New Assignment

WELCOME TO THE WORLD OF ACCOUNTING | 21

Efendi Company hired an accounting intern, Pat Morgan, to prepare its income statement, statement of retained earnings, and balance sheet. Pat indicated a reluctance to undertake this task due to a lack of ad- equate training. But, Pat agreed provided someone would examine the work in detail and provide useful suggestions for improvement. Pat’s work follows:

PAT MORGAN’S Income Statement

December 31, 20X5 Net income

Services to customers $125,000

Expenses

Dividends $13,500

Rent 11,000 24,500

Revenues $100,500

PAT MORGAN’S Statement of Retained Earnings

For the Year Ending December 31, 20X1 Beginning retained earnings $ 45,000

Plus: Net income 100,500

$145,500

Less: Capital stock 200,000

Ending retained earnings $ (54,500)

Team-based identification of errors and corrections I-01.07

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PAT MORGAN’S Equation Sheet

December 31, 20X1 Assets

Cash $ 92,700

Accounts receivable 37,400

Equipment 239,000

Total assets $369,100

Liabilities

Accounts payable $ 7,500

Wages expense 64,000

Total expenses $ 71,500

Stockholders’ equity

Notes payable $80,100

Retained earnings (54,500)

Total stockholders’ equity 25,600

Total liabilities and equity $ 97,100

(a) Find specific errors in Pat’s work. Prepare written review notes for Pat sufficient to allow Pat to understand the errors and make necessary corrections. To get you started, you may assume Pat did manage to get the listing of total assets correct.

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Review the following list of accounts, and indicate the debit/credit rules for the account, as well as the ac- count’s normal balance. The first one is done as an example.

Increased with a: Decreased with a: Normal Balance:

(a) Cash Debit Credit Debit

(b) Capital Stock

(c) Accounts Payable

(d) Revenues

(e) Rent Expense

continued...

B-02.02 Debit/Credit rules and normal balances

INFORMATION PROCESSING | 41

Increased with a: Decreased with a: Normal Balance:

(f ) Equipment

(g) Dividends

(h) Utilities Expense

(i) Accounts Receivable

(j) Loan Payable

Mo Lambert formed a corporation to provide concrete construction work. His jobs typically involve building parking lots, drives, and foundations. Mo provided the following information about transactions occurring during the first month of operation. Evaluate the transactions and prepare journal entries for this activity.

Jan. 2, 20X5 Mo Lambert invested $10,000 cash in the capital stock of the newly formed corporation.

Jan. 4, 20X5 Purchased equipment on account for $7,500.

Jan. 12, 20X5 Received $15,000 from customers for services rendered.

Jan. 15, 20X5 Received a bill for construction supplies used in the amount of $2,000.

Jan. 18, 20X5 Provided $3,200 of services on account.

Jan. 20, 20X5 Paid employees $2,300 for wages earned.

Jan. 22, 20X5 Collected 60% of the amount due for the work provided on January 18.

Jan. 23, 20X5 Paid 40% of the amount due on the equipment purchased on January 4.

Jan. 25, 20X5 Purchased (and immediately used) construction supplies for cash in the amount of $600.

Jan. 31, 20X5 The company paid Mo Lambert a $1,500 dividend.

Basic journal entries B-02.03

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Accounting “failures” occur when reported results are not presented in accordance with generally accept- ed accounting principles. These failures can produce significant financial losses to investors and creditors. Oftentimes, an accounting failure results from an incorrect application of revenue recognition concepts.

Revenue recognition principles B-03.02

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Revgression Corporation included each of the following described transactions in revenue during 20X5. Three of these transactions were appropriate, and three were not. Determine which are “ok” and which are “not ok.”

(1) Goods were sold and shipped in late 20X5, but the product still requires substantial installation and setup services. The price and terms of sale stipulate that seller must satisfactorily complete all in- stallation and setup at the buyer’s location.

(2) Goods were produced according to a customer purchase order, but had not yet been shipped by the end of 20X5.

(3) Goods were delivered to customers during early 20X5, but the customers had ordered and paid for the goods during 20X4.

(4) Customers purchased goods and services during late 20X5, but credit terms permitted them to delay payment until early 20X6. Full payment is expected eventually.

(5) Advance payment from a customer in a foreign country was received in 20X5, for services to be provided in 20X6.

(6) Goods were purchased and paid for by customers during 20X5, but customers may return defective goods for warranty work or a refund. The expected warranty/refund claims are subject to reasonable estimation and not anticipated to be significant.

The recognition of an expense usually occurs based on one of the following three intrinsic principles:

(a) Associating cause and effect

(b) Systematic and rational allocation

(c) Immediate recognition

Evaluate the following items and determine the intrinsic principle that establishes the basis by which it is to be recorded as an expense.

(1) The cost of a building used in the business.

(2) The cost of merchandise sold to customers.

(3) Rental costs under a three-year lease agreement.

