ABC Corporation is a new company that buys and sells office supplies

ac_323_comprehensive_problem.xls

2

>Instructions Read ALL instructions before getting started! ABC Corporation

is a new company that buys and sells office supplies. Business began on January

1

, 2

0 12

.

Given on the first two tabs are ABC’s 12/

3

1/12

Unadjusted Trial Balance

and a list of needed adjustments.

1. Make all 1

4

adjustments on the “

Adjusting Journal Entries

” tab. Remember to include a description under each journal entry.

2. Post the adjustments to the general ledger on the “

12

–

31-12 T-Accounts

” tab. You may have to add T-Accounts for new accounts.

Link your T-Account entries to your Journal Entries. PLEASE NOTE THAT THE “BB” (BEGINNING BALANCES) FOR THE T-ACCOUNTS REPRESENT THE BALANCES AS OF 12/1/12.

3. Once the

12/31/12

T-Accounts are complete, prepare the

Adjusted Trial Balance

. There may be some accounts with zero dollars, and you

may have to insert lines for new accounts. Link the Adjusted Trial Balance to your T-Accounts.

4. Use the Adjusted Trial Balance numbers to complete the

Income Statement

,

Statement of Retained Earnings

,

Balance Sheet

, and

Statement of

Cash

Flows

.

For purposes of the Income Statement, prepare using the multiple step format and assume that Rent Revenue, any Unrealized Holding Gains/Losses, Interest Expense, Interest Revenue, and any other Gains/Losses are NOT part of the major central ongoing operations of the company. Link your financial statements to your Adjusted Trial Balance. Use the Income Statement and Balance Sheet to finish the partially completed Statement of Cash Flows. Since this is ABC’s first year of operations, several line items on the

Statement of Cash Flows

have already been supplied to you. If necessary, review financial statement preparation in Chapters 4 and

5

of your textbook for a quick refresher. Plan on using your knowledge gained in completing Chapter 23 to help with the preparation of the Statement of Cash Flows. Additionally, since this is ABC Corporation’s first year of operations, the adjusted trial balance for all current assets and liabilities represents the change during the year for Statement of Cash Flows analysis purposes.

5. When the Financial Statements are complete, make the closing entries on the “

Closing Entries

” tab.

6

. When closing entries have been made, post the entries to the general ledger on the “After-Close T-Accounts” tab. Make sure your adjusting journal entries are also on your After-Close T-Accounts. They will not automatically flow from tab-to-tab. 7

. The final step is the

Post-Closing Trial Balance

, which will use the ending balances from the 1/1/

13

T-Accounts.

8

. Double-check your work. Here are a few things to check for: -Adjusted Trial Balance: Make sure debit column and credit column total to the same figure at the bottom. –

Net income

from the income statement will flow through to the Statement of Retained Earnings. -Ending Retained Earnings from the Statement of Retained Earnings will flow through to the Balance Sheet. -Ending Cash balance from the Balance Sheet should match your ending Cash balance on the Statement of Cash Flows. -The Post-Closing Trial Balance should not have any revenue, expense, gain, or loss accounts. -Check figure 1: Gross profit = $372,450. -Check figure 2: Income before income taxes = $

20

8,

14

7. -Check figure 3: Total Assets = $

9

06,

15

1. -Check figure 4:

Cash flow provided by operating activities

= $

17

,840. -Check figure 5: Adjusted Trial Balance debit and credit columns total $1,520,008. -Remember: Neatness matters in Financial Statements. Print or Print Preview before submitting to make sure your statements are neat. Otherwise, management may send back to you for revision! -Include your work at the bottom of each tab as needed. -Ask questions prior to the day/night before the due date. The due date is clearly indicated on the course schedule. -Utilize formulas and worksheet linkings in your financial statements to improve accuracy and save time in completing the assignment. -Please take advantage of Excel by using formulas to calculate groups of numbers (i.e. “Total Liabilities and Stockholders’ Equity”). Final comments: This project is intended to make sure that you understand the accounting cycle as well as several key financial accounting transactions that you have studied during your Intermediate Accounting series. It is very important to take the necessary time on this project to master these concepts. The concepts mastered in this comprehensive problem will serve you well in Advanced Accounting and the rest of your accounting curriculum.

