Given on the first two tabs are ABC's 12/31/16 Unadjusted Trial Balance and a list of needed adjustments. 1. Make all 12 adjustments on the "Adjusting Joumal Entries" tab. Remember to include a description under each journal entry. 2. Post the adjustments to the general ledger on the "12-31-16 T-Accounts" tal. You may have to add T-Accounts for new accounts. Link your T-Account entries to your Journal Entries. PLEASE NOTE THAT THE "BB" BEGINNING BALANCES) FOR THE T-ACCOUNTS REPRESENT THE BALANCES AS OF 12/31/16. 3. Once the 12/31/16 T-Accounts are complete, prepare the Adjusted Trial Balance. There may be some accounts with zero dollars, and you may have to insert lines for new accounts. Link the Adjusted Trial Balance to your T-Accounts. 4. Use the Adjusted Trial Balance numbers to complete the Income Statement, Statement of Retained Earnings, and Balance Sheet. For purposes of the Income Statement, prepare using the multiple step format and assume that Rent Revenue, any Unrealized Holding Gains/Losses, Interest Expense. Interest Revenue, and any other Gains/Losses are NOT part of the major central ongoing operations of the company. For purposes of the Balance Sheet, be sure to prepare a classifed Balance Sheet. Link your financial statements to your Adjusted Trial Balance. If necessary, review financial statement preparation in Chapters 3 and 4 of your Intermediate Accounting textbook for a quick refresher. 5. When the Financial Statements are complete, make the closing entries on the "Closing Entries" tab 6. When closing entries have been made, post the entries to the general ledger on the "Post-Close T-Accounts" tab. Make sure your adjusting journal entries are also on your Post-Close T-Accounts. They will not automatically flow from talb-to-tab. (Helpful hint: After you have completed and posted all of your adjusting entries, make a duplicate copy of your "12-31-16 T-Accounts" tab to replace the existing blank "Post-Close T Accounts" tal by sight clicking on the completed "12-31-16 T-Accounts" tab, select Move or Copy, then click on "Create a Copy" and then place at the desired location. You can then delete the original "Post-Close T-Accounts" tab and rename the newly duplicated tab as your "Post-Close T-Accounts" tab). 7. The final step is the Post-Closing Trial Balance, which will use the ending balances from the Post-Close T-Accounts. 8. Double-check your work. Here are a few things to check for: -Adjusted Trial Balance: Make sure debit column and credit column total to the same figure at the bottom. -Net income from the income statement will flow through to the Statement of Retained Earnings. -Ending Retained Earnings from the Statement of Retained Earnings will flow through to the Balance Sheet. -The Post-Closing Trial Balance should not have any revenue, expense, gain, or loss temporacy) accounts. -Check figure 1: Income from operations = $395,874. -Check figure 2: Income before income taxes = $347,603. -Check figure 3: Total Current Assets at 12/31/16 = $1,329,864. -Check figure 4: Retained Earnings at 12/31/16 = $197,942. -Check figure 5: Total Stockholders' Equity at 12/31/16 = $458,942. -Check figure 6: Total Liabilities at 12/31/16 = $1,051,857. ABC Corporation Unadjusted Trial Balance December 31, 2016 Credit Debit 759,444 442,120 247,000 6,750 88,000 37,500 1,150 21,600 9,000 50,000 Cash Accounts receivable Allowance for doubtful accounts Inventory Allowance to Reduce Inventory to NRV Purchases Prepaid insurance Land Building Acumulated depreciation building Equipment Acumulated depreciation equipment Patent Accounts payable Notes payable Income taxes payable Unearned cent devenue Bonds Payable Premium on Bonds Payable Common stock PIC In Excess of Par-Common Stock Retained earnings Treasury stock Dividends Sales Revenue Advertising expense Wages expense Office expense Depreciation expense Utilities expense Insurance expense Income taxes expense 88,851 40,000 99,000 13,500 700,000 56,774 125,000 40,000 20,000 28,000 790,000 9,240 62,150 28,500 10,150 33,571 20,250 99,000 $ 1,963,275 $ 1,963,275 1 On March 1, 2016, ABC purchased a one-year liability insurance policy for $27,000. Upon purchase, the following journal entry was made: Dr Prepaid insurance 27,000 Cr Cash 27,000 The expired portion of insurance must be recorded as of 12/31/16. Notice that the expired portion from March through November has been recorded already Make sure that the Prepaid Insurance balance after the adjusting entry is correct. 