1. In the given problem, transactions of S Co. are given for which journal entries can be prepared as follows:
S Company purchased merchandise from at $175,000, terms n/30 from K Company.
This will increase the inventory of S by $175,000 which will be debited. On the other hand accounts payable will be credited by same amount.
S Co a note of $175,000 for 30-day at 6% to K Company.
For the purchased merchandise, S has issued 30 day note. For this, accounts payable will be debited and notes payable will be credited.
Note amount is paid by K. Company.
The note issued by S to K is matured after 30 days. Hence S will repay amount of note with interest. With 6% interest rate, interest paid for this cash will be credited.Calculation of Interest
Issued a 45 day, 5% note and borrowed $400,000 from T Bank :
This will bring cash to S which will be debited. In return, notes payable will be credited with same amount.
Issued discounted note of $45,000 of 5%, for 60 days to purchase tools from P Co:
With the discount rate of 7%, discount amount will of $525 which will be debited as interest expense. Thus, S will receive tools of only $44,475. In return, $45,000 will be credited as notes payable
Calculation of discount
Issued New Note of $400,000 at 6% for 30 days to renew the loan and due bank interest is paid on Note issued on 1 June to T bank.
Interest paid on note at the rate 5% will be $2,500 For this, cash will be credited by the same amount. After renewing the loan with new interest rate, the old notes payable will be debited and new notes payable will be credited.Amount due on Note of 30 day, 6%is paid to T bank.
Notes payable will be debited of the amount $400,000 and interest paid of $2000. This whole amount will be credited from cash.
Amount due on 60 day, discounted note is paid to P bank.
As it is discounted note, only face amount of note i.e. $45,000 will be paid without any interest.
Paid cash $40,000 and issued ten 9% note of $22,000 each, to purchase the equipment of G Company. Every note will mature after the interval of 30 days.
Equipment account will be debited of amount $260,000, while cash of $ 40,000 will be credited. Also, notes payable will be debited of amount $220,000.
Settled a product liability lawsuit with customer for $50,000. This loss will be accrued in a litigation claims payable account.
Litigation claims payable account will be debited for $50,000.
Paid amount due to G Co. on the first note in the series.
First note is of 30 day maturity. Hence, notes payable account will be debited by the amount $22,000 and interest paid will be $165. This whole amount will be credited from cash.
2.Entries for accrued expenses are as follows:
A. Cost of product warranty $80,000.
For this, Product warranty expense account will be debited by $80,000. On the other side, Product warranty payable account will be credited.B. Interest on 9 remaining notes issued to G Co.
The remaining 9 notes will have maturity of 60 days, 90 days, and 120 days and so on.
Calculation for interest expenses
Similarly, we can compute it for other notes.
Note Payable is issued by thedebtors to their creditors for compensating the accounts payable which they previously issued to creditors. Notes payable includes loan from bank accounts. These are generally issued for purchasing merchandise or any assets
B Enterprises issues 90-day, 5 % note payable of $400,000 to S Enterprises.
a.Journal Entries in Books of B Enterprises
1. Issue of Notes Payable for purchase of merchandise.
Accounts Payable is debited as this liability is reduced and compensated against the notes payable, therefore Notes Payable are credited.2. Maturity of Notes Payable
Notes payable and interest expenses are debited as theit represents liabilities paid of and expenses respectively.
b.Journal Entries in Books of S Enterprises
1.Note Receivable Received
Notes Receivable is debited as this asset reduced, and compensated against the notes receivable, thereforeAccount Receivable are credited.2. Note Receivable Matured
Cash and interest revenue are debited as theit represents payment and revenue respectively. Notes Receivable is credited as asset is realized
Calculation of Interest
Where FA is face amount, R represents rate of interest and n is time period.
In the present case, company K has provided the list of transactions at year ended on December 31, 20Y5.1.The following journal entries to record its transactions occurred during the first accounting year.
First journal entry is shown below for the creation and transferring the amount to the petty cash fund of $4,500.
In the above entry, the amount of petty cash amounts to $4,500 is introduced for the year by the company and the same amount is credited which indicates the cash receipts because of the double-entry system.
