ACC 500 Sections J & K Fall 2018

CASE 2 Adjusting Entries

Due Date: Monday November 5, 2018

Please hand in one hard copy per group at the beginning of the class session.

Submission of this assignment is made under the terms of our academic integrity code.

Team: Akshay, Aditya, Nishitha, Jayesh

Each adjustment is worth 3 points. There is no partial credit for individual entries. The summary table at the
end is worth 8 points. The case is worth 50 points.

You are presented with the following information for Little Co. Consider all situations independently. The
company has a 12/31 year end and each item should be considered as a possible adjusting entry. Please present
each adjusting entry as you deem necessary in good form followed by a brief explanation.

A1: The bank statement indicates that a check you recorded for $600 for a payment to your vendor cleared the
bank for $6,000. You made the mistake of recording the check erroneously and the bank was correct.

The mistake resulted in overstated accounts payable and cash account. To adjust this record,
we should debit accounts payable and credit cash account for the amount of a difference
between bank statement and a ledger record. 6000-600=5400.
Dec, 31 Accounts payable $5,400

Cash $5,400

To reconcile payment to a vendor

A2: The balance in Allowance for Doubtful Accounts is $15,000 on the unadjusted trial balance. An aging of
accounts receivable analysis indicates that the balance in the Allowance account should be $17,500.

We are using allowance (not direct write-off method) as required by GAAP. To record an increase, we are using
bad debt expense account – as we recognized the amount that will not be received, utilizing expense
recognition principle. The allowance for uncollectible accounts is contra-asset account, therefore we don’t need
to adjust A/R record – it will be decreased with the allowance account on the balance sheet.

Dec, 31 Bad debt expense $2,50

0
Allowance for doubtful accounts $2,500

To adjust allowance for doubtful accounts

A3: Analysis of the replacement cost for inventory indicates a decline of $17,000 which you consider to be
material. The company uses the FIFO method of accounting for inventory.

Under GAAP, company has to recognize its inventory at a historical cost. However, if the value of inventory
declines significantly, a company should write down the inventory to market to report this loss. This would
increase Cost of Goods Sold and decrease inventory. Using FIFO method, company could estimate the cost of
inventory that was purchased earlier and make the adjustments more precise. But we don’t have enough data
to distinguish obsolete inventory in this problem.

Dec, 31 Cost of Goods Sold $17,000

Inventory $17,000

To write inventory down to market value

A4: You analyze the securities held in the Marketable Securities account at year end by looking up the closing
price on Yahoo Finance for each security and multiplying by the number of shares held. The result of your
analysis indicates that the portfolio declined $7,000 in value as of the year end.

Using mark-to-market valuation principle, the item should be recognized in the balance sheet at its current
market value on the balance sheet date. As the marketable securities value is less than their cost, we should
recognize a loss.

Dec, Unrealized holding loss $7,000

31
Marketable securities $7,000

To recognize loss on marketable securities

A5: Your analysis of the unadjusted trial balance shows a balance of $4,000 in Insurance Expense. The Prepaid
Insurance account has a balance of $1,200. Your analysis indicates that the correct balance in Insurance
Expense should be $3,500.

Prepaid insurance Insurance expense

Preliminary balance 1200 Preliminary balance 4000
Adjusting entry 500 500 Adjusting entry
Adjusting entry 500 500 Adjusting entry

Dec, 31 Prepaid insurance $500

Insurance expense $500

To adjust prepaid insurance balance

A6: The inventory analysis of supplies at year end indicates that the company had $12,200 of supplies on hand.
The unadjusted trial balance shows a Supplies Inventory of $14,000 and a Supplies Expense balance of
$22,000.

