Gen Combo Loose Leaf Financial Accounting; Connect Access Card
Gen Combo Loose Leaf Financial Accounting; Connect Access Card
18th Edition
ISBN: 9781264094295
Author: williams
Publisher: MCG
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Chapter 8, Problem 2CP

a.

To determine

Prepare a bank reconciliation statement and the necessary journal entries of Company M as of December 31, 2018.

a.

Expert Solution
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Explanation of Solution

Journal entry:

Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.

Rules of Debit and Credit:

Following rules are followed for debiting and crediting different accounts while they occur in business transactions:

  • Debit, all increase in assets, expenses and dividends, all decrease in liabilities, revenues and stockholders’ equities.
  • Credit, all increase in liabilities, revenues, and stockholders’ equities, all decrease in assets, and expenses.

Bank reconciliation:

Bank statement is prepared by bank. The company maintains its own records from its perspective. This is why the cash balance per bank and cash balance per books seldom agree. Bank reconciliation is the statement prepared by company to remove the differences and disagreement between cash balance per bank and cash balance per books.

Prepare a bank reconciliation statement and the necessary journal entries of Company M as of December 31, 2018 as follows:

Bank reconciliation statement:

Company M
Bank Reconciliation
December 31, 2018
Particulars $ $
Balance per bank statement, December 31, 201846,975
 Add: Deposits in transit not recorded by bank16,500
 63,475
 Less: Outstanding checks
No. 5085,500
No. 5117,500
No. 5218,00021,000
 Adjusted cash balance42,475
 
 Balance per depositor's records, December 31, 201845,000
 Less:
 Bank service charge25
 NSF check from Iggy Smarts2,5002,525
 Adjusted cash balance42,475

Table (1)

  • The deposits which are not recorded by the bank are referred to as deposits in transit. Since the deposits in transit are not reflected on the bank statement, the company should add deposits in transit to cash balance per bank, while preparation of bank reconciliation statement.
  • Outstanding checks are the checks that are issued by the company, but not yet paid by the bank. When the check is issued for payment, the company deducts the cash balance immediately. But the bank deducts only when the cash is paid for the issued check. So, company deducts the cash balance per bank to remove the differences.
  • Banks deduct the service charge for the services rendered like lock box rental, or printed checks. But the company is not aware of such deductions. So, company deducts the cash balance per books while bank reconciliation preparation.
  • While bank reconciliation, the NSF check should be deducted from the cash balance per book. This is because the bank could not collect funds from the customer’s bank due to lack of funds. But being recorded as Accounts Receivable previously, the balance should be deducted from books, to increase the Accounts Receivable account.

Therefore, the true cash balance of Company M as of December 31, 2018 is $42,475.

Necessary jounal entries for the bank reconciliation statement:

DateAccount Title and ExplanationPost Ref.Debit ($)Credit ($)
Bank Service Charges 25
Accounts Receivable 2,500
Cash 2,525
(To record bank service charges for December and the NSF check received from Musician I) 

Table (2)

  • Bank service charge is an expense account, and it decreases the value of stockholder’s equity by $25. Therefore, debit the bank service expense account with $25.
  • Accounts receivable is an asset account, and it increases the value of assets by $2,500. Therefore, debit the accounts receivable account with $2,500.
  • Cash is an asset account, and it decreases the value of assets by $2,525. Therefore, credit the cash account with $2,525.

b.

To determine

Prepare the adjusting entries for the marketable securities.

b.

Expert Solution
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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.

Prepare the adjusting entries for the marketable securities as follows:

DateAccount Title and ExplanationPost Ref.Debit ($)Credit ($)
Marketable Securities 2,500
Unrealized Holding Gain on Investments (1) 2,500
(To record increased amount of  reported value of marketable securities from $25,000 to $27,500) 

Table (3)

  • Marketable securities are asset account, and it increases the value of assets by $2,500. Therefore, debit the marketable securities account with $2,500.
  • Unrealized holding gain on investment is a revenue account, and it increases the value of stockholder’s equity by $2,500. Therefore, credit the unrealized holding gain on investment account with $2,500.

