Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Cumulative Coverage and Task-Based Simulation: Chapters 3 to 5 and Appendix C Templates to complete this task-based simulation are available in WileyPLUS and on the

Cumulative Coverage and Task-Based Simulation: Chapters 3 to 5 and Appendix C

Templates to complete this task-based simulation are available inWileyPLUSand on the instructor website.

Erskine 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 over the Internet, although some travel is occasionally required for meeting with customers to negotiate contracts and renewals of contracts, as well as resolving possible disputes in invoicing for their services. Erskine operates out of rented premises and has a modest investment in equipment that is used by the consulting team. Erskine is a private company that follows ASPE and that has a calendar year end.

At the end of each year, Erskine obtains the services of an accountant to complete the annual accounting cycle of the business and prepare any year-end adjusting of journal entries, financial statements, and corporate tax returns.

Upon arrival in early 2020, the accountant was given an unadjusted trial balance and obtained the following additional information to complete his work.

Erskine Consulting Ltd.

Unadjusted Trial Balance

December 31, 2020

AccountDebit

Credit

Petty cash$ 600Cash18,500

Accounts receivable44,700

Allowance for doubtful accounts$ 1,800

Interest receivable-0-

Prepaid insurance4,000

Supplies2,000

FV-NI investments20,000

Notes receivable25,000

Equipment94,000

Accumulated depreciationequipment36,000

Goodwill22,000

Bank loans18,000

Accounts payable7,950

Salaries and wages payable-0-

Interest payable-0-

Unearned revenue4,200

Litigation liability-0-

Income tax payable30,000

Common shares36,000

Retained earnings59,800

Dividends26,000

Service revenue242,768

Interest income1,042

Unrealized gain or loss-0-

Gain on disposal of equipment300

Depreciation expense-0-

Office expense4,100

Travel expense6,700

Insurance expense900

Interest expense1,300

Utilities expense750

Rent expense54,000

Salaries and wages expense49,510

Supplies expense-0-

Bad debt expense-0-

Telephone and Internet expense3,200

Repairs and maintenance expense600

Litigation expense-0-

Income tax expense -0-$407,860

$407,860

Additional information:

  1. 1.Management has been going over the list of accounts receivable for possible accounts that are not collectible. One account for $700 must be written off. In the past, 5% of the balance of all accounts receivable has been the basis of an estimate for the required balance in the allowance for doubtful accounts. Management feels that this estimate should be followed for 2020.
  2. 2.After doing a count of supplies on hand, management determined that $400 of supplies remained unused at December 31, 2020.
  3. 3.The account balance in Prepaid Insurance of $4,000 represents the annual cost of the renewal of all of Erskine's insurance policies that expire in one year. The policies' coverage started April 1, 2020.
  4. 4.FV-NI Investments are long-term investments. The fair value of the portfolio of investments was $22,500 at December 31, 2020, based on quoted market values on the TSX.
  5. 5.In January 2020, some old equipment was sold for proceeds of $300 cash. The entry made when depositing the cash was debit Cash, credit Gain on Disposal of Equipment. The original cost of the equipment was $4,300 and the accumulated depreciation was $4,200.
  6. 6.The depreciation expense for the remaining equipment was calculated to be $7,200 for the 2020 fiscal year.
  7. 7.The notes receivable from customers are due October 31, 2023, 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, 2020.
  8. 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 2020 that will go through on the January 2021 bank statement is in the amount of $200.
  9. 9.Unpaid salaries and wages at December 31, 2020, totalled $790. These will be paid as part of the first payroll of 2021.
  10. 10.After some analysis, management informs the accountant that the Unearned Revenue account should have a balance of $1,000.
  11. 11.Erskine was sued by one of its former clients for $50,000 for giving bad advice and instructions. Upon discussion with legal counsel, it has been agreed that it will likely take $5,000 to settle this dispute out of court, in the next fiscal year. No entry has yet been recorded.
  12. 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, 2021, at a rate of $400 per month.
  13. 13.Erskine 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. 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 28% 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.
b.Post the journal entries in adjustment columns and arrive at an adjusted trial balance. Enter the journal entries in the following worksheet format:
Unadjusted Trial Balance
Adjustments
Adjusted Trial Balance
Account
Debit
Credit
Debit
Credit
Debit
Credit
c.Using the adjusted trial balance columns of your worksheet, calculate the amount of income before income taxes. Use the information provided in item 14 to record income tax expense for the year.
d.Prepare a single-step statement of income, a statement of retained earnings, and a statement of financial position for 2020.
e.Explain the various levels of input in the fair value hierarchy. Based on

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Managerial Accounting

Authors: Karen Braun, Linda S Bamber

2nd Edition

136091164, 978-0136091165

More Books

Students also viewed these Accounting questions

Question

find all matrices A (a) A = 13 (b) A + A = 213

Answered: 1 week ago

Question

Do not get married, wait until I come, etc.

Answered: 1 week ago

Question

Do not come to the conclusion too quickly

Answered: 1 week ago

Question

Engage everyone in the dialogue

Answered: 1 week ago