Smith Manufacturing Inc. Needs Your Assistance

Smith Manufacturing Inc Has Asked That You Assist With Some Bookkeep

Smith Manufacturing, Inc. has asked that you assist with some bookkeeping services. The company is nearing year-end and needs help to prepare adjusting and closing entries. Following is the information that you need to prepare the entries: Bad debts are estimated at 1% of Net Sales. There is an $8,000 balance of unexpired insurance in the Prepaid Insurance account. A physical inventory determined that there is a $40,000 balance in inventory. Buildings are depreciated on a straight-line basis over 20 years, no salvage value. Equipment is depreciated on a straight-line basis over ten years, no salvage value. All interest remained unpaid at year-end. There was $2,000 in salaries payable at year-end.

Paper For Above instruction

Introduction

Effective bookkeeping and accurate financial reporting are vital for the operational success and fiscal health of any manufacturing company. As Smith Manufacturing Inc. approaches its fiscal year-end, it becomes essential to undertake a series of adjusting and closing entries to ensure the accuracy of financial statements. These entries reflect the company's actual financial position, including estimates for bad debt, prepaid expenses, inventory valuation, depreciation, unpaid interest, and accrued salaries. This paper discusses each of these adjustments in detail, providing the necessary journal entries and explaining their significance.

Bad Debts Expense

Since bad debts are estimated at 1% of net sales, the first step involves calculating this expense. Assuming net sales of, for example, $1,000,000, the bad debts expense would be $10,000 (1% of 1,000,000). The adjusting entry to record this estimate is:

Debit: Bad Debts Expense $10,000


Credit: Allowance for Doubtful Accounts $10,000

This entry aligns with the matching principle, ensuring that the expenses related to uncollectible receivables are recognized in the same period as the sales they relate to.

Prepaid Insurance Adjustment

The company reports an $8,000 balance of unexpired insurance. If the insurance policies were purchased at the beginning of the period, the entire amount may not be expensed yet. To recognize the insurance expense for the period, we need to determine the portion of the prepaid insurance that has expired, say over one year. The adjusting entry would be:

Debit: Insurance Expense $8,000


Credit: Prepaid Insurance $8,000

Alternatively, if the entire $8,000 remains unexpired at year-end, no adjusting entry is necessary. However, if some portion has expired, only that portion should be expensed.

Inventory Valuation

The physical inventory shows a balance of $40,000. This amount reflects the ending inventory valuation, which is essential for calculating the cost of goods sold (COGS) and gross profit. No adjusting entry is typically necessary if the inventory account already reflects the physical count, but if the book balance differs, an adjusting entry might be required to write down inventory to its physical count.

Depreciation of Buildings and Equipment

Buildings are depreciated over 20 years on a straight-line basis with no salvage value. Assuming the building's cost is known, say, $2,000,000, annual depreciation would be:

$2,000,000 / 20 = $100,000

The depreciation expense entry is:

Debit: Depreciation Expense - Buildings $100,000


Credit: Accumulated Depreciation - Buildings $100,000

Similarly, for equipment, suppose the equipment's cost is $500,000 with a useful life of ten years, no salvage value:

$500,000 / 10 = $50,000

The corresponding entry is:

Debit: Depreciation Expense - Equipment $50,000


Credit: Accumulated Depreciation - Equipment $50,000

Unpaid Interest and Salaries Payable

All interest remains unpaid at year-end, so interest expense must be recognized, although the specific interest amount isn't provided. Assuming an interest expense of, for instance, $5,000, the entry is:

Debit: Interest Expense $5,000


Credit: Interest Payable $5,000

Similarly, with salaries payable of $2,000 at year-end, the adjustment entry is:

Debit: Salaries Expense $2,000


Credit: Salaries Payable $2,000

Conclusion

Accurate and timely adjustments are crucial to ensure that Smith Manufacturing Inc.'s financial statements accurately reflect its financial position and performance at year-end. These entries for bad debts, prepaid insurance, inventory, depreciation, unpaid interest, and salaries payable embody the application of generally accepted accounting principles. Proper adjustments not only enhance the reliability of financial reporting but also assist management in making informed decisions based on precise financial data. Consistent adherence to these procedures will contribute to the company's ongoing financial integrity and compliance with accounting standards.

References

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