Question 2 (29 marks)

Question 2 (29 marks) Medici Corporation ("Medici") is preparing a meeting with its banker to discuss the renewal of a long-term debt. The following trial balance was taken from the books of Medici Corporation on 31 December 2020. Account Debit Credit Cash $ 12,000 Accounts Receivable 40,000 Note Receivable 7,000 Allowance for Doubtful Accounts $ 1,800 Inventory 44,000 Prepaid Insurance 4,800 Equipment 105,000 Accumulated Depreciation-Equipment 15,000 Accounts Payable 10,800 Dividends Payable 10,000 Share Capital-Ordinary 44,000 Retained Earnings 55,000 Sales Revenue 260,000 Cost of Goods Sold 1 11,000 Salaries and Wages Expense 50,000 Prepaid Rent 12,800 Dividends 10,000 Total $396,600 $396,600 The trial balance above has not yet reflected below: 1 . Insurance expired during the year, $2,000. 2. Estimated doubtful debts at the year-end, 11% of the accounts receivable (gross). No doubtful debt is expected regarding the note receivable. 3. Depreciation on equipment, 10% per year. Residual value is insignificant. Straight-line depreciation method is adopted. 4. Interest at 5% is receivable on the note for one full year. 5 . Rent expense for the year. (Two-year rental was prepaid on 1 January 2020 for $12,800.) 6. Accrued salaries and wages at 31 December 2020 is $5,800. Required: (a) Prepare the necessary adjusting entries. (12 marks) (b) Compute Medici's income: (i) before recording the adjusting entries; and (ii) after recording the adjusting entries. Explain why Medici's banker would prefer to wait for Medici to complete its year-end adjustment process before making a decision on the loan renewal. (5 marks) (c) Prepare the necessary closing entries after adjustments. (12 marks) [Total for Question 2: 29 marks] ---- End of the Question Paper