Case 1 - Accounting Cycle: CM Corporation (25 points)

CAN YOU PLEASE EXPLAIN HOW YOU GOT THE ADJUSTED ENTRY VALUES PLEASE! THANK YOU!

CM Corporation (CMC) was founded in 2010 by Eric Conner and Phil Martin. The company designs, installs, and services security systems for high-tech companies. The founders, who describe themselves as "entrepreneurial geeks," met in a computer lab when they were teenagers and found they had common interests in working on security systems for critical industries. In early January 2018, CMC hired you as an accounting intern to assist the CFO and the entire corporate accounting team.

Lately, Conner and Martin have been working with radio frequency identification (RFID) technology. They have developed a detailed system designed to track inventory items using RFID tags embedded invisibly in products. This technology has numerous applications in multiple industries. Conner and Martin have sold their system to several high-tech companies in the area. These companies have a number of government contracts that require extensive security systems to protect sensitive data from infiltration by terrorists and competitors. To date, CMCs cash flow from sales and services has adequately funded its operations.

CMC anticipates growth potential for its products. As a result, it is planning a new public offering of their common stock at the end of 2018. The accounting department is currently quite small and the CFO has requested additional staff to help keep pace with the companys fast-paced growth. Therefore, as an accounting intern you can immediately become a valuable member to their corporate accounting team. To familiarize you with the company's operations, the CFO has provided an unadjusted trial balance from the end of their last fiscal year (2017) on an Excel spreadsheet.

Instructions

(a) Download the excel file CASE 1 CMC which has the unadjusted trial balance with the existing accounts. This file also contains an accounting system comprised of a series of linked spreadsheets. The linkages enable the effects of all accounting entries (journal, adjusting, and closing) to flow through the spreadsheets to update the income statement, balance sheet, and retained earnings. You notice that for the fiscal year ended December 31, 2017, the bookkeeper has made all the routine general journal entries throughout the year, but none of the adjusting or closing entries have been recorded.

The following information is provided for adjustments prior to closing the books. The CFO asks you to enter the adjustments into the spreadsheet using the tab labeled AJEs & Closing Entries. Also, post these adjustments to the Trial Balance in the two columns to the right of the unadjusted trial balance. (CMC uses a perpetual inventory system.) You MUST use cell referencing when posting to the Trial Balance or your grade will be assessed an 8 point penalty.

Adjusting Journal Entries (AJEs):

1. Wages earned by employees during December (17) and to be paid in January (18) are $35,875; associated payroll taxes on these wages are $2,910. (Record in two separate adjusting entries. The payroll taxes are an expense to the company for unemployment benefits and recorded as a payable to the state & federal taxing authority.)

2. The Unearned Consulting Revenue account has a balance of $261,220 as of December 31, 2017. On May 1, 2017 a client paid CMC $153,000 cash in advance for a 12-month consulting services contract. CMC will earn revenue evenly over this 12-month period. This was the only prepayment received from clients during the entire 2017 fiscal year and recorded with a credit to Unearned Revenue. Of the remaining balance in Unearned Revenue (i.e. at Jan 1 2017), 65% of the work has now been completed by year end.

3. You discover that a sale of a product was made on account and recorded in December for $148,500; the product has not yet been shipped (i.e. delivered to the customer). The cost of the product was 55% of its selling price. CMC uses the perpetual inventory method.

4. Bad debt expense is estimated to be 6% of ending Accounts Receivable. (Round to the nearest whole dollar.)

5. CMC prepays for some insurance and advertising. The Prepaid Expense account has a balance of $26,774 at year end but before adjustment. This balance includes $12,200 for a two-year casualty insurance policy purchased on March 1, 2017. Of the remaining prepaid balance, 60% of the advertising has now been used. (Round to the nearest whole dollar.)

