Chapter 11, Problem 11CP

Bug-Off Exterminators provides pest control services and sells extermination products manufactured by other companies. The following six-column table contains the company's unadjusted trial balance as of December 31. 2019.

	MinrrfTTTrTB		Adjusted
December 31. 2019	Trial Balance	Adjustments	Trial Balance
Cash..........................	......... i 17.000
Accounts receivable.............	......... 4.000
Allowance for doubtful accounts ..	........ S 82B
Merchandise inventory...........	......... 11,700
Trucks.........................	..... 32J0OO
Accum. depreciation—Trucks......	......... 0
Equipment.....................	......... 45J0OO
Accum. depreciation—Equipment .	........ 12.200
Accounts payable...............	........ 5.000
Estimated warranty liability........	........ 1.400
Unearned services revenue.......	......... 0
Interest payable.................	......... 0
Long-term notes payable.........	........ 15,000
D. Buggs,Capital................	......... 59,700
D. Buggs, Withdrawals...........	......... 10,000
Extermination services revenue____	........ 60.000
Interest revenue................	........ 872
Sales (of merchandise)...........	......... 71.026
Cost of goods sold...............	......... 46.300
Depreciation expense—Trucks	......... 0
Depreciation expense—Equipment	......... 0
Wages expense.................	......... 35,000
Interest expense................	......... 0
Rent expense...................	......... 9,000
Bad debts expense..............	........ 0
Miscellaneous expense...........	........ 1,226
Repairs expense................	......... a.ooo
Utilities expense................	......... 6.B00
Warranly expense...............	......... 0
Totals.........................	......... S226.026 $226,026
The following information in a through h ap	iplies to the company at the end of the current	year.	-
3. The bank reconciliation as of December 31. 2019. includes the following facts.
Cash balance per bank..............	$15,100 Deposit in transit...............	........... $2,450

Cash balance per books.............. 17.000 Interest earned (on bank account}.................. 52
Outstanding checks................. 1.800 Bankservicecharges(mrscellaneousexpense)....... 15
Reported on the bank statement is a canceled check that the company failed to record. (Information from the bank reconciliation allows you to determine the amount of this check, which is a payment on an account payable.)
b. An examination of customers' accounts shows that accounts totaling S679 should be written off as uncollectible. Using an aging of receivables, the company determines that the ending balance of the Allowance for Doubtful Accounts should be S700.
C. A truck is purchased and placed in service on January 1₌ 2019. Its cost is being depreciated with the straight-line method using the following facts and estimates.
Original cost....... J32.000 Expected salvage value......... SE.000 Useful life (years)........ 4

To determine

Introduction:

An account is generally a part of accounting system that classifies, summarizes and presents increase or decrease in various element of business. A normal accounting cycle has four steps, analyze the transaction, prepare journal entries, posting into ledger, and preparation of trial balance.

To calculate:

a) The amounts for the following items.

b) Adjustment needed to obtain the correct ending balance of the Allowance for Doubtful Accounts.

c) Depreciation expense for the truck used

d) Depreciation expense for the two items of equipment used during year

e) The adjusted ending balances of the Extermination Services Revenue and Unearned Services Revenue accounts.

f) The adjusted ending balances of the accounts for Warranty Expense and Estimated Warranty Liability.

g) The adjusted ending balances of the accounts for Interest Expense and Interest Payable.

Answer to Problem 11CP

a) Reconciled ending of cash and amount of omitted check:

Balance as per bank	15,100
(+) Deposit in transit	2,450
(-) outstanding cheque	1,800
Reconciled balance	15,750
Balance as per books	17,000
(+) Interest earned	52
(-) Service Charge	15
Balance before omitted check	17,037
Reconciled balance (from above)	15,750
Amount of omitted cheque	1,287

b)

Unadjusted balance (Credit)	828
Anticipated write-off (Debit)	679
Revised unadjusted balance (Credit)	149
Desired ending balance (Credit)	700
Necessary adjustment (Credit)	551

c) Depreciation Expense on the Truck:

= (Original cost - salvage value) / Useful life Depreciation on truck

= (32,000-8,000)/4

= Depreciation on truck 6,000

d) Depreciation Expense on the Equipment:

Depreciation on sprayer

= (Original cost - salvage value )/ Useful life Depreciation on sprayer

= (27000-3000)/8 = $3000

Depreciation on injector:

= (Original cost - salvage value )/ Useful life Depreciation on injector

= (18000-2500)/5 = $3100

e)

Total advance received	$3,840
Months in contract	12
Revenue per month	$320
Months of services provided	5
Total earned ($320x5 months)	$1,600
Over statement of revenue	$2,240
Extermination Services Revenue account Unadjusted balance	$60,000
Overstatement	$2,240
Adjusted balance	$57,760
Unearned Services Revenue account Unadjusted balance	$0
Adjustment	$2,240
Adjusted balance	$2,240

f)

Warranty Expense ($57,700 * 2.5%)	$1,444
Estimated Warranty Liability	$ 1,400
Warranty Expense	$1,444
Adjusted Estimated Warranty Liability	$ 2,844

g)

Interest Expense ($15,000 * 8%)	$1,200
Adjusted Interest Payable	$1,200

Explanation of Solution

a) A bank reconciliation statement is a document that matches the cash balance on a company's balance sheet to the corresponding amount on its bank statement. Reconciling the two accounts helps determine if accounting changes are needed. Here, we determined first the closing balance as per cash book and then identified the amount of omitted cheques as balancing figure.