Working note:

Calculate the unrealized gain on the investment:

Unrealized gain = [Market value of sectuires on December 31, 2018The value of marketable securities reported in the trial balance]=$27,500$25,000=$2,500 (1)

c.

To determine

Prepare the adjusting entry for the uncollectible accounts expense at the end of the accounting year.

c.

Expert Solution
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Explanation of Solution

Prepare the adjusting entry for the uncollectible accounts expense at the end of the accounting year as follows:

DateAccount Title and ExplanationPost Ref.Debit ($)Credit ($)
Uncollectible Accounts Expense (2) 3,500
Allowance for Doubtful Accounts 3,500
(To record uncollectible accounts expense for December) 

Table (4)

  • Uncollectible accounts expense is an expense account, and it decreases the value of stockholder’s equity by $3,500. Therefore, debit the uncollectible accounts expense account with $3,500.
  • Allowance for doubtful account is a contra- asset account, and it increases the value of allowance for doubtful account by $3,500. Therefore, credit the allowance for doubtful account with $3,500.

Working note:

Calculate the value of uncollectable accounts receivable expense

Uncollectable accounts receivable expense} = [Allowance for doublful accounts on December 31, 2018Allowane for doubtfull accounts reported in the trial balance]=$8,500$5,000=$3,500 (2)

d.

To determine

Prepare the journal entry for the guitars missing from the company’s inventory at the end of the accounting year.

d.

Expert Solution
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Explanation of Solution

Prepare the journal entry for the guitars missing from the company’s inventory at the end of the accounting year as follows:

DateAccount Title and ExplanationPost Ref.Debit ($)Credit ($)
Cost of Goods Sold 1,350
Inventory 1,350
(To record inventory shrinkage of missing guitars) 

Table (5)

  • Cost of goods sold is an expense account, and it decreases the value of stockholder’s equity by $1,350. Therefore, debit the cost of goods sold account with $1,350.
  • Inventory is an asset account, and it decreases the value of assets by $1,350. Therefore, credit the inventory account with $1,350.

e.

To determine

Prepare the adjusting entry for the office supplies used during the December.

e.

Expert Solution
Check Mark

Explanation of Solution

Prepare the adjusting entry for the office supplies used during the December as follows:

DateAccount Title and ExplanationPost Ref.Debit ($)Credit ($)
Office Supplies Expense (3) 300 
Office Supplies  300
(To record office supplies used in December)   

Table (6)

  • Office supplies expense is an expense account, and it decreases the value of stockholder’s equity by $300. Therefore, debit the office supplies expense account with $300.
  • Office supplies are asset account, and it decreases the value of assets by $300. Therefore, credit the inventory account with $300.

Working note:

Calculate the value of office supplies expense

Office supplies expense = [Office supplies reported in the trial balance Office supplies on hand on December 31, 2018]=$1,200$900=$300 (3)

f.

To determine

Prepare the adjusting entry for the insurance expense incurred during the December.

f.

Expert Solution
Check Mark

Explanation of Solution

Prepare the adjusting entry for the insurance expense incurred during the December as follows:

DateAccount Title and ExplanationPost Ref.Debit ($)Credit ($)
Insurance Expense (4) 600 
Prepaid Insurance  600
(To record insurance policies expired during December)   

Table (7)

  • Insurance expense is an expense account, and it decreases the value of stockholder’s equity by $600. Therefore, debit the insurance expense account with $600.
  • Prepaid insurance is an asset account, and it decreases the value of assets by $600. Therefore, credit the prepaid insurance account with $600.

Working note:

Calculate the value of insurance expense

Insurance expense expense = Prepaid insurance reported in the trial balanceRemaining outstanding months=$6,60011 months=$600 (4)

g.

