Narrative and Instructions

Rockford Corporation is a wholesale plumbing supply distributor. The corporation was organized

in 1981, under the laws of the State of Illinois, with an authorized capitalization of 100,000 shares

of no-par common stock with a stated value of $18 per share. The common stock is sold over the

the counter in the local area. You have been hired as of Thursday, December 25, 2014, to replace the

controller, who has resigned. As controller, you are responsible for the corporation's accounting

recrods, preparation of the financial statements, safeguarding the corporate assets, and providing

management with financial information to set prices and to monitor and control operations.

Rockford Corporation closes its books annually on December 31 but prepares financial statements

quarterly. Adjusting entries are posted to the general ledger only at year-end; at the end of the

first, second, and third quarter the adjustments are entered only on a work sheet, not in the general

ledger. Therefore, the adjusting entries to be recorded on December 31 are annual adjustments that

you must journalize and the post to the general ledger accounts before preparing the financial

statements.

Rockford Corporation maintains a perpetual inventory system and takes a physical count each year

to adjust the inventory carrying amount. Purchases are recorded at the gross amount (discounts

taken are recognized at the date of payment) of the supplier's invoice, and the terms vary with

each supplier. Sales on account are subject to terms of 1/10, n/30. Discounts are taken and granted

only when the terms are met. The cost of all inventory sold in December was 65% of the sales price.

The corporation uses the following journals and ledgers:

Journals

1. A sales journal (S) - to record sales of merchandise on account.

2. A purchase journal (P)- to record purchases of merchandise on account.

3. A cash receipts journal (CR) - to record all cash receipts.

4. A cash disbursements journal (CD) - to record all cash payments.

5. A general journal (J) - to record all transacitons that cannot be recorded in the other journals.

Ledgers

1. A general ledger

2. An accounts receivable subsidiary ledger.

3. An accounts payable subsidiary ledger.

In recording sales transactions, each sale should be posted on the day of the sale directly to the

customer's account in the subsidiary ledger, using the invoice number as the posting reference

number in the subsidiary account. Also, cash receipts from customers should be posted to the

subsidiary ledger on the day they are received. The purchase order number should be used as

the posting reference number in the subsidiary ledger for purchases on account from suppliers.

Purchases from suppliers and payments to them should be posted daily. All other individual posting

may be made weekly or at the month-end. Account numbers should be used as posting reference

numbers in the journals. Officers and office personnel are salaried employees and are paid monthly

on the last day of each month. The delivery truck drivers and warehouse employees are hourly wage

employees and are paid biweekly. Each biweekly pay period ends Friday. On the following Monday

you assistants provide you with a payroll summary from which you prepare general journal entries

to record the biweekly payroll and the employer's taxes on the payroll. The biweekly employees'

paychecks are distributed on the following day (Tuesday).

The January 1, 2014, balances appear in the general ledger accounts as well as the Noverber 30, 2014,

balances, for those accounts whose balances have changed. All transacitons affecting the non-

current accounts from January 1, 2014, through Noverber 30, 2014, with explanations, appear in

these accounts to facilitate the preparation of the statement of cash flows.

Subsidiary ledger account balances as of Noverber 30, 2014, are as follows:

Accounts Receivable

Acct No

Amount

Boecker Builders

117

72,420

The Potts Company

122

42,300

Swanson Brothers Contruction

133

28,750

A & B Hardware

143

-

Trudy's Plumbing

155

13,500

Coconino Contractors Inc

160

31,700

Rankin Plumbing Corp

166

76,350

Beverly's Building Products

175

12,800

Bilder Construction Co

180

68,900

Iwanaga Plumbing and Heating

190

4,800

Total

351,520

Accounts Payable

Acct No

Amount

Phoenix Plastics

14

18,280

Business Basics Inc

16

-

Edward's Plumbing Suppliers

18

20,050

DeKalb Transport

20

-

Oxenford Copperworks

35

31,700

Smith Pipe Co

39

35,000

Ron & Rod's Plumbing Products

44

14,850

Khatan Steel Corp

57

18,000

Total

137,880

The transactions through December 23 have already been recorded by the former controller. You

are to begin your work by entering the transaction of December 25 for the payment of cash to

repurchase stock.

