Question
QUESTION 36 Accrual Accounting: Scroll down to complete all parts of this task. The following information pertains to Baron Flowers, a calendar-year sole proprietorship, which
QUESTION 36
- Accrual Accounting: Scroll down to complete all parts of this task. The following information pertains to Baron Flowers, a calendar-year sole proprietorship, which maintained its books on the cash basis during the year. Baron has developed plans to expand into the wholesale flower market and is in the process of negotiating a bank loan to finance the expansion. The bank is reuesting year 4 financial statements prepared on the accrual basis of accounting from Baron. During the course of a review engagement, Muir, Baron's accountant, obtained the following additional information.
- Amounts due from customers totaled $32,000 at December 31, year 4.
- An analysis of the receivables in item 1 revealed that an allowance for uncollectible accounts of $3,800 should be provided.
- Unpaid invoices for flower purchases totaled $30,500 and $17,000, at December 31, year 4, and December 31, year 3, respectively.
- The inventory totaled $72,800 based on a physical count of the goods at December 31. The inventory was priced at cost, which approximates market value.
- On May 1, year 4, Baron paid $8,700 to renew its comprehensive insurance coverage for one year. The premium on the previous policy, which expires on April 30, year 4, was $7,800.
- On January 2, year 4, Baron entered into a 25-year operating lease for the vacant lot adjacent to Baron's retail store for use as a parking lot. As agreed in the lease, Baron paved and fenced in the lot at a cost of $45,000. The improvements were completed on April 1, year 4, and have an estimated useful life of fifteen years. No provision for depreciation or amortization has been recorded. Depreciation on furniture and fixtures was $12,000 for year 4.
- Accrued expenses at December 31, year 3 and year 4, were as follows:
Year 3
Year 4
Utilities
$ 900
$ 1,500
Payroll taxes
1,100
1,600
$ 2,000
$ 3,100
- Baron is being sued for $400,000. Coverage under the comprehensive insurance policy is limited to $250,000. Baron's attorney believes that an unfavorable outcome is probable and that a reasonable settlement estimate is $300,000.
- The salaries account includes $4,000 per month paid to the proprietor. Baron also receives $250 per week for living expenses.
Using this table, prepare the adjustments necessary to convert the trial balance of Baron Flowers to the accrual basis of accounting for the year ended December 31, year 4. Formal journal entries are not reuired to support your adjustments. Enter all amounts as positive values rounded to the nearest whole dollar.
Cash Basis
Adjustments
Accrual Basis*
Account Title
Debit
Credit
Debit
Credit
Debit*
Credit*
Cash
25,600
*____
Accounts receivable, 12/31 Year 3
16,200
[1____]
*____
Inventory, 12/31 Year 3
62,000
[2____]
*____
Furniture & fixtures
118,200
*____
Land improvements
45,000
*____
Accumulated depreciation & amortization, 12/31 Year 3
32,400
[3____]
*____
Accounts payable, 12/31 Year 3
17,000
[4____]
*____
Baron, Drawings
[5____]
*____
Baron, Capital, 12/31 Year 3
124,600
[6____]
[7____]
*____
Allowance for uncollectible accounts
[8____]
*____
Prepaid Insurance
[9____]
*____
Accrued Expenses
[10___]
*____
Estimated liability from lawsuit
[11___]
*____
Sales
653,000
[12___]
*____
Purchases
305,100
[13___]
*____
Salaries
174,000
[14___]
*____
Payroll taxes
12,400
[15___]
*____
Insurance
8,700
[16___]
*____
Rent
34,200
*____
Utilities
12,600
[17___]
*____
Living expenses
13,000
[18___]
Uncollectible Account
[19___]
*____
Income summary inventory
[20___]
[21___]
*____
Depreciation and amortization
[22___]
*____
Estimated loss from lawsuit
[23___]
*____
$827,000
$827,000
[24____]
[25___]
*____
*____
* Completion of these columns is not reuired but may be useful in checking your work.
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