Adjusting Journal Entry to Accrue Interest
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Adjusting Journal Entry to Accrue Interest
Practice Final Exam study questions
Savory Sweet Ltd. had a September 30 year end. Savory Sweet Ltd.’s June 30, 2018 balance sheet recorded the following:
Accounts Receivable $ 400,000
Allowance for Doubtful Accounts (20,000)
Throughout Savory Sweet Ltd.’s last quarter of 2018, Savory Sweet Ltd. finalized the following selected transactions:
Sept. 29: Wrote off the following accounts receivables as uncollectible:
- Connie Downs $ 3,000
- Dennis Jade 3,200
- Evan Sanders 2,100
Sept. 30: Recorded bad debts expense based on the aging of accounts receivable, as follows:
Age of Accounts Accounts Receivable 1–30 Days 31–60 Days 61–90 Days Over 90 Days Total = $ 420,000 $ 250,000 $ 100,000 $ 40,000 $ 30,000 Estimated % Uncollectible 0.1% 0.4% 0.5% 30%
- Record the above transactions in the general journal.
- Open the Allowance for Doubtful Accounts general ledger, and post those journal entries affecting that account. Maintain a running balance in the general ledger account.
- At September 30, 2017, if Savory Sweet Ltd.’s Accounts Receivable balance was $ 440,000 and the Allowance for Doubtful Accounts balance was $ 30,000, demonstrate how Savory Sweet Ltd. would report its Accounts Receivable in a comparative balance sheet for 2018 and 2017.
- On September 30, 2018, if the bad debts expense was based on an estimate of 3% of the accounts receivable balance, instead of the aging of accounts receivable, record in the general journal the September 30, 2018 journal entry for bad debts expense.
Perfect Painting commenced business on March 01, 2018. The business produced monthly financial statements and had total sales of $ 600,000, of which $ 450,000 was on account, during the first 4 months.
As of June 30, 2018, no accounts have been written off to date. The accounts receivable had a $ 233,000 balance, which was comprised of the following accounts, aged according to the date of the sale:
Month of Sale Customer March April May June Mega Contracts $ 4,000 $ 2,000 $ 3,000 $ 2,000 Quadra Prints 2,000 3,000 4,000 1,000 Work Wear 6,000 17,000 10,000 3,000 Natural Paint 4,000 8,000 7,000 30,000 Other Accounts Receivable 22,000 15,000 50,000 40,000 $ 38,000 $ 45,000 $ 74,000 $ 76,000
The following accounts receivable transactions occurred in July 2018:
- July 07: Determined the Quadra Prints account was uncollectible and wrote it off.
- July 13: Collected $ 9,000 from Mega Contracts for sales made in the first 3 months.
- July 17: Determined the Work Wear account was uncollectible and wrote it off.
- July 22: Collected $ 4,000 from Natural Paint for sales made in the month of March.
- July 28: Received a cheque from Work Wear for $ 12,000 plus three cheques of $ 8,000 each, post-dated for August 28, September 28, and October 28.
- July 31: Total sales in the month of July were $ 400,000; 80% of these sales were on account, and 70% of the sales on account were collected in the month.
- Perfect Painting read on the internet that similar companies used the allowance method of accounting for uncollectibles, with many of these companies estimating the uncollectibles through an aging of accounts receivable.
- Journalize the adjustments that would have to be made on June 30 for the months of March through June, assuming the following estimates of uncollectibles:
Age of Accounts Receivable Percent Estimated Uncollectible
From current month 1%
From prior month 3%
From 2 months prior 4%
From 3 months prior 10%
From 4 months prior 30%
- Prepare journal entries for the July 2018 transactions.
- Prepare a journal entry for the month-end adjustment, using the information from the table that appears in part A.
- Use the allowance method, which was used above, to record the following:
- The balance sheet presentation of the accounts receivable for June and July 2018
- The effect of the uncollectibles on the income statement for June and July 2018
Assume the following transactions were completed by Dandy Distributors:
- December 01: Sold goods to Savanna Select, and received a $ 50,000, 6-month, 2% note. Ignore cost of goods sold.
- December 31: Made an adjusting journal entry to accrue interest on the Savanna Select note.
- December 31: Made an adjusting journal entry to record bad debt expense, which was based on the aging of accounts receivable. The aging analysis revealed that $ 60,000 of accounts receivable would not be collected. Prior to this adjustment, the credit balance in the allowance for doubtful accounts was $ 49,000.
- June 1: Collected the maturity value of the Savanna Select note.
- June 30: Sold goods for $ 20,000 on MasterCard. MasterCard charged 2%.
- August 01: Sold goods to Norfolk, and received a 45-day, 4% note for $ 30,000. Ignore cost of goods sold.