Dec-14

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31

December Transactions

December

1

Received a check in the amount of $28,463 from Swanson Brothers Contruction in full

payment of invoice No. 1120 dated Novermber 26 in the amount of $28,750.

1

Sold sewer and drainage pipe to Beverly's Building Products on account, invoice No. 1201

for $25050.

2

Purchased copper tubing and fittings from Edward's Plumbing Supplies Inc. on account,

purchase order No. 315 for $35880, terms n/60.

2

Issued check No. 1580 for $31700 to Oxenford Copperworks in settlement of the

balance owned on purchase order No. 280.

3

A court notice indicates that Iwanaga Plumbing and Heating is bankrupt and payment

of its account improbable; the president orders the account to be written off as a

bad debt (invoice No. 780).

3

Sold bathroom fixtures to Bilder Construction Co on account, invoice No. 1202 for

$42720.

4

Received a check in the amount of $41877 from the Potts Co in full payment of invoice

No. 1128 dated November 27 for $42300.

4

Sold plumbing supplies and plastic pipe to Coconino Contractors Inc. on account, invoice

No. 1203 for $11200.

4

Issued check No. 1581 for $1120 to Standard Oil Co, in payment of gas, oil, and truck repair

from Tierney's Standard Service.

5

Issued check No. 1582 for $17820 to Khatan Steel Corp. in full settlement of purchase order

No. 312 for $18000.

5

Issued check No. 1583 for $12,054 to Phoenix Plastics in full payment of Phoenix's invoice

dated November 28 in the amount of $12,300, for purchase order No. 313, terms 2/10, n/30.

5

Received a check in the amount of $75586 from Rankin Plumbing Corp. in full payment

of invoice No. 1129 dated November 28 for $76350.

8

Sold cast pipe to Trudy's Plumbing on account, invoice No. 1204 for $23100.

8

Received a check in the amount of $31700 from Coconion Contractors, Inc. in full payment

of invoice No. 1091 dated October 20.

8

Purchased bathroom fixtures from Phoenix Plastics, on account, purchcase order No. 316

for $51900 terms 3/10, n/30.

8

Received a check in the amount of $39100 from Boecker Builders in partial payment of

balance outstanding covering invoice Nos. 1050 and 1071.

9

The payroll summary for the biweekly pay period ended Friday, December 5 contained the

follwing information:

Delivery and warehouse wages

5,890

FICA taxes withheld

450

Federal income taxes withheld

1,472

State income taxes withheld

471

Net pay

3,497

Employer's payroll taxes:

FICA tax

450

Federal unemployment tax

-

State unemployment tax

-

Issued check No. 1584 for the amount of the net pay and deposited it in the payroll bank

account. Individual payroll checks were then preppared for distributions to the biweekly

emplyees on Tuesday, December 9, 2014.

9

Issued check No. 1585 for $790 to Scooter Gordon for lettering and sign painting on some

delivery trucks.

9

Issued check No. 1586 for $5980 to Phoenix Plastics, in payment of Phoenix's invoice dated

November 12 in the amount of $5980, our purchase order No. 299.

10

Issued check No. 1587 for $34300 to Smith Pipe Co in full payment of their invoice dated

November 28, terms 2/15, n/30, our purchase order No. 314.

10

Received a check in the amount of $13500 from Trudy's Plumbing in full settlement of

invoice No. 1106 dated November 7.

10

Sold pipe, fixtures, and accessories to Trudy's Plumbing on account, invoice No. 1205 for

$33850.

11

Sold pumbing supplies and copper tubing to The Potts Company on account, invoice No.

1206 for $51450.

