Questions
1. How can Alicia tell if something is wrong?
2. Is the list of adjusting and closing entries the correct one? Explain.
3. Does the list supplied have anything to do with Academy of Music?
Explain.
4. Give the most likely explanation for the error.
5. Work out the adjusting entries from the information that you have avail-
able. Start to prepare a new list of the correct adjusting and closing entries. You can do this by restructuring the worksheet, starting with the Balance Sheet and Income Statement columns and working backwards.
6. Work out the closing entries and complete a correct list of adjusting and closing entries.
CASE 2 A Mix-Up in Year-End Accounting Alicia Lee is a self-employed public accountant in Dartmouth, Nova Scotia. She performs a variety of accounting services for a number of clients within a 300-kilometre radius of her office. Currently, she happens to be working in a small town about 120 kilometres from home. While there, Alicia receives a telephone call from her office regarding a problem with the work of another client in the town where she is working. Before returning home, Alicia pays a visit to this other client, Academy of Music, to provide assistance. Academy of Music does its own accounting up to the trial balance stage. Alicia does the year-end accounting. She has recently provided Academy of Music with a set of financial statements and a list of adjusting and closing entries for the client to journalize and post. The client takes off the post-closing trial balance. The accounting clerk for Academy of Music sensed that something was wrong with the list of adjusting and closing entries. He decided not to process them until he talked to Alicia. Alicia has to work with data available in the client's office because all of her working papers are at her office. To prepare to study the situation, she gathers the four documents shown below and on the next two pages. ACADEMY OF MUSIC BALANCE SHEET DECEMBER 31, 20-2 Assets Current Assets Bank $ 3750 Accounts Receivable 18 184 300 Supplies Prepaid Insurance 630 $22 864 Plant and Equipment Equipment $22 375 Automobile 18012 40 387 $63 251 Total Assets Liabilities and Owner's Equity Current Liability Accounts Payable $ 5 085 F. Oke, Capital Balance January 1 $51 098 Net Income Drawings Increase in Capital 7.068 Balance December 31 58 166 Total Liabilities and Owner's Equity $63 251 $34 068 27 000 Revenue ACADEMY OF MUSIC INCOME STATEMENT YEAR ENDED DECEMBER 31, 20-2 $ 102 16 222 370 6 000 500 3825 28 375 650 1420 2000 1768 Fees Earned Operating Expenses Bank Charges Expense Car Expense Miscellaneous Expense Rent Expense Telephone Expense Utilities Expense Wages Expense Supplies Expense Insurance Expense Depreciation - Equipment Depreciation - Automobile Net Income ACADEMY OF MUSIC ADJUSTING AND CLOSING ENTRIES DECEMBER 31, 20-2 (provided by Alicia Lee) Dr Adjusting Entries Supplies Used Supplies Insurance Used Prepaid Insurance Car Expense Miscellaneous Expense Accounts Payable Closing Entries Fees Earned. Income Summary Income Summary Bank Charges Expense Car Expense Miscellaneous Expense Rent Expense Telephone Expense Utilities Expense Wages Expense Supplies Expense Insurance Expense Income Summary F. Oke, Capital F. Oke, Capital F. Oke, Drawings 810 1080 210 160 81 316 51 672 25 388 20 000 $95 300 61 232 $34 068 Cr 810 1080 370 81 316 1120 13 280 215 S 400 400 3 307 25 060 810 1080 25 388 20 000 ACADEMY OF MUSIC UNADJUSTED GENERAL LEDGER DECEMBER 31, 20-2 Accounts Receivable Supplies 3.750 18 184 950 Prepaid Insurance Automobile Equipment 24 375 2050 19 780 Accounts Payable F. Oke, Capital F. Oke, Drawings 27 000 4370 51 098 Fees Earned Bank Charges Expense 102 Car Expense 15 707 95 300 Miscellaneous Expense 370 Rent Expense 6 000 Telephone Expense 450 Wages Expense Supplies Expense Utilities Expense 3675 28 375 Depreciation - Equipment Insurance Expense Income Summary Depreciation - Automobile Questions 1. How can Alicia tell if something is wrong? 2. Is the list of adjusting and closing entries the correct one? Explain. 3. Does the list supplied have anything to do with Academy of Music? Explain. 4. Give the most likely explanation for the error. 5. Work out the adjusting entries from the information that you have avail- able. Start to prepare a new list of the correct adjusting and closing entries. You can do this by restructuring the worksheet, starting with the Balance Sheet and Income Statement columns and working backwards. 6. Work out the closing entries and complete a correct list of adjusting and closing entries. Bank
