||
Record the 2014 Cost of Goods Sold and the 12/31/14 Inventory adjustment. | |||||||||
Additionally, ABC adheres to GAAP by recording ending inventory at the lower of cost and net realizable value at a total inventory level. | |||||||||
A review of inventory data further indicated that the current retail sales value of the ending inventory is $110,000 and estimated costs of | |||||||||
completion and shipping is 15% of retail. Be sure to make an additional adjustment, if necessary, to properly value ending inventory | |||||||||
using the Loss and Allowance methodology. For Income Statement presentation purposes, be sure to use the Loss Method for accounting | |||||||||
for adjustments of inventory to market value. | |||||||||
7 | It would be unusual for a company to have an asset impairment in Year 1, but for the sake of this example, ABC realized | ||||||||
that their intangible asset might be impaired on December 31, 2014. Record the impairment if any. | |||||||||
The expected future net cash flows for this intangible asset totals $30,000, and the fair value of the asset is $27,500. | |||||||||
8 | On 7/1/14, ABC purchased 7,000 shares of its own stock from existing stockholders as treasury stock. The cost of the treasury | ||||||||
stock was $7 per share, or $49,000 in total. The effects of this transaction are already shown in the unadjusted trial balance. On 12/31/14, | |||||||||
ABC reissued these 7,000 shares of treasury stock at $10 per share. Record the journal entry required for the reissuance of the treasury stock. | |||||||||
9 | On 12/31/14, ABC issued 5,000 shares of $3 par value common stock at the closing market price of $7 per share. Prepare ABC's journal entry | ||||||||
to reflect the issuance of the stock on 12/31/14. | |||||||||
10 | On 7/1/14, ABC sold 12% bonds having a maturity value of $800,000 for $861,771, resulting in an effective yield of 10%. The bonds are | ||||||||
dated 7/1/14, and mature 7/1/19. Interest is payable semiannually on July 1 and January 1. ABC uses the effective interest method of | |||||||||
amortization for bond premium or discount. Record the adjusting entry for the accrual of interest and the related amortization on 12/31/14. | |||||||||
Hint: Develop an abbreviated amortization schedule to accurately determine the interest expense. | |||||||||
11 | The following information is available for ABC Corporation at 12/31/14 regarding its investments in stocks of other companies. | ||||||||
Securities | Cost | Fair Value | |||||||
2,200 shares of Toyota Corporation Common Stock | $ 100,000 | $ 125,000 | |||||||
1,100 shares of G.M. Corporation Common Stock | $ 67,000 | $ 34,000 | |||||||
$ 167,000 | $ 159,000 | ||||||||
Prepare the adjusting entry (if any) for 2014, assuming the securities are classified as trading. | |||||||||
12 | On 1/1/14, ABC Corporation purchased, as a held-to-maturity investment, $200,000 of the 8%, 5-year bonds of Intuit Corporation for $177,824, | ||||||||
which provides an 11% return. Prepare ABC's 12/31/14 journal entry to reflect the receipt of annual interest and discount amortization. | |||||||||
Assume the bond investment pays interest annually on 12/31 each year and that effective interest amortization is used. | |||||||||
Note: Notice that a discount account is not used for this investment. Therefore, for purposes of this adjusting entry, amortize the discount directly to the | |||||||||
investment account. | |||||||||
13 | ABC Corporation prepares an aging schedule on 12/31/14 that estimates total uncollectible accounts at $25,000. Assuming that the allowance method is used, | ||||||||
prepare the entry to record bad debt expense. | |||||||||
14 | On 1/1/14, ABC Corporation signed a 5-year noncancelable lease for a delivery vehicle. The terms of the lease called for ABC to Corporation to make | ||||||||
annual payments of $10,503 at the beginning of each year, starting January 1, 2014. The delivery vehicle has an estimated useful life of 6 years and a $7,000 | |||||||||
unguaranteed residual value. The delivery vehicle reverts back to the lessor at the end of the lease term. ABC Corporation uses the straight-line method | |||||||||
of depreciation for the delivery vehicle. ABC Corporation's incremental borrowing rate is 10%, and the Lessor's implicit rate is unknown. No entries have yet | |||||||||
been made concerning this lease arrangement. After determining the type of lease arrangement (capital or operating), prepare the necessary multiple-part journal | |||||||||
entry for 2014 for ABC Corporation. (Hints: You will need to compute the present value of the minimum lease payments and 4 separate sub-entries for | |||||||||
this lease transaction. Also, for Statement of Cash Flow purposes, the principal portion of lease payments are correctly categorized as a financing activity.) | |||||||||
15 | ABC Corporation provides a defined benefit pension plan for its employees. A combination adjusting entry should be made to correctly account for this type of pension | ||||||||
plan given the following items of information for the 2014 plan year, including the recording of pension expense and the employer's contribution to the pension plan in 2014. | |||||||||
Note: Use the summary entry method as demonstrated and discussed in the chapter lectures on pension accounting to prepare the adjusting entry. | |||||||||
Pension asset/liability (January 1) | $0 | ||||||||
Actual return on plan assets | $40,000 | ||||||||
Expected return on plan assets | $20,000 | ||||||||
Contributions (funding) in 2014 | $37,000 | ||||||||
Fair value of plan assets (December 31) | $75,000 | ||||||||
Settlement rate | 10% | ||||||||
Projected benefit obligation (January 1) | $0 | ||||||||
Service cost | $60,000 | ||||||||
Benefits paid in 2014 | $0 | ||||||||
*For purposes of financial statement presentation, consider Pension Expense as an operating item and any resulting Pension Asset/Liability as long-term in nature. | |||||||||
16 | On December 31, 2014, ABC Corporation issued 1,000 shares of restricted stock to its Chief Financial Officer. ABC stock had a fair value (closing market price) of | ||||||||
$10 per share on December 31, 2014. Additional information is as follows: | |||||||||
a. The service period related to the restricted stock is 2 years. | |||||||||
b. Vesting occurs if the CFO stays with the company for a two-year period. | |||||||||
c. The par value of the common stock is $3 per share. | |||||||||
Make the appropriate accounting entry as of the grant date, 12/31/14. Note: use the alternative method as described in your textbook for deferred compensation. | |||||||||
Do this step after preparing the Income Statement except for the Income taxes line: (You need to calculate Income Before Income Taxes in order to calcualte total Income Tax Expense) | |||||||||
17 | Corporate taxes are due in four estimated quarterly payments on April 15, June 15, September 15, and December 15. | ||||||||
However, for the purposes of this ABC illustration, we will assume that estimates are not paid, and that the tax is paid in full | |||||||||
on the return's March 15, 2015 due date. | |||||||||
ABC's income tax rate is 40%. The entire year's income tax expense was estimated at the beginning of 2014 to be $69,600, | |||||||||
so January through November income tax expense recognized amounts to $63,800 (11/12 months). | |||||||||
Since we are assuming estimates are not made during the year, the balance in Income taxes payable represents | |||||||||
tax accrued for January through November. Assume no deferred tax assets or deferred tax liabilities. | |||||||||
Based on the income before income taxes figure from the income statement, record December's income tax expense | |||||||||
so that the entire year's total tax expense is correct. |