11

Received a check in the amount of $33,320 from Boecker Builders in full payment of invoice

No. 1071.

11

Cash sales to date totaled $15258.

12

Received a check in the amount of $22869 from Trudy's Plumbing in payment of inoivce

No. 1204.

12

Sold plumbing fixtures and supplies to Boecker Builders, on account, invoice No. 1207

for $24,730.

15

The Potts Co returned defective copper tubing that is purchased on December 11. A credit

memo in the amount of $5145 is issued relative to invoice No. 1206. The copper tubing

had a cost of $3344.

15

The defective copper tubing is returned to Edward's Plumbing supplies, Inc. along with

a debit memo in the amount of $3344 in reduction of purchase order No. 315.

15

Issud check No. 1588 for $599 in payment of November telephone bill to Northern

Illinois Communications.

16

Issued check No. 1589 in the amount of $12,360 in payment of federal withholding taxes,

$10,573, and FICA taxes, $1787, payable on November salaries and wages; The check is

remitted to the Winnebago County Bank as the depository.

16

Issued check No. 1590 for $50,343 to Phoenix Plastics, Inc, in payment of purchase order

No. 316.

17

The president informs you that Bilder Construction Co agrees to convert the $68900

overdue account receivable (invoice No. 1120) to a 6% note due six months from today.

17

Purchased plumbing materials from Smith Pipe Company on account, purcase order No.

317 for $,55,120 terms 1/15, n/60.

17

Sold drain tile, plastic pipe, and copper tubing to A & B Hardware on account, invoice No.

1208 for $8,340.

18

Sold fixtures and materials to Coconino Contractors, Inc. on account, invoice No. 1209 for

$47,930.

18

An invoice in the amount of $1,021 was received from S. White Trucking Company for

freight on purchase order No. 317 and paid by issuing check No. 1591.

18

Received a check in the amount of $33,512 from Trudy's Plumbing in payment of invoice

No. 1205.

19

Purchased office supplies from the Pen & Pad, issuing check No. 1592 in the amount of

$1,460. (Note: Debit asset account).

19

Purchased a new Faith computer for $7600 from Business Basics, Inc, purchase order

No, 318, paying $600 down through check No. 1593 with the balance due in thirty days

(n/30). The computer has an estmated life of 6 years with a salvage value of $1600.

22

Purchased bathroom and kitchen fixtures from Phoenix Plastics, on account, purchase

order No. 319 for $48,330, terms 1/10, n/30.

22

Received a bill from DeKalb Transport for $3520 for freight costs incurred during the last 30

days, terms n/30.

23

The payroll summary for the biweekly pay period ended Friday, December 19 contained the

follwing information:

Delivery and warehouse wages

5,780

FICA taxes withheld

442

Federal income taxes withheld

1,445

State income taxes withheld

462

Net pay

3,431

Employer's payroll taxes:

FICA tax

442

Federal unemployment tax

-

State unemployment tax

-

Issued check No. 1594 for the amount of the net pay and deposited it in the payroll bank

account. Individual payroll checks were then prepared for distributions to the biweekly

emplyees on Tuesday, December 23.

NOTE: Transactions up to this point have been recorded. At this point you became

controller and are responsible for recordign all further transactions.

25

The board of directors voted to purchase 3,000 shares of its own stock from stockholder

Dionne Schivone at $56 per share and issued check No. 1595 in payment. Stock repurchases

are recorded at cost. Rockford is purchasing these shares because Ms. Schivone had been

a valuable employee.

26

The baord of directors declared a $1.50 per share cash dividend payable on January 14 to

shareholders of record by the end of the day of December 26.

26

The president informs you that Beverly's Building Products agrees to convert the $12,800

overdue accounts receivable (invoice No. 1119) balance to a 8% note due six months from

today.

29

A half-acre parcel of land adjacent to the building is acquired in exchange for 750 shares

of unissued common stock. The land has a fair value of $50,000 and will be used

immediately as an outside storage lot and parking lot.

