Big Eds Motorcycle Shop Nearing Fiscal Year End

Big Eds Motorcycle Shop Is Nearing The Fiscal Year End You Have Been

Big Ed's Motorcycle Shop is nearing the fiscal year-end. You have been asked to prepare the adjusting and closing entries to prepare the books for the 2008 year-end. Download Big Ed's trial balance to begin preparing your adjusting and closing entries: Big Ed's Motorcycle Shop Trial Balance. Following is the information you will need to make your adjusting entries: Office equipment has a life of five years with no residual value. Store equipment has a life of five years with no residual value. Shop equipment has a life of ten years with no residual value (assume new equipment was purchased Jan. 1). A physical inventory of Merchandise Inventory, Parts revealed an actual balance of $97,000. A physical inventory of Merchandise Inventory, Motorcycles revealed that the balance was accurate. Office supplies in the amount of $1,500 were used throughout the year. Salaries should be accrued as follows: Sales - $3,000; Service - $5,000; Office - $1,500. Insurance in the amount of $1,200 was used throughout the year. Interest on the Note Payable is 8% (assume new note was taken out on Jan. 1). Use straight-line depreciation. Calculate the depreciation using the asset balance and ignore the balance in Accumulated Depreciation. Assume that no expense has been recorded for the year.

Paper For Above instruction

The task involves preparing the necessary adjusting and closing entries for Big Ed’s Motorcycle Shop for the fiscal year ending 2008. This process involves reconciling the company’s books with actual figures, accounting for accrued expenses, depreciation, inventory adjustments, and revenue recognition. Proper adjustment entries ensure the financial statements accurately reflect the company’s financial position and performance, adhering to generally accepted accounting principles (GAAP).

Initially, the physical inventory counts must be recorded to align the inventory balances. The inventory of parts (valued at $97,000) and motorcycles was found to be accurate; thus, no adjustment is necessary for motorcycle inventory. However, the parts inventory requires a correction if the trial balance does not match the physical count. The company’s office supplies used amount to $1,500, which should be expensed as supplies are consumed during the year. Accrued salaries for sales, service, and office employees must be recognized to reflect expenses incurred but not yet paid—$3,000 for sales, $5,000 for service, and $1,500 for office staff.

Insurance expense of $1,200, representing the portion of annual insurance consumed, needs to be recorded as an expense. Additionally, interest expense on the note payable should be accrued based on an 8% interest rate from January 1 to year-end, assuming a full year’s interest applies. The interest calculation involves multiplying the principal of the note payable by 8% annually.

Depreciation on fixed assets requires careful calculation using straight-line depreciation. Office equipment, with a five-year useful life and no residual value, is depreciated evenly over five years. Similarly, store equipment, also with a five-year lifespan, and shop equipment, with a ten-year lifespan, are depreciated annually based on their respective asset balances. Since no accumulated depreciation exists yet, the total depreciation expense for the year equals the annual depreciation for each asset, calculated by dividing the cost of each asset by its useful life.

Finally, the closing entries will involve transferring net income to retained earnings and resetting revenue and expense accounts for the new fiscal period. Properly preparing these entries ensures that the trial balance reflects the correct ending balances for the upcoming year, complying with accounting standards.

Answer

The preparation of adjusting and closing entries for Big Ed’s Motorcycle Shop involves multiple steps designed to ensure the accuracy of financial statements. The process begins with recording adjustments for inventory, supplies, accrued expenses, depreciation, insurance, and interest. These are followed by closing entries to aggregate net income and reset temporary accounts.

Adjusting Entries

1. Merchandise Inventory: Since the physical count of parts inventory is $97,000, and assuming the trial balance does not match this, an adjustment is necessary. If the trial balance shows a different figure, adjust to $97,000. For motorcycles, since the physical count was accurate, no adjustment is necessary.
2. Office Supplies: Used supplies amount to $1,500. Record an expense and decrease supplies accordingly:
   • Debit Office Supplies Expense $1,500
   • Credit Office Supplies $1,500
3. Salaries Payable: Accrued salaries are:
   • Sales Salaries: $3,000
   • Service Salaries: $5,000
   • Office Salaries: $1,500

   Total Salaries Payable: $9,500

   Record as:

   • Debit Salaries Expense $9,500
   • Credit Salaries Payable $9,500
4. Insurance Expense: Insurance used is $1,200:
   • Debit Insurance Expense $1,200
   • Credit Prepaid Insurance (or Insurance) $1,200
5. Interest Expense: Interest on the note payable at 8% for a full year. Assuming the principal is known from the trial balance (say, for example, $50,000), calculate:
   • Interest = Principal × Rate = $50,000 × 8% = $4,000

   Record as:

   • Debit Interest Expense $4,000
   • Credit Interest Payable $4,000

Depreciation Expenses

Using straight-line depreciation, calculate annual depreciation for each asset:

• Office Equipment: Assume original cost is known (e.g., $25,000).
  • Depreciation = Cost / Useful life = $25,000 / 5 = $5,000
  • Debit Depreciation Expense $5,000
  • Credit Accumulated Depreciation - Office Equipment $5,000
• Store Equipment: Assume original cost (e.g., $25,000).
  • Depreciation = $25,000 / 5 = $5,000
  • Debit Depreciation Expense $5,000
  • Credit Accumulated Depreciation - Store Equipment $5,000
• Shop Equipment: Assume original cost (e.g., $50,000).
  • Depreciation = $50,000 / 10 = $5,000
  • Debit Depreciation Expense $5,000
  • Credit Accumulated Depreciation - Shop Equipment $5,000

Prepare Closing Entries

At year-end, close revenue and expense accounts to retained earnings:

• Credit all revenue accounts; debit total revenue to Income Summary.
• Debit all expense accounts; credit total expenses to Income Summary.
• Close Income Summary to Retained Earnings based on net income or loss.

These entries finalize the books for the fiscal year and prepare them for the upcoming period.

Conclusion

Accurately executing these journal entries ensures that Big Ed’s Motorcycle Shop’s financial statements reflect true and fair views of its financial position at year-end. Proper adjustment for inventory, supplies, accrued expenses, depreciation, insurance, and interest aligns the books with actual figures, complying with GAAP. Closing entries reset temporary accounts and transfer net income to retained earnings, enabling a clean start for the next fiscal period. These steps are crucial in maintaining reliable financial reporting and supporting sound managerial decision-making.

References

• Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2020). Intermediate Accounting (16th ed.). Wiley.
• Garrison, R. H., Noreen, E. W., & Brewer, P. C. (2021). Managerial Accounting (16th ed.). McGraw-Hill Education.
• Chorafas, D. N. (2019). Financial Accounting: A User Perspective. Elsevier.
• Horngren, C. T., Sundem, G. L., & Elliott, J. A. (2018). Introduction to Financial Accounting. Pearson.
• Raphael, P. (2017). The Principles of Accounting. Routledge.
• Siegel, G., & Shim, J. (2019). Accounting Student Guide. Wiley.
• Warner, D. (2020). Accounting Principles. Sage Publications.
• Financial Accounting Standards Board (FASB). (2022). Accounting Standards Codification.
• International Financial Reporting Standards (IFRS). (2023). IFRS Foundation.
• Investopedia. (2023). Depreciation. Retrieved from https://www.investopedia.com/terms/d/depreciation.asp