Selected transactions completed by Kornett Company during its first fiscal year ended December 31, 2016, were as follows: Jan. 3 Issued a check to establish a petty cash fund of $4,500. Feb. 26 Replenished the petty cash fund, based on the following summary of petty cash receipts: office supplies, $1,680; miscellaneous selling expense, $570; miscellaneous administrative expense, $880. Apr. 14 Purchased $31,300 of merchandise on account, n/30. The perpetual inventory system is used to account for inventory. May 13 Paid the invoice of April 14. 17 Received cash from daily cash sales for $21,200. The amount indicated by the cash register was $21,240. Jun. 2 Received a 60-day, 8% note for $180,000 on the Ryanair account. Aug. 1 Received amount owed on June 2 note, plus interest at the maturity date. Assume a 360-day year. 24 Received $7,600 on the Finley account and wrote off the remainder owed on a $9,000 accounts receivable balance. (The allowance method is used in accounting for uncollectible receivables.) Sep. 15 Reinstated the Finley account written off on August 24 and received $1,400 cash in full payment. (Record as two entries.) Record the following on journal page 22. Sep. 15 Purchased land by issuing a $670,000, 90-day note to Zahorik Co., which discounted it at 9%. Assume a 360-day year. Oct. 17 Sold office equipment in exchange for $135,000 cash plus receipt of a $100,000, 90-day, 9% note. The equipment had a cost of $320,000 and accumulated depreciation of $64,000 as of October 17. Nov. 30 Journalized the monthly payroll for November, based on the following data: Salaries: Sales salaries $135,000 Office salaries 77,250 $212,250 Deductions: Income tax withheld $39,266 Social security tax withheld 12,735 Medicare tax withheld 3,184 Unemployment Tax rates: State unemployment 5.4% Federal unemployment 0.8% Amount subject to unemployment taxes: State unemployment $5,000 Federal unemployment 5,000 30 Journalized the employers payroll taxes on the payroll. Dec. 14 Journalized the payment of the September 15 note at maturity. 31 The pension cost for the year was $190,400, of which $139,700 was paid to the pension plan trustee. Required: 1. Journalize the selected transactions, starting on page 21 of the journal.* 2. Based on the following data, prepare a bank reconciliation for December 2016. Refer to the Labels and Amount Descriptions list for exact wording of text entries. Enter all amounts as positive numbers. Balance according to the bank statement at December 31, $283,000. Balance according to the ledger at December 31, $245,410. Checks outstanding at December 31, $68,540. Deposit in transit, not recorded by bank, $29,500. Bank debit memo for service charges, $750. A check for $12,700 in payment of an invoice was incorrectly recorded in the accounts as $12,000. 3. Based on the bank reconciliation prepared in (2), journalize the entry or entries to be made by Kornett Company on page 23 of the journal. Kornett Company uses the Miscellaneous Administrative Expense account for bank service charges. 4. Based on the following selected data, journalize the adjusting entries as of December 31, 2016 on page 23 of the journal: Estimated uncollectible accounts at December 31, $16,000, based on an aging of accounts receivable. The balance of Allowance for Doubtful Accounts at December 31 was $2,000 (debit). The physical inventory on December 31 indicated an inventory shrinkage of $3,300. Prepaid insurance expired during the year, $22,820. Office supplies used during the year, $3,920. Depreciation is computed as follows: Residual Acquisition Useful Life Asset Cost Value Date in Years Depreciation Method Used Buildings $900,00 $0 January 2 50 Double-declining-balance Office Equip. 246,000 26,000 January 3 5 Straight-line Store Equip. 112,000 12,000 July 1 10 Straight-line A patent costing $48,000 when acquired on January 2 has a remaining legal life of 10 years and is expected to have value for eight years. The cost of mineral rights was $546,000. Of the estimated deposit of 910,000 tons of ore, 50,000 tons were mined and sold during the year. Vacation pay expense for December, $10,500. A product warranty was granted beginning December 1 and covering a one-year period. The estimated cost is 4% of sales, which totaled $1,900,000 in December. Interest was accrued on the note receivable received on October 17. Assume a 360-day year. * Refer to the Chart of Accounts for exact wording of account titles. 