Chapter 9, Problem 11CP

a.

To determine

To calculate: Reconciled ending balance of cash.

Explanation of Solution

Given,

Cash balance as per bank is $15,100.

Deposit in transit is $2,450.

Outstanding checks are $1,800.

Formula to calculate ending balance of cash,

  $\text{Ending}\text{balance}\text{of}\text{cash}=\left[\begin{array}{l}\text{Cash}\text{balance}\text{as}\text{per}\text{bank}+\text{Deposit}\text{in}\text{transit}\\ -\text{Outstanding}\text{checks}\end{array}\right]$

Substitute $15,100 for cash balance as per bank, $2,450 for deposit in transit and $1,800 for outstanding checks.

  $\begin{array}{c}\text{Ending}\text{balance}\text{of}\text{cash}=\$15,100+\$2,450-\$1,800\\ =\$15,750\end{array}$

Thus, ending balance of cash is $15,750.

b.

To determine

To calculate: Correct ending balance of the allowance for doubtful accounts.

Explanation of Solution

Given,

Bad debts are $679.

Required balance is $700.

Balance in Trial is $828.

Formula to calculate allowance for doubtful accounts,

  $\text{Allowance}\text{for}\text{doubtful}\text{accounts}=\left(\begin{array}{l}\text{Bad}\text{debt}+\text{Required}\text{balance}\\ -\text{Balance}\text{in}\text{Trial}\end{array}\right)$

Substitute $679 for bad debt, $700 for required balance and $ 828 for balance in trial.

  $\begin{array}{c}\text{Allowance}\text{for}\text{doubtful}\text{accounts}=\$679+\$700-\$828\\ =\$551\end{array}$

Thus, adjustment to correct ending balance of allowance for doubtful accounts is $551.

c.

To determine

To calculate: Depreciation expense for the truck used during year 2017.

Explanation of Solution

Given,

Original cost of truck is $32,000.

Salvage value of truck is $8,000.

Useful life of truck is 4 years.

Formula to calculate depreciation for truck,

  $\text{Depreciation}=\frac{\text{Original}\text{cost}-\text{Salvage}\text{value}}{\text{Number}\text{of}\text{years}}$

Substitute $32,000 for original cost, $8,000 for salvage value and 4 for number of years.

  $\begin{array}{c}\text{Depreciation}=\frac{\text{\$32,000}-\text{\$8,000}}{\text{4}}\\ =\$6,000\end{array}$

Thus, depreciation for truck is $6000.

d.

To determine

To calculate: Depreciation expenses for the two items of equipment used during year 2017.

Explanation of Solution

Calculated values,

Depreciation on Sprayer is $3,000 (working notes).

Depreciation on Injector is $3,100 (working notes).

Formula to calculate the depreciation on two items of equipment,

  $\text{Depreciation}\text{on}\text{two}\text{items}\text{of}\text{equipment}=\left[\begin{array}{l}\text{Depreciation}\text{on}\text{Sprayer}\\ +\text{Depreciation}\text{on}\text{Injector}\end{array}\right]$

Substitute $3,000 for depreciation on Sprayer and $3,100 for depreciation on Injector.

  $\begin{array}{c}\text{Depreciation}\text{on}\text{two}\text{items}\text{of}\text{equipment}=\$3,000+\$3,100\\ =\$6,100\end{array}$

Thus, depreciation for equipments is $6100.

Working notes:

Given,

Original cost of Sprayer is $27,000.

Expected salvage value of Sprayer is $3,000.

Useful life of Sprayer is 8 years.

Calculation of depreciation on Sprayer,

  $\begin{array}{c}\text{Depreciation}=\frac{\text{Original}\text{cost}-\text{Salvage}\text{value}}{\text{Number}\text{of}\text{years}}\\ =\frac{\text{\$27,000}-\text{\$3,000}}{8}\\ =\$3,000\end{array}$

Depreciation on Sprayer is $3,000.

Given,

Original cost of Injector is $18,000.

Expected salvage value of Injector is $2,500.

Useful life of Injector is 5years.

Calculation of depreciation on Injector,

  $\begin{array}{c}\text{Depreciation}=\frac{\text{Original}\text{cost}-\text{Salvage}\text{value}}{\text{Number}\text{of}\text{years}}\\ =\frac{\text{\$18,000}-\text{\$2,500}}{5}\\ =\$3,100\end{array}$

Depreciation on Injector is $3,100.

e.

To determine

To calculate: The adjusted 2017 ending balance of examination service revenue and unearned service revenue account.

Explanation of Solution

Calculate unearned service revenue.

Given,

Total service revenue received is $3,840 in August 2017.

Calculated value,

Revenue earned for 2016 is $1,600 (working note).

Formula to calculate unearned service revenue,

  $\text{Unearned service revenue}=\text{Total}\text{revenue}\text{received}-\text{Revenue}\text{earned}\text{for}2016$

Substitute $3,840 for total revenue received and $1,600 for revenue earned for 2016.