- September 15: Norfolk defaulted (i.e., failed to pay) his note at maturity; converted the maturing value of the note to an accounts receivable.
- November 20: Sold goods to Money Management for $ 50,000, and received a 120-day, 3% note. Ignore cost of goods sold.
- December 10: Collected in full from Norfolk.
- December 31: Accrued the interest on the Money Management note.
Record the above transactions in the general journal. Explanations are not required. Round interest amounts to the nearest dollar.
Task Force’s comparative financial statements for 2017 and 2018 included the following selected data:
2018 2017 (Dollar amounts in thousands) Balance Sheet Current Assets: Cash $ 100 $ 100 Short-Term Investments 300 500 Receivables, Net 800 700 Inventory 1,700 1,600 Prepaid Expenses 200 300 Total Current Assets $ 3,100 $ 3,200 Total Current Liabilities $ 2,000 $ 1,700 Income Statement Sales Revenue $ 11,000 $ 10,500
- Calculate the following ratios for 2017 and 2018:
- Current ratio
- Acid-test ratio
- One day’s sales
- Write a short memo describing to Task Force’s owner, Susan Night, which ratio values showed improvement from 2017 to 2018 and which ratio values deteriorated. Indicate whether this trend was favourable or unfavourable for Task Force.
Mighty Machinery purchased a machine on January 2, 2018 for $ 500,000. The machine was supposed to stay in service for 3 years and produce 3,000,000 parts. At the end of its useful life, company executives predicted that the machine’s residual value would only be $ 20,000. The machine produced 1,500,000 parts in the first year, 800,000 parts in the second year, and 720,000 in the third year.
- Create a schedule of amortization expense for 2018, 2019, and 2020 for the machine, using the straight-line, UOP, and DDB amortization methods. Assume that, in all cases, the machine was valued at $ 20,000 at the end of the third year, and the third-year amortization was modified (i.e., set as a plug) to make certain this occurred.
- Which amortization method resulted in the highest net income in the second year? Did the highest net income imply that the machine was used more efficiently under this method?
- Which method traced the wear and tear on the machine most closely? Why was that?
After 1 year under the DDM, Mighty Machinery changed to the straight-line method. Create a schedule of amortization expense for 2018, 2019, and 2020. All calculations must be shown
Best Construction completed the following transactions:
- February 01: Paid $ 10,000 cash for used equipment. Best Construction determined that the equipment would last 5 years and that it had no residual value.
- February 08: Paid $3,000 to have the equipment’s engine overhauled.
- February 09: Paid $ 2,000 to have the equipment modified for specialized lifting of heavy items.
- October 20: Paid $ 600 for an oil change and routine maintenance.
- December 31: Used the straight-line method to record amortization on the equipment.
- March 14: Replaced the used equipment’s broken handle for $ 700 cash. The new handle did not increase the useful life of the equipment.
- August 01: Traded the used equipment for new equipment, which cost $ 20,000. Best Construction determined that the new equipment would last 10 years and that it had no residual value. The dealer gave a $ 4,000 allowance on the used equipment, and Best Construction paid cash for the balance. Able Construction recorded 2019 amortization on the used equipment and then recorded the equipment switch.
- December 31: Used the straight-line method to record amortization on the new equipment.
Best Construction’s amortization policy was to calculate amortization based on the days that it actually owned the equipment.
Journalize the above transactions in the general journal. Provide explanations. Round all calculations to the nearest dollar.
Canadian Oil Production Ltd.’s business included selling refined petroleum products. Canadian Oil Production Ltd. purchased an oil lease for $ 20 million cash; that oil lease had an estimated reserve of 3,000,000 barrels of oil. Canadian Oil Production Ltd. paid $ 600,000 for further environmental tests, and $ 200,000 to get the land ready for drilling.
Before production started, Canadian Oil Production Ltd. signed a $ 300,000 note payable; those funds were used to construct a building on the property. The building was the onsite headquarters for the drilling operation and the building will be deserted when the oil is depleted. Therefore, the building’s cost was debited to the Oil Properties account and included in amortization charges.
During the first year of production, Canadian Oil Production Ltd. removed 200,000 barrels of oil, which it sold on credit for $ 95 per barrel.
- Prepare journal entries in the general journal to record the transactions relating to the oil properties, including amortization and the sale of the first-year production. Dates are not required. Round the amortization amount to the nearest dollar.
- Prepare a partial balance sheet, showing the oil properties’ accounts and dollar amounts.
Bright Lights Ltd. sold lighting merchandise. On June 05, Bright Lights acquired another company that had the following amounts on its financial statements:
Book value of Assets $ 1,800,000
Market value of assets $ 3,000,000
Liabilities $ 600,000
- Prepare a journal entry in the general journal to record Bright Lights Ltd.’s acquisition of the other company for $ 2,500,000 cash on June 05.
