Adjusting Entries And Financial Statements

adjusting Entries And Financial Statements The Following Informati

The following information pertains to Sally Corporation: · The company previously collected $1,500 as an advance payment for services to be rendered in the future. By the end of December, one half of this amount had been earned. · Sally Corporation provided $1,500 of services to Artech Corporation; no billing had been made by December 31. · Salaries owed to employees at year-end amounted to $1,000. · The Supplies account revealed a balance of $8,800, yet only $3,300 of supplies were actually on hand at the end of the period. · The company paid $18,000 on October 1 of the current year to Vantage Property Management. The payment was for 6 months’ rent of Sally Corporation’s headquarters, beginning on November 1.

Sally Corporation’s accounting year ends on December 31. Instructions Analyze the five preceding cases individually and determine the following: a. The type of adjusting entry needed at year-end (Use the following codes: A, adjustment of a prepaid expense; B, adjustment of an unearned revenue; C, adjustment to record an accrued expense; or D, adjustment to record an accrued revenue.) b. The year-end journal entry to adjust the accounts c. The income statement impact of each adjustment (e.g., increases total revenues by $.

Adjusting entries . You have been retained to examine the records of Mary’s Day Care Center as of December 31, 20X3, the close of the current reporting period. In the course of your examination, you discover the following: · On January 1, 20X3, the Supplies account had a balance of $1,350. During the year, $5,520 worth of supplies was purchased, and a balance of $1,620 remained unused on December 31. · Unrecorded interest owed to the center totaled $275 as of December 31. · All clients pay tuition in advance, and their payments are credited to the Unearned Tuition Revenue account. The account was credited for $65,500 on August 31. With the exception of $15,500 all amounts were for the current semester ending on December 31. · Depreciation on the school’s van was $3,000 for the year. · On August 1, the center began to pay rent in 6-month installments of $24,000. Mary wrote a check to the owner of the building and recorded the check in Prepaid Rent, a new account. · Two salaried employees earn $400 each for a 5-day week. The employees are paid every Friday, and December 31 falls on a Thursday. · Mary’s Day Care paid insurance premiums as follows, each time debiting Prepaid Insurance: Date Paid Policy No. Length of Policy Amount Feb. 1, 20XMCM year $540 Jan. 1, 20XHP 1 year 912 Aug. 1, 20X3 XQ943675ST 2 years 840 Instructions The center’s accounts were last adjusted on December 31, 20X2. Prepare the adjusting entries necessary under the accrual basis of accounting.

5. Bank reconciliation and entries . The following information was taken from the accounting records of Palmetto Company for the month of January: Balance per bank $6,150 Balance per company records 3,580 Bank service charge for January 20 Deposits in transit 940 Interest on note collected by bank 100 Note collected by bank 1,000 NSF check returned by the bank with the bank statement 650 Outstanding checks 3,080 Instructions: a. Prepare Palmetto’s January bank reconciliation. b. Prepare any necessary journal entries for Palmetto.

6. Direct write-off method . Harrisburg Company, which began business in early 20X7, reported $40,000 of accounts receivable on the December 31, 20X7, balance sheet. Included in this amount was $550 for a sale made to Tom Mattingly in July. On January 4, 20X8, the company learned that Mattingly had filed for personal bankruptcy. Harrisburg uses the direct write-off method to account for uncollectibles. a. Prepare the journal entry needed to write off Mattingly’s account. b. Comment on the ability of the direct write-off method to value receivables on the year-end balance sheet.

7. Allowance method: analysis of receivables . At a January 20X2 meeting, the president of Sonic Sound directed the sales staff “to move some product this year.†The president noted that the credit evaluation department was being disbanded because it had restricted the company’s growth. Credit decisions would now be made by the sales staff. By the end of the year, Sonic had generated significant gains in sales, and the president was very pleased. The following data were provided by the accounting department: 20XX1 Sales $23,987,000 $8,423,000 Accounts Receivable, 12/31 $24,444,056,000 Allowance for Uncollectible Accounts, 12/31 ? 23,000 cr. The $12,444,000 receivables balance was aged as follows: Age of Receivable Amount Percentage of Accounts Expected to Be Collected Under 31 days $4,321, % 31-60 days 4,890, days 1,067, Over 90 days 2,166, Assume that no accounts were written off during 20X2. Instructions a. Estimate the amount of Uncollectible Accounts as of December 31, 20X2. b. What is the company’s Uncollectible Accounts expense for 20X2? c. Compute the net realizable value of Accounts Receivable at the end of 20X1 and 20X2. d. Compute the net realizable value at the end of 20X1 and 20X2 as a percentage of respective year-end receivables balances. Analyze your findings and comment on the president’s decision to close the credit evaluation department.

Paper For Above instruction

The task involves analyzing a series of complex accounting scenarios to understand the proper application of adjusting entries, financial statement impacts, bank reconciliations, and receivables management under different accounting methods. This comprehensive review emphasizes the importance of understanding accrual accounting, the matching principle, and accurate financial reporting to ensure companies present a true and fair view of their financial position.

