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INTERMEDIATE ACCOUNTING II ACCT 3021

PRACTICE PROBLEM

**Due at the beginning of class on Thursday, January 19th

PURPOSE:

The purpose of the practice problem is to review what you should recall from Intermediate Accounting I that relates, in general, to the accounting cycle and Intermediate II the procedures that businesses normally use to record transactions and prepare financial statements. The accounting cycle is discussed in detail in Chapter 3 of your textbook. Having successfully completed Intermediate Accounting I will help you understand and complete the practice problem.

To review the accounting cycle, you will act as the bookkeeper for Travis Auto Parts, a sole proprietorship owned by Michael Travis. The post-closing trial balance for Travis Auto Parts for December 31, 2014 is given below:

Travis Auto Parts

Post-Closing Trial Balance

December 31, 2014

Debit Credit

Cash $11,520

Accounts Receivable 3,820

Allowance for Bad Debts - 0 -

Inventory 9,500

Supplies 250

Prepaid Rent - 0 -

Prepaid Insurance 640

Store Equipment 23,600

Accumulated Depreciation $14,160

Accounts Payable 4,660

Short-term Notes Payable 16,000

Interest Payable (on the $16,000 note) 400

Salaries Payable 580

Unearned Revenue - 0 -

Michael Travis, Capital 13,530

$49,330 $49,330

REQUIRED:

1. During 2015, the following transactions occurred. Prepare any necessary journal entries. For your own purposes, you should set up T-accounts for the temporary accounts (revenues, expenses, and owner withdrawals) as needed. I also suggest keeping track of entries you think will require an adjusting entry at the end of the year.

DO NOT PREPARE MONTHLY ADJUSTING AND CLOSING ENTRIES; wait until year-end to prepare these entries. Travis Auto Parts does not use reversing entries.

January 3 Sold store equipment for $7,200. The equipment originally cost $8,000 and had a book value of $4,800. (Given this information, you should be able to derive the accumulated depreciation on the equipment, and determine the gain or loss on the sale.)

January 7 Purchased inventory on account for $18,500. Travis Auto Parts uses a periodic system of inventory control.

January 10 Sold goods on account for $12,000. Made cash sales of $8,300.

January 15 Paid salaries owed to employees at the end of 2014.

February 1 Travis personally invested $6,000 into the business.

February 12 Received $9,800 from customers for previous sales made on

account.

February 21 Paid $10,000 to vendors for previous purchases of inventory made on account.

March 6 Purchased $15,000 of inventory on account.

March 10 Sold goods for $16,800 on account. Made cash sales of $12,600.

March 15 Credited customer accounts for $1,420 of merchandise returned.

March 25 Received $21,400 from customers for sales made previously on account.

April 1 Paid the $16,000 note and all interest accrued to date. Travis had borrowed the $16,000 on October 1, 2014. Interest accrued on the note at a rate of 10% annually.

April 10 Paid the remaining amounts owed to vendors for all goods and services purchased on account.

May 1 Borrowed $20,000 from the bank by issuing a 12-month note. Interest accrues on the note at a rate of 12% annually. Interest is to be paid when the note is due next year.

May 15 Purchased $4,000 worth of store equipment for cash. Travis Auto Parts has a policy of taking a full year's depreciation on its equipment in the year of purchase. (Record the purchase of the equipment on May 15th, but wait until the end of the year to record the depreciation.)

May 22 Purchased $20,000 of inventory from suppliers on account.

June 1 Entered into a rental agreement with Pecos Rentals, Inc. Travis paid $1,800 for a 12-month lease of storage space. Travis debited a permanent (real) account at the time of the transaction.

June 12 Sold $19,600 worth of goods on account. Made cash sales of $11,200.

June 30 Incurred and paid salaries and utilities expenses of $8,000 and $1,500, respectively.

July 8 Received payment of $18,400 from customers for sales on account.

July 20 Purchased $12,000 worth of inventory on account.

August 31 The prior insurance policy on Travis's operating assets expired on this date; prepare a journal entry to record this event. Travis replaced this policy with a 12-month policy by paying $9,600. Travis debited a nominal (temporary) account to record the purchase of the new policy.

September 18 Purchased supplies from vendors for $5,000 on account. A permanent account was debited to record the transaction

September 30 Received $7,500 advance payment for products to be shipped to customers by year-end. Travis recognized this cash receipt by crediting a temporary account.

October 8 Paid all amounts owed to vendors for inventory and supplies purchased on account.

November 15 Sold goods for $22,000 to customers on account.

December 9 Received payment of $17,500 for sales made on account.

December 21 Travis withdrew $2,000 for personal use. To record this transaction, debit a Drawing account and credit Cash. The Drawing account is a temporary account which will be closed out at the end of the year to the Capital account.

December 31 Incurred and paid salaries and utilities expenses of $10,000 and $1,800, respectively. 4

For Requirements 2 through 3 on the Practice Problem, please see the next page.

2. Based on (1) the previous transactions and (2) the following information, prepare and post any necessary adjusting entries at year-end.

*A physical count revealed supplies on hand of $3,750.

*Depreciation on the store equipment is 10% per year. Salvage value on the equipment is zero. Record depreciation for all of the store equipment which Travis Auto Parts has on December 31, 2015--not just the equipment which was purchased during the year.

*Of the $7,500 worth of goods paid for in advance on September 30, only $6,200 worth of goods had been shipped to customers by year-end.

*Based on previous experience, Travis felt that 5% of ending accounts receivable would ultimately be uncollectible.

(Please note: More than four adjusting entries need to be prepared.)

RECORD THE ADJUSTING ENTRIES ON A SEPARATE, APPROPRIATELY LABELED PAGE.

3. Prepare and post the closing entries as of December 31, 2015. A physical count revealed an ending inventory of $8,000.

ALSO RECORD THE CLOSING ENTRIES ON A SEPARATE, APPROPRIATELY LABELED PAGE.