Big accounting problem, lots of parts, plenty of answers…far to many for one question.

Big accounting problem, lots of parts, plenty of answers…far to many for one question.

Sears Corporation prepares quarterly financial statements. The balance sheet at 12/31/11 is presented below.

Balance Sheet
12/31/2011
Cash $24,300 Accounts payable $22,370
Accounts receivable 22,400 Common stock 85,000
Allowance for doubtful accounts (1,200) Retained earnings 23,130
Land 20,000
Equipment 30,000
Accumulated depreciation –
equipment (20,000)
Building 70,000
Accumulated depreciation –
building (15,000)
$130,500 $130,500

During the first quarter of 2012 the following transactions occurred:

1. Performed services for $140,000 on account.

2. On 2/1/12, collected fees of $12,000 in advance. $1,000 worth of services are to be performed each month from 2/1/12 to 1/30/13.

3. On 2/1/12, purchased equipment for $15,000 plus sales taxes of $750. $3,000 cash was paid with the remaining balance on account. Check #455 was used.

4. Collected $133,000 on 3/5/12 from customers on account.

5. Paid $16,370 on accounts payable. Check #456 was used.

6. Paid operating expenses of $97,500. Check #457 was used.

7. Acquired a patent with a 10-year life for $9,600 cash on 3/1/12. Check #458 was used.

8. Wrote off a receivable of $200 for a customer who went bankrupt.

9. On 3/31/12, Sears Corp sold for $2,620 cash equipment which originally cost $13,000. It had an estimated life of 5 years and salvage of $2,000. It had an
estimated life of 5 years and a salvage of $2,000. Accumulated depreciation as of 12/31/2011 was $8,000 using the straight line method. (1) Record depreciation on
the equipment sold, then (2) record the sale.

10. AJE 3/31/2012: Record revenue earned from item 2 above.

11. AJE: At 3/31/2012, $26,000 of Accounts Receivable is not yet due. The bad debt percentage for these current receivables is 4%. The remaining balance in
Accounts Receivable is past due. The bad debt percentage for these receivables is 23.75%. Record bad debt expense.
HINT: You will need to calculate the balance in accounts receivable before calculating bad debt expense.

12. AJE: Record depreciation as of 3/31/12. The new equipment purchased in February is being depreciated using the double declining balance method over 5 years.
The equipment has an estimated salvage value of $1,000. The equipment that was on the books on 12/31 that is still owned by Sears is being depreciated over a 10
year life using straight line with no salvage value.

13. AJE: Depreciation is recorded on the building on a straight-line basis using a 30-year life and a salvage value of $10,000.

14. AJE: Amortization is recorded on the patent.

15. The company reconciles its bank statement every quarter. Information from the 12/31/11 Bank Reconciliation is provided below:

Deposit in transit 12/30/11 $5,000

Outstanding Checks #440 $3,444
#452 333
#453 865
#454 5,845

The Bank statement received for the quarter ended 3/31/10 was:
Beginning balance per bank $ 29,787
Deposits: 1/2/12 $5,000; 2/2/12 $12,000; 3/6/12 $133,000 150,000
Checks: #452 $333; #453 $865; #456 $16,370; #457 $97,500 ( 115,068)
Debit memo: Bank service charge (Record as operating expense) (100)
Ending bank balance $ 64,619

16. AJE: Sears Corp’s income tax rate is 40%. The tax will be paid when the tax return is due in April.
Hint: Prepare the income statement up to income before taxes and multiply by 40% to compute the amount of income tax expense.
a. Enter the transactions numbered 1-9 in the general journal.
b. Enter the 12/31/11 balances in ledger accounts. Use the ledger account running balance format accounts provided on the following pages.
c. Post the journal entries to the ledger accounts for items 1-9.
d. Prepare an unadjusted trial balance at March 31st and enter on the worksheet.
Using your unadjusted trial balance above and the data for adjusting entries, prepare a 10 column worksheet.
e. Prepare a bank reconciliation in good form. (Item 15 above.) Use your own paper. Record the necessary AJE.
f. Journalize and post all other adjusting entries. (Items 10-16)
g. Prepare an income statement and a retained earnings statement for the quarter ended 3/31/12 and a classified balance sheet at 3/31/12. Use your own paper. (No
formatted sheets are supplied as for the other items.)

Parts: a, e and f

Extra Credit 2 ‘ General Journal Debit Credit
a.1.

a.2.

a.3.

a.4.

a.5.

a.6.

a.7.

a.8.

a.9.

a.10.

a.11.

a.12.

a.13.

a.14.

a.15.

a.16.

General Ledger Parts: b, c and d
CASH DR CR BALANCE
Beginning
Item 2
Item 3
Item 4
Item 5
Item 6
Item 7
Item 9
Item 15

ACCOUNTS RECEIVABLE DR CR BALANCE
Beginning
Item 1
Item 4
Item 8

ALLOWANCE FOR DOUBTFUL ACCTS DR CR BALANCE
Beginning
Item 8
Item 11

LAND DR CR BALANCE
Beginning

EQUIPMENT DR CR BALANCE
Beginning
Item 3
Item 9

ACCUM DEPR EQUIPMENT DR CR BALANCE
Beginning
Item 9
Item 9
Item 12

General Ledger continued
BUILDING DR CR BALANCE
Beginning

ACCUM DEPR BUILDING DR CR BALANCE
Beginning
Item 13

PATENTS DR CR BALANCE
Item 7
Item 14

ACCOUNTS PAYABLE DR CR BALANCE
Beginning
Item 3
Item 5

UNEARNED REVENUE DR CR BALANCE
Item 2
Item 10

INCOME TAXES PAYABLE DR CR BALANCE
Item 16

COMMON STOCK DR CR BALANCE
Beginning

RETAINED EARNINGS DR CR BALANCE
Beginning

SERVICE REVENUE DR CR BALANCE
Item 1
Item 10

OPERATING EXPENSES DR CR BALANCE
Item 6
Item 15

General Ledger continued
DEPRECIATION EXPENSE DR CR BALANCE
Item 9
Item 12
Item 13

AMORTIZATION EXPENSE DR CR BALANCE
Item 14

LOSS ON DISPOSAL DR CR BALANCE
Item 9

BAD DEBT EXPENSE DR CR BALANCE
Item 11

INCOME TAX EXPENSE DR CR BALANCE
Item 16

 

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