Conclusion:

Amount of omitted check is 1,287.

b) Allowance for Doubtful Accounts is a contra current asset account associated with Accounts Receivable. In the given instance, desired closing balance is given and necessary adjustment is required to make to keep the desired closing balances. The credit balance in this account exists from the entry wherein Bad Debts Expense is debited.

Conclusion:

Adjustment needed to obtain the correct ending balance of the Allowance for Doubtful Accounts is 551 (credit)

c) In the straight line depreciation, the value of asset is decreased equally over each given period until it reaches its residual value. SLM is the most commonly used and easiest depreciation method for allocation of cost of an asset. the formula of SLM is derived by dividing the cost of an asset, less its residual value, by the life of the asset.

Conclusion:

Depreciation expense for the truck used is 6,000

d) In the straight line depreciation, the value of asset is decreased equally over each given period until it reaches its residual value. SLM is the most commonly used and easiest depreciation method for allocation of cost of an asset. the formula of SLM is derived by dividing the cost of an asset, less its residual value, by the life of the asset.

Conclusion:

The depreciation expense of equipment i.e.sprayer and injector will be, $3,000 and $3,100 respectively.

e) In the given instance, Extermination Services Revenue was over stated by $2,240. hence the same was reduced from the revenue recorded. The same was then showed as closing balance in Unearned Services Revenue accounts.

As the company will earn the adjusted unearned revenue, it reduces the balance in the unearned revenue account (with a debit) and increases the balance in the revenue account (with a credit).

Conclusion:

The adjusted ending balances of the Extermination Services Revenue and Unearned Services Revenue accounts will be $ 57, 760 and $2,240.

f) The warrant expense will be recorded as a actual percentage of service revenue. Since it is assumed to be payable now, it will be recorded as an credit to estimated warranty liability. The liability will be reduced by the actual expenditures to repair or replace the product

Conclusion:

The adjusted ending balance of the accounts for warranty expense is $1,444 and for Adjusted Estimated Warranty Liability is $2,844.

g) Interest Payable is a liability account that reports the amount of interest the company owes as of the balance sheet date. The company should be reporting some amount in Interest Expense and in Interest Payable, unless interest is paid up to date.

Conclusion:

The note originated on December 31, thus the interest will be payable on 31 December 2020. Hence the adjusted balance of both the account as on today will be zero.

To determine

Introduction:

An account is generally a part of accounting system that classifies, summarizes and presents increase or decrease in various element of business. A normal accounting cycle has four steps, analyze the transaction, prepare journal entries, posting into ledger, and preparation of trial balance.

To calculate:

The adjusted trial balance columns.

Answer to Problem 11CP

The total of adjusted trial balance is 238,207

PARTICULARS	UNADJUSTED DEBIT	UNADJUSTEDCREDIT	ADJUSTMENT	ADJUSTED DEBIT	ADJUSTED CREDIT
CASH	17,000	-	1,250	15,750	-
ACCOUNTS RECEIVABLE	4,000	-	679	3,321	-
ALLOWANCE FOR DOUBTFUL ACCOUNTS	-	828	128	-	700
MERCHANDISE INVENTORY	11,700	-	-	11,700	-
TRUCK	32,000	-	-	32,000	-
ACCUM DEPRECIATION- TRUCKS	-	-	6,000	-	6,000
EQUIPMENT	45,000	-	-	45,000	-
ACCUM DEPRECIATION- EQUIPMENT	-	12,200	6,100	-	18,300
ACCOUNTS PAYABLE	-	5,000	1,287	-	3,713
ESTIMATED WARRANTY LIABILITY	-	1,400	1,444	-	2,844
UNEARNED SERVICE REVENUE	-	-	2,240	-	2,240
INTEREST PAYABLE	-	-	-	-	-
LONG TERM NOTES PAYABLE	-	15,000	-	-	15,000
D.BUGGS CAPITAL	-	59,700	-	-	59,700
D.BUGS WITHDRAWLS	10,000	-	-	10,000	-
EXTERMINATION SERVICE REVENUE	-	60,000	2,240	-	57,760
INTEREST REVENUE	-	872	52	-	924
SALES (OF MECHANDISE)	-	71,026	-	-	71,026
COST OF GOODS SOLD	46,300	-	-	46,300	-
DEPRECIATION EXPENSE-TRUCKS	-	-	-	6,000	-
DEPRECIATION EXPENSE-EQUIPMENT	-	-	-	6,100	-
WAGES EXPENSE	35,000	-	-	35,000	-
INTEREST EXPENSE	-	-	-	-	-
RENT EXPENSE	9,000	-	-	9,000	-
BAD DEBTS EXPENSE	-	-	551	551	-
MISCELLANEOUS EXPENSE	1,226	-	15	1,241	-
REPAIRS EXPENSE	8,000	-	-	8,000	-
UTILITIES EXPENSE	6,800	-	-	6,800	-
WARRANTY EXPENSE	-	-	1,444	1,444	-
TOTAL	226,026	226,026	-	238,207	238,207