To determine

Prepare the journal entry of the depreciation expense incurred during the December.

g.

Expert Solution
Check Mark

Explanation of Solution

Prepare the journal entry of the depreciation expense incurred during the December as follows:

DateAccount Title and ExplanationPost Ref.Debit ($)Credit ($)
Depreciation Expense 5,000 
Accumulated Depreciation  5,000
(To record depreciation expense for December)   

Table (8)

  • Depreciation expense is an expense account, and it decreases the value of stockholder’s equity by $5,000. Therefore, debit the depreciation expense account with $5,000.
  • Accumulated depreciation is a contra-asset account, and it increases the value of accumulated depreciation account by $5,000. Therefore, credit the accumulated depreciation with $5,000.

h.

To determine

Prepare the adjusting entry for the sales revenue earned during the December.

h.

Expert Solution
Check Mark

Explanation of Solution

Prepare the adjusting entry for the sales revenue earned during the December as follows:

DateAccount Title and ExplanationPost Ref.Debit ($)Credit ($)
Unearned Customer Deposits 3,200 
Sales (5)  3,200
(To record revenue earned from advance special orders)   

Table (9)

  • Unearned customer deposits are liability account, and it decreases the value of liabilities by $3,200. Therefore, debit the unearned customer deposit account with $3,200.
  • Sales are revenue account, and it increases the value of stockholder’s equity by $3,200. Therefore, credit the sales account with $3,200.

Working note:

Calculate the advance revenue received for the special orders

Revenue earned = [Unearned customer deposits in the trial balance Unearned customer deposits balance on December 31, 2018]=$8,000$4,800=$3,200 (5)

i.

To determine

Prepare the adjusting entry for the income tax expense during the December.

i.

Expert Solution
Check Mark

Explanation of Solution

Prepare the adjusting entry for the income tax expense during the December as follows:

DateAccount Title and ExplanationPost Ref.Debit ($)Credit ($)
Income Tax Expense (6) 6,000 
Income Tax Payable  6,000
(To record accrued income taxes in December)   

Table (10)

  • Income tax expense is an expense account, and it decreases the value of stockholder’s equity by $6,000. Therefore, debit the income tax expense account with $6,000.
  • Income tax payable is a liability account, and it increases the value of liabilities by $6,000. Therefore, credit the income tax payable account with $6,000.

Working note:

Calculate the income tax expense incurred at the end of the accounting year

Income tax expense = [Income tax expense balance on December 31, 2018 Income tax expense reported in the trial balance ]=$81,000$75,000=$6,000 (6)

j.

To determine

Prepare the adjusted trial balance of Company M at December 31, 2018.

j.

Expert Solution
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Explanation of Solution

Trial balance:

Trial balance is a summary of all the ledger accounts balances presented in a tabular form with two column, debit and credit. It checks the mathematical accuracy of the ledger postings and helps preparing the final accounts.

Prepare the adjusted trial balance of Company M at December 31, 2018 as follows:

Company M
Adjusted Trial Balance
As of December 31, 2018
Accounts (refer appropriate T-account balance)$$
Cash42,475
 Marketable securities27,500
 Accounts receivable127,500
 Allowance for doubtful accounts8,500
 Merchandise inventory248,650
 Office supplies900
 Prepaid insurance6,000
 Building and fixtures1,791,000
 Accumulated depreciation805,000
 Land64,800
 Accounts payable70,000
 Unearned customer deposits4,800
 Income taxes payable81,000
 Capital stock1,000,000
 Retained earnings240,200
 Unrealized holding gain on investments8,500
 Sales1,603,200
 Cost of goods sold959,350
 Bank service charges225
 Uncollectible accounts expense12,500
 Salary and wages expense395,000
 Office supplies expense700
 Insurance expense7,000
 Utilities expense3,600
 Depreciation expense53,000
 Income tax expense81,000
 Totals3,821,2003,821,200

Table (11)

Therefore, the total of debit, and credit columns of an adjusted trial balance of Company as of December 31, 2018 is $3,821,200 and agree.