5. Based on the following information and the post-closing trial balance that follows, prepare a balance sheet in report form at December 31, 2016. Be sure to complete the heading of the balance sheet. Enter assets in the order in which they appear in the post-closing trial balance. Refer to information given in the problem and the Labels and Amount Descriptions list for exact wording of text entries. There is no need to include (current portion) or a due date with any account titles. The word Less and colons will appear automatically. Enter all amounts as positive numbers. The merchandise inventory is stated at cost by the LIFO method. The product warranty payable is a current liability. Vacation pay payable: Current liability: $7,140 Long-term liability: 3,360 The unfunded pension liability is a long-term liability. Notes payable: Current liability: $70,000 Long-term liability: 630,000 Kornett Company POST-CLOSING TRIAL BALANCE December 31, 2016 ACCOUNT TITLE DEBIT CREDIT 1 Petty Cash 4,500.00 2 Cash 243,960.00 3 Notes Receivable 100,000.00 4 Accounts Receivable 470,000.00 5 Allowance for Doubtful Accounts 16,000.00 6 Merchandise Inventory 320,000.00 7 Interest Receivable 1,875.00 8 Prepaid Insurance 45,640.00 9 Office Supplies 13,400.00 10 Land 654,925.00 11 Buildings 900,000.00 12 Accumulated Depreciation-Buildings 36,000.00 13 Office Equipment 246,000.00 14 Accumulated Depreciation-Office Equipment 44,000.00 15 Store Equipment 112,000.00 16 Accumulated Depreciation-Store Equipment 5,000.00 17 Mineral Rights 546,000.00 18 Accumulated Depletion 30,000.00 19 Patents 42,000.00 20 Social Security Tax Payable 25,470.00 21 Medicare Tax Payable 4,710.00 22 Employees Federal Income Tax Payable 40,000.00 23 State Unemployment Tax Payable 270.00 24 Federal Unemployment Tax Payable 40.00 25 Salaries Payable 157,000.00 26 Accounts Payable 131,600.00 27 Interest Payable 28,000.00 28 Product Warranty Payable 76,000.00 29 Vacation Pay Payable 10,500.00 30 Unfunded Pension Liability 50,700.00 31 Notes Payable 700,000.00 32 J. Kornett, Capital 2,345,010.00 33 Totals 3,700,300.00 3,700,300.00 X Journal Shaded cells have feedback. 1. Journalize the selected transactions, starting on page 21 of the journal.* Scroll down for pages 22 and 23 of the journal. 3. Based on the bank reconciliation prepared in (2), journalize the entry or entries to be made by Kornett Company on page 23 of the journal.* Kornett Company uses the Miscellaneous Administrative Expense account for bank service charges. 4. Based on the selected data, journalize the adjusting entries** as of December 31, 2016 on page 23 of the journal.* * Refer to the Chart of Accounts for exact wording of account titles. ** For grading purposes, use one compound depreciation entry rather than three simple entries with separate dates. All transactions on this page must be entered (except for post ref(s)) before you will receive Check My Work feedback. PAGE 21 JOURNAL Score: 235/311 DATE DESCRIPTION POST. REF. DEBIT CREDIT 1 Jan. 3 Petty Cash 4,500.00 2 Cash 4,500.00 3 Feb. 26 Office Supplies 1,680.00 4 Miscellaneous Selling Expense 570.00 5 Miscellaneous Administrative Expense 880.00 6 Petty Cash 3,130.00 7 Apr. 14 Merchandise Inventory 31,300.00 8 Accounts Payable 31,300.00 9 May 13 Accounts Payable 31,300.00 10 Cash 31,300.00 11 May 17 Cash 21,200.00 12 Sales 21,200.00 13 Jun. 2 Notes Receivable 180,000.00 14 Accounts Receivable 180,000.00 15 Aug. 1 Cash 182,400.00 16 Notes Receivable 180,000.00 17 Interest Revenue 2,400.00 18 Aug. 24 Cash 7,600.00 19 f account 7,600.00 20 Sep. 15 Cash 1,400.00 21 bad debts recovered 1,400.00 22 23 24 25 Points: 45.34 / 60 Feedback Check My Work Jan. 3 As you go through these transactions, recall that the only time Petty Cash is debited is when the fund is initially established. Remember that at all times, the petty cash and/or receipts must equal the amount in the petty cash fund. Therefore, to replenish the fund, you add all receipts removed from petty cash and subtract that from the amount that should be in the fund. Any difference will be used as a balancing figure for the Cash Short and Over account. In making journal entries to replenish the fund, Petty Cash is not debited. Instead, the accounts affected by the petty cash disbursements are debited. Apr. 14 Debit merchandise inventory and credit accounts payable to record the purchase. May 13 Reduce the liability from April 14 and reduce cash for the entire amount of the purchase. May 17 Record the revenue. Subtract actual cash from cash register tape cash. If actual is less, cash does not equal sales and Cash Short and Over is debited for the shortage. Jun. 2 When the note is received, the accounts receivable is credited to transform it into a notes receivable which is debited for the $180,000 debt. Aug. 1 Determine the due date of the June 2 note. At the due date, the company records the receipt of cash for the maturity value and reduces the notes receivable for the face value and increases interest revenue for the short-term note interest. To calculate interest: Assume a 360-day year. Interest rate x face amount = annual interest. Annual interest x (short-term note duration 360 days) = interest on note Aug. 24 First, record the receipt of cash. Then, recall that under the allowance method, the entry to write off an account debits Allowance for Doubtful Accounts and credits Accounts Receivable. Sep. 15 In such cases where an account receivable that has been written off is later collected, the account is reinstated by an entry that reverses the write-off entry. Then record the receipt of cash as payment for the account. All transactions on this page must be entered (except for post ref(s)) before you will receive Check My Work feedback. PAGE 22 JOURNAL Score: 200/295 DATE DESCRIPTION