Explanation of Solution

An unadjusted trial balance is given in the question. However to proceed with the solution first, the trial balance needs to be adjusted with the adjusting journal entries. Adjusting entries here includes revenues earned but not yet recorded, and the expenses incurred but not yet recorded. Accrued expenses and the related liabilities often involve(as in our question) warranty, interest, depreciation, unearned revenues etc.Conclusion:

The total of adjusted trial balance is 238,207

To determine

Introduction:

In every book keeping system, any transaction related to business is first recorded as journal. The journalized amount appears in journal in chronological order and then further posted

To calculate:

Prepare journal entries to record the adjustments entered on the six-column table. Assume Bug-Off's adjusted balance for Merchandise Inventory matches the year-end physical count.

Answer to Problem 11CP

The journal entry will be passed as under:

S.NO.	PARTICULARS	DR AMOUNT	CR AMOUNT
1	Cash A/c Dr Interest revenue A/c	$52	$52
2	Miscellaneous expense A/c Dr To Cash A/c	$15	$15
3	Accounts payable A/c Dr To cash A/c	$1287	$1287
4	Allowance for doubtful debts A/c Dr To accounts receivable A/c	$128	$128
5	Depreciation expense-trucks A/c Dr To accum depreciation-trucks A/c	$6000	$6000
6	Depreciation expense-equipment A/c Dr To accum depreciation-equipment A/c	$6100	$6100
7	Extermination service revenue A/c Dr To Unearned Services Revenue A/c	$1444	$1444
8	Warranty Expense A/c Dr To Estimated warranty liability A/c	$1500	$1500

Explanation of Solution

Adjusting entries are journalised at the end of accounting period (to which it relates) after a trial balance is prepared(such trial balance is usually an unadjusted trial balance). The adjusting entries are passed just to adjust revenues and expenses to the accounting period in which they occurred, but are not yet recorded.

After the entries are made in the accounting journals, next step is to post them to the general ledger and further into trial balance. General examples of such entries would be accrued revenues, accrued expenses, unearned revenue, depreciation and prepaid expense.

Conclusion:

The above mentioned journal entry will be passed

To determine

Introduction:

An Income statement is the summary of all the income and expenses of a company over a periodA statement of owners equity summarizes changes in the capital balance of a business over a defined period

Balance sheet is a statement of assets and liabilities and capital of a business at a particular point of time

Prepare a single-step income statement, a statement of owner's equity (cash withdrawals during 2019 were $10,000), and a classified balance sheet.

Answer to Problem 11CP

The overall financial will be stated as below:

The income statement as on December 31^st will be as under

PARTICULARS	AMOUNT
Revenue	57,760
Sales - cost of goods sold	24,726
Interest revenue	924
Expenses:
Depreciation expenses-trucks	6,000
Depreciation expenses-Equipment	6,100
Wages Expenses	35,000
MISCELLANEOUS EXPENSE	1,241
Rent Expenses	9,000
Repair Expenses	8,000
Utility expense	6,800
Warranty Expense	1,444
Bad debts expense	551
TOTAL EXPENSES	74,136
Operating Income	9,274

Owners Equity as on December 31, 2019

Opening Capital	59,700
(+) Income earned	9,274
(-) Losses incurred
(+) Owners Contribution during the period
(-) Owners draw during the period	10,000
Closing Capital	58,974

Balance Sheet as on December 31, 2019

Assets		Liabilities
Truck	26,000	Owners Equity	58,974
Computer Equipment	26,700	Current Liabilities
Cash	15,750	Accounts Payable	3,713
Accounts Receivable	2,621	Estimated Warranty liability	2,844
Closing inventory	11,700	Unearned service revenue	2,240
		Long Term notes payable	15,000
	82,771		82,771

Explanation of Solution

Financial statements present the results of operations and the financial position of the company.

The balance sheet works on the accounting equation:

Assets = Liabilities + Owners Equity

Financial statement includes, income statement, owner's equity statement and balance sheet.

After passing adjusting entries and preparing adjusted trial balance for the year end, balances or related accounts is posted in either income statement, or equity statement or balance sheet. The operating income is transferred to Owner's equity account since it is a proprietary concern. And balance of Owner's equity account is then reflected in balance sheet.

Conclusion:

The operating income for the year is $9,274.

The closing balance of owner's equity is $58,974

The total of Balance sheet will be $82,771