Unadjusted Trial Balance

ABC Corporation
Unadjusted Trial Balance
Cash

–

,500

–

15,000

–

25,000

66,000

$ 1,409,790

		December 31, 2012
		Debit			Credit
$				270,751
		Short term investments					65,000
		Fair value adjustment (Trading)
		Accounts receivable					2	56
		Allowance for doubtful accounts
		Inventory					92,800
		Purchases					251,000
		Prepaid insurance					9,000
		LT (Debt) investments (HTM)					74,086
		Land			5		2,000
		Building							36,000
		Accumulated depreciation: building	$				850
		Equipment					12,000
		Accumulated depreciation: equipment					4,000
		Patent					30,000
		Accounts payable					52,690
		Notes payable														15,000
		Income taxes payable										66,000
		Unearned rent revenue
		Bonds Payable					500,000
		Discount on Bonds Payable					36,803
		Common stock					80,000
		PIC In Excess of Par-Common Stock										25,000
		Retained earnings
		Treasury stock
		Dividends					14,000
		Sales Revenue					651,250
		Advertising expense					3,900
		Wages expense					56,800
		Office expense					6,900
		Depreciation expense					4,850
		Utilities expense					19,400
		Insurance expense					27,000
		Income taxes expense
	$ 1,409,790

Adjustments Needed

1

36,000

36,000

2

3

15,000

15,000

4

5

Dr Cash 15,000

15,000

6

of Goods Sold and the 12/31/12 Inventory adjustment. (This includes closing Purchases.)

7

8

9

reviated amortization schedule to accurately determine the interest expense.

Cost

12

13

,500. Assuming that the allowance method is used,

14

On March 1, ABC purchased a one-year liability insurance policy for $36,000.

Upon purchase, the following journal entry was made:

Dr Prepaid insurance

Cr Cash

The expired portion of insurance must be recorded as of 12/31/12.

Notice that the expired portion from March through November has been recorded already.

Make sure that the Prepaid Insurance balance after the adjusting entry is correct.

Depreciation expense must be recorded for the month of December.

The building was purchased on February 1, 2012 for $36,000 with a remaining useful life of 30 years and a salvage value of $5,400.

The method of depreciation for the building is straight-line.

The equipment was purchased on February 1, 2012 for $12,000 with a remaining useful life of 5 years and a salvage value of $500.

The method of depreciation for the equipment is double-declining balance.

Depreciation has been recorded for the building and equipment for months February through November.

On December 1, XYZ Co. agreed to rent space in ABC’s building for $5,000 per month,

and XYZ paid ABC on December 1 in advance for the first three months’ rent.

The entry made on December 1 was as follows:

Dr Cash

Cr Unearned rent revenue

The unearned revenue account must be adjusted to reflect the amount earned as of 12/31/12.

Per timecards, from the last payroll date through December 31, 2012, ABC’s employees have worked a total of 250 hours.

Including payroll taxes, ABC’s wage expense averages about $25 per hour. The next payroll date is January 5, 2013.

The liability for wages payable must be recorded as of 12/31/12.

On November 30, 2012, ABC borrowed $15,000 from American National Bank by issuing an interest-bearing note payable.

This loan is to be repaid in three months (on February 28, 2013), along with interest computed at an annual rate of 6%.

The entry made on November 30 to record the borrowing was:

Cr Notes payable

On February 28, 2013 ABC must pay the bank the amount borrowed plus interest.

Assume the beginning balance for Notes Payable is correct.

Interest through 12/31/12 must be accrued on the$15,000 note.

ABC uses a periodic inventory system, and the ending inventory for each year is determined by taking a complete

physical inventory at year-end. A physical count was taken on December 31, 2012, and the inventory on-hand at

that time totaled $65,000.

Record the 2012

Cost

It would be unusual for a company to have an asset impairment in Year 1, but for the sake of this example, ABC realized

that their intangible asset might be impaired on December 31, 2012. Record the impairment if any.

The expected future net cash flows for this intangible asset totals $22,500, and the fair value of the asset is $25,000.

On 7/1/12, ABC purchased 5,000 shares of its own stock from existing stockholders as treasury stock. The cost of the treasury

stock was $5 per share, or $25,000 in total. The effects of this transaction are already shown in the unadjusted trial balance. On 12/31/12,

ABC reissued these 5,000 shares of treasury stock at $6 per share. Record the journal entry required for the reissuance of the treasury stock.

On 12/31/12, ABC issued 4,500 shares of $1 par value common stock at the closing market price of $6 per share. Prepare ABC’s journal entry

to reflect the issuance of the stock on 12/31/12.

10

On 7/1/12, ABC sold 10% bonds having a maturity value of $500,000 for $463,197, resulting in an effective yield of 12%. The bonds are

dated 7/1/12, and mature 7/1/17. Interest is payable semiannually on July 1 and January 1. ABC uses the effective interest method of

amortization for bond premium or discount. Record the adjusting entry for the accrual of interest and the related amortization on 12/31/12.

