| 1 |
On January 1, 2021, ABC purchased a one-year liability insurance policy for $50,000 |
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Upon purchase, the following journal entry was made: |
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Dr Prepaid insurance |
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50,000 |
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Cr Cash |
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50,000 |
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The expired portion of insurance must be recorded as of 12/31/21. |
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Notice that the expired portion from January through November has been recorded already. |
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Make sure that the Prepaid Insurance balance after the adjusting entry is correct. |
| 2 |
Depreciation expense must be recorded for the month of December. |
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The building was purchased on February 1, 2021 for $500,000 with a remaining useful life of 25 years and a salvage value of $3,000. |
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The method of depreciation for the building is straight-line. |
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The equipment was purchased on February 1, 2021 for $260,000 with a remaining useful life of 4 years and a salvage value of $1,800. |
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The method of depreciation for the equipment is double-declining balance. |
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Depreciation has been recorded for the building and equipment for months February through November. |
| 3 |
On December 1, 2021, XYZ Co. agreed to rent space in ABC’s building for $5,000 per month, |
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and XYZ paid ABC on December 1 in advance for the first three months’ rent. |
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The entry made on December 1 was as follows: |
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Dr Cash |
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15,000 |
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Cr Unearned rent revenue |
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15,000 |
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The unearned revenue account must be adjusted to reflect the amount earned as of 12/31/21. |
| 4 |
Per timecards, from the last payroll date through December 31, 2021, ABC’s employees have worked a total of 300 hours. |
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Including payroll taxes, ABC’s wage expense averages about $30 per hour. The next payroll date is January 5, 2022. |
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The liability for wages payable must be recorded as of 12/31/21. |
| 5 |
On November 30, 2021, ABC borrowed $100,000 from American National Bank by issuing an interest-bearing note payable. |
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This loan is to be repaid in three months (on February 28, 2022), along with interest computed at an annual rate of 7%. |
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The entry made on November 30 to record the borrowing was: |
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Dr Cash |
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100,000 |
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Cr Notes payable |
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100,000 |
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On February 28, 2022 ABC must pay the bank the amount borrowed plus interest. |
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Assume the beginning balance for Notes Payable is correct. |
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Interest through 12/31/21 must be accrued on the $100,000 note. |
| 6 |
ABC uses a periodic inventory system, and the ending inventory for each year is determined by taking a complete |
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physical inventory at year-end. A physical count was taken on December 31, 2021, and the inventory on-hand at |
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that time totaled $50,000, which reflects historical cost. Record the adjusting entry for properly recognizing |
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2021 Cost of Goods Sold. Hint: This was the first year of operations, so beginning inventory balance is zero. |
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Additionally, ABC adheres to GAAP by recording ending inventory at the lower of cost and net realizable value at a total inventory level. |
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A review of inventory data further indicated that the current retail sales value of the ending inventory is $45,000 and estimated costs of |
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completion and shipping is 10% of retail. Be sure to make an additional adjustment, if necessary, to properly value ending inventory |
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using the Loss and Allowance methodology. For Income Statement presentation purposes, be sure to use the Loss Method for accounting |
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for adjustments of inventory to market value. |
| 7 |
It would be unusual for a company to have an asset impairment in Year 1, but for the sake of this example, ABC determined |
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that their intangible asset might be impaired on December 31, 2021. Record the impairment adjustment, if any. |
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The expected future undiscounted net cash flows for this intangible asset totals $175,000, and the fair value of the asset is $165,000. |
| 8 |
On 7/1/21, ABC purchased 5,000 shares of its own stock from existing stockholders as treasury stock. The cost of the treasury |
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stock was $10 per share, or $50,000 in total. The effects of this transaction are already shown in the unadjusted trial balance. On 12/31/21, |
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ABC reissued 2,000 shares of the treasury stock at $15 per share. Record the journal entry required for the reissuance of the treasury stock. |
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To refresh your memory, treasury stock is usually accounted for at cost. When treasury stock is reissued for more than its cost, a separate |
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Paid-in Capital-Treasury Stock account should be used to account for the excess proceeds over cost. (See your Principles of Accounting textbook |
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or Chapter 18 of your Intermediate Accounting textbook for a review.) |
| 9 |
On 12/31/21, ABC issued 20,000 shares of $1 par value common stock at the closing market price of $15 per share. Prepare ABC’s journal entry |
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to reflect the issuance of the stock on 12/31/21. To refresh your memory, a Paid-in Capital in Excess of Par account should be used to account for |
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excess proceeds over par value in a stock issuance transaction. (See your Principles of Accounting textbook or Chapter 18 of your Intermediate |
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Accounting textbook for a review.) |
| 10 |
On 7/1/21, ABC sold 10% bonds having a maturity value of $1,000,000 for $1,081,105, resulting in an effective yield of 8%. The bonds are |
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dated 7/1/21, and mature 7/1/26. Interest is payable semiannually on July 1 and January 1. ABC uses the effective interest method of |
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amortization for bond premium or discount. Record the adjusting entry for the accrual of interest and the related amortization on 12/31/21. |
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Hint: Develop an abbreviated amortization schedule to accurately determine the interest expense. |
| 11 |
ABC Corporation prepares an aging schedule on 12/31/21 that estimates total uncollectible accounts at $40,000. Assuming that the allowance |
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method is used, prepare the entry to record bad debt expense for the calendar year. |
| 12 |
ABC Corporation purchased 5,000 shares of XYZ Company common stock for $20.00 per share on 11/30/21. The investment represents |
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a 5% voting interest and is classified as a trading security. At 12/31/21, the stock is trading at $25.00 per share. Prepare the appropriate |
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adjusting journal entry for end-of-year valuation purposes. |
| 13 |
On 12/31/21, ABC Corporation exchanged equipment for two pickup trucks. The book value and fair value of the equipment given |
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up were $20,000 (original cost of $65,000 less accumulated depreciation of $45,000) and $17,000, respectively. Assume ABC paid $10,000 |
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in cash and the exchange has commercial substance. Prepare the approriate journal entry to reflect the nonmonetary exchange. |
| 14 |
Do this final adjusting entry after preparing the Income Statement through the line “Income Before Income Taxes”: |
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Corporate taxes are due in four estimated quarterly payments on April 15, June 15, September 15, and December 15. |
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However, for the purposes of this ABC illustration, we will assume that estimates are not paid, and that the tax is paid in full |
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on the return’s March 15, 2022 due date. |
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ABC’s income tax rate is 20%. The entire year’s income tax expense was estimated at the beginning of 2021 to be $52,000, |
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so January through November income tax expense recognized amounts to $47,667 (11/12 months). |
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Since we are assuming estimates are not paid during the year, the balance in Income taxes payable represents |
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income tax accrued for January through November. Assume no deferred tax assets or deferred tax liabilities. |
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Based on the income before income taxes figure from the income statement, calculate and record December’s income tax expense adjustment |
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so that the entire year’s tax expense is correct (i.e. the difference between total income tax expense and the amount already accrued through November). |