Working note:

Cash
Op. Bal.45,000a.2,525
  
Cl. Bal.42,475
Marketable securities
Op. Bal.25,000
b.2,500
Cl. Bal.27,500
Accounts receivable
Op. Bal.125,000
a.2,500
Cl. Bal.127,500
Allowance for doubtful accounts
Op. Bal.5,000
c.3,500
Cl. Bal.8,500
Merchandise inventory
Op. Bal.250,000d.1,350
Cl. Bal.248,650
Office supplies
Op. Bal.1,200e.300
Cl. Bal.900
Prepaid insurance
Op. Bal.6,600f.600
Cl. Bal.6,000
Accumulated depreciation
Op. Bal.800,000
g.5,000
Cl. Bal.805,000
Unearned customer deposits
h.3,200Op. Bal.8,000
Cl. Bal.4,800
Unearned customer deposits
Op. Bal.75,000
i.6,000
Cl. Bal.81,000
Bank service changes
Op. Bal.200  
a.25  
Cl. Bal.225
Unrealized gain on investment
Op. Bal.6,000
b.2,500
Cl. Bal.8,500
Uncollectable accounts expense
Op. Bal.9,000  
c.3,500  
Cl. Bal.12,500
Cost of goods sold
Op. Bal.958,000  
d.1,350  
Cl. Bal.959,350
Office supplies expense
Op. Bal.400  
e.300  
Cl. Bal.700
Insurance expense
Op. Bal.6,400  
e.600  
Cl. Bal.7,000
Depreciation expense
Op. Bal.48,000  
g.5,000  
Cl. Bal.53,000
Sales account
Op. Bal.1,600,000
h.3,200
Cl. Bal.1,603,200
Income tax expense
Op. Bal.75,000  
g.6,000  
Cl. Bal.81,000

k.

To determine

Prepare an income statement, statement of retained earnings, and a balance sheet of Company M as of December 31, 2018.

k.

Expert Solution
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Explanation of Solution

Income statement: The financial statement which reports revenues and expenses from business operations and the result of those operations as net income or net loss for a particular time period is referred to as income statement.

Retained earnings: Retained earnings are that portion of profits which are earned by a company but not distributed to stockholders in the form of dividends. These earnings are retained for various purposes like expansion activities, or funding any future plans.

Balance sheet: This financial statement reports a company’s resources (assets) and claims of creditors (liabilities) and stockholders (stockholders’ equity) over those resources. The resources of the company are assets which include money contributed by stockholders and creditors. Hence, the main elements of the balance sheet are assets, liabilities, and stockholders’ equity.

Prepare an income statement, statement of retained earnings, and a balance sheet of Company M as of December 31, 2018 as follows:

Income statement:

Company M
Income Statement
For the Year Ended December 31, 2018
Particulars $ $
 Sales1,603,200
 Cost of goods sold959,350
 Gross profit643,850
 Bank service charges225
 Uncollectible accounts expense12,500
 Salary and wages expense395,000
 Office supplies expense700
 Insurance expense7,000
 Utilities expense3,600
 Depreciation expense53,000472,025
 Income before income tax171,825
 Less: Income taxes expense81,000
 Net income90,825

Table (12)

Therefore, the net income of Company M for the year ended December 31, 2018 is $90,825.

Statement of retained earnings:

Statement of Retained Earnings
For the Year Ending December 31, 2018
Particulars$
 Retained earnings, January 1, 2018240,200
 Add: Net income (from income statement)90,825
 Ending Retained earnings, December 31, 2018331,025

Table (13)

Therefore, the ending retained earnings on December 31, 2018 is $331,025.