2 Depreciation expense must be recorded for the month of December. The building was purchased on February 1, 2016 for $37,500 with a remaining useful life of 25 years and a salvage value of $3,000. The method of depreciation for the building is straight-line. The equipment was purchased on February 1, 2016 for $21,600 with a remaining useful life of 4 years and a salvage value of $1,800. The method of depreciation for the equipment is double-declining balance. Depreciation has been recorded for the building and equipment for months February through November. 3 On December 1, 2016, XYZ Co. agreed to rent space in ABC's building for $4,500 per month, and XYZ pad ABC on December 1 in advance for the first three months' rent. The entry made on December 1 was as follows: Dr Cash 13,500 Cr Unearned rent revenue 13,500 The unearned revenue account must be adjusted to reflect the amount earned as of 12/31/16. 4 Per timecards, from the last payroll date through December 31, 2016, ABC's employees have worked a total of 200 hours. Including payroll taxes, ABC's wage expense averages about $25 per hour. The next payroll date is January 5, 2017. The liability for wages payable must be recorded as of 12/31/16. 5 On November 30, 2016, ABC borrowed $40,000 from American National Bank by issuing an interest-bearing note payable. This loan is to be repaid in three months on February 28, 2017), along with interest computed at an annual rate of 9% The entry made on November 30 to record the borrowing was: Dr Cash 40,000 Cr Notes payable 40,000 On February 28, 2017 ABC must pay the bank the amount borrowed plus interest. Assume the beginning balance for Notes Payable is correct. Interest through 12/31/16 must be accrued on the $40,000 note. 6 ABC uses a periodic inventory system, and the ending inventory for each year is determined by taking a complete physical inventory at year-end. A physical count was taken on December 31, 2016, and the inventory on-hand at that time totaled $100,000, which reflects historical cost. Record the adjusting entry for properly recognizing 2016 Cost of Goods Sold. Hint: This was the first year of operations, so beginning inventory balance is zero. Additionally, ABC adheres to GAAP by recording ending inventory at the lower of cost and net realizable value at a total inventory level. A review of inventory data further indicated that the current retail sales value of the ending inventory is $90,000 and estimated costs of completion and shipping is 8% of retail. Be sure to make an additional adjustment, if necessary, to properly value ending inventory using the Loss and Allowance methodology. For Income Statement presentation purposes, be sure to use the Loss Method for accounting for adjustments of inventory to market value. 7 It would be unusual for a company to have an asset impairment in Year 1, but for the sake of this example, ABC determined that their intangible asset might be impaired on December 31, 2016. Record the impairment adjustment, if any. The expected future undiscounted net cash flows for this intangible asset totals $48,000, and the fair value of the asset is $45,000. 8 On 7/1/16, ABC purchased 4,000 shares of its own stock from existing stockholders as treasury stock. The cost of the treasury stock was $5 per share, or $20,000 in total. The effects of this transaction are already shown in the unadjusted trial balance. On 12/31/16, ABC reissued 2,000 shares of the treasury stock at $8 per share. Record the journal entry required for the reissuance of the treasury stock. To refresh your memory, treasury stock is usually accounted for at cost. When treasury stock is reissued for more than its cost, a separate Paid-in Capital-Treasury Stock account should be used to account for the excess proceeds over cost. (See your Principles of Accounting textbook or Chapter 18 of your Intermediate Accounting textbook for a review.) 