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Allied American University

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This paper was prepared for [INSERT COURSE NAME], [INSERT COURSE ASSIGNMENT] taught by [INSERT INSTRUCTOR’S NAME].

PART I: SHORT RESPONSE

Directions: Please respond to each of the following questions. Write at least 3 to 5 sentences for each question.

1. Discuss the accounting principle served by crediting amounts received (which will not be earned during the present fiscal period) to an Unearned Revenue account instead of to the Revenue account. Give an example of a business in which this might occur. Explain how failure to make an adjustment to the Unearned Revenue account and the Revenue account would affect the financial statements.

2. For companies using the periodic inventory system, explain how the Merchandise Inventory account is handled in the accounting records through the journal entries and the work sheet.

3. Write the skeleton of an income statement from Sales through Net Income.

4. Define current ratio and how it is calculated, and explain the relationship between the two parts of the ratio resulting from the calculation.

5. What are reversing entries? Which adjusting entries can be reversed?

PART II: APPLICATION

Directions: Please answer each of the following questions. Show your work as necessary.

6. Using T accounts, record the required adjusting entries for the year ended December 31 for Manning Equipment. Manning Equipment uses the periodic inventory system.

a–b.	A physical count of inventory revealed a balance of $63,222. The Merchandise Inventory account shows a balance of $72,589.
c.	Equipment purchased on July 7 of the current year for $14,500 is expected to have a useful life of eight years, with a $3,750 trade-in value. All other equipment has been fully depreciated. The straight-line method is used. (Round to the nearest dollar.)
d.	As of December 31, three days' salaries will be unpaid at $587 per day per employee. There are five employees.
e.	The balance of Supplies account prior to adjustments is $3,125. The amount of supplies used is $1,965.
f.	A prepaid order was received on September 20 for $6,298. At year end, $2,477 had been delivered to the customer.

a–b.	Merchandise Inventory		Income Summary
	+	–		(a) Adj.	72,589	(b) Adj.	63,222
Bal.
(b) Adj.

c.	Depreciation Expense, Equipment		Accumulated Depreciation, Equipment
	+	–		–	+
(c) Adj.

d.	Salaries Expense		Salaries Payable
	+	–		–	+
(d) Adj.

e.	Supplies		Supplies Expense
	+	–		+	–
Bal.
(e) Adj.

f.	Unearned Income		Earned Income
	–	+		–	+
(f) Adj.

2. Zamora Corporation uses the perpetual inventory system. The following information is presented as of December 31, the end of its fiscal year:

Beginning inventory, January 1	$147,572
Merchandise purchased during the year	68,950
Merchandise sold during the year	112,341
Physical count of ending inventory, December 31	102,789

Instructions:

Prepare the journal entry to adjust Merchandise Inventory at year end on page 10.

GENERAL JOURNAL	PAGE	10
Date	Description	Post. Ref.	Debit	Credit
20--		Adjusting Entries
Dec.	31	Cost of Goods Sold
		Merchandise Inventory

3. The balances of the ledger accounts of Wilson Appliances as of December 31, the end of its fiscal year, are found in the work sheet on the following page.

Data for the adjustments are as follows:

a–b.	Merchandise Inventory at December 31, $112,219.
c.	Wages accrued at December 31, $1,973.
d.	Supplies inventory at December 31, $793.
e.	Depreciation of store equipment, $6,737.
f.	Depreciation of office equipment, $1,608.
g.	Insurance expired during the year, $696.
h.	Rent earned, $2,500.

Instructions:

Complete the work sheet.

Wilson Appliances	>
Work Sheet	>
For Year Ended December 31, 20--	>
				>
	Trial Balance		Adjustments	>
Account Name	Debit	Credit		Debit	Credit	>
Cash	21,672.00					>
Accounts Receivable	52,543.00					>
Merchandise Inventory	130,292.00					>
Supplies	1,780.00					>
Prepaid Insurance	2,514.00					>
Store Equipment	49,475.00					>
Accumulated Depreciation, Store						>
Equipment		33,687.00				>
Office Equipment	9,150.00					>
Accumulated Depreciation, Office						>
Equipment		1,500.00				>
Notes Payable		5,000.00				>
Accounts Payable		28,770.00				>
Unearned Rent		2,800.00				>
J. P. Wilson, Capital		114,107.00				>
J. P. Wilson, Drawing	29,600.00					>
Sales		712,448.00				>
Sales Returns and Allowances	8,434.00					>
Purchases	533,490.00					>
Purchases Returns and Allowances		14,702.00				>
Purchases Discounts		7,998.00				>
Freight In	24,090.00					>
Wages Expense	57,200.00					>
Interest Expense	772.00	_________				>
	921,012.00	921,012.00				>
						>
						>
						>
						>
						>
						>
						>
						>
						>
						>
						>
						>
						>