Hint: Develop an a

bb

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The following information is available for ABC Corporation at 12/31/12 regarding its investments in stocks of other companies.

Securities

Fair Value

2,000 shares of Ford Corporation Common Stock

$ 40,000

$ 45,000

1,000 shares of G.M. Corporation Preferred Stock

$ 25,000

$ 22,500

$ 65,000

$ 67,500

Prepare the adjusting entry (if any) for 2012, assuming the securities are classified as trading.

On 1/1/12, ABC Corporation purchased, as a held-to-maturity investment, $80,000 of the 9%, 5-year bonds of Intuit Corporation for $74,086,

which provides an 11% return. Prepare ABC’s 12/31/12 journal entry to reflect the receipt of annual interest and discount amortization.

Assume the bond investment pays interest annually on 12/31 each year and that effective interest amortization is used.

ABC Corporation prepares an aging schedule on 12/31/12 that estimates total uncollectible accounts at $

18

prepare the entry to record bad debt expense.

Do this step after preparing the Income Statement except for the Income taxes line:

Corporate taxes are due in four estimated quarterly payments on April 15, June 15, September 15, and December 15.

However, for the purposes of this ABC illustration, we will assume that estimates are not paid, and that the tax is paid in full

on the return’s March 15, 2013 due date.

ABC’s income tax rate is 40%. The entire year’s income tax expense was estimated at the beginning of 2012 to be $72,000,

so January through November income tax expense recognized amounts to $66,000 (11/12 months).

Since we are assuming estimates are not made during the year, the balance in Income taxes payable represents

tax accrued for January through November. Assume no deferred tax assets or deferred tax liabilities.

Based on the income before income taxes figure from the income statement, record December’s income tax expense

so that the entire year’s tax expense is correct.

Adjusting Journal Entries

12/31/12 Adjusting Journal Entries
1
2
3
4
5
6
7
8
9
10
11
12
13
14

	JE #		Account Titles		Debits		Credits

12-31-12 T-Accounts

Cash Accounts receivable Inventory Purchases Prepaid insurance Land
bb 270,751 bb 256,500 bb 92,800 bb 251,000 bb 9,000 bb

270,751 256,500 92,800 251,000 9,000 52,000
Short term investments Fair value adjustment (Trading) Allowance for doubtful accounts LT (Debt) investments (HTM) Bonds Payable Discount on Bonds Payable
bb 65,000 bb – – bb bb 74,086 500,000 bb bb 36,803
500,000
65,000 – – 74,086 36,803
Building Accumulated depreciation: building Equipment Accumulated depreciation: equipment Patent Accounts payable
bb 36,000 850 bb bb 12,000 4,000 bb bb 30,000 52,690 bb
36,000 850 12,000 4,000 30,000 52,690
Notes payable Income taxes payable Unearned rent revenue Common stock Retained earnings Dividends PIC In Excess of Par-Common Stock
15,000 bb 66,000 bb 15,000 bb 80,000 bb – bb bb 14,000 25,000 bb

15,000

66,000 15,000 80,000 – 14,000 25,000
Sales Revenue Advertising expense Wages expense Office expense Depreciation expense Utilities expense Treasury stock
651,250 bb bb 3,900 bb 56,800 bb 6,900 bb 4,850 bb 19,400 bb 25,000
651,250 3,900 56,800 6,900 4,850 19,400 25,000
Insurance expense Income taxes expense

bb 27,000 bb 66,000
27,000 66,000 – – – – –
– – – – –

	Beginning balances (bb) on these T-accounts are the 12/31/12 unadjusted balances.
	Hint: If there is no beginning balance (bb), it is a new account.
	52,000
	Rent revenue earned		Wages payable		Interest expense		Interest payable		PIC-Treasury Stock
	Cost of goods sold		Loss on Impairment		Unrealized holding G/L (Income)		Bad debt expense		Interest revenue

Adjusted Trial Balance

ABC Corporation

Adjusted Trial Balance

December 31, 2012

Debit Credit

0

$

			$ –		– 0

Income Statement

ABC Corporation

Income Statement

			For the Year Ended December 31, 2012

Note: You will need this for the Statement of Retained Earnings.

Statement of Retained Earnings

ABC Corporation

Statement of Retained Earnings

For the Year Ended December 31, 2012

$ –

$ –

You will need this for the Balance Sheet.