9 On 12/31/16, ABC issued 10,000 shares of $1 par value common stock at the closing market price of $10 per share. Prepare ABC's journal entry to reflect the issuance of the stock on 12/31/16. To refresh your memory, a Paid-in Capital in Excess of Par account should be used to account for excess proceeds over par value in a stock issuance transaction. See your Principles of Accounting textbook or Chapter 18 of your Intermediate Accounting textbook for a review.) 10 On 7/1/16, ABC sold 10% bonds having a maturity value of $700,000 for $756,773.50, resulting in an effective yield of 8%. The bonds are dated 7/1/16, and mature 7/1/21. Interest is payable semiannually on July 1 and January 1. ABC uses the effective interest method of amortization for bond premium or discount. Record the adjusting entry for the accrual of interest and the related amortization on 12/31/16. Hint: Develop an abbreviated amortization schedule to accurately determine the interest expense. 11 ABC Corporation prepares an aging schedule on 12/31/16 that estimates total uncollectible accounts at $75,000. Assuming that the allowance method is used, prepare the entry to record bad debt expense for the calendar year. Do this final adjusting entry after preparing the Income Statement through the line "Income Before Income Taxes": 12 Corporate taxes are due in four estimated quarterly payments on April 15, June 15, September 15, and December 15. However, for the purposes of this ABC illustration, we will assume that estimates are not paid, and that the tax is paid in full on the return's March 15, 2017 due date. ABC's income tax rate is 35%. The entire year's income tax expense was estimated at the beginning of 2016 to be $108,000, so January through November income tax expense recognized amounts to $99,000 (11/12 months). Since we are assuming estimates are not made during the year, the balance in Income taxes payable represents income tax accrued for January through November. Assume no deferred tax assets or deferred tax liabilities. Based on the income before income taxes figure from the income statement, calculate and record December's income tax expense adjustment so that the entire year's tax expense is correct (1.e. the difference between total income tax expense and the amount already accrued through November). Given on the first two tabs are ABC's 12/31/16 Unadjusted Trial Balance and a list of needed adjustments. 1. Make all 12 adjustments on the "Adjusting Joumal Entries" tab. Remember to include a description under each journal entry. 2. Post the adjustments to the general ledger on the "12-31-16 T-Accounts" tal. You may have to add T-Accounts for new accounts. Link your T-Account entries to your Journal Entries. PLEASE NOTE THAT THE "BB" BEGINNING BALANCES) FOR THE T-ACCOUNTS REPRESENT THE BALANCES AS OF 12/31/16. 3. Once the 12/31/16 T-Accounts are complete, prepare the Adjusted Trial Balance. There may be some accounts with zero dollars, and you may have to insert lines for new accounts. Link the Adjusted Trial Balance to your T-Accounts. 4. Use the Adjusted Trial Balance numbers to complete the Income Statement, Statement of Retained Earnings, and Balance Sheet. For purposes of the Income Statement, prepare using the multiple step format and assume that Rent Revenue, any Unrealized Holding Gains/Losses, Interest Expense. Interest Revenue, and any other Gains/Losses are NOT part of the major central ongoing operations of the company. For purposes of the Balance Sheet, be sure to prepare a classifed Balance Sheet. Link your financial statements to your Adjusted Trial Balance. If necessary, review financial statement preparation in Chapters 3 and 4 of your Intermediate Accounting textbook for a quick refresher. 5. When the Financial Statements are complete, make the closing entries on the "Closing Entries" tab 6. When closing entries have been made, post the entries to the general ledger on the "Post-Close T-Accounts" tab. Make sure your adjusting journal entries are also on your Post-Close T-Accounts. They will not automatically flow from talb-to-tab. (Helpful hint: After you have completed and posted all of your adjusting entries, make a duplicate copy of your "12-31-16 T-Accounts" tab to replace the existing blank "Post-Close T Accounts" tal by sight clicking on the completed "12-31-16 T-Accounts" tab, select Move or Copy, then click on "Create a Copy" and then place at the desired location. You can then delete the original "Post-Close T-Accounts" tab and rename the newly duplicated tab as your "Post-Close T-Accounts" tab). 