The following entry records the payment from petty cash fund for office supplies, miscellaneous selling expenses and administrative expenses.
Above integrated entry shows debit accounts of all expenses with their respective amounts. The credit balance of $3,130 indicates the total payment made fromthe petty cash fund.
The following entry records the merchandise bought by company on account value of $31,300.
The entry shows the debit balance of inventory that records the increased value of assets. As the amount of credit purchase needs to pay after a certain period, recorded now as raised liability credited with accounts payable account.
The following entry records the payment to accounts payable for the credit purchase of inventory amounts to $31,300
The entry shows the debit balance of accounts payable and being a liability, its value has decreased on making payment of inventory. On the other hand, the decreased value of cash has recorded on credit side with the same amount.
The following entry records the cash short as difference between the cash sales of $21,200 and amount shown in register as $21,240.
The difference between cash sales recorded in register and cash sales receipts is the amount of cash short which is computed as under.
The journal entry shows the debit balance of $40 with cash shortage amount that is included in the income statement under the miscellaneous expense. And it is allowed as an incentive for faster cash recovery. The debit amount of $21,200 indicates the amount actually received from sales.
On the other hand, the credit balance of $21,240 indicates the amount of sales recorded in the register that is also shown in the income statement.
The following entry records the received note of $180,000 at 8% rate payable after 60 days from R on account.
The entry debits the received note of $180,000which indicates the increased value of assetsand accounts receivable will be credited as it has issued on account of R.
The following entry records the amount received from respective note with interest.
The interest expense has computed for 60 days at 8% by using given formula. The entry shows the debit balance of the cash as
that is the total of principal and interest amount. And the note receivable is credited with its value along with interest revenue of $2,400.
The following entry records the received amount of $7,600 from F and using allowance method the remaining has written off.
The entry debits the amount of cash received from F. To write off whole balance of accounts receivables, $9,000 is credited. And the balancing figure of
is debited as allowance for doubtful accounts.
The following entries recordthe amount received in cash and amount that has written off on account of F. This transaction involves two entries.
Firstly, the above reverse entry of written off amount need to debit accounts receivable and allowance for doubtful accounts is credited. And in the second entry, cash is debited with the received amount and accounts receivable is credited to record the deduction of asset value.
The following entry records the note issued in regard to land acquisition cost of $670,000 to Z Company.
The interest expense has computed for 90 days at 9%discount rate by using given formula. The entry shows the interest value of $15,075 and the issued note of $670,000 that includes the same value of interest. Therefore, the balancing figure of
which indicates the cost of land. As per the rule, the increase in asset value needs to debit always.
The following entry records the integrated transactions of cash receivedfrom sale with the note receivable and depreciation on such equipment.
The entry shows the debit balance of cash received as $135,000 and for remaining balance a Noteof $100,000 has been received by way of sale of equipment. The accumulated depreciation of $64,000 is also debited being an expense charged over it. On the other side, the equipment account has credited that indicates the decrease in the book-value of assets from $320,000.
The debit balance of loss on the equipment sale has derived as balancing figure from the entry, which is computed as:
The following entry records the transactions of payroll of the November month.
The entry shows the debit balance of sales salary expense and office salary expense that would be deducted in the books of company as they are expenses to company. In return, all taxes and saving funds are deducted from salaries of employees and thus, they are credited. Therefore, the amount of total deductions has computed as under:
So, the amount of salaries payable can be computed as balancing figure, shown as under:
Hence, the credit amount of salaries payable is $157,065.The following Journal entry recordsthe employer's payroll taxes of the November month.
The entry shows the debit balance of $16,229 asthe total of all taxes that is debited as Payroll tax expenses. It includes following taxes:
Social security tax: For the given company the social security tax for the year is $12,735.Medicare tax: For the given company the Medicare tax for the year is $3,184.State Unemployment Tax: It is $270 (5.4% of $5,000) for the company K.
Federal unemployment compensation: It is $40 (0.8% of $5,000) for the company K.
The following entryrecords the payment of September 15 note to Z Company that was issued in exchange of the purchased land. The entry indicates the debit balance with the face value of the note which amounts to $670,000 without any interest. On the other side, cash is credited which shows the decreased value of asset after payment in favor of note payable to Z company.
