Comprehensive Exam A A3 Problem AlI Adjusting and Reversing

Comprehensive Exam A A-3 Problem A-lI Adjusting and Reversing Entries The following list of accounts and their balances represents the unadjusted trial balance of Alt Company at December 31,2014: Cash Equity Investments (trading) S 27,290 60,000 69,000 Allowance for Doubtful Accounts Inventory Prepaid Rent Plant Assets Accumulated Depreciation-Plant Assets Accounts Payable Bonds Payable Common Stock Retained Earnings Sales Revenue Cost of Goods Sold Freight-Out Salaries and Wages Expense Interest Expense Rent Revenue Miscellaneous Expense Insurance Expense $ 500 54,720 36,000 160,000 14,740 11,370 90,000 170,000 97,180 214,800 54,400 11,000 32,000 2,040 21,600 890 $820.190 Additional Data: Problem A-l- (cont.) 1. The balance in the Insurance Expense account contains the premium costs of three policies: Policy 1, remaining cost of $2,550, 1-yr. term, taken out on May 1, 2013 Policy 2, original cost of $9,000, 3-yr. term, taken out on Oct. 1, 2014; Policy 3, original cost of $1,300, 1-yr. term, taken out on Jan. 1, 2014 2. On September 30, 2014, Alt received $21,600 rent from its lessee for an eighteer month lease beginning on that date. The regular rate of depreciation is 10% per year. Acquisitions and retirements during a year are depreciated at half this rate. There were no purchases during the year. On December 31, 2013, the balance of the Plant and Equipment account was $220,000. 3. 4. On December 28, 2014, the bookkeeper incorrectly credited Sales Revenue for a 5. At December 31, 2014, salaries and wages accrued but unpaid were $4,200 6. Alt estimates that 1% of sales will become uncollectible. 7. On August 1, 2014, Alt purchased, as a short-term investment, 60 $1,000, 6% bonds receipt on account in the amount of $20,000. of Allen Corp. at par. The bonds mature on August 1, 2015. Interest payment dates are July 31 and January 31

Solution

(a)   1. Prepaid Insurance ..........................................................................         8,250

                        Insurance Expense ............................................................                              8,250

                              (Both Policies 1 and 3 have expired and their costs

                              belong in Insurance Expense. The monthly premium

                              on Policy 2 is $9,000 ÷ 36 = $250. At 12/31/14, 33 mos.

                              of insurance, or $8,250, remains unexpired)

       2. Rent Revenue ................................................................................       18,000

                        Unearned Rent ..................................................................                            18,000

                              (Monthly rent is $21,600 ÷ 18 = $1,200. At 12/31/14,

                              15 mos. of rent, or $18,000, remains unearned)

       3. Depreciation Expense ...................................................................       19,000

                        Accumulated Depreciation ................................................                            19,000

                              [(Equipment retired during 2014 =

                              $220,000 – $160,000 = $60,000)

                                    10% of $160,000 =                      $16,000

                                    5% of $60,000 =                              3,000

                                          Total depreciation =                $19,000]

       4. Sales Revenue...............................................................................       20,000

                        Accounts Receivable .........................................................                            20,000

                              (To correct the entry made in error)

       5. Salaries and Wages Expense ........................................................         4,200

                        Salaries and Wages Payable .............................................                              4,200

       6. Bad Debt Expense .........................................................................         1,948

                        Allowance for Doubtful Accounts ......................................                              1,948

                              (Corrected Sales Revenue balance is $214,800 – $20,000

                              = $194,800. 1% of $194,800 is $1,948.)

       7. Interest Receivable ........................................................................         1,500

                        Interest Revenue ...............................................................                              1,500

                              (Monthly interest is $60,000 × .06 × 1/12 = $300.

                              5 months\' accrued interest is $1,500)

       8. Rent Expense .............................................................................        24,000

                        Prepaid Rent ...................................................................                             24,000

                         (To record 8 months\' of rent expired at $3,000 per month)

(b)                    1, 2, 5, and 7. Items No. 1 and No. 2 represent prepaid items that were initially recorded in nominal accounts. Items No. 5 and No. 7 represent accrued items