Morgan Companys balance sheet at December 31, 2016, is presented below.

MORGAN COMPANY

Balance Sheet

December 31, 2016

Cash 30,000 Accounts Payable 13,750

Inventory 30,750 Interest Payable 250

Prepaid Insurance 6,000 Notes Payable 50,000

Equipment 38,000 Owners Capital 40,750

104,750 104,750

During January 2017, the following transaction occurred. (Morgan Company uses the perpetual inventory system.)

Morgan paid $250 interest on the note payable on January 1, 2017. The note is due December 31, 2018.

Morgan purchased $261,000 of inventory on account

Morgan sold for $440,000 cash, inventory which cost $265,000. Morgan also collected $28,600 in sales taxes.

Morgan paid $230,000 in accounts payable

Morgan paid $17,000 in sales taxes to the state.

Paid other operating expenses $30,000

On January 31, 2017, the payroll for the month consists of salaries and wages of $60,000. All salaries and wages are subject o 7.65% FICA taxes. A total of $8,900 federal income taxes are withheld. The salaries and wages are paid on February 1.

Adjustment Data:

Interest expense of $250 has been incurred on the notes payable.

The insurance for the year 2017 was prepaid on December 31, 2016.

The equipment was acquired on December 31, 2016 and will be depreciated on a straight-line basis over 5 years with a $2,000 salvage value.

Employers payroll taxes include 7.65% FICA taxes, a 5.4% state unemployment tax, and an 0.8% federal unemployment tax.

Instruction:

(you may need to set up T-accounts to determine ending balances.)

Prepare journal entries for the transactions listed above and the adjusting entries.

Date	Accounts Titles and Explanation	Dr.	Cr
Jan. 1	Interest Expense	250
	Cash		250
	(to record interest on notes payable)
(2)	Inventory	261,000
	Accounts Payable		261,000
(3)	Cash	440,000
	Sales revenue		413,200
	Sales Tax Payable		26,800
	(to record sale of inventory/collected sales tax)
	Cost of goods sold	265,000
	Finished goods inventory		265,000
	(to record cost of goods sold)
(4)	Accounts Payable	230,000
	Cash		230,000
	(to record payment to accounts payable)
(5)	Sales Tax payable	17,000
	Cash		17,000
	(to records payment of state sales tax)
(6)	Other Operating Expenses	30,000
	Cash		30,000
	(to record payment of other operating expenses)
(7)	Salaries and Wages Expense	60,000
	Federal Income tax withheld		8,900
	FICA taxes payable		4,590
	Salaries and Wages Payable		46,510
	(to record salaries/wages and tax)
	Adjustment Entries
(8)	Interest Expense	250
	Interest payable		250
	(to record interest)
(9)	Insurance Expense	500
	Prepaid Insurance		500
	Cont. Next page
(10)	Depreciation	7,200
	Accumulated Depreciation - Equipment		7,200
	[(38,000 2,000)/5 = 7,200]
	(to record equipment depreciation for one month)
(11)	Employers Payroll taxes expense	8,310
	FICA taxes payable @ 7.65%		4,590
	State unemployment tax payable @ 5.4%		3,240
	Federal Unemployment tax payable @ 0.8%		480
	(all calculation on gross payroll of 58,000)
	(to record payroll tax)

Prepare an adjusted trial balance at January 31, 2017.

Prepare an income statement, an owners equity statement for the month ending January 31, 2017 and a classified balance sheet as of January 31, 2017.

Income Statement
Description Amount
Sales	440,000
Gain on Bond Redemption
Total revenue
Less: Expenses
Cost of Goods Sold	265,000
Operating Expense	30,000
Depreciation Expense	7,200
Interest on Bond
Insurance Expense (
Total Expenses
Net Income Before tax
Less: income tax
Net Income After Tax