The following entry records the payment to the pension plan trustee of $139,700.
The entry indicates the debit balance of $190,400 being pension expense of business. On the other side, cash is credited with theamount of $139,700as the payment made to pension trustee and the remaining balance indicates unfunded liability of pension.
2.Bank reconciliation statement (BRS): The statement which helps in reconciling the amounts of cash account of ledger and the cash balance of bank statement. After the analysis of both amounts the adjusted balance is reported via this statement with stated reasons of differences.
Above BRS is prepared by using the given steps.
In the first step, the balance of cash shown in bank records is stated in the column of cash balance as per bank statement that is $283,000 in this case. In the next step, the deposits in transit that are not yet recognized by the bank added with the changed value arose due to errors of non- recording or recorded wrongly items.
Further the deductions from the above addition need to make regarding the checks that has remained outstanding till the end of period. These outstanding checks are issued by the company but not yet paid by the bank to the payer which creates the difference in the amounts. Lastly the adjusted balance value can be computed by subtracting above calculated amounts from the cash balance as per bank records.
Similarly, the ledger balance of cash account is stated in the column of cash balance as per company account that is $245,410 in this case. In the next step, the values of credit memo like notes receivables needs to add and values of debit memos like bank charges need to deduct that has not verified by the company although the bank has recorded the transaction for the same. In the present case, the incorrect entry amounts to
Then the adjusted balance value would be determined from the above adjustments in the cash accounts balancethat must be matched with the above adjusted balance value of bank section that is $243,960 in this case.
In the present case, the company K has not recorded the transactions of bank charges and the error occurred in to recording of invoice amount on account payment. Therefore, to rectify the same followingintegrated journal entry need to record in the books of the company.
The debit balance of $750 is the expense for the business paid as bank charges to bank.And the amount of $700 indicates the error of recording the accounts payable. And the credit balance of cash account indicates the collective amount to rectify the same that is $1,450.
Adjusting Entries: The journal entries need to record the necessary adjustments prior to the preparation of the final statements of the company can be termed as adjusting entries. These entries record the updated amounts of necessary accounts in the balance sheet.
Following are the adjusting entries for the transactions of current year end at Dec 31.
A. At the end of year, uncollectible accounts receivable amounts to $16,000 and the allowance for doubtful accounts has debit balance of $2,000.
The amount of the adjusting entry would be the amount estimated for the expenses of bad debt. Therefore, the debit balance of bad debt expenses has recorded with the amount of the estimated uncollectible accounts. And the credit balance with the same amount of $16,000 to adjust the debit balance of allowance of doubtful accounts.
B. Inventory shrinkage indicates shortage of actual inventory as compared to inventory recorded in the books of accounts. The shrinkage of inventory assessedof $3,300 indicated by physical inventory valuation.
This amount indicates inventory loss which could not be recovered. Thus, it should be debited. On the other hand, inventory account should be credited by same amount which is $3,300 in this case.
C. Prepaid insurance is current asset, it arises when the payment of future expenses has made in advance. But when it becomes due, it is considered as expense.
Hence, insurance expense account will be debited and prepaid insurance account will be credited with the same amount of $22,820.
D. Office supplies are also prepaid expenses. It will be realized, when it is used during the year which is $3,920.
Hence, office supplies expense account will be debited to record the expenses incurred during the year.The office supplies will be credited to record the deduction in the asset of the company.
E. Depreciation: It is the expense charged on each asset which needs tocompute and transferred to respective accumulated depreciation account at the year ending. Due to this, depreciation account will become zero at the beginning of next year.
The formula for computing the depreciation expense as per the Straight Line Method (SLM) is:
Depreciation on building: It is calculated on the basis of Double-Declining Balance (DDB) method
Firstly, the expenses of depreciation need to compute as per SLM by putting the values.
Under the methodof, the computed depreciation value needs to multiply by 2.
Hence, it is concluded that depreciation for the year by this method is $36,000. The depreciation will be calculated on
instead of $900,000.