<	Wilson Appliances
<	Work Sheet
<	For Year Ended December 31, 20--
<
<		Income Statement		Balance Sheet
<	Account Name	Debit	Credit		Debit	Credit
<	Cash
<	Accounts Receivable
<	Merchandise Inventory
<	Supplies
<	Prepaid Insurance
<	Store Equipment
<	Accumulated Depreciation, Store
<	Equipment
<	Office Equipment
<	Accumulated Depreciation, Office
<	Equipment
<	Notes Payable
<	Accounts Payable
<	Unearned Rent
<	J. P. Wilson, Capital
<	J. P. Wilson, Drawing
<	Sales
<	Sales Returns and Allowances
<	Purchases
<	Purchases Returns and Allowances
<	Purchases Discounts
<	Freight In
<	Wages Expense
<	Interest Expense
<
<
<
<
<
<
<
<
<
<
<
<
<

4. For the year ended December 31, Bailey Tool Company uses the periodic inventory system and has the following adjusting entry information:

a–b.	On December 31, a physical count of inventory totaled $56,842. The Merchandise Inventory account shows a balance of $53,715.
c.	On September 1 of the current year, $3,600 was paid for a one-year insurance policy.
d.	On November 1 of the current year, $900 was paid for three months of holiday advertising.
e.	As of December 31, the following balance in the Unearned Revenue account is $15,290. Of this amount $9,674 has been earned for tool income.
f.	Equipment purchased April 1 of the current year for $11,500 is expected to have a useful life of six years with a trade-in value of $1,250. The straight-line depreciation method is used, and all other equipment items are fully depreciated.
g.	As of December 31, two days of wages had accrued for five employees who each earn $125 per day.
h.	On December 31, a physical count of the supplies on hand was completed showing $2,365 remained. The balance (prior to adjustment) in the Supplies account is $3,459

Instructions:

Journalize in quality format the necessary adjusting entries for Bailey Tool Company on page 46.

GENERAL JOURNAL	PAGE	46
Date	Description	Post. Ref.	Debit	Credit
20--		Adjusting Entries
Dec.	31	Income Summary
		Merchandise Inventory

	31	Merchandise Inventory
		Income Summary

	31	Insurance Expense
		Prepaid insurance

	31	Advertising Expense
		Prepaid Advertising

	31	Unearned Revenue
		Tool Income

	31	Depreciation Expense, Equip.
		Accumulated Depreciation, Equip.

	31	Wages Expense
		Wages Payable

	31	Supplies Expense
		Supplies

5. Simpson Corporation has the following information as of December 31, the end of its fiscal year:

Purchases Discounts	$ 2,850
Merchandise Inventory, December 31	78,651
Purchases	25,653
Merchandise Inventory, January 1	82,580
Purchases Returns and Allowances	3,270
Freight In	10,326

Instructions:

Using the information presented above, prepare the Cost of Goods Sold section of the income statement.

Cost of Goods Sold:
Merchandise Inventory, January 1, 20--
Purchases
Less: Purchases Returns and Allowances
Purchases Discounts
Net Purchases
Add Freight In
Delivered Cost of Purchases
Cost of Goods Available for Sale
Less Merchandise Inventory, December
31, 20--
Cost of Goods Sold

6. Selected account balances of Rich and Company as of December 31, the end of its fiscal year, are listed below in alphabetical order.

Accounts Payable	$ 36,510
Accounts Receivable	32,633
Accumulated Depreciation, Building	39,350
Accumulated Depreciation, Equipment	23,030
Building	66,970
Cash	28,705
Equipment	36,720
Land	13,580
Merchandise Inventory	58,823
Mortgage Payable	30,613
Mortgage Payable (current portion)	4,100
Notes Payable	5,200
Notes Receivable	4,023
Prepaid Insurance	3,113
S. Rich, Capital	105,049
Supplies	2,585
Unearned Rent Income	1,000
Wages Payable	2,300

Instructions:

Based on the account balances above, prepare a classified balance sheet.

Rich and Company Balance Sheet December 31, 20--
Assets
Current Assets:
Cash
Notes Receivable
Accounts Receivable
Merchandise Inventory
Prepaid Insurance
Supplies
Total Current Assets
Property and Equipment:
Land
Building
Less Accumulated Depreciation
Equipment
Less Accumulated Depreciation
Total Property and Equipment
Total Assets

Liabilities
Current Liabilities:
Notes Payable
Mortgage Payable (current portion)
Accounts Payable
Wages Payable
Unearned Rent Income
Total Current Liabilities
Long-Term Liabilities:
Mortgage Payable
Total Liabilities

Owner's Equity
S. C. Rich, Capital
Total Liabilities and Owner's Equity

7. A partial work sheet for Carman and Company is presented below. The merchandise inventory at the beginning of the year was $46,700. D. E. Carman, the owner, withdrew $33,500 during the year. The fiscal year ends on July 31 of this year.