  $\begin{array}{c}\text{Unearned service revenue}=\text{\$3,840}-\$1,600\\ =\$2,240\end{array}$

Calculate balance of examination service revenue.

Given,

Total service revenue for the year 2017 is $60,000.

Unearned service revenue for 2016 is $2,240

Formula to calculate examination service revenue,

  $\text{Examination service revenue}=\left[\begin{array}{l}\text{Total}\text{service}\text{revenue}\\ -\text{Unearned service revenue}\text{for}\text{2016}\end{array}\right]$

Substitute $60,000 for total service revenue and $2,240 for unearned service revenue for 2016.

  $\begin{array}{c}\text{Examination service revenue}=\$60,000-\$2,240\\ =\$57,760\end{array}$

Thus, the unearned service revenue is $2,240 and balance of examination service revenue is $57,760.

Working notes:

Calculate service revenue for the period August to December.

Given,

Total revenue received is $3,840 on August 2017.

Company began providing the service from August.

Therefore the time period of providing the service is 5 months. (August to December)

Calculation of service revenue for the period August to December,

  $\begin{array}{c}\left[\begin{array}{l}Servicerevenueforthe\\ periodAugusttoDecember\end{array}\right]=\left[\begin{array}{l}\left(\frac{\text{Total}\text{revenue}\text{recived}}{\text{Number}\text{of}\text{months}\text{in}\text{a}\text{year}}\right)\\ \times \left(\text{Months}\text{of}\text{service}\text{revenue}\right)\end{array}\right]\\ =\frac{\$3,840}{12\text{months}}\times 5\text{months}\\ =\text{\$1,600}\end{array}$

f.

To determine

To calculate: The adjusted 2017 ending balance of the warranty expenses and the estimated warranty liability account.

Explanation of Solution

Calculate balance of warranty expense.

Given,

The examination service revenue for 2017 is $57.760.

Cost of providing warranty service is 2.5%

Formula to calculate warranty expenses,

  $\text{Warrant}\text{expenses}=\left[\begin{array}{l}\text{Examination}\text{service}\text{revenue}\text{for}2017\\ \times \text{Cost}\text{of}\text{providing}\text{warranty}\text{service}\end{array}\right]$

Substitute $57,576 for examination service revenue for 2017 and 2.5% for cost of providing warranty service.

  $\begin{array}{c}\text{Warranty}\text{expense}=\$57,760\times 2.5\%\\ =\$1,444\end{array}$

Calculate estimated warranty liability.

Given,

Estimated warranty liability in trial balance is $1,400.

Adjusted warranty liability is $1,444.

Formula to calculate estimated warranty liability,

  $\text{Estimated}\text{warranty}\text{liability}=\left[\begin{array}{l}\text{Estimated}\text{warranty}\text{liability}\text{in}\text{Trial}\\ +\text{Adjusted}\text{warranty}\text{liability}\end{array}\right]$

Substitute $1,400 for warranty liability in trial and $ 1,444 for adjusted warranty liability.

  $\begin{array}{c}\text{Estimated}\text{warranty}\text{liability}=\$1,400+\$1,444\\ =\$2,844\end{array}$

Thus, ending balance of warranty expenses is $1,444 and estimated warranty liability is $2,844 .

g.

To determine

To calculate: Ending balance of Interest expense and interest payable account.

Explanation of Solution

Note was signed on 31^st December 2017. Interest on note is payable annually on 31^st December 2017. So, no entry of interest expense this year.

h.

To determine

To prepare: Adjusted trial balance

Explanation of Solution

Adjusted Trial balance

Particulars	Amount ($)	Particulars	Amount ($)
Cash	15,750	Allowance for doubtful accounts	700
Accounts receivable	3,193	Accumulated depreciation truck	6,000
Inventory	11,700	Accumulated depreciation on equipments	18,300
Truck	32,000	Accounts Payable	5,000
Omitted checks	637	Warranty liability	2,844
Equipment	45,000	Outstanding checks	1,800
Deposit in Transit	2,450	Unearned service revenue	2,240
Dividend	10,000	Interest payable	0
Cost of goods sold	46,300	Long term notes payable	15,000
Depreciation on Truck	6,000	Common stock	10,000
Depreciation on equipment	6,100	Retained earnings	49,700
Wages	35,000	Service revenue	57,760
Interest expense	0	Interest revenue	924
Rent	9,000	Sales	71,026
Bad Debt	679
Miscellaneous	1,226
Repairs	8,000
Utilities	6,800
Bank charges	15
Warranty	1,444
Total	241,294	Total	241,294

Table (1)

i.

To determine

To prepare: Journal entries for adjustments.