6. CMC records depreciation and amortization expense annually as one compound adjusting journal entry. They do not use an accumulated amortization account. Annual depreciation rates are 7% for Buildings/Equipment/Furniture, no salvage. (Round to the nearest whole dollar.) Annual Amortization rates are 10% of original cost, straight-line method, no salvage. The patent was acquired on October 1, 2015. The last time depreciation & amortization were recorded was December 31, 2016.

7. The long-term liabilities were outstanding for all of 2017 and accrue interest at 8% APR. CMC records accrued interest quarterly (interest was last updated on Sept. 30.) The company is required to pay the interest annually each January 1^st.

8. CMC often allows customers to finance the purchase of their products through long-term lending agreements and therefore reports Long-term Notes Receivable on their Balance Sheet. These notes are interest bearing and earn CMC interest revenue. The beginning balance of Interest Receivable at January 1, 2017 was $3,500. During 2017, cash received from customers for interest on these notes amounted to $17,600. You determine that the income statement for the year-ended December 31, 2017 should show Interest Revenue in the amount of $21,800. The adjusting entry to accrue interest revenue has not yet been recorded.

9. On December 15, CMC declared a dividend of $150,000, to be paid on January 20, 2018. It had not yet been recorded.

10. At December 31, the Long-Term Investments (Available-for-sale securities or AFS) had a fair value of $180,190. The AFS Investment was originally purchased on May 1, 2017 for $160,500. CMC uses a Fair Value Adjustment account (an adjunct/contra account to the Investments) to mark-to-market the investment portfolio at year end. CMCs tax rate is 21%.

11. Income tax is based on a 21% tax rate.

(b) After making the 11 adjusting entries in (a), record the appropriate closing entries on the spreadsheet provided using the tab labeled AJEs and Closing Entries. Post to the Trial Balance.

(c) Complete the each of the required financial statements (Statement of Comprehensive Income, and Statement of Stockholders Equity) in good form. The Statement of Stockholders Equity should reconcile with your balance sheet, income statement, & Statement of Comprehensive Income. (Use cell referencing to link the appropriate cells from the other financial statements. Keep in mind that not all cells on the Statement of Stockholders Equity will require any updates. For example, no new stock was issued during 2018; the balance in the contributed capital accounts will therefore not change.)

General Ledger Account Name		Unadj. Balance 12/31/17
	Debit		Credit
Cash and cash equivalents	92,063
Accounts Receivable	913,780
Allowance for doubtful accounts			29,462
Interest Receivable	0
Inventory	1,270,160
Prepaid expenses	26,774
Other Current Assets	16,063
Investments	160,500
Fair Value Adjustment	0		0
Notes Receivable	220,000
Building	876,418
Equipment and furniture	332,983
Land	348,791
Accum Depr			656,465
Goodwill	493,951
Patents	217,000
Accounts Payable			1,169,343
Dividends payable
Interest payable			41,310
Unearned Consulting Revenue			261,220
Wages payable			81,350
Payroll taxes payable			8,850
Income tax payable
Long term liabilities			694,700
Common Stock			920,000
Paid-in capital common stock			105,000
Treasury Stock	400,000
Retained Earnings			539,069
Dividends
Accum Other Comprehensive Income	0		0
Sales revenue			9,253,346
Service revenue			1,158,785
Interest Revenue			14,100
Sales returns	162,400
Sales discounts	269,662
Product cost of goods sold	5,384,590
Service cost of goods sold	570,811
Advertising	159,080
Bad debt expense	0
Depreciation and amortization	0
Professional Dues & subscriptions	21,470
Gain/loss on disposal	4,790
Income tax expense	0
Insurance	80,144
Interest expense	41,310
Legal and accounting fees	106,650
Miscellaneous	9,048
Office expense	220,114
Payroll taxes	136,975
Property taxes	104,570
Repair and maintenance	42,028
Research and development	470,680
Telephone	20,085
Travel and entertainment	38,391
Utilities	47,049
Wages	964,670
Salaries - Officers	710,000
Income Summary	0		0
Unrealized Gain/Loss-AFS	0		0
	14,933,000		14,933,000