The following entry records the depreciation expense of building.
The depreciation on building will be debited as being an expense of the company and accumulated depreciation account will be credited with the same amount.
Depreciation on office equipment: It is calculated on the basis of SLM by putting the values in the given formula. Hence, depreciation expense of office equipment would be amounts to $44,000.
The following entry records the depreciation expense of office equipment.
The depreciation on office equipment will be debited as being an expense of the company and accumulated depreciation account will be credited with the same amount.
Depreciation on store equipment: As the office building had acquired on July 1, the amount of depreciation would be calculated for the next 6 months (1July-31Dec) of year shown as below.
Hence, itamounts to $5,000 for depreciation by using the SLM.
The following entry records the depreciation expense of store equipment.
The depreciation on store equipment will be debited as being an expense of the company and accumulated depreciation account will be credited with the same amount.
F.In the present case, the cost of patent is $48,000 with its remaining legal life of 10 years and 8 years of expected life.Expected life should be considered onlyfor the computation of amortization expenses. Thus, amortization for this year will be
The amortization account has debited with the amount of $6,000. The patent account has credited to record the deducted value of the patents being an asset.
G. The mineral rights wereacquired at cost of $546,000. From total deposit of 910,000 tons of ore, 50,000 tons were mined and sold.The depletion expense of 50,000 tons which will be debited and accumulated depletion account will be credited. Due to this, depletion expense account will become zero at the beginning of next year.
Firstly, calculation to determine the rate of depletion is given as under.
Now, the expense of depletion is given as under.
Hence, it can be concluded that the depletion expense is $30,000.
The following entry records the expense of depletion of minerals.
The entry records the debit balance of depletion expense and credit balance of accumulated depletion with the same amount to recognize the reduction in the value of asset.
H. The payment of the Vacation expense is $10,500. To record such expenses the journal entry has shown below.
This amount will be transferred to wages payable account by crediting it and debiting wages expense account as all the expenses being a nominal account.
I. The warranty cost of the product A was estimated as 4% of the sales that is $1,900,000. The journal entry has shown below to record such warranty expenses.
The debit balance of the entry indicates the warranty expense account with the amount of $76,000. And the same amount has transferred to estimated liability under warranty account.
J. The accrued interest has receivedon the note receivable.
The computation of the accrued interestissued for the period of 90 days.
The debit balance of the entry records the accrued interest of $2,250 on the note receivable that indicates the increased value of expense. And the interest revenue to be received in future has credited.5.The balance sheet of company K on December 31 has prepared on the basis of given information and the closing balances of trial balance as shown under.
The above balance sheet consists of the three main portions which are derived from the post-closing trial balance and other information.
Current assets : It consists of the following items
Cash and cash equivalent: It is the total of petty cash fund and cash.
Accounts receivable: It is net total of accounts receivable after deducting allowance for doubtful accounts.
Prepaid expenses: It includes prepaid insurance and office supplies.
Other current assets: It includes notes receivable and interest receivable.
Inventory: It represents the value of closing merchandise of the company.
The total of these items result in to the total current assets.
Long term assets : It consists of the following items
Fixed assets: It includes land, building, office equipment and store equipment. Fromwhich the accumulated depreciation needs to deduct.
Mineral rights: It is the net amount of mineral rights after deducting accumulated depletion.
Patents: It represents the value provided in the trial balance.
The total of these items result in to the total long term assets.
Hence, the total assets can be calculated by adding total current assets and total long term assets.
Current liabilities : It consists of the following items
Salaries and accounts payable: bothrepresent the values provided in the trial balance.
Tax payable: It is the total of Social security tax. Medicare tax, Employee federal income tax, State unemployment tax and Federal unemployment tax.
Other current liability: It is the total of Interest payable, Product warranty payable, current vacation pay payable and current notes payable.
The total of these items results in to the total current liabilities.
Long term liability : It is the total of long term vacation pay payable, long term notes payable and unfunded pension liability.
Stockholders' equity : It is the total of retained earnings and common stock.
Lastly, the total liabilities and stockholders' equity can be calculated by adding total current liabilities, total long term liabilities and stockholders'equity.