University of Houston



INTERMEDIATE ACCOUNTING I

PRACTICE PROBLEM

PURPOSE:

The purpose of the practice problem is to review the accounting cycle -the procedures that businesses normally use to record transactions and prepare financial statements. The accounting cycle is discussed in Chapter 3 of your textbook. Studying Chapter 3 and working the assigned homework problems will help you understand and complete the practice problem. You will also find it helpful to review the Jane Addams Company which is on Dr. Nathan’s web page.

To review the accounting cycle, you will act as the bookkeeper for Travis Auto Parts, a sole proprietorship owned by Michael Travis. The post-closing trial balance for Travis Auto Parts for December 31, 20x1 is given below:

Travis Auto Parts

Post-Closing Trial Balance

December 31, 20x1

Debit Credit

Cash $11,520

Accounts Receivable 3,820

Allowance for Bad Debts - 0 -

Inventory 9,500

Supplies 250

Prepaid Rent - 0 -

Prepaid Insurance 640

Store Equipment 23,600

Accumulated Depreciation $14,160

Accounts Payable 4,660

Short-term Notes Payable 16,000

Interest Payable (on the $16,000 note) 400

Salaries Payable 580

Unearned Revenue - 0 -

Michael Travis, Capital 13,530

$49,330 $49,330

REQUIRED:

1. During 20x2, the following transactions occurred. Prepare any necessary journal entries. For your own purposes, you will also have to post all journal entries to appropriate T-accounts. The post-closing trial balance on the previous page lists the permanent (balance sheet) accounts which Travis Auto Parts uses; you should set up T-accounts for the temporary accounts (revenues, expenses, and owner withdrawals) as needed.

DO NOT PREPARE MONTHLY ADJUSTING AND CLOSING ENTRIES; wait until year-end to prepare these entries. Travis Auto Parts does not use reversing entries.

January 3 Sold store equipment for $5,000. The equipment originally cost $9,000 and had a book value of $6,300. (Given this information, you should be able to derive the accumulated depreciation on the equipment and determine the gain or loss on the sale.)

January 5 Travis personally invested $10,000 into the business.

January 10 Purchased inventory on account for $22,500. Travis Auto Parts uses a periodic system of inventory control.

January 15 Paid salaries owed to employees at the end of 20x1.

February 1 Sold goods on account for $15,000. Made cash sales of $10,400.

February 18 Received payment of $11,500 from customers for previous sales made on account.

March 1 Entered into a rental agreement with Pecos Real Estate Agency. Travis paid $10,800 for a 12-month lease of office space. Travis debited a temporary (nominal) account to record the transaction.

March 8 Purchased $19,000 worth of inventory on account.

March 15 Sold goods for $21,000 on account. Made cash sales of $18,800.

March 25 Credited customer accounts for $2,520 of merchandise returned.

April 1 Paid the $16,000 note and all interest accrued to date. Travis had borrowed the $16,000 on October 1, 20x1. Interest accrued on the note at a rate of 10% annually.

April 12 Received $18,200 from customers for sales made previously on account.

April 20 Paid $33,000 of the amount owed to suppliers for goods and services purchased on account.

May 9 Purchased $15,000 worth of store equipment for cash. Travis Auto Parts has a policy of taking a full year's depreciation on its equipment in the year of purchase.

May 18 Purchased inventory on account for $25,000.

May 26 Sold $24,500 worth of goods on account. Made cash sales of $14,000.

June 1 Borrowed $15,000 from the bank by issuing a 12-month note. Interest accrues on the note at the rate of 12% annually, or 1% per month. Interest is to be paid when the note is due next year.

June 30 Incurred and paid the following expenses: salaries, $13,000; utilities, $1,800; and advertising, $2,100.

July 7 Received payment of $23,600 from customers for previous sales made on account.

July 22 Purchased supplies on account for $7,200. Travis debited a permanent (real) account to record the transaction.

August 15 Purchased inventory on account for $17,000.

August 31 The prior insurance policy on Travis's operating assets expired on this date; prepare a journal entry to record this event. Travis replaced this policy with a 12-month policy by paying $8,400. Travis debited a permanent account to record the new policy.

September 4 Sold $16,500 worth of goods to customers on account. Made cash sales of $11,000.

September 20 Credited customer accounts for $1,200 worth of merchandise returned.

October 8 Received $9,500 advance payment for products to be shipped to customers by year-end. Travis recognized this cash receipt by crediting a temporary account.

October 19 Paid $40,000 of the amount owed to suppliers for goods and services purchased on account.

November 16 Sold goods for $18,700 to customers on account.

December 4 Received payment of $27,000 for sales made on account.

December 18 Travis withdrew $6,000 from the business for personal use. To record this transaction, debit a Drawing account and credit Cash. The Drawing account is a temporary account which will be closed out at the end of the year to the Capital account.

December 31 Incurred and paid the following expenses: salaries, $15,500; utilities, $2,300; and advertising, $2,500.

2. Based on (1) the previous transactions and (2) the following information, prepare and post any necessary adjusting entries at year-end.

* A physical count revealed supplies on hand of $4,800.

* Depreciation on the store equipment is 10% per year. Salvage value on the equipment is zero. Record depreciation for all of the store equipment which Travis Auto Parts has at December 31, 20x2--not just the equipment which was purchased during the year.

* Of the $9,500 worth of goods paid for in advance on October 8, only $6,800 worth of goods had been shipped to customers by year-end.

* Based on previous experience, Travis felt that 5% of ending accounts receivable would ultimately be uncollectible.

(Please note: More than four adjusting entries need to be prepared.)

RECORD THE ADJUSTING ENTRIES ON A SEPARATE, APPROPRIATELY LABELED PAGE.

3. Prepare and post the closing entries as of December 31, 20x2. A physical count revealed an ending inventory of $12,000. ALSO RECORD THE CLOSING ENTRIES ON A SEPARATE, APPROPRIATELY LABELED PAGE.

4. Prepare an income statement in a multiple-step format for 20x2. The multiple-step format is illustrated on page 135 of the textbook and in the solution to Problem 3-9 which is attached to this assignment. Do not separate the operating expenses into selling expenses and administrative expenses. Do not worry about income tax expense.

5. Prepare an statement of owner's equity (also called a statement of capital) for 20x2. The statement of owner's equity for a sole proprietorship is similar to a statement of retained earnings for a corporation. (A simple statement of retained earnings is illustrated on p. 149 of the textbook.) The basic formula for a statement of owner's equity is as follows:

Beginning capital

+ Owner investments for the period

+ Net income for the period

- Owner withdrawals for the period

Ending capital

Once the ending capital for Travis Auto Parts is calculated, it is reported under Owner's Equity (Capital) on the balance sheet for 20x2.

6. Prepare a balance sheet for 20x2. The balance sheet for a sole proprietorship is illustrated in the solution to Problem 3-9 which is attached to this assignment.

-----------------------

1

................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download