POST. REF. DEBIT CREDIT 1 Sep. 15 Land 670,000.00 2 Notes Payable 670,000.00 3 Oct. 17 Cash 135,000.00 4 Notes Receivable 100,000.00 5 Accumulated Depreciation-Office Equipment 64,000.00 6 Loss on Sale of Office Equipment 21,000.00 7 Office Equipment 320,000.00 8 Nov. 30 Sales Salaries Expense 135,000.00 9 income tax payable 39,266.00 10 Social Security Tax Payable 12,735.00 11 Medicare Tax Payable 3,184.00 12 Salaries Payable 79,815.00 13 Nov. 30 income tax payable 39,266.00 14 Social Security Tax Payable 12,735.00 15 Medicare Tax Payable 3,184.00 16 Salaries Payable 79,815.00 17 Cash 135,000.00 18 Dec. 14 Notes Payable 670,000.00 19 Interest Expense 14,868.00 20 Cash 684,868.00 21 Dec. 31 pension cost 190,400.00 22 Cash 139,700.00 23 pension plan trustee 50,700.00 24 Points: 36.61 / 54 Feedback Check My Work Sep. 15 The face of the note is credited as a payable and the discount is debited along with an amount for the land less the discount. In other words, interest is paid up front. Assuming a 360-day year, the discount is computed by multiplying the discount rate times the face amount of the note times short-term note duration of 90/360. Oct. 17 Record the Note Receivable as a debit for the face value. Cash is also debited for the sales price minus the note. Reduce the equipment account by the cost of the asset. Also eliminate the accumulated depreciation associated with the equipment. By comparing the equipment book value to the sale price, a gain or loss on the sale can be determined. Remember gains are credited and losses are debited. Nov. 30 Debit an expense for the gross salaries. Credit payables for the federal income tax, Medicare, and social security withholdings and the net pay amount. Nov. 30 Debit an expense for the payroll taxes. Credit liabilities for the social security, Medicare, and unemployment taxes. Calculate unemployment by multiplying earnings subject to these taxes by the respective percentages applicable to state and federal unemployment and list separately in your journal entry. Dec. 14 Reduce the liability for the face of the Sep. 15 note and reduce Cash. Dec. 31 Recall that the pension cost of a defined benefit plan is debited to Pension Expense. Cash is credited for the amount contributed (funded) by the employer. Any unfunded amount is credited to Unfunded Pension Liability. Question not attempted. PAGE 23 JOURNAL Score: 0/336 DATE DESCRIPTION POST. REF. DEBIT CREDIT 1 2 3 4 Adjusting Entries 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Points: 0 / 65 Feedback Check My Work Requirement 3: Keep in mind that the company needs to journalize any adjusting items in the company section of the bank reconciliation, because these have not been previously recorded by the company. Requirement 4: Under the analysis of receivables method, Allowance for Doubtful Accounts is the focus of the estimation process. The amount of the adjusting entry is the amount that will yield an adjusted balance for Allowance for Doubtful Accounts equal to that estimated by the aging schedule. So if the unadjusted balance of the allowance account has a debit amount, this will be added to the estimated doubtful account estimate and if the unadjusted balance has a credit amount, it will be subtracted from the estimated doubtful account estimate to determine the adjustment. When inventory shrinkage occurs, the missing inventory amount is recorded as a debit to cost of merchandise sold and a credit to merchandise inventory. Increase insurance expense and reduce the prepaid asset for the expired insurance. Increase supplies expense and reduce the office supplies asset for those used. - Total cost of the asset minus the residual value equals the depreciable cost. - Straight-line deprecation allocates the depreciable cost of the asset equally over the period of use. - Double-declining-balance rate is 2 x straight-line rate. However, when the double-declining-balance method is used, the estimated residual value is not considered. - Double-declining-balance depreciation is book value x (2 x straight-line rate). Book value is the asset cost minus accumulated depreciation. In the first year of calculating depreciation, the balance in the accumulated depreciation account is zero. - To adjust depreciation at year-end, debit an expense and credit accumulated depreciation for each asset type or group. Calculate the expense by dividing the patent cost by the useful life. Record the amortization expense and reduce the patents account. Divide the cost of the resource by the estimated total units. Multiply the depletion rate by the quantity extracted. Record the expense, and accumulate the depletion in the contra asset account, Accumulated Depletion. Debit an expense and credit a liability for the vacation pay. Debit an expense and credit a liability for the products sold times the estimated warranty percentage. Calculate the number of days of interest that accrues between Oct. 17 and December 31. Use this to calculate: Interest rate x face amount = annual interest. Annual interest x (number of days to end of year 360 days) = interest on note to the end of the year.