Balance sheet:

Company M
Balance Sheet
As of December 31, 2018
Assets $ $
 Current assets:
 Cash42,475
 Marketable securities27,500
 Accounts receivable127,500
 Less: Allowance for doubtful accounts(8,500)119,000
 Merchandise inventory248,650
 Office supplies900
 Prepaid insurance6,000
 Total current assets (A)444,525
 Plant and equipment:
 Building and fixtures1,791,000
 Less: Accumulated depreciation(805,000)986,000
 Land64,800
 Total plant and equipment (B)1,050,800
 Total assets (A+B)1,495,325
 Liabilities
 Current liabilities:
 Accounts payable70,000
 Unearned customer deposits4,800
 Income taxes payable81,000
 Total current liabilities155,800
 Long-term liabilities:-
 Total liabilities (C)155,800
 Stockholders' Equity
 Capital stock1,000,000
 Retained earnings (from statement of retained earnings)331,025
 Unrealized holding gain on investments8,500
 Total stockholders' equity (D)1,339,525
 Total Liabilities and Stockholders' Equity (C+D)1,495,325

Table (14)

Therefore, the total assets of Company M are $1,495,325, and the total liabilities and stockholders’ equity is $1,495,325.

l.

To determine

Ascertain the average days on accounts receivable of Company M.

l.

Expert Solution
Check Mark

Explanation of Solution

Ascertain the average days on accounts receivable of Company M as follows:

Days' sales in receivable=Days in accounting periodReceivable turnover ratio (7)=36513.47 times=27.1 days

Therefore, the average days on accounts receivable is 27.1 days.

Working note:

Calculate the value of receivable turnover ratio for outstanding inventories.

Receivable turnover ratio = Net sales for the year endedEnding accounts receivable=$1,603,200$119,000=13.47times (7)

m.

To determine

Ascertain the average number of days that merchandise remains in the inventory before it was sold.

m.

Expert Solution
Check Mark

Explanation of Solution

Ascertain the average number of days that merchandise remains in the inventory before it was sold.

Days' sales in inventory=Days in accounting periodInventory turnover=3653.9 times=93.6 days

Therefore, the average number of days that merchandise remains in the inventory before it was sold is 93.6 days.

Working note:

Calculate the inventory turnover ratio

Inventory turnover ratio = Cost of goods soldEnding inventory=$959,350$248,650=3.9 times (8)

n.

To determine

Ascertain the number of days that company M takes to convert the inventory into cash.

n.

Expert Solution
Check Mark

Explanation of Solution

Ascertain the number of days that company M takes to convert the inventory into cash as follows:

Days in operating cycle =[ Average days sales in inventory  + Average days receivables remain outstanding (2)]=93.6 days + 27.1 days=120.7 days

Therefore, the number of days that company M takes to convert the inventory into cash is 120.7 days.

o.

To determine

Comment the financial position of Company M from the perspective of a short-term creditor.

o.

Expert Solution
Check Mark

Explanation of Solution

Comment the financial position of Company M from the perspective of a short-term creditor as follows:

Short-term creditors give more attention to the inventory turnover measurement because this ratio indicates how quickly the company is able to sell its merchandise (convert into cash).

Inventory turnover ratio is the ratio which analyzes the number of times inventory is sold during the period. This ratio gauges the efficacy of inventory management. The larger ratio indicates that the company has more efficient inventory management.

In this case, inventory turnover ratio of Company M is 3.9 times, and it clearly shows that company M should increase the inventory management efficiently.