Explanation of Solution

Journal entries for adjustments

Date	Account Title and Explanation	Post ref	Debit($)	Credit($)
Dec 31,2017	Cash		1,852
	Interest earned			52
	Outstanding checks			1,800
	(To record changes in cash)

Table (2)

• Cash is an asset account. Since company has earned interest and there is one outstanding checks. So balance of cash will increase. Hence it is debited.
• Interest earned is a revenue account. Since its balance is increasing, so it is credited.
• Outstanding checks are liability of company. Since its balance is increasing it is credited.

Date	Account Title and Explanation	Post ref	Debit($)	Credit($)
Dec 31,2017	Deposit in transit		2,450
	Bank charges		15
	Cash			2,465
	(To record changes in cash)

Table (3)

• Deposit in transit is an asset account. Since its balance is increasing, it is debited.
• Bank charges are expense account. Since its balance is increasing, it is debited.
• Cash is an asset account. Since companies cash has reduced because of bank charges and deposit in transit, cash account is credited.

Date	Account Title and Explanation	Post ref	Debit($)	Credit($)
Dec 31,2017	Allowance for doubtful account		128
	Bad debt		679
	Accounts Receivable			807
	(To record bad debt and allowance)

Table (4)

• Allowance for doubtful account is a provision account. Since its balance is increasing, it is debited.
• Bad debt is a loss account. Since its balance is increasing, it is debited.
• Accounts receivable is an asset account. Since companies accounts receivable are reducing because of bad debt, accounts receivable is credited.

Date	Account Title and Explanation	Post ref	Debit($)	Credit($)
Dec 31,2017	Depreciation on truck		6,000
	Accumulated depreciation on truck			6,000
	(To record depreciation on truck)

Table (5)

• Depreciation on truck is an expense account. Since its balance is increasing, it is debited.
• Accumulated depreciation on truck is a liability account. Since, its balance is increasing, it is credited.

Date	Account Title and Explanation	Post ref	Debit($)	Credit($)
Dec 31,2017	Depreciation on equipments		6,100
	Accumulated depreciation on equipments			6,100
	(To record depreciation on equipments)

Table (6)

• Depreciation on equipments is an expense account. Since its balance is increasing, it is debited.
• Accumulated depreciation on equipments is a liability account. Since, its balance is increasing, it is credited.

Date	Account Title and Explanation	Post ref	Debit($)	Credit($)
Dec 31,2017	Service revenue		2,240
	Unearned service revenue			2,240
	(To record unearned service revenue)

Table (7)

• Service revenue is a revenue account. Since its balance is decreasing, it is debited.
• Unearned service revenue is a liability account. Since, its balance is increasing, it is credited.

Date	Account Title and Explanation	Post ref	Debit($)	Credit($)
Dec 31,2017	Warranty expense		1,444
	Estimated warranty liability			1,444
	(To record estimated warranty liability)

Table (8)

• Warranty expense is an expense account. Since its balance is increasing, it is debited.
• Estimated warranty liability is a liability account. Since, its balance is increasing, it is credited.

j.

To determine

To prepare: Income statement, retained earnings statement and balance sheet.

Explanation of Solution

Income statement

B Company
Income Statement
For the year ended December 31,2017
Particulars	Amount ($)
Revenues and Gains
Sales revenue	71,026
Interest Revenue	924
Service revenue	57,760
Total revenue	129,710
Expenses and Losses
Cost of goods sold	46,300
Rent	9,000
Depreciation on Truck	6,000
Depreciation on equipments	6,100
Wages	35,000
Bad debt	679
Bank charges	15
Utilities	6,800
Repair	8,000
Miscellaneous	1,226
Warranty	1,444
Total expenses and losses	120,564
Net Income	9,146

Table (9)

Retained earnings statement

B CompanyStatement of Retained earningsFor the year ended December 31,2017
Particulars	Amount ($)
Retained earnings at the beginning of period	49,700
Add: Net income	9,146
Less: Dividend paid	10,000,
Retained earnings at the end	48,846

Table (10)

Balance sheet

B Company
Balance Sheet
December 31,2017
Assets	Amount($)	Amount($)
Current Assets:
Cash	15,750
Accounts Receivable	3,193
Inventory	11,700
Deposit in transit	2,450
Omitted checks	637
Total Current Assets		43,730
Property, plant and equipment
Equipment:	45,000
Less: Accumulated depreciation	18,300	26,700
Truck	32,000
Less: Accumulated depreciation	6,000	26,000
Total Assets		86,430
Liabilities and Owners' Equity
Current liabilities:
Warranty liability	2,844
Accounts payable	5,000
Outstanding checks	1,800
Unearned service revenue	2,240
Allowance for doubtful debts	700
Total current liabilities		12,584
Long-term liabilities:
Long term notes	15,000
Total Liabilities		27,584
Owners' equity:
Common stock		10,000
Retained earnings		48,846
Total Liabilities and Owners' Equity		86,430

Table (11)