- In the future, how should Bright Lights Ltd. account for goodwill at year end?
On January 01, Current Technology acquired a patent for $ 3,000,000. On the same day, even before Current Technology could use the patent, it incurred an extra cost of $ 300,000, money it spent on a lawsuit, which defended Current Technology’s right to obtain it. The patent gave Current Technology legal protection for 30 years. However, Current Technology decided to amortize the patent’s cost over 10 years, because technologies changed quickly.
- Prepare a journal entry in the general journal to record Current Technology’s acquisition of the patent, including straight-line amortization for 1 year at December 31.
- Prepare a partial balance sheet, showing the accounts and dollar amounts.
Complex Computer Ltd. had a December 31 year end. Complex Computer Ltd. completed the following transactions:
- February 01: Paid $ 3,000,000 plus $ 100,000 in legal fees, pertaining to all assets purchased, to acquire the following assets:
Asset Appraised Value Estimated Useful Life Estimated Residual Value Land $ 900,000 ___ ___ Building 1,600,000 20 years $ 200,000 Equipment 800,000 10 years 50,000
- Complex Computer Ltd. used the straight-line amortization method.
- March 01: Purchased a van for $ 60,000 cash. Complex Computer Ltd. determined that the estimated useful life of the van was 5 years with no residual value.
- March 01: Complex Computer Ltd. paid $ 4,000 cash to paint the company’s logo on the van.
- June 01: Complex Computer Ltd. paid $ 65,000 cash for annual maintenance work done on the equipment.
- December 31: Complex Computer Ltd. recorded amortization on its assets.
- July 01: Complex Computer Ltd. sold the van for $ 40,000.
- December 31: Complex Computer Ltd. recorded amortization on its assets.
- Record the above transactions in a general journal. Provide explanations. Round all amounts to the nearest dollar.
- Show the balance sheet presentation of the assets at December 31, 2019.
Brenda Jones worked for Cool Corner Store for straight-time earnings of $ 15.00 per hour with time and a half for hours in excess of 35 hours per week. Brenda Jones’ payroll deductions included the following:
- Income tax of 25%
- CPP of 4.95% on earnings (Account for the $ 3,500 basic annual exemption.)
- EI of 1.88% on earnings
In addition, Brenda Jones contributed $ 20 per week to her Registered Retirement Savings Plan (RRSP). Brenda Jones worked 40 hours during the week. She had not reached the CPP or EI maximum earning levels.
- Calculate Brenda Jones’s gross pay and net pay for the week.
- Make an October 17 journal entry in the general journal to record Cool Corner Store’s wage expense for Brenda Jones’ work, including her payroll deductions and the employer’s payroll costs. Explanations are not required.
ABC Ltd. had employees who were paid on a monthly basis. November payroll information included the following:
Employment Salaries $ 180,000 Union Dues 4,000 Charitable Donations 1,000 Employee CPP Contributions 7,000 Employee EI Contributions 3,000 Employee Income Tax Withheld 40,000
Prepare the journal entries in the general journal to record the November 30 payroll payment and the payroll benefits expense for ABC Ltd. Prepare the journal entries to record the payment of payroll withholdings to the government and other agencies on December 15. Explanations are not required.
A10-8 Assignment 10
ACCT 1211: Accounting I A10-1
The following particular transactions of Sequential Data occurred during 2018 and 2019. Sequential Data had a December 31 year end.
- January 02: Purchased equipment at a cost of $ 400,000 plus 5% GST, signing a 4%, 180-day note payable.
- January 31: Recorded the month’s sales of $ 1,600,000, which excludes PST and GST; 75% was on credit, and 25% was cash. Sales amounts were subject to 7% PST and 5% GST, and they were not included in the $ 1,600,000 amount.
- February 04: Paid January’s PST and GST to the appropriate authorities.
- March 01: Borrowed $ 4,000,000 on a 5% note payable that called for annual instalment payments of $ 400,000.
- July 02: Paid the 6-month, 4% note at maturity.
- October 31: Purchased inventory for $ 200,000 plus GST, signing a 6-month, 3% note payable.
- December 31: Accrued warranty expense estimated at 6% of annual sales, which totalled $ 9,000,000.
- December 31: Accrued interest on all outstanding notes payable. Made a separate interest accrual entry for each note payable.
- March 01: Paid the first instalment and interest for 1 year on the long-term note payable.
- April 30: Paid off the 3% note plus interest at maturity.
Prepare journal entries in Sequential Data’s general journal to record the above transactions. Use days in any interest accrual calculations, not months. Round all amounts to the nearest dollar. Explanations are not required.