7. The final step is the Post-Closing Trial Balance, which will use the ending balances from the Post-Close T-Accounts. 8. Double-check your work. Here are a few things to check for: -Adjusted Trial Balance: Make sure debit column and credit column total to the same figure at the bottom. -Net income from the income statement will flow through to the Statement of Retained Earnings. -Ending Retained Earnings from the Statement of Retained Earnings will flow through to the Balance Sheet. -The Post-Closing Trial Balance should not have any revenue, expense, gain, or loss temporacy) accounts. -Check figure 1: Income from operations = $395,874. -Check figure 2: Income before income taxes = $347,603. -Check figure 3: Total Current Assets at 12/31/16 = $1,329,864. -Check figure 4: Retained Earnings at 12/31/16 = $197,942. -Check figure 5: Total Stockholders' Equity at 12/31/16 = $458,942. -Check figure 6: Total Liabilities at 12/31/16 = $1,051,857. ABC Corporation Unadjusted Trial Balance December 31, 2016 Credit Debit 759,444 442,120 247,000 6,750 88,000 37,500 1,150 21,600 9,000 50,000 Cash Accounts receivable Allowance for doubtful accounts Inventory Allowance to Reduce Inventory to NRV Purchases Prepaid insurance Land Building Acumulated depreciation building Equipment Acumulated depreciation equipment Patent Accounts payable Notes payable Income taxes payable Unearned cent devenue Bonds Payable Premium on Bonds Payable Common stock PIC In Excess of Par-Common Stock Retained earnings Treasury stock Dividends Sales Revenue Advertising expense Wages expense Office expense Depreciation expense Utilities expense Insurance expense Income taxes expense 88,851 40,000 99,000 13,500 700,000 56,774 125,000 40,000 20,000 28,000 790,000 9,240 62,150 28,500 10,150 33,571 20,250 99,000 $ 1,963,275 $ 1,963,275 1 On March 1, 2016, ABC purchased a one-year liability insurance policy for $27,000. Upon purchase, the following journal entry was made: Dr Prepaid insurance 27,000 Cr Cash 27,000 The expired portion of insurance must be recorded as of 12/31/16. Notice that the expired portion from March through November has been recorded already Make sure that the Prepaid Insurance balance after the adjusting entry is correct. 2 Depreciation expense must be recorded for the month of December. The building was purchased on February 1, 2016 for $37,500 with a remaining useful life of 25 years and a salvage value of $3,000. The method of depreciation for the building is straight-line. The equipment was purchased on February 1, 2016 for $21,600 with a remaining useful life of 4 years and a salvage value of $1,800. The method of depreciation for the equipment is double-declining balance. Depreciation has been recorded for the building and equipment for months February through November. 3 On December 1, 2016, XYZ Co. agreed to rent space in ABC's building for $4,500 per month, and XYZ pad ABC on December 1 in advance for the first three months' rent. The entry made on December 1 was as follows: Dr Cash 13,500 Cr Unearned rent revenue 13,500 The unearned revenue account must be adjusted to reflect the amount earned as of 12/31/16. 4 Per timecards, from the last payroll date through December 31, 2016, ABC's employees have worked a total of 200 hours. Including payroll taxes, ABC's wage expense averages about $25 per hour. The next payroll date is January 5, 2017. The liability for wages payable must be recorded as of 12/31/16. 5 On November 30, 2016, ABC borrowed $40,000 from American National Bank by issuing an interest-bearing note payable. This loan is to be repaid in three months on February 28, 2017), along with interest computed at an annual rate of 9% The entry made on November 30 to record the borrowing was: Dr Cash 40,000 Cr Notes payable 40,000 On February 28, 2017 ABC must pay the bank the amount borrowed plus interest. Assume the beginning balance for Notes Payable is correct. Interest through 12/31/16 must be accrued on the $40,000 note. 6 ABC uses a periodic inventory system, and the ending inventory for each year is determined by taking a complete physical inventory at year-end. A physical count was taken on December 31, 