CM Corporation (CMC) was founded in 2011 by Eric Conner and Phil Martin. The company designs install, 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 2017, 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 inventory applications in multiple industries. One of the most basic applications is tracking manufacturing components; if tagged components "go walking" (if employees attempt to take them), companies can easily track and find them. 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, CMC’s 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 2017. The accounting department is currently quite small and the CFO has requested additional staff to help keep pace with the company’s 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 (2016) 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 to spreadsheets to update the income statement, balance sheet, and retained earnings. You notice that for the fiscal year ended December 31, 2016, 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. Connor and Martin ask you to enter the adjustments into the spreadsheet using the tab labeled “AJE’s & 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.)

Adjusting Journal Entries (AJEs):

1. Wages earned by employees during December (’16) and to be paid in January (’17) 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, 2016. Earlier in the year, on May 1, 2016, 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 2016 fiscal year and recorded with a credit to Unearned Revenue. Of the beginning balance in Unearned Revenue (i.e. at Jan 1, 2016), 65% of the work has now been completed by year-end.

3. You discover that a sale of a product was made on the 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, 2016. 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 expenses 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 the original cost, straight-line method, no salvage. The patent was acquired on October 1, 2013. The last time depreciation & amortization were recorded was December 31, 2015.

7. The long-term liabilities were outstanding for all of 2016 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, 2016, was $3,500. During 2016, 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, 2016, should show Interest Revenue in the amount of $18,700. The adjusting entry to accrue interest revenue at year-end has not yet been recorded.

9. On December 15, CMC declared a dividend of $150,000, to be paid on January 20, 2017. It had not yet been recorded.

10. On December 31, the Long-Term Investments are classified as available-for-sale debt securities (or “AFS”). To comply with GAAP, CMC must report long-term investments in financial instruments at fair value as of the balance sheet date. These debt securities have a current fair value of $162,600. The Investment is in a corporate bond that was issued at par for $180,000, earns 8% APR, and pays interest semi-annually each Jun 30 and Dec 31. The investment was purchased on July 1, 2016. You discover that the semi-annual interest revenue on this bond has not yet been received and therefore not recorded, and the company has yet to mark-to-market the investment portfolio at year-end. CMC uses a “Fair Value Adjustment” account (an adjunct/contra account) to report any increase/decrease in the asset’s value. (Ignore income taxes as this is an unrealized gain/loss)

11. CMC has a 35% tax rate on their taxable income.

(b) After making the 11 adjusting entries in Part (a), record the appropriate closing entries on the spreadsheet provided using the tab labeled “AJEs and Closing Entries”. Post all closing entries to the Trial Balance in the columns labeled 12/31/16 Closing Entries. *Remember, after closing, all temporary accounts should show a zero balance.

(c) Complete the required financial statements (Statement of Comprehensive Income, and Statement of Stockholder’s Equity) in good form. The Statement of Stockholder’s Equity should reconcile with your balance sheet (which is automatically updated for you…so check to make sure the ending balances are the same), 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 Stockholder’s Equity will require any updates. For example, no new stock was issued during 2016; the balance in the contributed capital accounts will therefore not change.)