	Income Statement
Account Name	Debit	Credit
Sales		204,000.00
Sales Returns and Allowances	2,100.00
Purchases	125,500.00
Purchases Returns and Allowances		1,800.00
Purchases Discounts		1,300.00
Freight In	6,200.00
Wages Expense	16,100.00
Rent Expense	8,200.00
Advertising Expense	2,100.00
Store Supplies Expense	1,100.00
Interest Expense	2,500.00
Income Summary	46,700.00	51,000.00
Insurance Expense	700.00
Depreciation Expense, Equipment	8,900.00	_________
	220,100.00	258,100.00
Net Income	38,000.00	_________
	258,100.00	258,100.00

Instructions:

1.	Prepare an income statement.
2.	Journalize the closing entries.

Carman and Company Income Statement For Year Ended July 31, 20--
Revenue from Sales:
Sales
Less: Sales Returns and Allowances
Net Sales
Cost of Goods Sold:
Merchandise Inventory, August 1, 20--
Purchases
Less: Purchases Returns and Allowances
Purchases Discounts
Net Purchases
Add Freight In
Delivered Cost of Purchases
Cost of Goods Available for Sale
Less Merchandise Inventory, July 31, 20--
Cost of Goods Sold
Gross Profit
Operating Expenses:
Wages Expense
Rent Expense
Advertising Expense
Store Supplies Expense
Insurance Expense
Depreciation Expense, Equipment
Total Operating Expenses
Income from Operations
Other Expenses:
Interest Expense
Net Income

GENERAL JOURNAL	PAGE
Date	Description	Post. Ref.	Debit	Credit
20--		Closing Entries
July	31	Sales
		Purchases Returns and Allowances
		Purchases Discounts
		Income Summary

	31	Income Summary
		Sales Returns and Allowances
		Purchases
		Freight In
		Wages Expense
		Rent Expense
		Advertising Expense
		Store Supplies Expense
		Insurance Expense
		Depreciation Expense, Equipment
		Interest Expense

	31	Income Summary
		D. E. Carman, Capital

	31	Income Summary
		D. E. Carman, Drawing

8. The following accounts are from the Athletics Store worksheet dated March 31 of the current year:

Cash	$ 8,250
Accounts Receivable	21,400
Merchandise Inventory	48,700
Store Supplies	3,106
Prepaid Insurance	2,380
Store Equipment	29,400
Accumulated Depreciation, Store Equipment	8,630
Accounts Payable	16,350
T. Phelps, Capital	157,900
T. Phelps, Drawing	32,570
Sales	203,842
Sales Returns and Allowances	1,770
Purchases	146,910
Purchases Returns and Allowances	3,527
Purchase Discounts	2,615
Freight In	6,947
Wages Expense	28,400
Advertising Expense	3,219
Rent Expense	19,200

The data needed for adjustments on March 31 are as follows:

a-b.	Merchandise Inventory, March 31, $46,250.
c.	Insurance expired for the year, $1,580.
d.	Depreciation for the year, $4,230.
e.	Accrued wages on January 31, $2,513.
f.	Supplies used during the year $950.

Instructions: (Note: use t-accounts to assist in calculation the below items.)

1.	Journalize the adjusting entries.
2.	Journalize the closing entries.
3.	Journalize the reversing entries.

GENERAL JOURNAL	PAGE
Date	Description	Post. Ref.	Debit	Credit
20--		Adjusting Entries
March	31	Income Summary
		Merchandise Inventory

	31	Merchandise Inventory
		Income Summary

	31	Insurance Expense
		Prepaid Insurance

	31	Depreciation Expense, Store Equipment
		Acc. Depr., Store Equipment

	31	Wages Expense
		Wages Payable

	31	Supplies Expense
		Supplies

		Closing Entries
	31	Sales
		Purchases Returns and Allowances
		Purchases Discounts
		Income Summary

	31	Income Summary
		Sales Returns and Allowances
		Purchases
		Freight In
		Wages Expense
		Advertising Expense
		Rent Expense
		Insurance Expense
		Depr. Expense, Store Equipment
		Supplies Expense

	31	T. Phelps, Capital
		Income Summary

	31	T. Phelps, Capital
		T. Phelps, Drawing

		Reversing Entries
April	1	Wages Payable
		Wages Expense