1 INTERMEDIATE ACCOUNTING II – ACCT 3021 PRACTICE PROBLEM **Due at the beginning of class on Thursday, January19th PURPOSE: The purpose of the practice problem is to review what you shouldrecall from Intermediate Accounting I that relates, in general, tothe accounting cycle and Intermediate II — theprocedures that businesses normally use to record transactions andprepare financial statements. The accounting cycle is discussed indetail in Chapter 3 of your textbook. Having successfully completedIntermediate Accounting I will help you understand and complete thepractice problem. To review the accounting cycle, you will act as the bookkeeperfor Travis Auto Parts, a sole proprietorship owned by MichaelTravis. The post-closing trial balance for Travis Auto Parts forDecember 31, 2014 is given below: Travis Auto Parts Post-Closing Trial Balance December 31, 2014 Debit Credit Cash $11,520 AccountsReceivable 3,820 Allowance for Bad Debts – 0 – Inventory 9,500 Supplies 250 PrepaidRent – 0 – PrepaidInsurance 640 StoreEquipment 23,600 Accumulated Depreciation $14,160 Accounts Payable 4,660 Short-term NotesPayable 16,000 Interest Payable (on the $16,000 note) 400 Salaries Payable 580 UnearnedRevenue – 0 – Michael Travis, Capital 13,530 $49,330 $49,330 REQUIRED: 1. During 2015, the following transactions occurred. Prepare anynecessary journal entries. For your own purposes, you should set upT-accounts for the temporary accounts (revenues, expenses, andowner withdrawals) as needed. I also suggest keeping track ofentries you think will require an adjusting entry at the end of theyear. DO NOT PREPARE MONTHLY ADJUSTING AND CLOSINGENTRIES; wait until year-end to prepare these entries.Travis Auto Parts does not use reversingentries. January 3 Sold store equipment for $7,200. The equipmentoriginally cost $8,000 and had a book value of $4,800. (Given thisinformation, you should be able to derive the accumulateddepreciation on the equipment, and determine the gain or loss onthe sale.) January 7 Purchased inventory on account for $18,500. TravisAuto Parts uses a periodic system of inventorycontrol. January 10 Sold goods on account for $12,000. Made cash sales of$8,300. January 15 Paid salaries owed to employees at the end of2014. February 1 Travis personally invested $6,000 into thebusiness. February 12 Received $9,800 from customers for previous salesmade on account. February 21 Paid $10,000 to vendors for previous purchases ofinventory made on account. March 6 Purchased $15,000 of inventory on account. March 10 Sold goods for $16,800 on account. Made cash sales of$12,600. March 15 Credited customer accounts for $1,420 of merchandisereturned. March 25 Received $21,400 from customers for sales madepreviously on account. April 1 Paid the $16,000 note and all interest accrued to date.Travis had borrowed the $16,000 on October 1, 2014. Interestaccrued on the note at a rate of 10% annually. April 10 Paid the remaining amounts owed to vendors for allgoods and services purchased on account. May 1 Borrowed $20,000 from the bank by issuing a 12-month note.Interest accrues on the note at a rate of 12% annually. Interest isto be paid when the note is due next year. May 15 Purchased $4,000 worth of store equipment for cash.Travis Auto Parts has a policy of taking a full year’s depreciationon its equipment in the year of purchase. (Record the purchase ofthe equipment on May 15th, but wait until the end of the year torecord the depreciation.) May 22 Purchased $20,000 of inventory from suppliers onaccount. June 1 Entered into a rental agreement with Pecos Rentals, Inc.Travis paid $1,800 for a 12-month lease of storage space. Travisdebited a permanent (real) account at the time of thetransaction. June 12 Sold $19,600 worth of goods on account. Made cash salesof $11,200. June 30 Incurred and paid salaries and utilities expenses of$8,000 and $1,500, respectively. July 8 Received payment of $18,400 from customers for sales onaccount. July 20 Purchased $12,000 worth of inventory on account. August 31 The prior insurance policy on Travis’s operatingassets expired on this date; prepare a journal entry to record thisevent. Travis replaced this policy with a 12-month policy by paying$9,600. Travis debited a nominal (temporary) account to record thepurchase of the new policy. September 18 Purchased supplies from vendors for $5,000 onaccount. A permanent account was debited to record thetransaction September 30 Received $7,500 advance payment for products to beshipped to customers by year-end. Travis recognized this cashreceipt by crediting a temporary account. October 8 Paid all amounts owed to vendors for inventory andsupplies purchased on account. November 15 Sold goods for $22,000 to customers on account. December 9 Received payment of $17,500 for sales made onaccount. December 21 Travis withdrew $2,000 for personal use. To recordthis transaction, debit a Drawing account and credit Cash. TheDrawing account is a temporary account which will be closed out atthe end of the year to the Capital account. December 31 Incurred and paid salaries and utilities expenses of$10,000 and $1,800, respectively. 4 For Requirements 2 through 3 on the Practice Problem,please see the next page. 2. Based on (1) the previous transactions and (2) thefollowing information, prepare and post any necessaryadjusting entries at year-end. *A physical count revealed supplies on hand of $3,750. *Depreciation on the store equipment is 10% per year. Salvagevalue on the equipment is zero. Record depreciation forall of the store equipment which Travis Auto Partshas on December 31, 2015–not just the equipment which waspurchased during the year. *Of the $7,500 worth of goods paid for in advance on September30, only $6,200 worth of goods had been shipped to customers byyear-end. *Based on previous experience, Travis felt that 5% of endingaccounts receivable would ultimately be uncollectible. (Please note: More than four adjusting entries need to beprepared.) RECORD THE ADJUSTING ENTRIES ON A SEPARATE,APPROPRIATELY LABELED PAGE. 3. Prepare and post the closing entries as of December 31, 2015.A physical count revealed an ending inventory of $8,000. ALSO RECORD THE CLOSING ENTRIES ON A SEPARATE,APPROPRIATELY LABELED PAGE. . . .
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