Western Supplies Ltd.’s general ledger at their July 31, 2018 year end included the following account balances before adjusting journal entries:
Note Payable, Short-Term $ 80,000 Accounts Payable 400,000 Current Portion of Long-Term Debt Payable Interest Payable Salaries Payable Employee Withholdings Payable Employee Payroll Costs Payable Employee Insurance Benefits Payable Estimated Vacation Pay Liability 8,000 GST Payable 5,000 Property Tax Payable 10,000 Unearned Service Revenue 24,000 Long-Term Debt Payable 400,000
The following information is related to selected transactions of Western Supplies Ltd. This information will be used by the company to prepare adjusting journal entries at July 31, 2018.
- On August 31, 2017, Western Supplies Ltd. signed a 2%, 1-year, $ 80,000 note payable.
- The $ 400,000 long-term debt was payable in annual instalments of $ 50,000, with the next instalment due March 31, 2019. On that date, Western Supplies Ltd. would also pay 1 year’s interest at 4%. Interest was last paid on March 31, 2018.
- Gross salaries for the last payroll of the fiscal year were $ 30,000. Of this amount, employee withholdings were $ 5,000, and salaries payable was $ 25,000.
- Employer payroll costs were $ 4,000, and Western Supplies Ltd.’s liability for employee life insurance was $ 500.
- Western Supplies Ltd. estimated that vacation pay is 5% of gross salaries, which was $ 450,000. Note that the $ 450,000 included the last payroll of the fiscal year.
- On April 01, 2018, Western Supplies Ltd. collected 1 year’s service contract revenue, paid in advance, worth $ 24,000. It will earn the revenue evenly throughout the year.
- At July 31, 2018, Western Supplies Ltd. was the defendant in a $ 300,000 lawsuit, which Western Supplies Ltd. expected to win. However, the outcome was uncertain.
- Open T-accounts for the listed accounts, inserting their unadjusted July 31, 2018 balances.
- Post the July 31, 2018 adjusting journal entries to the accounts opened. Round all amounts to the nearest dollar. Use months (as opposed to actual days) in your calculations for the adjusting journal entries.
- Prepare the liability section of Western Supplies Ltd.’s balance sheet at July 31, 2018. Show total current liabilities, long-term liabilities and total liabilities.
- Was there a contingent liability? If yes, write a note to explain it, indicating where the note should appear.
Technically Correct manufactured and sold tailored network systems. Technically Correct gave a 60-day, all software and labour, and an extra 90-day, parts-only, warranty on all of its products. Technically Correct incurred the following 2018 transactions:
- January 31: Sales for the month totalled $ 200,000 (not including 7% PST and 5% GST), of which 90% were on credit. Technically Correct estimated its warranty costs to be 1% of sales.
- January 31: Based on its prior year’s property tax assessment, Technically Correct anticipated that the property taxes for 2018 would be $ 120,000. Technically Correct recorded the estimated property taxes for the month, crediting Property Tax Payable.
- February 02: Technically Correct finished repair work for a customer. The software ($ 4,000) and labour ($ 5,000) were all covered under warranty.
- February 09: Technically Correct remitted the appropriate GST and PST for the month of January. Technically Correct had paid $ 17,000 GST on purchases in January.
- February 28: Technically Correct recorded the estimated property taxes for the month of February.
- February 28: Sales for the month totalled $ 300,000, not including 7% PST and 5% GST; 80% was on credit. Technically Correct estimated its warranty costs to be 3% of sales.
- March 09: Technically Correct remitted the appropriate GST and PST for the month of February. Technically Correct had paid $ 10,000 GST on purchases in February.
- March 13: Technically Correct got a registered letter, which stated that it was being sued by a customer. Technically Correct’s lawyer was unable to predict the outcome of the lawsuit; however, Technically Correct assumed the lawsuit might cost the company about $ 250,000 to settle.
- March 18: Technically Correct finished repair work for a customer. The software ($ 5,000) and labour ($ 2,000) were all covered under the warranty.
- March 20: Technically Correct finished repair work for a customer. The software ($ 3,000) was covered by the warranty, but the labour ($ 1,500) was not covered. The customer would pay the invoice in 30 days.
- March 31: Sales for the month totalled $ 500,000, not including 7% PST and 5% GST; 70% was on credit. Technically Correct estimated its warranty costs to be 5% of sales.
- March 31: Technically Correct received the property tax assessment for 2018. The assessment notice revealed that the assessed value of the property was $ 3,000,000, and the tax rate was 6% of the assessed value. Technically Correct made the appropriate adjustment and used the Property Tax Payable account. The property tax will be paid on July 31.
- Prepare journal entries in the general journal regarding the above transactions. No explanations are required.
- Prepare the liability section of Technical Correct’s balance sheet at March 31, 2018. Show the appropriate financial statement presentation for all liabilities.