Introduction

Adjusting entries are fundamental in accounting as they ensure that financial statements reflect the accurate financial position and performance of a company at the end of an accounting period. They are essential for recognizing revenues when earned and expenses when incurred, regardless of when cash is received or paid. This paper examines various scenarios from Sally Corporation, Mary’s Day Care Center, Palmetto Company, Harrisburg Company, and Sonic Sound to illustrate the application of adjusting entries, bank reconciliations, and receivables valuation.

Adjusting Entries for Sally Corporation

In the first scenario, Sally Corporation collected $1,500 in advance for future services. Since half of this amount was earned by year-end, a portion of unearned revenue needs to be recognized as earned income. This involves a B adjustment (unearned revenue), where $750 is recognized as revenue, and the remaining $750 remains as unearned. The journal entry includes debiting Unearned Revenue and crediting Service Revenue, affecting total revenues positively.

Provision of services to Artech Corporation was made but not billed; thus, an accrued revenue adjustment (D) is necessary. The journal entry would debit accounts receivable and credit service revenue, increasing both assets and revenues accordingly.

Salaries owed, totaling $1,000, are accrued expenses (C). The appropriate journal entry involves debiting Salaries Expense and crediting Salaries Payable, increasing expenses and liabilities.

Supplies management involves an adjustment to reflect supplies used; the supplies expense is recorded by debiting Supplies Expense and crediting Supplies Inventory for the amount of supplies used, which is $8,800 minus the $3,300 on hand.

The rent paid in advance covers from November 1, for six months. By December 31, two months of rent have been used, necessitating an adjustment—an accrued expense—to allocate rent expense for November and December. This is an adjustment of a prepaid expense (A).

Adjustments at Mary’s Day Care Center

The Supplies account, starting with a balance of $1,350, plus purchases during the year ($5,520), less unused supplies ($1,620), indicates supplies used of $5,250. An adjustment for supplies used is necessary, debiting Supplies Expense and crediting Supplies Inventory.

Interest owed ($275), is an accrued expense (C), requiring a debit to Interest Expense and a credit to Interest Payable.

Tuition received in advance ($65,500) needs to be adjusted to reflect amounts earned by December 31. Since most payment pertains to the current semester, the unearned revenue is reduced by the amount earned, and revenue is recognized accordingly.

Depreciation on the van ($3,000) involves an adjustment for depreciation expense. A debit to Depreciation Expense and a credit to Accumulated Depreciation is recorded.

Prepaid rent starting August 1 is an asset; the monthly rent expense for two months (August and September) needs recognition. An adjustment involves recognizing rent expense for those months.

Salaries owed to employees earning $400 each for Thursday (December 31) require accruing salaries expense (C), increasing liabilities.

Insurance premiums paid but not yet expired require an adjusting entry to allocate costs over the policy periods, debiting Insurance Expense and crediting Prepaid Insurance proportionally.

Bank Reconciliation for Palmetto Company

The bank reconciliation process identifies timing differences between the bank statement and the company’s books. For Palmetto, deposits in transit of $940, outstanding checks totaling $3,080, and bank charges need to be accounted for.

The adjusted cash balance from the bank side considers deposits in transit, less outstanding checks, plus the bank’s collected interest and note, which are added to company books through journal entries. The NSF check reduces the book balance, requiring a debit to Accounts Receivable and a credit to Cash.

Harrisburg Company and the Direct Write-off Method

The company writes off uncollectible accounts directly when identified. The journal entry to record the bankruptcy of Tom Mattingly involves debiting Bad Debt Expense and crediting Accounts Receivable for $550. While simple, this method often results in a poor matching of expenses with revenues, especially if receivables are significant at year-end, because receivables are not adjusted until deemed uncollectible.

Allowance Method and Analysis of Receivables at Sonic Sound

The allowance method estimates uncollectible accounts based on aging receivables. Using aging data, Sonic Sound can determine an appropriate allowance for doubtful accounts. Based on the provided aging schedule, the expected uncollectible amount can be calculated, considering historical percentages, for example, higher for older receivables.

The company's Uncollectible Accounts expense is then the adjustment needed to bring the Allowance for Uncollectible Accounts to this estimated amount, impacting net income. The net realizable value (NRV) of receivables is calculated by subtracting the allowance from gross receivables. The analysis shows that quickly aging receivables have a higher likelihood of uncollectibility, influencing the allowance estimates. The decision to disband the credit evaluation department increased reliance on sales staff for credit decisions, which may impact the accuracy of receivables valuation.

Conclusion

The scenarios outlined underscore the critical importance of applying appropriate accounting principles, whether through adjusting entries, bank reconciliations, or receivables management. Accurate financial reporting hinges on timely and correct adjustments, reflecting true economic conditions of the business at quarter and year-end. The choice of receivables valuation methods directly impacts the reported financial health, affecting stakeholder decisions and managerial strategies.

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