Balance Sheet

ABC Corporation

Balance Sheet

For the Year Ended December 31, 2012

Statement of Cash Flows

ABC Corporation

Statement of Cash Flows

For the Year Ended December 31, 2012

Net income
Cash flow provided by operating activities – 0

132,000

2,000

– 0

2,000

Cash flows from operating activities
Add: Depreciation expense
Add: Bad debt expense
Add: Amortization of bond discount amort (Issued bonds)
Deduct: Unrealized holding G/L
Add: loss on impairment
Deduct: Amortization of HTM discount amort (Bond investment)
Cash flows from investing activities
Purchase of property, plant, & equipment	(100,000)
Investment in short term investments
Purchase of Patent	(30,000)
Investment in L-T bonds
Cash flow used by investing activities	(130,000)
Cash flows from financing activities
Issuance of bonds
Payment of dividends
Issuance of common stock		132,000
PIC-Treasury stock
Cash flow provided by financing activities
Net change in cash
Beginning cash balance 1/1/12
Ending cash balance 12/31/12
*Note: As indicated in the instructions, the Statement of Cash Flows has been partially populated to assist you in the
preparation of this financial statement. Remember, since the beginning cash balance is zero, the ending cash balance
should also represent the total net change in cash.

Closing Entries

12/31/12 Closing Entries

JE # Account Titles Debits Credits

15
17
18

	16

Post-Close T-Accounts

Beginning balances (bb) on these T-accounts are the 12/31/12 unadjusted balances.
Hint: If there is no beginning balance (bb), it is a new account.

Cash Accounts receivable Inventory Purchases Prepaid insurance Land
bb 270,751 bb 256,500 bb 92,800 bb 251,000 bb 9,000 bb 52,000

270,751 256,500 92,800 251,000 9,000 52,000

Short term investments Fair value adjustment (Trading) Allowance for doubtful accounts LT (Debt) investments (HTM) Bonds Payable Discount on Bonds Payable
bb 65,000 bb – – bb bb 74,086 500,000 bb bb 36,803

500,000
65,000 – – 74,086 36,803

Building Accumulated depreciation: building Equipment Accumulated depreciation: equipment Patent Accounts payable
bb 36,000 850 bb bb 12,000 4,000 bb bb 30,000 52,690 bb

36,000 850 12,000 4,000 30,000 52,690

Notes payable Income taxes payable Unearned rent revenue Common stock Retained earnings Dividends PIC In Excess of Par-Common Stock
15,000 bb 66,000 bb 15,000 bb 80,000 bb – bb bb 14,000 25,000 bb

15,000

66,000 15,000 80,000 – 14,000 25,000

Sales Revenue Advertising expense Wages expense Office expense Depreciation expense Utilities expense Treasury stock
651,250 bb bb 3,900 bb 56,800 bb 6,900 bb 4,850 bb 19,400 bb 25,000

651,250 3,900 56,800 6,900 4,850 19,400 25,000

Insurance expense Income taxes expense Rent revenue earned Wages payable Interest expense Interest payable PIC-Treasury Stock
bb 27,000 bb 66,000

27,000 66,000 – – – – –

Cost of goods sold Loss on Impairment Unrealized holding G/L (Income) Bad debt expense Interest revenue

– – – – –

Post-Closing Trial Balance

ABC Corporation

Post-Closing Trial Balance

December 31, 2012

Debit Credit

$ – 0

	$ – 0

grading rubric

1 4
2 4
3 4
4 4
5 4
6 4
7 4
8 4
9 4
10 4
11 4
12 4
13 4
14 4
56 0
Adjusted Trial Balance Points Possible Points Earned

4

4

8 0
Income Statement Points Possible Points Earned

at

4

4

4

4

4

20 0
Balance Sheet Points Possible Points Earned
Correct Form 4

4

2

4

14 0
Statement of Retained Earnings Points Possible Points Earned

Correct Form 4

4

8 0

Statement of Cash Flows Points Possible Points Earned

Correct Form 4

4

4

4

4

20 0

Closing Entries Points Possible Points Earned

1 4
2 4
3 4
4 4

16 0

Points Possible Points Earned

Correct totals (based on formula) 4
Totals balance 4
8 0

0

Grading Rubric for AC323 Comprehensive Problem

Adjusting Entries

Points Possible

Points Earned

Correct totals (based on formula)

Totals balance

Correct Form

Correct Income Before Income Taxes (based on formula)

Correct Gross Profit (based on formula)

Correct Income Tax Expense

Components Sum to Net Income

Assets=Liabilities+Stockholders Equity

Correct Totals for Assets, Liab, & Equity

Components Sum Correctly

Correct Ending Retained Earnings

Correct Cash flows from Operating Activities

Correct Cash Flows from Investing Activities

Correct Cash Flows from Financing Activities

Correct Net Change in Cash

After-Closing Trial Balance

Total Grade

150