29

An invoice in the amount of $1,060 is received from Wayne McManus, lawyer, for legal

services involved in the acquisition of the adjacent parcel of land; check No. 1596 is issued.

29

Sold pipe and plumbing materials to Boecker Builders on account, invoice No. 1210 for

$48,080

30

Issued check No. 1597 in the amount of $4,500 to the Northern Star for adverstisement run in

the home building supplement of December 13.

30

Issued check No. 1598 in the amount of $1,830 to Standard Oil Co. in payment of gas, oil,

and truck repairs from Standard Oil Co. (use Freight-out).

30

Purchased copper and cast iron pipe from Oxenford Copperworks on account, purchase

order No. 320 for $65,640, terms 1/10, n/30.

30

Check No. 1599 for $12,400 is issued to the bond sinking fund trustee, Chicago Trust Co.,

for deposit in the sinking fund. (Use Other Assets).

30

Sold plumbing supplies to Swanson Brothers Construction on account, invoice No. 1211

for $22,150.

31

Received a check for $24,730 from Boecker Builders in payment of invoice No. 1207.

31

Issued check No. 1600 for $54,569 to Smith Pipe Company in payment of purchase order

No. 317.

31

The custodian of the petty cash fund submits the following receipts for reimbursement

and reports a cash-on-hand count of $8.

Postage stampls used (supplies)

$38

United Parcel (freight-out)

23

C.O.D postage (freight costs)

51

Christmas office decorations (Misc exp)

30

Check No. 1601 is issued and cashed to reimburse the fund.

31

Sold an electric truck-lift to Leila Stierman Co. for $2600 cash. The original cost was

$7900 with salvage value of $900, a life of 10 years, and accumulated depreciation

recorded through 12/31/13 is $4,550. The straight-line method is used. (Note: the

company follows the practice of recording a half year's depreciation in the year of

acquisition and a half year in the year of disposal.) First, bring the depreciation expense

up to date in the general journal. Then journalize the entire entry for the sale in the cash

receipts journal.

31

Sold bathroom fixtures and plumbing supplies to Trudy's Plumbing on account, invoice

No. 1212 for $50370.

31

Because for some time the petty cash fund has been smaller than required for monthly

expenditures, the fund is increased by $105 by cashing check No. 1602 and placing the

money in the petty cash fund.

31

The payroll summary for the monthly paid employees in submitted so that December

checks can be distributed before the year-end; the details are as follows:

Office and administrative salaries

$43,900

Federal income taxes withheld

10,975

State income taxes withheld

3,512

FICA taxes withheld

3,358

Net pay

$26,055

Issued check No, 1603 for the amount of the net pay and deposited it in the payroll bank

account. Individual payroll checks were prepared for distribution to all monthly employees

by the end of the day.

Employer's payroll taxes:

FICA tax (all office and administrative)

$3,358

Federal unemployment tax

0

State unemployment tax

0

31

Cash sale since December 12 total $52100.

Instructions

1

Make the entries in the appropriate journal for December 25 through December 31.

(adjusting entries are recorded in general journal)

2

Post any amounts to be posted as individual amounts from journals to the general ledger

and update the receivable and payable subsidiary ledger accounts.

(only a few entries are posted for Dec, e.g., account receivable. Please post all other entries)

3

Foot and cross-foot the columnar journals and complete the month-end postings of all

books of orginal entry.

4

Prepare a trial balance by entering the accout balance from the general ledger in the

work sheet (list all accounts, including those with zero balances).

5

From the following information prepare adjusting entries in the general journal and

enter them in the work sheet.

a

The annual provison for doubtful accounts receivable is recorded by

providing a charge to Bad Debt Expense in an amount equal to 3% of net

credit sale. All cash sales were executed in December.

b

An inventory count of the office supplies revealed $800 of supplies on hand

at year end.

c

The prepaid insurance on January 1, 2014 was $3400 which covers the period

January 1 through August 31, 2014. The insurance premium of $6800 recorded

in August covers the period of September 1, 2014 through August 31, 2015.

