Chapter 13, Problem 4PA

Obtain all data that is necessary from the worksheet prepared for Healthy Eating Foods Company in Problem 12.5A at the end of Chapter 12. Then follow the instructions to complete this problem.

INSTRUCTIONS

1. 1. Record adjusting entries in the general journal as of December 31, 2019. Use 25 as the first journal page number. Include descriptions for the entries.
2. 2. Record closing entries in the general journal as of December 31, 2019. Include descriptions.
3. 3. Record reversing entries in the general journal as of January 1, 2020. Include descriptions.

Analyze: Assuming that the firm did not record a reversing entry for salaries payable, what entry is required when salaries of $6,000 are paid on January 3?

Problem 12.5A

Healthy Eating Foods Company is a distributor of nutritious snack foods such as granola bars. On December 31, 2019, the firm’s general ledger contained the accounts and balances that follow.

INSTRUCTIONS

1. 1. Prepare the Trial Balance section of a 10-column worksheet. The worksheet covers the year ended December 31, 2019.
2. 2. Enter the adjustments in the Adjustments section of the worksheet. Identify each adjustment with the appropriate letter.
3. 3. Complete the worksheet.

Note: This problem will be required to complete Problem 13.4A in Chapter 13.

ACCOUNTS AND BALANCES

ADJUSTMENTS

a.–b.    Merchandise inventory on December 31, 2019, is $78,000.

c.    During 2019, the firm had net credit sales of $560,000; past experience indicates that 0.5 percent of these sales should result in uncollectible accounts.

d.    On December 31, 2019, an inventory of supplies showed that items costing $1,180 were on hand.

e.    On May 1, 2019, the firm purchased a one-year insurance policy for $5,400.

f.    On January 2, 2017, the firm purchased office equipment for $8,300. At that time, the equipment was estimated to have a useful life of six years and a salvage value of $350.

g.    On January 2, 2017, the firm purchased warehouse equipment for $28,000. At that time, the equipment was estimated to have a useful life of five years and a salvage value of $4,000.

h.    On November 1, 2019, the firm issued a four-month, 12 percent note for $32,000.

i.    On December 31, 2019, the firm owed salaries of $5,000 that will not be paid until 2020.

j.    On December 31, 2019, the firm owed the employer’s social security tax (assume 6.2 percent) and Medicare tax (assume 1.45 percent) on the entire $5,000 of accrued wages.

k.    On December 31, 2019, the firm owed the federal unemployment tax (assume 0.6 percent) and the state unemployment tax (assume 5.4 percent) on the entire $5,000 of accrued wages.

Analyze: When the financial statements for Healthy Eating Foods Company are prepared, what net income will be reported for the period ended December 31, 2019?

To determine

Journalize the adjusting entries as on December 31, 2019.

Explanation of Solution

Adjusting entries: Adjusting entries are those entries which are recorded at the end of the year, to update the income statement accounts (revenue and expenses) and balance sheet accounts (assets, liabilities, and stockholders’ equity) to maintain the records according to accrual basis principle.

Pass the adjusting entry for the given transaction:

	General Journal			Page - 25
Date	Description	Post Ref.	Debit	Credit
2019
December 31	Income Summary		$86,000
	Merchandise Inventory			$86,000
	(To record the beginning inventory)
December 31	Merchandise Inventory		$78,000
	Income Summary			$78,000
	(To record the closing inventory)
December 31	Uncollectible Accounts Expense		$2,800
	Allowance for Doubtful Accounts			$2,800
	(To record the estimated loss on the net credit sale)
December 31	Supplies Expense		$9,220
	Supplies			$9,220
	(To record the Supplies used)

Table (1)

	General Journal			Page - 26
Date	Description	Post Ref.	Debit	Credit
2019
December 31	Insurance expense		$3,600
	Prepaid Insurance			$3,600
	(To record the prepaid insurance)
December 31	Depreciation Expense - Office Equipment		$1,325
	Accumulated Depreciation - Office Equipment			$1,325
	(To record the depreciation on equipment)
December 31	Depreciation Expense - Warehouse Equipment		$4,800
	Accumulated Depreciation - Warehouse Equipment			$4,800
	(To record the depreciation on equipment)
December 31	Interest expense		$640
	Interest Payable			$640
	(To record the interest payable)
December 31	Salaries Expense		$5,000
	Salaries Payable			$5,000
	(To record the salaries payable)
December 31	Payroll Taxes Expense		$682.50
	Federal Unemployment Tax Payable			$30.00
	State Unemployment Tax Payable			$270.00
	Social Security Tax Payable			$310.00
	Medicare Tax Payable			$72.50
	(To record the taxes on accrued wages)

Table (2)

To determine

Journalize the closing entries as on December 31, 2019.

Explanation of Solution

Closing entries: The journal entries prepared to close the temporary accounts to Retained Earnings account are referred to as closing entries. The revenue, expense, and dividends accounts are referred to as temporary accounts because the information and figures in these accounts is held temporarily and consequently transferred to permanent account at the end of accounting year.

Pass the closing entries:

	General Journal			Page - 27
Date	Description	Post Ref	Debit	Credit
2019
December 31	Sales		$653,778
	Purchases Returns and allowances		$9,200
	Income Summary			$662,978
	(To record the closing entry for the income)
December 31	Income Summary		$55,710
	PT Capital			$55,710
	(To record the closing entry for the capital)
December 31	PT Capital		$56,000
	PT Drawings			$56,000
	(To record the closing entry for the capital)

Table (3)

	General Journal			Page - 28
Date	Description	Post Ref	Debit	Credit
2019
December 31	Income Summary		$599,267.50
	Sales Returns and Allowances			$10,000
	Purchases			$350,000
	Rent Expense			$36,000
	Telephone Expense			$2,200
	Salaries Expense			$165,000
	Payroll Taxes Expense			$13,682.50
	Supplies Expense			$9,220
	Insurance expense			$3,600
	Depreciation Expense - Office Equipment			$1,325
	Depreciation Expense - Warehouse Equipment			$4,800
	Uncollectible Accounts Expense			$2,800
	Interest Expense			$640
	(To record the closing entry for the expenses)

Table (4)

To determine

Journalize the reversing entries as on January 1, 2020 and identify the journal entry to be passed if Salaries are paid on January 3, 2020.

Explanation of Solution

Reversing entries: Reversing entries are those entries which are recorded at the beginning of the year, to reverse or set right the adjusting entries made in the end of the previous accounting year, in order to maintain the records according to accrual basis principle.

Pass the reversing entries:

	General Journal			Page - 29
Date	Description	Post Ref	Debit	Credit
2020
January 1	Interest Payable		$640
	Interest Expense			$640
	(To record the reversing entry for interest payable)
January 1	Salaries Payable		$5,000
	Salaries Expense - Office			$5,000
	(To record the reversing entry for salaries payable)
January 1	Social Security Tax Payable		$310.00
	Medicare Tax Payable		$72.50
	Federal Unemployment Tax Payable		$30.00
	State Unemployment Tax Payable		$270.00
	Payroll Taxes Expense			$682.50
	(To record the reversing entry for payroll taxes payable)

Table (5)

	General Journal			Page - 30
Date	Description	Post Ref	Debit	Credit
2020
January 3	Salaries Payable		$5,000
	Salaries Expense		$1,000
	Cash			$6,000
	(To record the payment of salaries ignoring the payroll taxes)

Table (6)