2016, and the inventory on-hand at that time totaled $100,000, which reflects historical cost. Record the adjusting entry for properly recognizing 2016 Cost of Goods Sold. Hint: This was the first year of operations, so beginning inventory balance is zero. Additionally, ABC adheres to GAAP by recording ending inventory at the lower of cost and net realizable value at a total inventory level. A review of inventory data further indicated that the current retail sales value of the ending inventory is $90,000 and estimated costs of completion and shipping is 8% of retail. Be sure to make an additional adjustment, if necessary, to properly value ending inventory using the Loss and Allowance methodology. For Income Statement presentation purposes, be sure to use the Loss Method for accounting for adjustments of inventory to market value. 7 It would be unusual for a company to have an asset impairment in Year 1, but for the sake of this example, ABC determined that their intangible asset might be impaired on December 31, 2016. Record the impairment adjustment, if any. The expected future undiscounted net cash flows for this intangible asset totals $48,000, and the fair value of the asset is $45,000. 8 On 7/1/16, ABC purchased 4,000 shares of its own stock from existing stockholders as treasury stock. The cost of the treasury stock was $5 per share, or $20,000 in total. The effects of this transaction are already shown in the unadjusted trial balance. On 12/31/16, ABC reissued 2,000 shares of the treasury stock at $8 per share. Record the journal entry required for the reissuance of the treasury stock. To refresh your memory, treasury stock is usually accounted for at cost. When treasury stock is reissued for more than its cost, a separate Paid-in Capital-Treasury Stock account should be used to account for the excess proceeds over cost. (See your Principles of Accounting textbook or Chapter 18 of your Intermediate Accounting textbook for a review.) 9 On 12/31/16, ABC issued 10,000 shares of $1 par value common stock at the closing market price of $10 per share. Prepare ABC's journal entry to reflect the issuance of the stock on 12/31/16. To refresh your memory, a Paid-in Capital in Excess of Par account should be used to account for excess proceeds over par value in a stock issuance transaction. See your Principles of Accounting textbook or Chapter 18 of your Intermediate Accounting textbook for a review.) 10 On 7/1/16, ABC sold 10% bonds having a maturity value of $700,000 for $756,773.50, resulting in an effective yield of 8%. The bonds are dated 7/1/16, and mature 7/1/21. Interest is payable semiannually on July 1 and January 1. ABC uses the effective interest method of amortization for bond premium or discount. Record the adjusting entry for the accrual of interest and the related amortization on 12/31/16. Hint: Develop an abbreviated amortization schedule to accurately determine the interest expense. 11 ABC Corporation prepares an aging schedule on 12/31/16 that estimates total uncollectible accounts at $75,000. Assuming that the allowance method is used, prepare the entry to record bad debt expense for the calendar year. Do this final adjusting entry after preparing the Income Statement through the line "Income Before Income Taxes": 12 Corporate taxes are due in four estimated quarterly payments on April 15, June 15, September 15, and December 15. However, for the purposes of this ABC illustration, we will assume that estimates are not paid, and that the tax is paid in full on the return's March 15, 2017 due date. ABC's income tax rate is 35%. The entire year's income tax expense was estimated at the beginning of 2016 to be $108,000, so January through November income tax expense recognized amounts to $99,000 (11/12 months). Since we are assuming estimates are not made during the year, the balance in Income taxes payable represents income tax accrued for January through November. Assume no deferred tax assets or deferred tax liabilities. Based on the income before income taxes figure from the income statement, calculate and record December's income tax expense adjustment so that the entire year's tax expense is correct (1.e. the difference between total income tax expense and the amount already accrued through November)