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Chapter 8 Solutions

Gen Combo Loose Leaf Financial Accounting; Connect Access Card

Ch. 8 - 5. What are the characteristics of a just-in-time...Ch. 8 - 6. Why do companies that use perpetual inventory...Ch. 8 - 7. Under what circumstances might a company write...Ch. 8 - 8. What is meant by the year-end cutoff of...Ch. 8 - 9. Explain why errors in the valuation of...Ch. 8 - 10. Briefly explain the gross profit method of...Ch. 8 - 11. A store using the retail inventory method...Ch. 8 - 12. How is the inventory turnover computed? Why is...Ch. 8 - 13. Baxter Corporation has been using FIFO during...Ch. 8 - In anticipation of declining inventory replacement...Ch. 8 - Notes to the financial statements of two clothing...Ch. 8 - BRIEF EXERCISE 8.1 FIFO Inventory Smalley, Inc.,...Ch. 8 - BRIEF EXERCISE 8.2 LIFO Inventory Mason Company...Ch. 8 - BRIEF EXERCISE 8.3 Average-Cost Inventory Fox...Ch. 8 - BRIEF EXERCISE 8.4 FIFO and LIFO Inventory Murphy,...Ch. 8 - BRIEF EXERCISE 8.5 FIFO and Average-Cost...Ch. 8 - BRIEF EXERCISE 8.6 Inventory Shrinkage Bruing...Ch. 8 - BRIEF EXERCISE 8.7 Inventory Error Pixy, Inc.,...Ch. 8 - BRIEF EXERCISE 8.8 Inventory Error Due to...Ch. 8 - BRIEF EXERCISE 8.9 Inventory Turnover Alamo...Ch. 8 - BRIEF EXERCISE 8.10 Inventory Turnover Rouse...Ch. 8 - EXERCISE 8.1 Accounting Terminology Listed as...Ch. 8 - EXERCISE 8.2 Cost Flow Assumptions On May 10,...Ch. 8 - EXERCISE 8.3 Physical Flow versus Cost Flow...Ch. 8 - EXERCISE 8.4 Effects of Different Cost Flow...Ch. 8 - EXERCISE 8.5 Transfer of Title Jensen Tire had two...Ch. 8 - Prob. 6ECh. 8 - EXERCISE 8.7 Costing Inventory in a Periodic...Ch. 8 - EXERCISE 8.8 Effects of Errors in Inventory...Ch. 8 - EXERCISE 8.9 Estimating Inventory by the Gross...Ch. 8 - EXERCISE 8.10 Estimating Inventory by the Retail...Ch. 8 - Prob. 11ECh. 8 - Prob. 12ECh. 8 - EXERCISE 8.13 Inventory Turnover A recent annual...Ch. 8 - Prob. 14ECh. 8 - EXERCISE 8.15 Using the Financial Statements of...Ch. 8 - Prob. 1APCh. 8 - PROBLEM 8.2A Alternative Cost Flow Assumptions in...Ch. 8 - PROBLEM 8.3A Alternative Cost Flow Assumptions in...Ch. 8 - Prob. 4APCh. 8 - PROBLEM 8.5A Periodic Inventory Costing...Ch. 8 - PROBLEM 8.6A Effects of Inventory Errors on...Ch. 8 - PROBLEM 8.7A Retail Method Between The Ears...Ch. 8 - PROBLEM 8.8A FIFO versus LIFO Comparisons Walmart...Ch. 8 - Prob. 1BPCh. 8 - PROBLEM 8.2B Alternative Cost Flow Assumptions in...Ch. 8 - PROBLEM 8.3B Alternative Cost Flow Assumptions in...Ch. 8 - Prob. 4BPCh. 8 - PROBLEM 8.5B Periodic Inventory Costing...Ch. 8 - PROBLEM 8.6B Effects of Inventory Errors on...Ch. 8 - PROBLEM 8.7B Retail Method Song Meister is a...Ch. 8 - PROBLEM 8.8B FIFO versus LIFO Comparisons J.C....Ch. 8 - Prob. 1CTCCh. 8 - CASE 8.2 LIFO Liquidation Jackson Specialties has...Ch. 8 - CASE 8.3 Dealing with the Bank Millennium Frozen...Ch. 8 - CASE 8.4 Inventory Turnover A company’s inventory...Ch. 8 - Prob. 2CP
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