1. Listed below are several qualitative characteristics, accounting principles and assumptions. Read the statements (i) through (viii) below about Sheldon Inc. and determine which item (a) through (k) is violated by the company in the statement. (Items a through k may be used more than once or not at all.) For each item, you only need to list one violation. Some items relate to more than one violation. If there is no violation, then write "None".
Assumptions, Principles and Qualitative Characteristics:
a. Economic entity assumption g. Expense recognition principle
b. Going concern assumption h. Full disclosure principle
c. Monetary unit assumption i. Relevance characteristic
d. Periodicity assumption j. Faithful representation characteristic
e. Historical cost principle k. Consistency characteristic
f. Revenue recognition principle
Statements:
____ i. Sheldon Inc. will likely file for bankruptcy in the next three months as they lost ten large customers in December and have a huge amount of debt due in two months.
____ ii. The CEO of Sheldon Inc. spent $2,500 on a trip to New York with her friends. The CEO used the company's American express card. The purchase was expensed in the account called Other Miscellaneous Expenses.
____ iii. The company purchased a plot of land as a site for a new factory for $200,000. Each month, they record the land at fair market value to show the gains in the land. This year, they recorded a $20,000 gain for the increase in the land market value.
____ iv. The company had a loss of $500 due to a fire in their factory which was not insured. The loss was recorded on the income statement. The company included discussion of the loss in the footnotes even though the loss is immaterial to users of the financial statements.
____ v. In the current year, the company recorded the loss due to theft of inventory in their COGS account. Last year, the company recorded the loss due to theft in an Inventory Short expense account.
____ vi. Last year, the company's financial statements included 10 months of activities. This year, the company's financial statements included 12 months of activities.
____ vii. The company reported $5,000 worth of fictitious sales revenue. The CFO made up these transactions to try and boost Net Income at the end of the year.
____ viii. The company recorded the last week of December's salaries and wages in January when the paychecks were given to the employees.
2. Adjusting Entries:
The following list of accounts and their balances represents the unadjusted trial balance of Rayna James Inc. at December 31, 2015 (assume that all previous year transactions were made accurately):
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Rayna James Inc.
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Unadjusted Trial Balance
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|
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December 31, 2015
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|
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Cash
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$125,040
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|
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Equity Investments (trading)
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42,500
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|
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Accounts Receivable
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351,000
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|
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Allowance for Doubtful Accounts
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$56,390
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Inventory
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105,000
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|
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Prepaid Legal Expense
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4,500
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|
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Prepaid Insurance Expense
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9,625
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|
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Equipment
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320,000
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|
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Accumulated Depreciation-Equipment
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45,500
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Accounts Payable
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93,500
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Bonds Payable
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210,000
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Common Stock
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250,000
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Retained Earnings
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221,400
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Sales Revenue
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623,190
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Cost of Goods Sold
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329,640
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|
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Freight-Out Expense
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40,800
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|
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Salaries and Wages Expense
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79,500
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|
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Insurance Expense
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875
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Depreciation Expense
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19,500
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|
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Rental Expense
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72,000
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|
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$1,499,980
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$1,499,980
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Additional Data:
1. Rayna James Inc. rents a warehouse for additional storage space. On January 1st, 2015, Rayna James paid the owners of the warehouse $72,000 for 36 months of rent payments covering 2015, 2016 and 2017.
2. On December 31st, 2015, the bookkeeper recorded $9,500 of sales revenue on credit (these inventory items were shipped on January 2nd, 2016 to a customer). The cost of the inventory sold was $6,500.
3. On March 1st, 2015, Rayna James paid $4,500 in advance for legal fees. The company used $1,200 of legal services in 2015 and will use the remaining advance payment to cover any legal costs incurred in 2016.
4. The company purchased equipment costing $320,000 on Jan. 1st, 2014. The equipment has a salvage value of $60,000 and a useful life of 10 years. They use the straight-line depreciation method. There were no purchases made during 2015.
5. At December 31, 2015, the company recorded salaries and wages expense for $10,500 for 8 days in December 2015 and 2 days in January 2016. Assume the original entry was accrued into accounts payable.
6. On December 1st, 2015, Rayna James Inc. purchased $2,400 of supplies from Office Depot. Rayna James mistakenly recorded this purchase into inventory and used cash to make the purchase. A physical inventory of supplies found that $600 worth of supplies remained on December 31, 2015.
7. On November 1st, 2015, Rayna James paid $10,500 for a 12 month insurance policy on the equipment.
8. Rayna James mistakenly booked $15,200 of interest revenue into the sales revenue account. The cash for the interest earned was received and booked on December 31, 2015.
Instructions: Record the necessary adjusting entries for 2015.