Rockford estimates that 50% of the premiums are attributable to general

activities (Use Insurance Expense) and 50% to selling activities. (Use

Miscellaneous Expense).

d

The payroll summary for the employees who are paid biweekly shows the

following information at December 31, 2014:

Delivery and Warehouse Wages

$6,000

FICA Taxes Payable

459

Federal Withholding Taxes

1,500

State Withholding Taxes

$480.00

Net pay

3,561

(will pay in 2015)

e

The employer's share of the FICA tax ($459) must be accrued; no state or

federal unemployment tax is incurred during the fourth quarter because all

wages and salries earned during the last quarter exceed the maximum

subject to unemployment tax.

f

Interest has accrued at 7% on the long-term notes payable since July 1,2014.

These interests are due on January 1, 2015 (The first six-month interests have

been recorded and paid in July).

Interest on bonds is accrued and paid semi-annually, at a 4% annual coupon rate.

The next interest payment is due on January 1, 2015. The bonds are dated

January 1, 2008, and mature January 1, 2018. Market interest rate was 6%

at issurance . Use effective interest amortization method.

g

The interest accrued to 12/31/14 on notes receivable is composed of the

following:

Platteville Plumbers, 10%, 6 months, due March 31, 2015

$1,052

Bilder Construction, 6%, 6 months, due June 14, 2015

161

Beverly's Building, 8%, 6 months, due June 26, 2015

23

$1,236

The interst accrued at 12/31/14 on the note payable (current) of $16000 is

$1250. Interest is payable on January 2, 2015. (The note is due in 2015)

h

A warehouse lease payment of $8400 was made on Septermber 1, 2014,

for rental through February 28, 2015. (The Prepaid Rent account is for

advance lease payments on the warehouse.)

i

$815 is owned to Northern Electric Co. and $425 is owned to City of Rockford

for utility services proved during December 2014.

j

Plant and equipmentto be depreciated are composed of the following:

Assets

Date Acquired

cost

estimated usage or life

salvage value

depreciation method

Building

7/1/10

$306,000

25 years

$20,000

sum-of-years' digits

Truck #1

4/1/10

28,000

60,000 miles

3,100

miles driven

Truck #2

9/1/11

33,000

60,000 miles

4,200

miles driven

Lift Truck #1*

8/17/07

7,900

10 years

900

straight-line

Lift Truck #2

3/29/11

4,500

10 years

500

straight-line

Lift Truck #3

9/16/12

5,000

10 years

500

straight-line

Office Equipment

7/1/12

32,800

7 years

2,000

straight-line

Computer

12/19/14

7,600

4 years

1,600

Double-decling

*

sold 12/31/14

Truck No. 1has been driven 45,000 miles prior to 1/1/14 and truck No. 2 has

been driven 30,500 miles prior to 1/1/14. During 2014 truck No. 1 was driven

10000 miles and truck No. 2 was driven 15000 miles. Remember that Rockford

Company takes a half-year's depreciation in the year of acquisition and a half-

year in the year of sale.

6

Complete the worksheet. Compute State of Illinois corporate income taxes at 4.5% of pretax

income. The state income tax is deductible on the federal tax return, and the federal tax is

not deductible on the Illinois return. Assume federal corporate income tax on income

subject to federal tax is as follows:

first $50000

15%

next 25000

25%

remainder

34%

Income between $100,000 and $335,000 is assessed a 5% federal surtax, not to exceed

$11,750.00

7

Prepare the journal entry for income taxes. Post all adjusting entries.

8

Prepare 2014's income statement (assume the weighted-average number of shares outstanding

for the year 2014 is 5,600 shares). Assume that bad debt expense and depreciation expense

are administrative expenses.

9

Prepare 2014's statement of retained earnings.

10

Prepare 2014's balance sheet.