Assignment 1 Blue Spruce Consulting Ltd. has been in business for several years, providing software consulting to its customers on an annual contract or special assignment basis. All work is done online, although some travel is occasionally required for meetings with customers to negotiate contracts and renewals of contracts, as well as resolving possible disputes in invoicing their services. Blue Spruce operates out of rented premises and has a modest investment in equipment that is used by the consulting team. Blue Spruce is a private company that follows ASPE and has a calendar year- end. At the end of each year, Blue Spruce obtains the services of an accountant to complete the annual accounting cycle of business and prepare any year-end adjusting journal entries, financial statements, and corporate tax returns. On arrival in early 2023, the accountant was given an unadjusted trial balance (Appendix A), and obtained the following additional information to complete their work. Additional information 1. Management has been going over the list of accounts receivable for possible accounts that are not collectible. One account for $826 must be written off. In the past, 5% of the balance of all accounts receivable has been the basis of the estimate for the required balance of the allowance for doubtful accounts. Management feels that this estimate should be followed for 2023. 2. After doing a count of supplies on hand, management determined that $472 of supplies remained unused at December 31, 2023. 3. The account balance in Prepaid Insurance of $4,720 represents the annual cost of the renewal of all of Blue Spruce's insurance policies that expire in one year. The policies' coverage started April 1, 2023. 4. FV-NI Investments are long-term investments. The fair value of the portfolio of investments was $26,550 at December 31, 2023, based on quoted market values on the TSX. 5. In January 2023, some old equipment was sold for proceeds of $354 cash. The entry made when depositing the cash was debit Cash, credit Gain on Disposal of Equipment. The original cost of the equipment was $5,074 and the accumulated depreciation was $4,956. 6. The depreciation expense for the remaining equipment was calculated to be $8,496 for the 2023 fiscal year. 2 7. The notes receivable from customers are due October 31, 2026, and bear interest at 5%, with interest paid semi-annually. The last interest collected related to the notes was for the six months ended October 31, 2023. 8. Bank loans are demand bank loans for working capital needs and vary in amount as the needs arise. The bank advised that the interest charge for December 2023 that will go through on the January 2024 bank statement is in the amount of $236. 9. Unpaid salaries and wages at December 31, 2023, totalled $932. These will be paid as part of the first payroll of 2024. 10. After some analysis, management informs the accountant that the Unearned Revenue account should have a balance of $1,180. 11. Blue Spruce was sued by one of its former clients for $59,000 for giving bad advice and instructions. After discussion with legal counsel, it has been agreed that it will likely take $5,900 to settle this dispute out of court, in the next fiscal year. No entry has yet been recorded. 12. The accountant is told that a sublet lease arrangement for some excess office space has been negotiated and signed. It will provide Erskine with rent revenue starting on February 1, 2024, at a rate of $472 per month. 13. Blue Spruce has been making income tax instalments as required by the Canada Revenue Agency. All instalment payments have been debited to the Income Taxes Payable account. 14. After recording all of the necessary adjustments and posting to the general ledger, management drafted a new trial balance to arrive at the income before income taxes. Using this result, the accountant prepared the tax returns, and determined that a tax rate of 29% needed to be applied to the income before income tax amount. The necessary adjusting entry for taxes has not yet been recorded. Instructions a) Prepare all necessary adjusting and correcting entries required based on the information given, up to item 13. Note: some items may not require any adjusting entries! b) Create a new adjusted trial balance and determine the amount of income before taxes. Calculate the amount of income tax expense that needs to be recorded for 2023. Appendix A: Unadjusted Trial Balance for Blue Spruce, December 31, 2023 Account Debit Credit Petty cash $ 600 Cash 18,500 Accounts receivable 44,700 Allowance for doubtful accounts $ 1,800 Interest receivable Prepaid insurance 4,000 Supplies 2,000 FV-NI investments 20,000 Notes receivable 25,000 Equipment 94,000 Accumulated depreciation - equipment 36,000 Goodwill 22,000 Bank loans 18,000 Accounts payable 7,950 Salaries and wages payable Interest payable Unearned revenue Litigation liability Income taxes payable Common shares Retained earnings 4,200 30,000 36,000 59,800 Dividends Service revenue 26,000 242,768 Interest income 1,042 Unrealized gain or loss Gain on disposal of equipment 300 Depreciation expense Office expense 4,100 Travel expense 6,700 Insurance expense 900 Interest expense 1,300 Utilities expense 750 Rent expense 54,000 Salaries and wages expense 49,510 Supplies expense Bad debt expense Telephone and internet expense 3,200 Repairs and maintenance expense 600 Litigation expense Income tax expense $407.860 $407.860