Problem 2

In conjunction with your firm’s examination of the financial statements of Ronryan

Company as of December 31, 2007, you obtained from the voucher register the information
shown in the work paper below.

Item Entry Date Description Amount Account Charged

1. 12/18/07 Supplies, purchased FOB

destination, 12/15/07;
received, 12/17/07 15,000 Supplies on hand

2. 12/18/07 Auto insurance, 12/15/07

to 12/15/08 24,000 Prepaid insurance
3. 12/21/07 Repair services; received
12/20/07 19,000 Repairs and Main.

4. 12/21//07 Merchandise shipped FOB

shipping point, 12/20/07;
received, 12/24/07 12,300 Inventory

5. 12/21/07 Payroll, 12/07/07 – 12/21/07

(12 working days) 69,000 Sal. and wages

6. 12/26/07 Subscription to Tax Journals

for 2008 5,000 Dues & subs

7. 12/28/07 Utilities for December 2007 24,000 Utilities expense

8. 12/28/07 Merchandise shipped FOB

destination, 12/24/07;
received, 1/2/08 111,000 Inventory

9. 12/28/07 Merchandise shipped FOB

shipping point, 12/26/07;
received, 1/3/08 84,000 Inventory

10. 1/5/08 Payroll 12/21/07 – 1/05/08

(12 working days. 4 working
days in January) 72,000 Sal. and wages
11. 1/10/08 Merchandise shipped FOB
destination, 1/03/08,
received, 1/10/08 38,000 Inventory

12. 1/14/08 Interest on bank loan,

10/10/07 to 01/10/08 30,000 Interest
expense
13. 1/15/08 Manufacturing equipment
installed, 12/29/07 254,000 Machinery

14. 1/15/08 Dividends declared,

12/15/07 160,000 Dividends payable

Accrued liabilities of 12/31/07 were as follows:

Accrued payroll P 48,000

Accrued interest payable 26,667
Dividends payable 160,000

The accruals made on December 31, 2007 were reversed effective January 1, 2008.

Review the data given above and prepare adjusting journal entries to correct the accounts
on December 31, 2007. Assume that the company follows FOB terms for recording
inventory purchases.

Questions

1. The entry to adjust item #2 is

a. Insurance expense 24,000 c. Insurance expense 1,000
Prepaid insurance 24,000 Prepaid insurance 1,000
b. Insurance expense 1,000 d. No adjustment
Prepaid insurance 1,000

2. The entry to adjust item #10 is

a. Salaries expense 48,000 c. Accrued payroll 48,000
Accrued payroll 48,000 Salaries expense 24,000
b. Accrued payroll 48,000 Cash 72,000
Salaries expense 48,000 d. No adjustment

3. The entry to adjust item #12 is

a. Interest expense 26,667 c. Interest expense 26,667
Interest payable 26,667 Interest payable 3,333
b. Interest expense 30,000 Cash 30,000
Interest payable 30,000 d. No adjustment

4. The entry to adjust item #13

a. Machinery 254,000 c. No adjustment
AP – others 254,000
b. AP – others 254,000 d. No adjustment since payment
Machinery 254,000 was made on Jan. 15, 2008

5. The entry to adjust item #14

 a. Dividends declared 160,000 c. No adjustment
Dividends payable160,000
b. Dividends payable 160,000 d. No adjustment since payment
Dividends declared 160,000 was made on Jan. 15, 2008.

Solution
1. No Adjustment
2. Insurance expense 1,000
Prepaid insurance 1,000
3. No Adjustment
4. No Adjustment
5. No Adjustment
6. Prepaid subscription 5,000
Dues and subscription 5,000
7. No adjustment
8. Accounts payable 111,000
Inventory 111,000
9. No adjustment
10. No adjustment
11. No adjustment
12. No adjustment
13. Machinery 254,000
AP – others 254,000
14. No adjustment
Answer:
1. B 2. D 3. D 4. A 5. C