Prepare the journal entries and financial statements

Question

Assignment:

Comprehensive Problem

Q: You are about to begin working on a comprehensive problem. This means that when you prepare the journal entries and financial statements for this problem you need to follow ALL the rules applicable to the accounting process. You need to prepare the journal entries and financial statements as if you were doing it for your employer. Be sure to look over the grading rubric prior to starting this problem.

Balance Sheet accounts are provided in the table below. *The debits and credits do not equal/balance because the net income earned so far this year ($79,000) has not yet been included in retained earnings. This amount will show up as part of the net income when you prepare the financial statements

Account	Debit	Credit
Cash	100,000
Trading Securities	50,000
Available-for-Sale Securities	50,000
Fair Value Adjustment-AFS		5,000
Accounts Receivable	75,000
Receivable from Employee	10,000
Inventories	200,000
Assets Held-for-Sale	25,000
Cash Value of Insurance	10,000
Equipment	54,000
Accumulated Depreciation-Equipment		16,500
Building	96,000
Accumulated Depreciation-Building		32,000
Land	25,000
Goodwill	275,000
Accounts Payable		80,000
Interest Payable		15,000
Salaries Payable		10,000
Taxes Payable		5,000
Current Portion of Note		40,000
Note Payable (noncurrent portion of note)		190,000
Mortgage Liability		110,000
Common Stock		300,000
Retained Earnings		92,500
Accumulated Other Comprehensive Income/Loss	5,000	______
	$975,000	$896,000

The following information relates to the revenues earned and expenses incurred during the first half of 2012.

	Debit	Credit
Sales		$1,911,500
Sales Returns and Allowances	100,000
Sales Discounts	22,500
Cost of Goods Sold	1,240,000
Selling Expenses	250,000
General and Administrative Expenses	220,000

Transactions occurring in 2012 but not considered in the current net income of 79,000 are as follows:

1. On July 1^st, the corporation entered into a lease agreement for a machine that qualifies as a capital lease. The lease calls for annual lease payments of $26,269 over a six-year lease term, with the first payment at July 1^st, the leases inception. The interest rate is 5%. *(Round your answer to the nearest whole dollar).

2. On July 1^st, the corporation sold a $15,000, 5 year bond with a stated rate of 8%. The effective yield on the bonds is 10%. Interest on the bond is paid semiannually on January 1^st and July 1^st. The company uses the effective interest method to amortize any bond discount or premium. *(Round your answer to the nearest whole dollar).

3. One month following the issue of the bonds, the corporation invested $5,000 into a sinking fund in order to have the money to pay off the bonds when they come due.

4. On September 3^rd, the corporation experienced an uninsured flood loss (extraordinary) which destroyed the building. The tax rate is 40%.

5. On September 20^th, the company sold their shares in Hobokin Company resulting in a loss of $1,000 (pretax). See the portfolio tables below.

6. When its president died, on October 8^th, the corporation realized $110,000 from an insurance policy. The cash surrender value of this policy had been carried on the books as an investment in the amount of $10,000 (the gain is nontaxable).

7. On November 1^st, the corporation filed a suit against Tri-Star, Inc. seeking damages for patent infringement. Legal counsel believes that it is probable that the company will be successful against Tri-Star for an estimated amount in the range of $100,000 to $150,000, with all amounts in the range considered equally likely.

8. On November 15^th, the corporation disposed of its wholesale division at a loss of $5,000 before taxes. The wholesale operations were shut down at the beginning of the year. This transaction meets the criteria for discontinued operations. The assets associated with this sale are being classified as "Assets Held-For-Sale"

9. The corporation decided to change its method of inventory pricing from average cost to the FIFO method. The effect of this change on prior years is to increase 2010 income by $60,000 and decrease 2011 income by $20,000 before taxes. The FIFO method has been used for 2012. The tax rate on these items is 40%.

10. On December 18^th, the corporation purchased 2,000 shares of its own common stock at $20 a share.

11. On December 20^th, the corporation paid off the current portion of the note payable along with the $15,000 in interest that had been accrued.

12. December 31^st, interest on the lease has accrued.

13. December 31^st, interest on the bonds has accrued.

14. The company's products carry a one year warranty against manufacturer's defects. Warranty costs are expected to be 1% of net sales.

15. At the beginning of 2011, the corporation purchased a piece of equipment for $54,000, salvage value of $9,000 that had a useful life of 6 years. The bookkeeper used straight-line depreciation for 2011 and 2012. However, in 2012 the bookkeeper failed to deduct the salvage value in computing the depreciation base (an error was made). The journal entry for this year depreciation has already been made, but a correcting entry is required to fix the mistake.

16. Adjust the Trading securities and AFS securities to their respective fair values. See the portfolio tables below.

Portfolio Tables

AFS Securities Portfolio	Cost	Fair Value 2011	Fair Value 2012
Disney Corporation	$5,000	$8,000	$10,000
Monster Truck, Inc.	25,000	20,000	22,000
Hobokin Company	20,000	17,000	______
Totals	$50,000	$45,000	$32,000

Trading Securities Portfolio	Cost	Fair Value 2011	Fair Value 2012
GM Company	$15,000	$20,000	$23,000
Shaffer Corporation	35,000	30,000	34,000
Totals	$50,000	$50,000	$57,000

Required:

A. Journalize transactions 1 - 16. The corporation's tax rate is 40%.

B. Don't forget to include a journal entry for your income taxes once you have prepared the income statement.

C. Prepare a multiple-step income statement, statement of retained earnings, and a balance sheet. Do each statement on a separate page in Excel and put your name as part of the company name on all of the statements (e.g., Frilly Things, Fay Barton). List "Other Comprehensive Income" below net income on the income statement. Be sure to list the unrealized holding gains & losses, but do not list them net of taxes. Use good form in preparing these financial statements. Financial statements will be graded on presentation which means that the proper categories and subcategories are to be used, proper placement of dollar values in appropriate columns as well as appropriate use of dollar signs and underlines, etc.