Supplies inventory Supplies expense

Preliminary balance $14,000 Preliminary balance $22,000
Adjusting entry $1,800 Adjusting entry $1,800
Correct balance $12,200 Correct balance $23,800

Dec, 31 Supplies expense $1,800

Supplies $1,800

To adjust supplies account

A7: The company has a balance in Notes Receivable of $15,000. The note is due in 3 years and carries a 6%
interest rate. Interest is paid on the note each January. Interest has been correctly accrued through September
30.

In the above question, it is given that the interest has been correctly accrued through September 30, which
means that we need to accrue interest for three months more i.e October, November and December.

The interest revenue will be 15000 * 6 % * 3 / 12 = $ 225

The adjusting entry will be :-

Dec, 31 Interest receivable $225

Interest revenue $225

We will debit an asset " Interest receivable " and Credit the income i.e " Interest revenue “.

Next year , when cash will be received, then cash will be debited and interest receivable will be credited.
A8: The company has recorded depreciation expense through September 30. Data on the company’s PP&E is
as follows:

Type Cost Useful Life Salvage Value Accumulated

Depreciation
Land $50,000 NMF
Buildings $500,000 20 years $50,000 $125,000
Equipment $80,000 5 years $5, 000 $ 25,000
Furniture and Fixtures $30,000 3 years $3,000 $ 20,000

Record the entry for depreciation expense at year end using one compound entry.
Buildings
500000-50000=450000
450000/20=22500
22500/12 = 1875
1875*3 = 5625

To record acuumulated depreciation for the Q4

A9: Limited life Intangible assets of $40,000 are listed the unadjusted trial balance. These are being amortized
at the rate of $10,000 per year. Amortization has been recorded through the quarter ended September 30.

Limited life Intangible assets amortizes over useful life. Amortizable base equals cost minus residual value.
10000/12*3=2500

Dec, 31 Limited life intangible assets $2,500

Accumulated amortisation $2,500

To record accumulated amortization for limited life intangible

A10: When analyzing Accounts Payable you discover invoices for inventory items that have been received and
billed to you but have not yet been recorded in the amount of $6,000.

Dec, 31 Inventory $6,000

Accounts payable $6,000

To adjust inventory to match the physical count.

A11: Salaries earned but not yet paid on December 31 were $12,000.
Dec, 31 Salary expense $12,000

Salaries payable $12,000

To record salaries expense

A12: The interest on notes payable that has been incurred but not yet paid totaled $1,500 and was not on the
unadjusted trial balance.

Dec, 31 Interest expense $1,500

Interest payable $1,500

To record interest expense

A13: The company has been involved in lawsuit. You reviewed the legal file and the letter received from your
attorney stating that is was not likely that you would lose the suit but that if you did, the judgment would be
approximately $30,000.

As per the guidelines of The Financial Accounting Standards Board (FASB) a contingent liability should be
disclosed in financial statement note if it's reasonably possible (less than probable but more than remote) that
a loss or an expense will occur. In the mentioned scenario as per the lawyer, loosing the lawsuit is less than
probable. Hence, as it is not likely to be lost we will disclose it in the financial statements notes but not
pass an adjusting entry for the same.

A14: Analysis of the Revenue accounts indicated that $15,000 listed as revenues for the year ended 12/31 had
not yet been billed to the client in January.

Amount received in advance recorded as revenue which was to be billed in January next year is an unearned
revenue which is a current liability. As the entry has already been made in the revenue account by crediting the
revenue account, adjusting entry will involve debiting the revenue account and crediting the liability account
which is unearned revenue

Dec, 31 Revenue $15,000

Unearned revenue $15,000

Being unearned revenue received in advance for January transferred to unearned revenue.
Summarizing the effects of the adjustments:

The pre-tax income on the unadjusted trial balance was $75,000. Prepare a schedule that begins with the
unadjusted amount and shows each addition and subtraction to the unadjusted income with a reference
to the relevant adjustment. The final figure in the column should be “Adjusted pre-tax income”. If an
adjustment does not affect Pretax Income enter a 0.

Pretax Income: $75,000

A1:
A2:
Etc.