(4) The cost of a rebate offered on goods sold to customers.

(5) An uninsured storm loss.

(6) Commissions paid to a sales person.

B-03.03 Expense recognition principles

Identification of items in need of adjustment is not automatic. It requires careful monitoring of the business environment, and can entail assessment of information found on various source documents within the business organization. This problem introduces typical “business papers” that document transactions of the W. Brian Voss Company. You are to examine the provided information, and determine what related adjust- ing entry is needed for each item on December 31, 20X1.

(a) Following is a deposit ticket. This item is usually prepared to accompany money that is taken to a bank for deposit to the company’s bank account. The W. Brian Voss Company provides security services, and the following deposit was from a customer that fully prepaid a 6-month contract commencing on the date of the deposit. The proceeds were initially entered into Voss’s Unearned Revenue account.

I-03.03 Business papers and adjustments

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W. Brian Voss Company Cash and coins 6th Avenue Checks: Austin, TX D. Dutter $750.00

4567654Account # November 1, 20X1Date

TOTAL $750.00 Austin Capital Bank

(b) The W. Brian Voss Company wrote these checks to purchase supplies during 20X1. Voss began the year with $1,297 of supplies on hand. At year’s end, only $560 of supplies remained. Each of these transactions was initially recorded in the Supplies account, and no adjusting entries were made during the year.

W. Brian Voss Company 6th Avenue Austin, TX

Check # 11034

Date: January 5, 20X1

Pay to the order of: Everything Office Supply Company $1,175.00

*************ONE-THOUSAND, ONE-HUNDRED SEVENTY-FIVE AND NO/100 DOLLARS*************

Austin Capital Bank MEMO office supplies W. Brian Voss

W. Brian Voss Company 6th Avenue Austin, TX

Check # 11164

Date: June 6, 20X1

Pay to the order of: Ink Jet Now Company $90.00

**********************************NINETY AND NO/100 DOLLARS**********************************

Austin Capital Bank MEMO office supplies W. Brian Voss

W. Brian Voss Company 6th Avenue Austin, TX

Check # 11202

Date: November 5, 20X1

Pay to the order of: Everything Office Supply Company $940.00

**************************NINE-HUNDRED, FORTY AND NO/100 DOLLARS**************************

Austin Capital Bank MEMO office supplies W. Brian Voss

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(c) The W. Brian Voss Company purchased a new computer. The company estimates that the computer will last four years, and have no salvage value at the end of the four-year period. Following is the invoice that was received at the time the computer was purchased.

DEAL COMPUTER COMPANY 1825 Pecan

Pflugerville, TX

Bill To: W. Brian Voss Company Invoice #34848 6th Avenue Austin, TX

P.O. NUMBER INVOICE DATE F.O.B. POINT TERMS 593CCG July 1, 20X1 Austin 30 days

QTY. PART # DESCRIPTION UNIT PRICE TOTAL

1 PC4456 MegaPlex Computer w/FlexPlex Monitor $2,424 $2,424

THANK YOU FOR YOUR BUSINESS! TOTAL $2,424

(d) The W. Brian Voss Company received the following electric utility bill. It has not been recorded into the accounts.

AUSTIN POWER AND LIGHT 711 Capitol Avenue

Austin, TX

ELECTRIC UTILITIES

Your payment is due by January 15

W. Brian Voss Company 6th Avenue Austin, TX

Amount Due $374.00

Account # 0707BB6AVATX

Electric utility service for December, 20X1 - meter #5340757

Meter Read:

Prior month 334346

End of current month 338086

Current months usage 3740 KWH

Rate X 0.1

374

(e) W. Brian Voss leases office space from Trammell Raven Property Management Company. The leasing market was very soft at that time the lease agreement was struck, and the lease includes terms that are very favorable to Voss. Below is the lease agreement. No entry has been recorded for this lease.

LEASE AGREEMENT

This agreement is entered into by and between TRAMMELL RAVEN PROPERTY MANAGEMENT COMPANY (lessor) and W. Brian Voss Company, (lessee). Lessee agrees to lease from lessor the of- fice space described as 6th Avenue, Austin, Texas.

The term of the lease shall be for 4 years commencing on January 1, 20X1 and continuing until December 31, 20X4. The annual rental rate is $20,000. Lessee is hereby granted the option to renew and extend the lease for one additional successive four-year period at the then prevailing market rate of rent.

Rent is payable in arrears, annually, on the 1st day of each year following the year of use. The first payment is due January 1, 20X2 (for the preceding year), and continues in similar fashion thereafter for the duration of the lease, including periods of renewal and extension.

Lessor is responsible for all taxes, insurance, and property maintenance. Lessee is responsible for all electric utilities. Lessee agrees to use reasonable care in protecting and preserving the quality of the property covered by this lease.

Date: January 1, 20X1

Trammel Raven W. Brian Voss for TRPMC for W. Brian Voss Company