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QUESTION

Balance Sheet accounts are provided in the table below.

Balance Sheet accounts are provided in the table below. *The debits and credits do not equal/balance because the net income earned so far this year ($79,000) has not yet been included in retained earnings. This amount will show up as part of the net income when you prepare the financial statements

Account

Debit

Credit

Cash

100,000

Trading Securities

50,000

Available-for-Sale Securities

50,000

Fair Value Adjustment-AFS

5,000

Accounts Receivable

75,000

Receivable from Employee

10,000

Inventories

200,000

Assets Held-for-Sale

25,000

Cash Value of Insurance

10,000

Equipment

54,000

Accumulated Depreciation-Equipment

16,500

Building

96,000

Accumulated Depreciation-Building

32,000

Land

25,000

Goodwill

275,000

Accounts Payable

80,000

Interest Payable

15,000

Salaries Payable

10,000

Taxes Payable

5,000

Current Portion of Note

40,000

Note Payable (noncurrent portion of note)

190,000

Mortgage Liability

110,000

Common Stock

300,000

Retained Earnings

92,500

Accumulated Other Comprehensive Income/Loss

5,000

______

$975,000

$896,000

The following information relates to the revenues earned and expenses incurred during the first half of 2012.

Debit

Credit

Sales

$1,911,500

Sales Returns and Allowances

100,000

Sales Discounts

22,500

Cost of Goods Sold

1,240,000

Selling Expenses

250,000

General and Administrative Expenses

220,000

Transactions occurring in 2012 but not considered in the current net income of 79,000 are as follows:

1. On July 1st, the corporation entered into a lease agreement for a machine that qualifies as a capital lease. The lease calls for annual lease payments of $26,269 over a six-year lease term, with the first payment at July 1st, the leases inception. The interest rate is 5%. *(Round your answer to the nearest whole dollar).

2. On July 1st, the corporation sold a $15,000, 5 year bond with a stated rate of 8%. The effective yield on the bonds is 10%. Interest on the bond is paid semiannually on January 1st and July 1st. The company uses the effective interest method to amortize any bond discount or premium. *(Round your answer to the nearest whole dollar).

3. One month following the issue of the bonds, the corporation invested $5,000 into a sinking fund in order to have the money to pay off the bonds when they come due.

4. On September 3rd, the corporation experienced an uninsured flood loss (extraordinary) which destroyed the building. The tax rate is 40%.

5. On September 20th, the company sold their shares in Hobokin Company resulting in a loss of $1,000 (pretax). See the portfolio tables below.

6. When its president died, on October 8th, the corporation realized $110,000 from an insurance policy. The cash surrender value of this policy had been carried on the books as an investment in the amount of $10,000 (the gain is nontaxable).

7. On November 1st, the corporation filed a suit against Tri-Star, Inc. seeking damages for patent infringement. Legal counsel believes that it is probable that the company will be successful against Tri-Star for an estimated amount in the range of $100,000 to $150,000, with all amounts in the range considered equally likely.

8. On November 15th, the corporation disposed of its wholesale division at a loss of $5,000 before taxes. The wholesale operations were shut down at the beginning of the year. This transaction meets the criteria for discontinued operations. The assets associated with this sale are being classified as “Assets Held-For-Saleâ€.

9. The corporation decided to change its method of inventory pricing from average cost to the FIFO method. The effect of this change on prior years is to increase 2010 income by $60,000 and decrease 2011 income by $20,000 before taxes. The FIFO method has been used for 2012. The tax rate on these items is 40%.

10. On December 18th, the corporation purchased 2,000 shares of its own common stock at $20 a share.

11. On December 20th, the corporation paid off the current portion of the note payable along with the $15,000 in interest that had been accrued.

12. December 31st, interest on the lease has accrued.

13. December 31st, interest on the bonds has accrued.

14. The company’s products carry a one year warranty against manufacturer’s defects. Warranty costs are expected to be 1% of net sales.

15. At the beginning of 2011, the corporation purchased a piece of equipment for $54,000, salvage value of $9,000 that had a useful life of 6 years. The bookkeeper used straight-line depreciation for 2011 and 2012. However, in 2012 the bookkeeper failed to deduct the salvage value in computing the depreciation base (an error was made). The journal entry for this year depreciation has already been made, but a correcting entry is required to fix the mistake.

16. Adjust the Trading securities and AFS securities to their respective fair values. See the portfolio tables below.

Portfolio Tables

AFS Securities Portfolio

Cost

Fair Value 2011

Fair Value 2012

Disney Corporation

$5,000

$8,000

$10,000

Monster Truck, Inc.

25,000

20,000

22,000

Hobokin Company

20,000

17,000

______

Totals

$50,000

$45,000

$32,000

Trading Securities Portfolio

Cost

Fair Value 2011

Fair Value 2012

GM Company

$15,000

$20,000

$23,000

Shaffer Corporation

35,000

30,000

34,000

Totals

$50,000

$50,000

$57,000

Required:

(1) Journalize transactions 1 - 14. The corporation's tax rate is 40%.

(2) Remember to include a journal entry for income taxes once you have prepared the income statement.

(3) Prepare a multiple-step income statement, statement of retained earnings, and a balance sheet.

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